Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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For
the fiscal year ended December 31,
2009
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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For the transitional period from _____ to _____ |
Commission
file number: 000-50217
ICON
Income Fund Nine, LLC
(Exact
name of registrant as specified in its charter)
Delaware
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13-4183234
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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100
Fifth Avenue, 4th
Floor
New
York, New York
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10011
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(Address
of principal executive offices)
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(Zip
Code)
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(212)
418-4700
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Shares of Limited Liability Company
Interests
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
No þ
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes þ No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).
Yes No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer Accelerated filer
Non-accelerated filer þ Smaller
reporting company
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes No þ
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter: Not
applicable. There is no
established market for shares of the registrant.
Number of
outstanding shares of limited liability company interests of the registrant on
March
19, 2010 is 97,955.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
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Forward-Looking
Statements
Certain
statements within this Annual Report on Form 10-K may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (“PSLRA”). These statements are being made pursuant to the
PSLRA, with the intention of obtaining the benefits of the “safe harbor”
provisions of the PSLRA, and, other than as required by law, we assume no
obligation to update or supplement such statements. Forward-looking
statements are those that do not relate solely to historical fact. They include,
but are not limited to, any statement that may predict, forecast, indicate or
imply future results, performance, achievements or events. You can identify
these statements by the use of words such as “may,” “will,” “could,”
“anticipate,” “believe,” “estimate,” “expect,” “continue,” “further,” “plan,”
“seek,” “intend,” “predict” or “project” and variations of these words or
comparable words or phrases of similar meaning. These forward-looking statements
reflect our current beliefs and expectations with respect to future events and
are based on assumptions and are subject to risks and uncertainties and other
factors outside our control that may cause actual results to differ materially
from those projected. We undertake no obligation to update publicly or review
any forward-looking statement, whether as a result of new information, future
developments or otherwise.
Our
History
ICON
Income Fund Nine, LLC (the “LLC” or “Fund Nine”) was formed on July 11, 2001 as
a Delaware limited liability company. The LLC will continue until
December 31, 2020, unless terminated sooner. When used in this Annual
Report on Form 10-K, the terms “we,” “us,” “our” or similar terms refer to the
LLC and its consolidated subsidiaries.
Our
manager is ICON Capital Corp., a Delaware corporation (our “Manager”). Our
Manager manages and controls our business affairs, including, but not limited
to, our equipment leases and other financing transactions that we entered into
pursuant to the terms of our amended and restated operating agreement (our “LLC
Agreement”).
We are
currently in our liquidation period. Our initial capitalization was $1,000,
which was contributed by our Manager. We offered shares of limited
liability company interests (“Shares”) with the intent to raise up to
$100,000,000 of capital and we commenced business operations on our initial
closing date, December 18, 2001, when we issued 1,250 Shares, representing
$1,249,910 of capital contributions. Between December 19, 2001 and
April 30, 2003, our final closing date, we sold an additional 98,416 Shares
representing $98,403,564 of capital contributions, bringing the total sale of
Shares and capital contributions to 99,666 and $99,653,474,
respectively. Through December 31, 2009, we redeemed 1,711 Shares,
bringing the total number of outstanding Shares to 97,955.
Our
Business
We
operate as an equipment leasing program in which the capital our members
invested was pooled together to make investments, pay fees and establish a small
reserve. We primarily acquired equipment subject to lease, purchased equipment
and leased it to third-party end users or financed equipment for third parties,
provided equipment and other financing and, to a lesser degree, acquired
ownership rights to leased equipment at lease expiration. Some of our equipment
leases were acquired for cash and provide current cash flow, which we refer to
as “income” leases. For the other equipment leases, we financed the majority of
the purchase price through borrowings from third parties. We refer to these
leases as “growth” leases. These growth leases generate little or no current
cash flow because substantially all of the rental payments received from the
lessee are used to service the indebtedness associated with acquiring or
financing the lease. For these leases, we anticipated that the future value of
the leased equipment would exceed our cash portion of the purchase
price.
We divide
the life of the program into three distinct phases:
(1)
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Offering Period: We
invested most of the net proceeds from the sale of Shares in equipment
leases and other financing
transactions.
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(2)
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Operating Period: After
the close of the offering period, we reinvested and continued to reinvest
the cash generated from our initial investments to the extent that cash
was not needed for our expenses, reserves and distributions to members.
Our operating period ended on April 30,
2008.
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(3)
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Liquidation Period: We
began our liquidation period on May 1, 2008. Since the beginning of the
liquidation period, we have sold and will continue to sell our assets in
the ordinary course of business. Our goal is to complete the liquidation
period within three years from the end of the operating period, but it may
take longer to do so.
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As we
sell our assets during our liquidation period, both rental income and finance
income will decrease over time as will expenses related to our assets, such as
depreciation and amortization expense. Additionally, interest expense should
decrease as we reach the expiration of leases that were financed and the debt is
repaid to the lender. As leased equipment is sold, we will incur
gains or losses on these sales.
At
December 31, 2009 and 2008, we had total assets of $102,900,677 and
$114,231,144, respectively. For the year ended December 31, 2009,
three lessees accounted for approximately 95% of our total rental and finance
income of $18,162,892. We had net income for the year ended December
31, 2009 of $6,700,146. For the year ended December 31, 2008, three
lessees accounted for approximately 83% of our total rental and finance income
of $21,820,889. We had net income for the year ended December 31,
2008 of $1,047,818. For the year ended December 31, 2007, three
lessees accounted for approximately 77% of our total rental and finance income
of $20,579,263. We had net income attributable to us for the year ended
December 31, 2007 of $7,940,018.
At
December 31, 2009, our portfolio, which we hold either directly or through joint
ventures, consisted primarily of the following investments:
Air
Transportation Equipment
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We
own one Airbus A340-313X aircraft (“Aircraft 128”) and have a 50%
ownership interest through a joint venture with ICON Income Fund Eight B
L.P. (“Fund Eight B”), an entity also managed by our Manager, in a second
Airbus A340-313X aircraft (“Aircraft 126”). Both aircraft are on lease to
Cathay Pacific Airways Limited (“Cathay”). The leases are scheduled to
expire on December 1, 2011 and July 1, 2011,
respectively.
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Marine
Vessels
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We
own three car and truck carrying vessels (“Wilhelmsen Vessels”) on
bareboat charter to Wilhelmsen Lines Shipowning AS (“Wilhelmsen”).
Effective March 14, 2006, the terms of the bareboat charters were extended
through December 22, 2013.
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We
own the Samar Spirit (“Samar Spirit”), an Aframax product tanker, which is
subject to bareboat charter with an affiliate of the Teekay Corporation
(“Teekay”) that expires on July 23,
2011.
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Telecommunications
Equipment
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We
have a 14.40% ownership interest in ICON Global Crossing II, LLC (“Global
Crossing II”), which purchased telecommunications equipment that is
subject to a lease with Global Crossing Telecommunications, Inc. and
Global Crossing North American Networks, Inc. (collectively, the “Global
Crossing Group”). The lease expires on October 31,
2010.
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Energy
Equipment
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We
have a 5.62% interest in the rights to the profits, losses and cash flows
from an entity that owns a 50% interest in a mobile offshore drilling rig
subject to a lease with Rowan Companies,
Inc.
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For a
discussion of the significant transactions that we engaged in
during the years ended December 31, 2009, 2008 and 2007, please refer to
“Item 7. Manager’s Discussion and Analysis of Financial Condition and Results of
Operations.”
Segment
Information
We are
engaged in one business segment, the business of purchasing equipment and
leasing it to third-party end users, providing equipment and other financing,
acquiring equipment subject to lease and, to a lesser degree, acquiring
ownership rights to items of leased equipment at lease expiration.
Competition
The commercial leasing and financing
industry is highly competitive and is characterized by competitive factors that
vary based upon product and geographic region. When we made our investments, we
competed, and as we seek to liquidate our portfolio, we compete with a variety
of competitors, including other equipment leasing and finance funds, hedge
funds, captive and independent finance companies, commercial and industrial
banks, manufacturers and vendors. Competition from both traditional competitors
and new market entrants has intensified in recent years due to growing
marketplace liquidity and increasing recognition of the attractiveness of the
commercial leasing and finance industry. Our competitors may have
been and/or may be in a position to offer equipment to prospective customers on
financial terms that were or are more favorable than those that we could offer
or that we can offer in liquidating our portfolio, which may have affected our
ability to make investments and may affect our ability to liquidate our
portfolio, in each case, in a manner that would enable us to achieve our
investment objectives. For additional information about our
competition and other risks related to our operations, please see “Item 1A. Risk
Factors.”
Employees
We have
no direct employees. Our Manager has full and exclusive control over
our 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.iconcapital.com as soon as reasonably practicable
after such reports are electronically filed with or furnished to 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.
Financial
Information Regarding Geographic Areas
We have long-lived assets, which
include finance leases and operating leases, and we generate revenues in
geographic areas outside of the United States. For additional information, see
Note 15 to our consolidated financial statements.
We are subject to a number of
risks. Careful consideration should be given to the following risk
factors, in addition to the other information included in this Annual
Report. The risks and uncertainties described below are not the only
ones we may face. Each of these risk factors could adversely affect
our business operating results and/or financial condition, as well as adversely
affect the value of an investment in our Shares. In addition to the
following disclosures, please refer to the other information contained in this
Annual Report including the consolidated financial statements and the related
notes.
General
Investment Risks
All
or a substantial portion of your distributions may be a return of capital and
not a return on capital, which will not necessarily be indicative of our
performance.
The portion of total distributions that
is a return of capital and the portion that is economic return will depend upon
a number of factors that cannot be determined until all of our investments have
been sold or otherwise matured. At that time, you will be able to compare the
total amount of all cash distributions you receive to your total capital
invested in order to determine your economic return.
The Internal Revenue Service (the
“IRS”) may deem the majority of your distributions to be a return of capital for
tax purposes during our early years. Distributions would be deemed to be a
return of capital for tax purposes to the extent that we are distributing cash
in an amount greater than our taxable income. The fact that the IRS deems
distributions to be a return of capital in part and we report an adjusted tax
basis to you on Form K-1 is not an indication that we are performing greater
than or less than expectations and cannot be utilized to forecast what your
final return might be.
Your
ability to resell your Shares is limited by the absence of a public trading
market and, therefore, you should be prepared to hold your Shares for the life
of the fund.
A public
market does not exist for our Shares and we do not anticipate that a public
market will develop for our Shares, our Shares are not currently and will not be
listed on any national securities exchange at any time, and we will take steps
to assure that no public trading market develops for our Shares. In addition,
our LLC Agreement imposes significant restrictions on your right to transfer
your Shares. We have established these restrictions to comply with
federal and State securities laws and so that we will not be considered to be a
publicly traded partnership that is taxed as a corporation for federal income
tax purposes. Your ability to sell or otherwise transfer your Shares is
extremely limited and will depend on your ability to identify a buyer. Thus, you
will probably not be able to sell or otherwise liquidate your Shares in the
event of an emergency and if you were able to arrange a sale, the price you
receive would likely be at a substantial discount to the price you paid for your
Shares. As a result, you must view your investment in our Shares as a
long-term, illiquid investment.
If
you choose to request that we redeem your Shares, you may receive significantly
less than you would receive if you were to hold your Shares for the life of the
fund.
You may
request that we redeem up to all of your Shares. We are under no obligation to
do so, however, and will have only limited cash available for this purpose. If
we redeem your Shares, the redemption price has been unilaterally set and,
depending upon when you request redemption, the redemption price may be less
than the unreturned amount of your investment. If your Shares are redeemed, the
redemption price may provide you a significantly lower value than the value you
would realize by retaining your Shares for the duration of the
fund.
You
may not receive cash distributions every month and, therefore, you should not
rely on any income from your Shares.
You
should not rely on the cash distributions from your Shares as a source of
income. During the liquidation period, although we expect that lump sums will be
distributed from time to time if and when financially significant assets are
sold, regularly scheduled distributions will decrease because there will be
fewer investments available to generate cash flow.
Our
assets may be plan assets for ERISA purposes, which could subject our Manager to
additional restrictions on its ability to operate our business.
The
Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and the
Internal Revenue Code of 1986, as amended (the “Code”) may apply what is known
as the look-through rule to an investment in our Shares. Under that rule, the
assets of an entity in which a qualified plan or IRA has made an equity
investment may constitute assets of the qualified plan or IRA. If you are a
fiduciary of a qualified plan or IRA, you should consult with your advisors and
carefully consider the effect of that treatment if that were to occur. If the
look-through rule were to apply, our Manager may be viewed as an additional
fiduciary with respect to the qualified plan or IRA to the extent of any
decisions relating to the undivided interest in our assets represented by the
Shares held by such qualified plan or IRA. This could result in some restriction
on our Manager’s willingness to engage in transactions that might otherwise be
in the best interest of all Share holders due to the strict rules of ERISA
regarding fiduciary actions.
The
statements of value that we include in this Annual Report on Form 10-K and
future Annual Reports on Form 10-K and that we will send to fiduciaries of plans
subject to ERISA and to certain other parties is only an estimate and may not
reflect the actual value of our Shares.
The
statements of estimated value are based on the estimated value of each Share (i)
as of the close of our fiscal year, for the annual statements included in this
and future Annual Reports on Form 10-K and (ii) as of September 30 of each
fiscal year, for annual statements sent to fiduciaries of plans subject to ERISA
and certain other parties. Management, in part, will rely upon third-party
sources and advice in arriving at this estimated value. No independent
appraisals on the particular value of our Shares will be obtained and the value
will be based upon an estimated fair market value as of the referenced date for
such value. Because this is only an estimate, we may subsequently revise any
valuation that is provided. We cannot assure that:
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this
estimate of value could actually be realized by us or by our members upon
liquidation;
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members
could realize this estimate of value if they were to attempt to sell their
Shares;
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this
estimate of value reflects the price or prices that our Shares would or
could trade at if they were listed on a national stock exchange or
included for quotation on a national market system, because no such market
exists or is likely to develop; or
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·
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the
statement of value, or the method used to establish value, complies with
any reporting and disclosure or valuation requirements under ERISA, Code
requirements or other applicable
law.
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You
have limited voting rights and are required to rely on our Manager to make all
of our investment decisions and achieve our investment objectives.
Our
Manager will make all of our investment decisions, including determining the
investments and the dispositions we make. Our success will depend upon the
quality of the investment decisions our Manager makes, particularly relating to
our investments in equipment and the realization of such investments. You are
not permitted to take part in managing, establishing or changing our investment
objectives or policies.
The
decisions of our Manager may be subject to conflicts of interest.
The
decisions of our Manager may be subject to various conflicts of interest arising
out of its relationship to us and our affiliates. Our Manager could be
confronted with decisions in which it will, directly or indirectly, have an
economic incentive to place its respective interests or the interests of our
affiliates above ours. As of December 31, 2009, our Manager is managing seven
other equipment leasing and finance funds. See “Item 13. Certain
Relationships and Related Transactions, and Director
Independence.” These conflicts may include, but are not limited
to:
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our
Manager may have received more fees for making investments in which we
incurred indebtedness to fund these investments than if indebtedness was
not incurred;
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our
LLC Agreement does not prohibit our Manager or any of our affiliates from
competing with us for investments and engaging in other types of
business;
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our
Manager may have had opportunities to earn fees for referring a
prospective investment opportunity to
others;
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the
lack of separate legal representation for us and our Manager and lack of
arm’s-length negotiations regarding compensation payable to our
Manager;
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our
Manager is our “tax matters partner” and is able to negotiate with the IRS
to settle tax disputes that would bind us and our members that might not
be in your best interest given your individual tax situation;
and
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our
Manager can make decisions as to when and whether to sell a jointly-owned
asset when the co-owner is another business it
manages.
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The
Investment Committee of our Manager is not independent.
Any
conflicts in determining and allocating investments between us and our Manager,
or between us and another fund managed by our Manager, were resolved by our
Manager’s investment committee, which also serves as the investment committee
for other funds managed by our Manager. Since all of the members of our
Manager’s investment committee are officers of our Manager and are not
independent, matters determined by such investment committee, including
conflicts of interest between us and our Manager and our affiliates involving
investment opportunities, may not have been as favorable to you and our other
investors as they would be if independent members were on the committee.
Generally, if an investment was appropriate for more than one fund, our
Manager’s investment committee allocated the investment to a fund (which
includes us) after taking into consideration at least the following
factors:
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whether
the fund had the cash required for the
investment;
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whether
the amount of debt to be incurred with respect to the investment was
acceptable for the fund;
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the
effect the investment would have on the fund’s cash
flow;
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whether
the investment would further diversify, or unduly concentrate, the fund’s
investments in a particular lessee/borrower, class or type of equipment,
location, industry, etc.;
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whether
the term of the investment was within the term of the fund;
and
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·
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which
fund had been seeking investments for the longest period of
time.
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Notwithstanding
the foregoing, our Manager’s investment committee may have made exceptions to
these general policies when, in our Manager’s judgment, other circumstances made
application of these policies inequitable or economically undesirable. In
addition, our LLC Agreement permits our Manager and our affiliates to engage in
equipment acquisitions, financing secured loans, refinancing, leasing and
releasing opportunities on their own behalf or on behalf of other funds even if
they compete with us.
Our
Manager’s officers and employees manage other businesses and did not and will
not devote their time exclusively to managing us and our business.
We do not
and will not employ our own full-time officers, managers or employees. Instead,
our Manager will supervise and control our business affairs. Our Manager’s
officers and employees will also be spending time supervising the affairs of
other equipment leasing and finance funds it manages. Therefore, such officers
and employees devoted and will devote the amount of time that they think is
necessary to conduct our business, which may not be the same amount of time that
would be devoted to us if we had separate officers and employees.
Our
Manager may have difficulty managing its growth, which may divert its resources
and limit its ability to expand its operations successfully.
The
amount of assets that our Manager manages has grown substantially since our
Manager was formed in 1985 and our Manager and its affiliates intend to continue
to sponsor and manage, as applicable, funds similar to us that may be concurrent
with us and they expect to experience further growth in their respective assets
under management. Our Manager’s future success will depend on the ability of its
and its affiliates’ officers and key employees to implement and improve their
operational, financial and management controls, reporting systems and
procedures, and manage a growing number of assets and investment funds. They,
however, may not implement improvements to their management information and
control systems in an efficient or timely manner and they may discover
deficiencies in their existing systems and controls. Thus, our Manager’s
anticipated growth may place a strain on its administrative and operations
infrastructure, which could increase its costs and reduce its efficiency and
could negatively impact our operations, business and financial
condition.
Operational
risks may disrupt our business and result in losses.
We may
face operational risk from errors made in the execution, confirmation or
settlement of transactions. We may also face operational risk from our
transactions not being properly recorded, evaluated or accounted for. We rely
heavily on our Manager’s financial, accounting, and other software systems. If
any of these systems fail to operate properly or become disabled, we could
suffer financial loss and a disruption of our business. In addition,
we are highly dependent on our Manager’s information systems and technology.
There can be no assurance that these information systems and technology will be
able to accommodate our Manager’s growth or that the cost of maintaining such
systems will not increase from its current level. Such a failure to accommodate
growth, or an increase in costs related to such information systems, could also
negatively affect our liquidity and cash flows, and could negatively affect our
profitability. Furthermore, we depend on the headquarters of our
Manager, which are located in New York City, for the operation of our business.
A disaster or a disruption in the infrastructure that supports our businesses,
including a disruption involving electronic communications or other services
used by us or third parties with whom we conduct business, or directly affecting
our headquarters, may have an adverse impact on our ability to continue to
operate our business without interruption that could have a material adverse
effect on us. Although we have disaster recovery programs in place, there can be
no assurance that these will be sufficient to mitigate the harm that may result
from such a disaster or disruption. In addition, insurance and other safeguards
might only partially reimburse us for any losses. Finally, we rely on
third-party service providers for certain aspects of our business, including
certain accounting and financial services. Any interruption or deterioration in
the performance of these third parties could impair the quality of our
operations and could adversely affect our business and result in
losses.
Our
internal controls over financial reporting may not be effective or our
independent registered public accounting firm may not be able to certify as to
their effectiveness, which could have a significant and adverse effect on our
business.
Our
Manager is required to evaluate our internal controls over financial reporting
in order to allow management to report on, and if and when required, our
independent registered public accounting firm to attest to, our internal
controls over financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act of 2002, as amended, and the rules and regulations of the SEC
thereunder, which we refer to as “Section 404.” During the course of testing,
our Manager may identify deficiencies that it may not be able to remediate in
time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with
the requirements of Section 404. In addition, if we fail to achieve and maintain
the adequacy of our internal controls, as such standards are modified,
supplemented or amended from time to time, we may not be able to ensure that we
can conclude on an ongoing basis that we have effective internal controls over
financial reporting in accordance with Section 404. We cannot be certain as to
the timing of completion of our evaluation, testing and any remediation actions
or the impact of the same on our operations. If we are not able to complete our
annual evaluations required by Section 404 in a timely manner or with
adequate compliance, we may be subject to sanctions or investigation by
regulatory authorities, such as the SEC. As a result, we may be required to
incur costs in improving our internal control system and the hiring of
additional personnel. Any such action could negatively affect our results of
operations and the achievement of our investment objectives.
We
are subject to certain reporting requirements and are required to file certain
periodic reports with the SEC.
We are
subject to reporting requirements under the Securities Exchange Act of 1934,
including the filing of quarterly and annual reports. Prior public funds
sponsored by our Manager have been and are subject to the same requirements.
Some of these funds have been required to amend previously filed reports to,
among other things, restate the audited or unaudited financial statements filed
in such reports. As a result, the prior funds have been delinquent in filing
subsequent quarterly and annual reports when they became due. If we experience
delays in the filing of our reports, our members may not have access to timely
information concerning us, our operations, and our financial
results.
Your
ability to institute a cause of action against our Manager and its affiliates is
limited by our LLC Agreement.
Our LLC
Agreement provides that neither our Manager nor any of its affiliates will have
any liability to us for any loss we suffer arising out of any action or inaction
of our Manager or an affiliate if the Manager or affiliate determined, in good
faith, that the course of conduct was in our best interests and did not
constitute negligence or misconduct. As a result of these provisions in our LLC
Agreement, your right to institute a cause of action against our Manager may be
more limited than it would be without these provisions.
Business
Risks
Our
business could be hurt by economic downturns.
Our
business is affected by a number of economic factors, including the level of
economic activity in the markets in which we operate. A decline in economic
activity in the United States or internationally could materially affect our
financial condition and results of operations. The equipment leasing and
financing industry is influenced by factors such as interest rates, inflation,
employment rates and other macroeconomic factors over which we have no control.
Any decline in economic activity as a result of these factors typically results
in a decrease in the number of transactions in which we participate and in our
profitability.
Uncertainties
associated with the equipment leasing and financing industry may have an adverse
effect on our business and may adversely affect our ability to give you any
economic return from our Shares or a complete return of your
capital.
There are
a number of uncertainties associated with the equipment leasing and financing
industry that may have an adverse effect on our business and may adversely
affect our ability to make cash distributions to you that will, in total, be
equal to a return of all of your capital, or provide for any economic return
from our Shares. These include:
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fluctuations
in demand for equipment and fluctuations in interest rates and inflation
rates;
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the
continuing economic life and value of equipment at the time our
investments mature;
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the
technological and economic obsolescence of
equipment;
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potential
defaults by lessees, borrowers or other
counterparties;
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supervision
and regulation by governmental authorities;
and
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increases
in our expenses, including taxes and insurance
expenses.
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The
risks and uncertainties associated with the industries of our lessees,
borrowers, and other counterparties may indirectly affect our business,
operating results and financial condition.
We are
indirectly subject to a number of uncertainties associated with the industries
of our lessees, borrowers, and other counterparties. We invested in a pool of
equipment by, among other things, acquiring equipment subject to lease,
purchasing equipment and leasing equipment to third-party end users, financing
equipment for third-party end users, acquiring ownership rights to items of
leased equipment at lease expiration, and acquiring interests or options to
purchase interests in the residual value of equipment. The lessees, borrowers,
and other counterparties to these transactions operate in a variety of
industries. As such, we are indirectly subject to the various risks and
uncertainties that affect our lessees’, borrowers’, and other counterparties’
businesses and operations. If such risks or uncertainties were to affect our
lessees, borrowers, or other counterparties, we may indirectly suffer a loss on
our investment, lose future revenues or experience adverse consequences to our
business, operating results and financial condition.
Because
we borrowed money to make our investments, losses as a result of lessee,
borrower or other counterparty defaults may be greater than if such borrowings
were not incurred.
Although
we acquired some of our investments for cash, we borrowed a substantial portion
of the purchase price of certain of our investments. While we believe the use of
leverage resulted in our ability to make more investments with less risk than if
leverage was not utilized, there can be no assurance that the benefits of
greater size and diversification of our portfolio will offset the heightened
risk of loss in an individual investment using leverage. With respect
to non-recourse borrowings, if we are unable to pay our debt service obligations
because a lessee, borrower or other counterparty defaults, a lender could
foreclose on the investment securing the non-recourse indebtedness. This could
cause us to lose all or part of our investment or could force us to meet debt
service payment obligations so as to protect our investment subject to such
indebtedness and prevent it from being subject to
repossession. Additionally, while the majority of our borrowings were
non-recourse, we are jointly and severally liable for recourse indebtedness
incurred under a revolving line of credit facility with California Bank &
Trust (“CB&T”) that is secured by certain of our assets that are not
otherwise pledged to other lenders. CB&T has a security interest in such
assets and the right to sell those assets to pay off the indebtedness if we
default on our payment obligations. This recourse indebtedness may
increase our risk of loss because we must meet the debt service payment
obligations regardless of the revenue we receive from the investment that is
subject to such secured indebtedness.
Restrictions
imposed by the terms of our indebtedness may limit our financial
flexibility.
We,
together with certain of our affiliates (entities managed by our Manager),
Fund Eight B, ICON Income Fund Ten, LLC (“Fund Ten”), ICON Leasing Fund Eleven,
LLC (“Fund Eleven”), ICON Leasing Fund Twelve, LLC (“Fund Twelve”) and ICON
Equipment and Corporate Infrastructure Fund Fourteen, L.P. (“Fund Fourteen”),
are party to the revolving line of credit agreement with CB&T, as
amended. The terms of that agreement could restrict us from paying
distributions to our members if such payments would cause us not to be in
compliance with our financial covenants in that agreement. For
additional information on the terms of our credit agreement, see “Item 7.
Manager’s Discussion and Analysis of Financial Condition and Results of
Operations – Liquidity and Capital Resources.”
Guarantees
made by the guarantors of some of our lessees, borrowers and other
counterparties may be voided under certain circumstances and we may be required
to return payments received from such guarantors.
Under
federal bankruptcy law and comparable provisions of State fraudulent transfer
laws, a guarantee could be voided, or claims in respect of a guarantee could be
subordinated to all other debts of that guarantor if, among other things, the
guarantor, at the time it incurred the indebtedness evidenced by its
guarantee:
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received
less than reasonably equivalent value or fair consideration for the
incurrence of such guarantee; and
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was
insolvent or rendered insolvent by reason of such incurrence;
or
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was
engaged in a business or transaction for which the guarantor’s remaining
assets constituted unreasonably small capital;
or
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intended
to incur, or believed that it would incur, debts beyond its ability to pay
such debts as they mature.
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In
addition, any payment by that guarantor pursuant to its guarantee could be
voided and required to be returned to the guarantor, or to a fund for the
benefit of the creditors of the guarantor.
The
measures of insolvency for purposes of these fraudulent transfer laws will vary
depending upon the law applied in any proceeding to determine whether a
fraudulent transfer has occurred. Generally, however, a guarantor would be
considered insolvent if:
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the
sum of its debts, including contingent liabilities, was greater than the
fair saleable value of all of its
assets;
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the
present fair saleable value of its assets was less than the amount that
would be required to pay its probable liability on its existing debts,
including contingent liabilities, as they become absolute and mature;
or
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it
could not pay its debts as they become
due.
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We cannot
assure you as to what standard a court would apply in making these
determinations or that a court would agree with our conclusions in this regard.
We also cannot make any assurances as to the standards that courts in foreign
jurisdictions may use or that courts in foreign jurisdictions will take a
position similar to that taken in the United States.
If
the value of our investments declines more rapidly than we anticipate, our
financial performance may be adversely affected.
A
significant part of the value of a significant portion of the equipment that we
invested in is expected to be the potential value of the equipment once the
lease term expires (with respect to leased equipment). Generally, equipment is
expected to decline in value over its useful life. In making these types of
investments, we assumed a residual value for the equipment at the end of the
lease or other investment that, at maturity, was expected to be enough to return
the cost of our investment in the equipment and provide a rate of return despite
the expected decline in the value of the equipment over the term of the
investment. However, the actual residual value of the equipment at maturity and
whether that value meets our expectations will depend to a significant extent
upon the following factors, many of which are beyond our control:
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our
ability to acquire or enter into agreements that preserved or enhanced the
relative value of the equipment;
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our
ability to maximize the value of the equipment at maturity of our
investment;
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market
conditions prevailing at maturity;
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the
cost of new equipment at the time we are remarketing used
equipment;
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the
extent to which technological or regulatory developments reduce the market
for such used equipment;
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the
strength of the economy; and
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the
condition of the equipment at
maturity.
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We cannot
assure you that our assumptions with respect to value will be accurate or that
the equipment will not lose value more rapidly than we anticipate.
If
equipment is not properly maintained, its residual value may be less than
expected.
If a
lessee or other counterparty fails to maintain equipment in accordance with the
terms of our agreements, we may have to make unanticipated expenditures to
repair the equipment in order to protect our investment. In addition, some of
the equipment we invested in was used equipment. While we planned to inspect
most used equipment prior to making an investment, there is no assurance that an
inspection of used equipment prior to purchasing it revealed any or all defects
and problems with the equipment that may occur after it was acquired by
us.
We
typically obtained representations from the sellers and lessees of used
equipment that:
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the
equipment has been maintained in compliance with the terms of applicable
agreements;
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that
neither the seller nor the lessee was in violation of any material terms
of such agreements; and
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the
equipment was in good operating condition and repair and that, with
respect to leases, the lessee had no defenses to the payment of rent for
the equipment as a result of the condition of such
equipment.
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We have
rights against the seller of equipment for any losses arising from a breach of
representations made to us and against the lessee for a default under the lease.
However, we cannot assure you that these rights will make us whole with respect
to our entire investment in the equipment or our expected returns on the
equipment, including legal costs, costs of repair and lost revenue from the
delay in being able to sell or re-lease the equipment due to undetected problems
or issues. These costs and lost revenue could negatively affect our liquidity
and cash flows, and could negatively affect our profitability if we are unable
to recoup such costs from the lessee or other third parties.
If
a lessee, borrower or other counterparty defaults on its obligations to us, we
could incur losses.
We
entered into transactions with parties that had senior debt rated below
investment grade. We did not require such parties to have a minimum credit
rating. Lessees, borrowers, and other counterparties with lower credit ratings
may default on payments to us more frequently than lessees, borrowers or other
counterparties with higher credit ratings. For example, if a lessee does not
make lease payments to us or to a lender on our behalf or a borrower does not
make loan payments to us when due, or violates the terms of its contract in
another important way, we may be forced to terminate our agreements with such
parties and attempt to recover the equipment. We may do this at a time when we
may not be able to arrange for a new lease or to sell our investment right away,
if at all. We would then lose the expected revenues and might not be able to
recover the entire amount or any of our original investment. The costs of
recovering equipment upon a lessee’s or borrower’s default, enforcing the
obligations under the contract, and transporting, storing, repairing, and
finding a new lessee or purchaser for the equipment may be high and may
negatively affect the value of our investment in the equipment. These costs
could also negatively affect our liquidity and cash flows, and could negatively
affect our profitability.
If
a lessee, borrower or other counterparty files for bankruptcy, we may have
difficulty enforcing the terms of the contract and may incur
losses.
If a
lessee, borrower or other counterparty files for protection under the bankruptcy
laws, the remaining term of the lease, loan or other financing contract could be
shortened or the contract could be rejected by the bankruptcy court, which could
result in, among other things, any unpaid pre-bankruptcy lease, loan or other
contractual payments being cancelled as part of the bankruptcy proceeding. We
may also experience difficulties and delays in recovering equipment from a
bankrupt lessee or borrower that is involved in a bankruptcy proceeding or has
been declared bankrupt by a bankruptcy court. If a contract is rejected in a
bankruptcy, we would bear the cost of retrieving and storing the equipment and
then have to remarket such equipment. In addition, the bankruptcy court would
treat us as an unsecured creditor for any amounts due under the lease, loan or
other contract. These costs and lost revenues could also negatively affect our
liquidity and cash flows and could negatively affect our
profitability.
Investing
in equipment in foreign countries may be riskier than domestic investments and
may result in losses.
We made
investments in equipment for use by domestic or foreign parties outside of the
United States. We may have difficulty enforcing our rights under foreign
transaction documents. In addition, we may have difficulty repossessing
equipment if a foreign party defaults and enforcement of our rights outside the
United States could be more expensive. Moreover, foreign jurisdictions may
confiscate our equipment. Use of equipment in a foreign country will be subject
to that country’s tax laws, which may impose unanticipated taxes. While we
sought to require lessees, borrowers, and other counterparties to reimburse us
for all taxes imposed on the use of the equipment and require them to maintain
insurance covering the risks of confiscation of the equipment, we cannot assure
you that we will be successful in doing so or that insurance reimbursements will
be adequate to allow for recovery of and a return on foreign
investments.
In
addition, we invested in equipment that may travel to or between locations
outside of the United States. Regulations in foreign countries may adversely
affect our interest in equipment in those countries. Foreign courts may not
recognize judgments obtained in U.S. courts and different accounting or
financial reporting practices may make it difficult to judge the financial
viability of a lessee, borrower or other counterparty, heightening the risk of
default and the loss of our investment in such equipment, which could have a
material adverse effect on our results of operations and financial
condition.
In
addition to business uncertainties, our investments may be affected by
political, social, and economic uncertainty affecting a country or region. Many
financial markets are not as developed or as efficient as those in the U.S. and,
as a result, liquidity may be reduced and price volatility may be higher. The
legal and regulatory environment may also be different, particularly with
respect to bankruptcy and reorganization. Financial accounting standards and
practices may also differ and there may be less publicly available information
with respect to such companies. While our Manager considered these factors when
making investment decisions, no assurance can be given that we will be able to
fully avoid these risks or generate sufficient risk-adjusted
returns.
Sellers
of leased equipment could use their knowledge of the lease terms for gain at our
expense.
We may
have acquired equipment subject to lease from leasing companies that have an
ongoing relationship with the lessees. A seller could use its knowledge of the
terms of the lease, particularly the end of lease options and date the lease
ends, to compete with us. In particular, a seller may approach a lessee with an
offer to substitute similar equipment at lease end for lower rental amounts.
This may adversely affect our opportunity to maximize the residual value of the
equipment and potentially negatively affect our profitability.
Investment
in joint ventures may subject us to risks relating to our co-investors that
could adversely impact the financial results of such joint
ventures.
We
invested in joint ventures with other businesses our Manager manages, as well as
with unrelated third parties. Investing in joint ventures involves additional
risks not present when acquiring leased equipment that will be wholly owned by
us. These risks include the possibility that our co-investors might become
bankrupt or otherwise fail to meet financial commitments, thereby obligating us
to pay all of the debt associated with the joint venture, as each party to a
joint venture may be required to guarantee all of the joint venture’s
obligations. Alternatively, the co-investors may have economic or business
interests or goals that are inconsistent with our investment objectives and want
to manage the joint venture in ways that do not maximize our return. Among other
things, actions by a co-investor might subject leases that are owned by the
joint venture to liabilities greater than those contemplated by the joint
venture agreement. Also, when none of the joint owners control a joint venture,
there might be a stalemate on decisions, including when to sell the equipment or
the prices or terms of a lease. Finally, while we typically have the right to
buy out the other joint owner’s interest in the equipment in the event of the
sale, we may not have the resources available to do so. These risks could
negatively affect our profitability and could result in legal and other costs,
which would negatively affect our liquidity and cash flows.
We
may not be able to obtain insurance for certain risks and would have to bear the
cost of losses from non-insurable risks.
Equipment
may be damaged or lost. Fire, weather, accidents, theft or other events can
cause damage or loss of equipment. While our transaction documents generally
require lessees and borrowers to have comprehensive insurance and assume the
risk of loss, some losses, such as from acts of war, terrorism or earthquakes,
may be either uninsurable or not economically feasible to insure. Furthermore,
not all possible liability claims or contingencies affecting equipment can be
anticipated or insured against, and, if insured, the insurance proceeds may not
be sufficient to cover a loss. If such a disaster occurs to the equipment, we
could suffer a total loss of any investment in the affected equipment. In
investing in some types of equipment, we may have been exposed to environmental
tort liability. Although we used our best efforts to minimize the possibility
and exposure of such liability including by means of attempting to obtain
insurance, we cannot assure you that our assets will be protected against any
such claims. These risks could negatively affect our profitability and could
result in legal and other costs, which would negatively affect our liquidity and
cash flows.
We
could suffer losses from failure to maintain our equipment registration and from
unexpected regulatory compliance costs.
Many
types of transportation assets are subject to registration requirements by U.S.
governmental agencies, as well as foreign governments if such equipment is to be
used outside of the United States. Failing to register the equipment, or losing
such registration, could result in substantial penalties, forced liquidation of
the equipment and/or the inability to operate and lease the equipment.
Governmental agencies may also require changes or improvements to equipment and
we may have to spend our own funds to comply if the lessee, borrower or other
counterparty is not required to do so under the transaction documents. These
changes could force the equipment to be removed from service for a period of
time. The terms of the transaction documents may provide for payment reductions
if the equipment must remain out of service for an extended period of time or is
removed from service. We may then have reduced income from our investment for
this equipment. If we do not have the funds to make a required change, we might
be required to sell the affected equipment. If so, we could suffer a loss on our
investment, lose future revenues and experience adverse tax
consequences.
If
any of our investments become subject to usury laws, we could have reduced
revenues or possibly a loss on such investments.
In
addition to credit risks, we may be subject to other risks in equipment
financing transactions in which we are deemed to be a lender. For example,
equipment leases have sometimes been held by U.S. courts to be loan transactions
subject to State usury laws, which limit the interest rate that can be charged.
Uncertainties in the application of some laws may result in inadvertent
violations that could result in reduced investment returns or, possibly, loss on
our investment in the affected equipment. Although part of our business strategy
was to enter into or acquire leases that we believe were structured so that they
avoid being deemed loans, and would therefore not be subject to usury laws, we
cannot assure you that we were successful in doing so. If an equipment lease is
held to be a loan with a usurious rate of interest, the amount of the lease
payment could be reduced and adversely affect our revenue.
State
laws determine what rates of interest are deemed usurious, when the applicable
rate of interest is determined, and how it is calculated. In addition, some U.S.
courts have also held that certain lease features, such as equity interests,
constitute additional interest. Although we generally sought assurances and/or
opinions to the effect that our transactions do not violate applicable usury
laws, a finding that our transactions violate usury laws could result in the
interest obligation to us being declared void and we could be liable for damages
and penalties under applicable law. We cannot assure you as to what standard a
court would apply in making these determinations or that a court would agree
with our conclusions in this regard. We also cannot make any assurances as to
the standards that courts in foreign jurisdictions may use or that courts in
foreign jurisdictions will take a position similar to that taken in the United
States.
We
competed with a variety of financing sources for our investments, which may
affect our ability to achieve our investment objectives.
The
commercial leasing and financing industry is highly competitive and is
characterized by competitive factors that vary based upon product and geographic
region. Our competitors are varied and include other equipment leasing and
finance funds, hedge funds, captive and independent finance companies,
commercial and industrial banks, manufacturers and vendors. Competition from
both traditional competitors and new market entrants has intensified in recent
years due to growing marketplace liquidity and increasing recognition of the
attractiveness of the commercial leasing and finance industry.
When we
made our investments, we competed primarily on the basis of pricing, terms and
structure. To the extent that our ability to make favorable investments was
adversely affected by any combination of those factors, we could fail
to achieve our investment objectives. In addition, our competitors
may have been and/or may be in a position to offer equipment to prospective
customers on financial terms that were or are more favorable than those that we
could offer or that we can offer in liquidating our portfolio, which may have
affected our ability to make favorable investments and may affect our
ability to liquidate our portfolio, in each case, in a manner that would enable
us to achieve our investment objectives.
General
Tax Risks
If
the IRS classifies us as a corporation rather than a partnership, your
distributions would be reduced under current tax law.
We did
not and will not apply for an IRS ruling that we will be classified as a
partnership for federal income tax purposes. Although counsel rendered an
opinion to us at the time of our offering that we will be taxed as a partnership
and not as a corporation, that opinion is not binding on the IRS and the IRS has
not ruled on any federal income tax issue relating to us. If the IRS
successfully contends that we should be treated as a corporation for federal
income tax purposes rather than as a partnership, then:
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our
realized losses would not be passed through to
you;
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our
income would be taxed at tax rates applicable to corporations, thereby
reducing our cash available to distribute to you;
and
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your
distributions would be taxed as dividend income to the extent of current
and accumulated earnings and
profits.
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In
addition, we could be taxed as a corporation if we are treated as a publicly
traded partnership by the IRS. To minimize this possibility, our LLC Agreement
places significant restrictions on your ability to transfer our
Shares.
We
could lose cost recovery or depreciation deductions if the IRS treats our leases
as sales or financings.
We expect
that, for federal income tax purposes, we will be treated as the owner and
lessor of the equipment that we leased. However, the IRS may challenge the
leases and instead assert that they are sales or financings. If the IRS
determines that we are not the owner of our leased equipment, we would not be
entitled to cost recovery, depreciation or amortization deductions, and our
leasing income might be deemed to be portfolio income instead of passive
activity income. The denial of such cost recovery or amortization deductions
could cause your tax liabilities to increase.
You
may incur tax liability in excess of the cash distributions you receive in a
particular year.
In any
particular year, your tax liability from owning our Shares may exceed the cash
distributions you receive from this investment. While we expect that your net
taxable income from owning our Shares for most years will be less than your cash
distributions in those years, to the extent any of our debt is repaid with
income or proceeds from equipment sales, taxable income could exceed the amount
of cash distributions you receive in those years. Additionally, a sale of our
investments may result in taxes in any year that are greater than the amount of
cash from the sale, resulting in a tax liability in excess of cash
distributions. Further, due to the operation of the various loss disallowance
rules, in a given tax year you may have taxable income when, on a net basis, we
have a loss, or you may recognize a greater amount of taxable income than our
net income because, due to a loss disallowance, income from some of our
activities cannot be offset by losses from some of our other
activities.
You
may be subject to greater income tax obligations than originally anticipated due
to special depreciation rules.
We may
have acquired equipment subject to lease that the Code requires us to depreciate
over a longer period than the standard depreciation period. Similarly, some of
the equipment that we purchased was not be eligible for accelerated depreciation
under the Modified Accelerated Costs Recovery System, which was established by
the Tax Reform Act of 1986 to set forth the guidelines for accelerated
depreciation under the Code. Further, if we acquired equipment that the Code
deems to be tax-exempt use property and the leases did not satisfy certain
requirements, losses attributable to such equipment are suspended and may be
deducted only against income we receive from such equipment or when we dispose
of such equipment. Depending on the equipment that we acquired and its
eligibility for accelerated depreciation under the Code, we may have less
depreciation deductions to offset gross lease revenue, thereby increasing our
taxable income.
There
are limitations on your ability to deduct our losses.
Your
ability to deduct your share of our losses is limited to the amounts that you
have at risk from owning our Shares. This is generally the amount of your
investment, plus any profit allocations and minus any loss allocation and
distributions. This determination is further limited by a tax rule that applies
the at-risk rules on an activity by activity basis, further limiting losses from
a specific activity to the amount at risk in that activity. Additionally, your
ability to deduct losses attributable to passive activities is restricted. Some
of our operations will constitute passive activities and you can only use our
losses from such activities to offset passive activity income in calculating tax
liability. Furthermore, passive activity losses may not be used to offset
portfolio income.
The
IRS may allocate more taxable income to you than our LLC Agreement
provides.
The IRS
might successfully challenge our allocations of taxable income or losses. If so,
the IRS would require reallocation of our taxable income and loss, resulting in
an allocation of more taxable income or less loss to you than our LLC Agreement
allocates.
If
you are a tax-exempt organization, you will have unrelated business taxable
income from this investment.
Tax-exempt
organizations are subject to income tax on unrelated business taxable income
(“UBTI”). Such organizations are required to file federal income tax returns if
they have UBTI from all sources in excess of $1,000 per year. Our leasing income
will constitute UBTI. Furthermore, tax-exempt organizations in the form of
charitable remainder trusts will be subject to an excise tax equal to 100% of
their UBTI.
This
investment may cause you to pay additional taxes.
You may
be required to pay alternative minimum tax in connection with owning our Shares,
since you will be allocated a proportionate share of our tax preference items.
Our Manager’s operation of our business affairs may lead to other adjustments
that could also increase your alternative minimum tax. Alternative minimum tax
is treated in the same manner as the regular income tax for purposes of making
estimated tax payments.
You
may incur State tax and foreign tax liabilities and have an obligation to file
State or foreign tax returns.
You may
be required to file tax returns and pay foreign, State or local taxes, such as
income, franchise or personal property taxes, as a result of an investment in
our Shares, depending upon the laws of the jurisdictions in which the equipment
that we own is located.
Any
adjustment to our tax return as a result of an audit by the IRS may result in
adjustment to your tax return.
If we
adjust our tax return as a result of an IRS audit, such adjustment may result in
an examination of other items in your returns unrelated to us, or an examination
of your tax returns for prior years. You could incur substantial legal and
accounting costs in contesting any challenge by the IRS, regardless of the
outcome. Further, because you will be treated for federal income tax purposes as
a partner in a partnership by investing in our Shares, an audit of our tax
return could potentially lead to an audit of your individual tax return.
Finally, under certain circumstances, the IRS may automatically adjust your
personal return without the opportunity for a hearing if it adjusts our tax
return.
Some
of the distributions on our Shares will be a return of capital, in whole or in
part, which will complicate your tax reporting and could cause unexpected tax
consequences at liquidation.
As we
depreciated our investments in leased equipment over the term of our existence,
a portion of each distribution to you was likely considered a return of capital,
rather than income. Therefore, the dollar amount of each distribution should not
be considered as necessarily being all income to you. As your capital in our
Shares is reduced for tax purposes over the life of your investment, you will
not receive a lump sum distribution upon liquidation that equals the purchase
price you paid for our Shares, such as you might expect if you had purchased a
bond. Also, payments made upon our liquidation will be taxable to the extent
that such payments are not a return of capital.
As you
receive distributions throughout the life of your investment, you will not know
at the time of the distribution what portion of the distribution represents a
return of capital and what portion represents income. The Schedule K-1 statement
you received and continue to receive from us each year will specify the amounts
of capital and income you received throughout the prior year.
None.
We
neither own nor lease office space or any other real property in our business at
the present time.
In the
ordinary course of conducting our business, we may be subject to certain claims,
suits, and complaints filed against us. In our Manager’s opinion, the
outcome of such matters, if any, will not have a material impact on our
consolidated financial position or results of operations. We are not
aware of any material legal proceedings that are currently pending against us or
against any of our assets.
Our
Shares are not publicly traded and there is no established public trading market
for our Shares. It is unlikely that any such market will develop.
Number
of Members
|
|
Title of Class
|
as of March 19, 2010
|
Manager
(as a member)
|
1
|
Additional
members
|
3,244
|
We, at
our Manager’s discretion, paid monthly distributions to each of our members
beginning the first month after each member was admitted to the LLC through the
end of our operating period, which was on April 30, 2008. We paid
distributions to additional members totaling $2,899,453, $7,678,004 and
$8,825,274 for the years ended December 31, 2009, 2008 and 2007, respectively.
Additionally, our Manager was paid distributions of $29,285, $77,556 and $89,144
for the years ended December 31, 2009, 2008 and 2007, respectively. The terms of
our loan agreement with CB&T, as amended, could restrict us from paying cash
distributions to our members if such payment would cause us to not be in
compliance with our financial covenants. See “Item 7. Manager’s Discussion and
Analysis of Financial Condition and Results of Operations – Liquidity and
Capital Resources.”
In order
for Financial Industry Regulatory Authority, Inc. (“FINRA”) members and their
associated persons to have participated in the offering and sale of Shares
pursuant to the 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 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 $443.24 per Share as of December
31, 2009. 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.
Following
the termination of the offering of our Shares, the estimated value of our Shares
is 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 calculated the sum of: (i) the
unpaid finance lease and note receivable payments on our existing finance leases
and notes receivable, discounted at the implicit yield for each such
transaction, (ii) the fair market value of our operating leases, equipment held
for sale or lease, and other assets, as determined by the most recent
third-party appraisals we have obtained for certain assets or our
Manager’s estimated values of certain other assets, as applicable,
and (iii) our cash on hand. From this amount, we then subtracted our
total debt outstanding and then divided that sum by the total number of Shares
outstanding.
The
foregoing valuation is an estimate only. The appraisals that we
obtained and the methodology utilized by our management in estimating our per
Share value were subject to various limitations and were 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. Except for independent third-party
appraisals of certain 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
members could receive $443.24 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:
·
|
as
to the amount members may actually receive if and when we seek to
liquidate our assets or the amount of lease and note receivable 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 $1,000 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;
|
·
|
that
the foregoing valuation, or the method used to establish value, will
satisfy the technical requirements imposed on plan fiduciaries under
ERISA; or
|
·
|
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 Shares.
|
The
redemption price we offer in our redemption 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 $443.24 per
Share does not reflect the amount that a member would currently receive under
our redemption plan. In addition, there can be no assurance that you
will be able to redeem your Shares under our redemption plan.
The
selected financial data should be read in conjunction with the consolidated
financial statements and related notes included in “Item 8. Consolidated
Financial Statements and Supplementary Data” contained elsewhere in this Annual
Report on Form 10-K.
Years Ended December 31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Total
revenue (a)
|
$ | 18,837,809 | $ | 20,158,872 | $ | 23,460,086 | $ | 24,885,153 | $ | 30,349,467 | ||||||||||
Net
income (loss) attributable to Fund Nine (b)
|
$ | 6,700,146 | $ | 1,047,818 | $ | 7,940,018 | $ | (667,903 | ) | $ | (2,777,128 | ) | ||||||||
Net
income (loss) attributable to Fund Nine
|
||||||||||||||||||||
allocable to additional members | $ | 6,633,145 | $ | 1,037,340 | $ | 7,860,618 | $ | (661,224 | ) | $ | (2,749,357 | ) | ||||||||
Net
income (loss) attributable to Fund Nine
|
||||||||||||||||||||
allocable to the Manager
|
$ | 67,001 | $ | 10,478 | $ | 79,400 | $ | (6,679 | ) | $ | (27,771 | ) | ||||||||
Weighted
average number of additional shares
|
||||||||||||||||||||
of limited liability company interests outstanding
|
97,955 | 97,955 | 98,052 | 98,123 | 98,215 | |||||||||||||||
Net
income (loss) attributable to Fund Nine per weighted
average
|
||||||||||||||||||||
additional share of limited liability company interests
|
$ | 67.72 | $ | 10.59 | $ | 80.17 | $ | (6.74 | ) | $ | (27.99 | ) | ||||||||
Distributions
to additional members
|
$ | 2,899,453 | $ | 7,678,004 | $ | 8,825,274 | $ | 8,831,229 | $ | 8,840,105 | ||||||||||
Distributions
per weighted average additional share
|
||||||||||||||||||||
of limited liability company interests
|
$ | 29.60 | $ | 78.38 | $ | 90.01 | $ | 90.00 | $ | 90.01 | ||||||||||
Distributions
to the Manager
|
$ | 29,285 | $ | 77,556 | $ | 89,144 | $ | 89,204 | $ | 89,294 | ||||||||||
December 31,
|
||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Total
assets (a)
|
$ | 102,900,677 | $ | 114,231,144 | $ | 139,570,167 | $ | 137,187,658 | $ | 151,635,559 | ||||||||||
Notes
payable
|
$ | 62,437,098 | $ | 77,448,699 | $ | 96,122,281 | $ | 92,480,648 | $ | 97,782,942 | ||||||||||
Members'
equity
|
$ | 36,962,094 | $ | 31,783,252 | $ | 39,909,465 | $ | 42,333,349 | $ | 52,543,253 | ||||||||||
(a)
The decline in revenue and total assets is due to the winding down of
our operations commencing with the beginning of our liquidation
period on May 1, 2008. During our liquidation period, we are selling and
will continue to sell our assets in the ordinary course of
business. As we sell our assets, both rental income and finance
income will continue to decrease over time.
|
||||||||||||||||||||
(b)
In 2008, we recorded impairment losses of approximately $3,900,000 on our
investment in Aircraft 128 and approximately $1,950,000 related to our 50%
investment in Aircraft 126. During 2006 and 2005, we recorded impairment
losses of approximately $3,005,000 and $3,182,000,
respectively.
|
Our Manager’s Discussion and
Analysis of Financial Condition and Results of Operations relates to our
consolidated financial statements and should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this Annual Report
on Form 10-K. Statements made in this section may be considered forward-looking.
These statements are not guarantees of future performance and are based on
current expectations and assumptions that are subject to risks and
uncertainties. Actual results could differ materially because of
these risks and assumptions, including, among other things, factors discussed in
“Part I. Forward-Looking Statements” and “Item 1A. Risk Factors” located
elsewhere in this Annual Report on Form
10-K.
Overview
We
operate as an equipment leasing program in which the capital our members
invested was pooled together to make investments, pay fees and establish a small
reserve. We primarily acquired equipment subject to lease, purchased equipment
and leased it to third-party end users or financed equipment for third parties,
provided equipment and other financing and, to a lesser degree, acquired
ownership rights to items of leased equipment at lease expiration. Some of our
equipment leases were acquired for cash and provide current cash flow, which we
refer to as “income” leases. For the other equipment leases, we financed the
majority of the purchase price through borrowings from third parties. We refer
to these leases as “growth” leases. These growth leases generate little or no
current cash flow because substantially all of the rental payments received from
the lessee are used to service the indebtedness associated with acquiring or
financing the lease. For these leases, we anticipated that the future value of
the leased equipment would exceed our cash portion of the purchase
price.
Our
Manager manages and controls our business affairs, including, but not limited
to, our equipment leases and other financing transactions, under the terms of
our LLC Agreement. We completed our operating period on April 30, 2008 and
entered our liquidation period effective May 1, 2008. During our liquidation
period, we are selling and will continue to sell our assets in the ordinary
course of business. As we sell our assets, both rental income and finance income
will decrease over time, as will expenses related to our assets, such as
depreciation and amortization expense. Additionally, interest expense should
decrease as we reach the expiration of leases that were financed and the debt is
repaid to lenders. As leased equipment is sold, we will incur gains or losses on
these sales. We will continue to liquidate our assets during this period and we
expect to see a reduction in revenue and expenses accordingly.
Current
Business Environment and Outlook
Recent
trends indicate that domestic and global equipment leasing and financing volume
is correlated to overall business investments in equipment. According to
information provided by Global Insight, Inc., a global forecasting company, and
the Equipment Leasing and Finance Foundation, a non-profit foundation dedicated
to providing research regarding the equipment leasing and finance industry
(“ELFF”), total domestic business investment in equipment and software increased
annually from approximately $922 billion in 2002 to approximately $1,205 billion
in 2006 and 2007. Similarly, during the same period, total domestic equipment
leasing and financing volume increased from approximately $515 billion in 2002
to approximately $684 billion in 2007.
According
to the World Leasing Yearbook
2010, which was published by Euromoney Institutional Investor PLC, global
equipment leasing volume increased annually from approximately $462 billion in
2002 to approximately $760 billion in 2007. The most significant
source of that increase was due to increased volume in Europe, Asia and South
America. For example, during the same period, total equipment leasing
volume in Europe increased from approximately $162 billion in 2002 to
approximately $367 billion in 2007, total equipment leasing volume in Asia
increased from approximately $71 billion in 2002 to approximately $119 billion
in 2007 and total equipment leasing volume in South America increased from
approximately $3 billion in 2002 to approximately $41 billion in
2007. It is believed that global business investment in equipment and
global equipment financing volume increased as well during the same
period.
The
volume of equipment financing typically reflects general economic conditions. As
the economy slows or builds momentum, the demand for productive equipment
generally slows or builds and equipment financing volume generally decreases or
increases. The economy in the United States experienced a downturn from 2001
through 2003, resulting in a decrease in equipment leasing and financing volume
during that period. From 2004 through most of 2007, however, the economy in the
United States and the global economy in general experienced significant growth,
including growth in business investment in equipment and equipment leasing and
financing volume.
In
general, the U.S. and global credit markets have deteriorated significantly over
the past two years. The U.S. economy entered into a recession in
December 2007 and global credit markets continue to experience dislocation and
tightening. Many financial institutions and other financing providers
have failed or significantly reduced financing operations, creating both
uncertainty and opportunity in the finance
industry.
According
to information provided by the Equipment Leasing and Finance Association, an
equipment finance trade association and affiliate of ELFF (“ELFA”), total
domestic business investment in equipment and software decreased to $1,187
billion in 2008. Similarly, during the same period, total domestic
equipment financing volume decreased to $671 billion in 2008. Global business
investment in equipment, and global equipment financing volume, decreased as
well during the same period. According to the World Leasing Yearbook 2010, global equipment leasing volume decreased to
approximately $644 billion in 2008. For 2009, domestic
business investment in equipment and software is forecasted to drop to an
estimated $1,011 billion with a corresponding decrease in equipment financing
volume to an estimated $518 billion. Nevertheless, ELFA projects that
domestic investment in equipment and software and equipment financing volume
will begin to recover in 2010, with domestic business investment in equipment
and software projected to increase to an estimated $1,108 billion in 2010 and
$1,255 billion in 2011 and corresponding increases in equipment financing volume
to an estimated $583 billion in 2010 and $668 billion in 2011.
As we are
currently liquidating our portfolio, however, the recent performance of the
equipment leasing and financing market is not expected to be correlated to our
performance and our Manager does not expect that there will be any long-term
material adverse impact on the demand for equipment that we own.
Lease
and Other Significant Transactions
We
engaged in the following significant transactions during the years ended
December 31, 2009, 2008 and 2007:
Aircraft
During
July 2002, we formed a wholly-owned subsidiary, ICON Aircraft 128 LLC (“ICON
128”), for the purpose of acquiring Aircraft 128 for approximately $69,000,000,
including the assumption of approximately $64,800,000 of fixed rate non-recourse
debt. The lease with Cathay was initially scheduled to expire in June 2006, but
has been extended until December 1, 2011. Simultaneously with the lease
extension of the aircraft, we refinanced the non-recourse debt associated with
the aircraft.
During
February 2002, we and Fund Eight B formed ICON Aircraft 126 LLC (“ICON 126”) for
the purpose of acquiring all of the outstanding shares of Delta Aircraft Leasing
Limited (“D.A.L.”), a Cayman Islands registered company that owns, through an
owner trust, Aircraft 126. ICON 126 completed the transaction during March 2002.
The lease with Cathay was initially scheduled to expire in March 2006, but has
been extended until July 1, 2011. We and Fund Eight B each have a 50% ownership
interest in ICON 126. ICON 126 consolidates the financial position and
operations of D.A.L. in its consolidated financial statements.
ICON 126
had a commitment with respect to Aircraft 126 to pay certain maintenance costs,
which were incurred on or prior to March 27, 2006. ICON 126 established a
maintenance reserve cash account under the original lease to pay for its portion
of these costs. This account was funded by free cash from the lease payments in
accordance with the terms of the original lease. During 2006, ICON 126 received
$182,021 of capital contributions from both of its members, of which $50,000 was
for amounts relating to the maintenance reserve cash account and $132,021 was
related to costs paid by its members relating to the refinancing of ICON
126's non-recourse debt. During September 2006, approximately $1,153,000
was paid for maintenance costs. The maintenance account for Aircraft 126 was
cross-collateralized with the maintenance account for ICON Aircraft 123 LLC
(“ICON 123”), a wholly-owned subsidiary of Fund Eight B, pursuant to two first
priority charge on cash deposit agreements entered into in connection with the
purchase of an Airbus A340-313X aircraft on lease to Cathay (“Aircraft 123”).
Under the terms of these agreements, ICON 126 was required to pay on behalf of
ICON 123 any maintenance cost shortfalls incurred by the affiliate. On January
30, 2007, ICON 126 paid approximately $143,000 in maintenance costs from its
maintenance account on behalf of ICON 123. The maintenance account
and related security interests were then terminated. ICON 123 will
reimburse ICON 126 when the aircraft is sold. The excess cash remaining in ICON
126’s account at December 31, 2009 is approximately $97,000, which includes
accreted interest in the amount of approximately $38,000 through December 31,
2009.
Each of
ICON 123 and ICON 126 is a party to a residual sharing agreement with respect to
its aircraft. (See Notes 5 and 13 in “Item 8. Consolidated Financial Statements
and Supplementary Data.”)
In light
of unprecedented high fuel prices during 2008 and the related impact on the
airline industry, our Manager reviewed our investments in Aircraft 126 and
Aircraft 128 as of June 30, 2008. In accordance with the accounting
pronouncement that accounts for the impairment or disposal of long-lived assets,
and based upon changes in the airline industry, our Manager determined that
Aircraft 126 and Aircraft 128 were impaired.
Based on
our Manager’s review, the carrying values of Aircraft 126 and Aircraft 128
exceeded the expected undiscounted future cash flows of Aircraft 126 and
Aircraft 128 and, as a result, we recognized an impairment charge representing
the difference between the carrying value and the expected discounted future
cash flows of Aircraft 126 and Aircraft 128. The expected discounted future cash
flows of Aircraft 126 and Aircraft 128 were determined using a market approach,
a recent appraisal for Aircraft 126 and Aircraft 128 and recent sales of similar
aircraft, as well as other factors, including those discussed
below. As a result, we recognized an impairment loss on Aircraft 128
of approximately $3,900,000 as of June 30, 2008. In addition, as of June 30,
2008, ICON 126 recognized an impairment loss on Aircraft 126 of approximately
$3,900,000, of which our share was approximately $1,950,000.
The
following factors in 2008, among others, indicated that the full carrying values
of Aircraft 126 and Aircraft 128 might not be recoverable: (i) indications that
lenders were willing to finance less of the acquisition cost of four-engine
aircraft, which increased with each dollar rise of the price of fuel, thereby
undermining the carrying value expectations of such aircraft; (ii) the
rising cost of fuel was increasing the operating costs of four-engine aircraft
and similar capacity twin-engine aircraft, thereby making such aircraft less
attractive investments at the time and thereby depressing the market for
Aircraft 126 and Aircraft 128; and (iii) the likelihood of aircraft operators
switching to more efficient aircraft, thereby depressing the market for Aircraft
126 and Aircraft 128.
During
December 2002, we and Fund Eight B formed a joint venture, ICON Aircraft 46835
LLC (“Aircraft 46835”), in which we and Fund Eight B had ownership interests of
85% and 15%, respectively. Aircraft 46835 was formed for the purpose of
acquiring a McDonnell Douglas DC10-30F aircraft on lease to Federal Express
Corporation (“FedEx”). On December 27, 2002, the joint venture acquired the
aircraft for approximately $25,292,000, including approximately $22,292,000 of
non-recourse debt. Our portion of the cash purchase price was approximately
$2,550,000. On March 30, 2007, Aircraft 46835 sold the aircraft to FedEx for
$4,260,000 and recognized a loss on the sale of approximately
$640,000.
During
March 2003, we and Fund Eight B formed a joint venture, ICON Aircraft 47820 LLC
(“Aircraft 47820”), in which we and Fund Eight B had ownership interests of 10%
and 90%, respectively. Aircraft 47820 was formed for the purpose of acquiring an
investment in a McDonnell Douglas DC10-30F aircraft and two spare engines (the
“Aircraft and Engines”) on lease to FedEx. On March 11, 2003, Aircraft 47820
acquired the Aircraft and Engines for approximately $27,288,000, including
approximately $24,211,000 of non-recourse debt. Our portion of the cash purchase
price was approximately $308,000. On March 30, 2007, Aircraft 47820 sold the
Aircraft and Engines to FedEx for $5,475,000 and recognized a loss on the sale
of approximately $1,025,000.
Marine
Vessel
On July
24, 2007, ICON Samar, LLC (“ICON Samar”), our wholly-owned subsidiary, purchased
the Samar Spirit from Teekay. The purchase price for the Samar Spirit was
$40,250,000, including the assumption of approximately $23,382,000 of
non-recourse debt under a secured loan agreement with Fortis Capital Corp.
(“Fortis”). In addition, ICON Samar paid an arrangement fee to Fortis of
approximately $175,000 and has a payable to our Manager for approximately
$54,000 related to legal fees incurred. Simultaneously with the purchase of the
Samar Spirit, a bareboat charter was entered into with Teekay for a term of 48
months. The charter commenced on July 24, 2007 and is scheduled to expire on
July 23, 2011. Simultaneously with the execution of the loan agreement, we
entered into an interest rate swap contract with Fortis in order to fix the debt
interest rate at 6.35% per year. Our Manager waived acquisition fees payable in
connection with the purchase.
Railcars
During
November 2002, we acquired 324 railcars on lease to Texas Genco LP (“Texas
Genco”). On May 7, 2007, we sold the equipment to an unrelated third
party for $4,960,000, of which approximately $1,500,000 was used to repay the
related long-term debt. We recognized a gain on the sale of
approximately $3,100,000.
On
January 28, 2008, ICON Railcar I, LLC (“ICON Rail”), our wholly-owned
subsidiary, sold its entire interest in 110 railcars (the “Railcars”) to an
unrelated third party that was leasing and operating the Railcars. We
recognized a gain on the sale of approximately $313,000.
Telecommunications
and Computer Equipment
On March
31, 2004, we and Fund Ten formed a joint venture, ICON GeicJV, for the purpose
of purchasing information technology equipment subject to a 36-month lease with
Government Employees Insurance Company (“GEICO”). We and Fund Ten have ownership
interests of 26% and 74%, respectively, in the joint venture. On
April 30, 2004, ICON GeicJV acquired the information technology equipment
subject to lease for a total cost of approximately $5,853,000, of which our
portion was approximately $1,522,000.
During
2007, GEICO returned equipment with a cost basis of approximately $5,798,000 and
extended the leases on a month-to-month basis on other equipment with a cost
basis of approximately $55,000. Of the equipment that was returned, ICON GeicJV
sold equipment with a net book value of approximately $781,000. ICON GeicJV
realized proceeds of approximately $775,000 and recognized a loss of
approximately $6,000 on the sale of that equipment. The remaining returned
equipment had a net book value of approximately $58,000.
During
2008, the joint venture sold all of the remaining equipment previously on lease
to GEICO. The joint venture realized proceeds of approximately
$96,000 and recognized a gain on the sale of equipment of approximately
$31,000.
During
December 2004, we acquired four Noritsu QSS 3011 digital mini-labs subject to
leases with Rite Aid Corporation (“Rite Aid”). The leases expired during
November 2007 and were extended on a month-to-month basis. The purchase price of
this equipment was approximately $399,000. During September and October of 2008,
the four digital mini-labs were sold. The aggregate proceeds from the
sale were $32,000 and we recorded a gain of approximately $2,000.
Manufacturing
and Other Investments
On April
30, 2003, we acquired a Double Kraft Paper Forming Tubing Unit on lease to
Wildwood Industries, Inc. (“Wildwood”) through February 2007 for approximately
$1,350,000. Effective March 1, 2007, the lease was extended for an
additional twelve months. Effective March 1, 2008, this lease was
again extended for an additional twelve months and was reclassified as an
operating lease. Subject to the terms of the lease renewal, there is a residual
interest sharing agreement with a third-party broker, payable upon attainment of
a minimum return on investment, whereby all sales proceeds received above
$150,000 will be shared equally with the third party. For the years ended
December 31, 2009, 2008 and 2007, approximately $0, $130,000 and $87,000,
respectively, was distributed to the third party in accordance with the residual
interest sharing agreement. On August 31, 2008 and September 30, 2008, two other
finance leases with Wildwood expired, were renewed for twelve-month periods,
commencing September 1, 2008 and October 1, 2008, respectively, and expired on
August 31, 2009 and September 30, 2009, respectively.
At
December 31, 2008, our Manager determined that all three assets on lease to
Wildwood were fully impaired based on the estimate that lease proceeds would be
insufficient to cover the residual position and we recorded an aggregate
impairment loss of approximately $283,000 and bad debt expense for uncollectable
receivables of approximately $201,000.
On
January 21, 2009, we filed a lawsuit in the U.S. District Court for the Southern
District of New York against Wildwood and its owners who guaranteed Wildwood’s
obligations to us. Our claims were for breaches of the leases
and guarantees for Wildwood’s failure to pay rents. On March 5, 2009, an
involuntary petition under Chapter 11 of the United States Bankruptcy Code was
filed against Wildwood by three of Wildwood’s creditors in United States
Bankruptcy Court. On September 18, 2009, the involuntary petition under Chapter
11 of the United States Bankruptcy Code was converted to a Chapter 7 case by the
United States Bankruptcy Trustee. We do not expect to receive any further
proceeds from Wildwood.
On June
20, 2003, we acquired a manufacturing device previously on lease (the “AMD
Lease”) to Spansion for approximately $6,391,000. On August 1, 2003, we acquired
semi-conductor memory testing equipment subject to two leases (the “FASL
Leases”) with Spansion for approximately $4,561,000. The FASL Leases were each
renewed for a 15-month period commencing on April 1, 2008.
On March
1, 2009, Spansion filed a petition for reorganization under Chapter 11 in United
States Bankruptcy Court. On March 12, 2009, Spansion rejected the
FASL Leases and affirmed the AMD Lease. On June 3, 2009, Spansion
returned the equipment subject to the FASL Leases, which has been classified on
the consolidated balance sheets as assets held for sale and has been recorded at
the lower of its carrying value or fair market value less estimated costs to
sell. Based on our Manager’s assessment of the equipment and
knowledge of the market for such equipment, we recorded an impairment charge of
approximately $164,000 on the consolidated financial statements for the year
ended December 31, 2009.
In July
2009, the equipment subject to the AMD Lease was sold for approximately $585,000
and we recognized a gain on sale of the equipment and lease termination of
approximately $432,000.
Each
Spansion lease has a related residual interest sharing agreement with a
third-party that is triggered when a minimum return on investment has
been attained by us. Subject to the original terms, all proceeds received above
approximately $633,000 will be shared 35% with the third party. For the years
ended December 31, 2009, 2008 and 2007, approximately $350,000, $739,000 and
$56,000 was distributed to the third party in accordance with the residual
interest sharing agreements.
On
February 22, 2010, the U.S. Bankruptcy Court approved a stipulation between us
and Spansion allowing our administrative expense claim in the amount of
approximately $90,000 and unsecured claim in the amount of
approximately $269,000. On March 22, 2010, we sold our unsecured
claim to a third party for approximately $161,000.
On
December 18, 2009, the lease with Short Hills Surgery Center (“Short Hills”)
expired and Short Hills purchased the medical equipment for approximately
$40,000.
Recently
Adopted Accounting Pronouncements
In 2009,
we adopted and, for presentation and disclosure purposes, retrospectively
applied the accounting pronouncement relating to noncontrolling interests in the
consolidated financial statements. As a result, noncontrolling
interests are reported as a separate component of consolidated equity and net
income attributable to the noncontrolling interest is included in consolidated
net income. The attribution of income between controlling and noncontrolling
interests is disclosed on the accompanying consolidated statements of
operations. Accordingly, the prior year consolidated financial statements have
been revised to conform to the current year presentation. See Note 2 to our
consolidated financial statements.
In 2009,
we adopted the accounting pronouncement relating to accounting for fair value
measurements, which establishes a framework for measuring fair value and
enhances fair value measurement disclosure for non-financial assets and
liabilities. See Note 2 to our consolidated financial statements.
In 2009,
we adopted the accounting pronouncement that amended the current accounting and
disclosure requirements for derivative instruments. The requirements were
amended to enhance how: (a) an entity uses derivative instruments; (b)
derivative instruments and related hedged items are accounted for; and (c)
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. See Note 2 to our consolidated
financial statements.
In 2009,
we adopted the accounting pronouncement that provides additional guidance for
estimating fair value in accordance with the accounting standard for fair value
measurements when the volume and level of activity for the asset or liability
have significantly decreased. This pronouncement also provides guidance for
identifying transactions that are not orderly. This pronouncement was effective
prospectively for all interim and annual reporting periods ending after June 15,
2009. See Note 2 to our consolidated financial statements.
In
2009, we adopted the accounting pronouncement that amends the requirements for
disclosures about fair value of financial instruments, regarding the fair value
of financial instruments for annual, as well as interim, reporting periods. This
pronouncement was effective prospectively for all interim and annual reporting
periods ending after June 15, 2009. See Note 2 to our consolidated financial
statements.
In 2009,
we adopted the accounting pronouncement regarding the general standards of
accounting for, and disclosure of, events that occur after the balance sheet
date, but before the financial statements are issued. This pronouncement was
effective prospectively for interim and annual reporting periods ending after
June 15, 2009. See Note 2 to our consolidated financial statements.
In 2009,
we adopted Accounting Standards Codification 105, “Generally Accepted Accounting
Principles,” which establishes the Financial Accounting Standards Board
Accounting Standards Codification (the “Codification”), which supersedes all
existing accounting standard documents and is the single source of
authoritative non-governmental U.S. Generally Accepted Accounting Principles
(“US GAAP”). All other accounting literature not included in the
Codification is considered non-authoritative. This accounting standard is
effective for interim and annual periods ending after September 15, 2009.
The Codification did not change or alter existing US GAAP and it did not
result in a change in accounting practices for us upon adoption. We have
conformed our consolidated financial statements and related notes to the new
Codification for the year ended December 31, 2009. See Note 2 to our
consolidated financial statements.
Critical
Accounting Policies
An
understanding of our critical accounting policies is necessary to understand our
financial results. The preparation of financial statements in conformity with US
GAAP requires our Manager to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities as of the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Significant estimates primarily include the determination of allowance for
doubtful accounts, depreciation and amortization, impairment losses, estimated
useful lives and residual values. Actual results could differ from
those estimates. We applied our critical accounting policies and estimation
methods consistently in all periods presented. We consider the following
accounting policies to be critical to our business:
·
|
Lease
classification and revenue
recognition;
|
·
|
Asset
impairments;
|
·
|
Depreciation;
|
·
|
Initial
direct costs;
|
·
|
Acquisition
fees; and
|
·
|
Derivative
financial instruments.
|
Lease
Classification and Revenue Recognition
Each
equipment lease we entered into is classified as either a finance lease or an
operating lease, which is determined based upon the terms of each
lease. For a finance lease, the initial direct costs were capitalized and
amortized over the lease term. For an operating lease, the initial direct
costs were included as a component of the cost of the equipment and depreciated
over the lease term.
For
finance leases, we recorded, at lease inception, 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. Billed operating lease receivables are included in
accounts receivable until collected. Accounts receivable are stated
at their estimated net realizable value. Deferred revenue is the difference
between the timing of the receivables billed and the income recognized on a
straight-line basis.
Our
Manager has an investment committee that approved each new equipment lease and
other financing transaction. As part of its process, the investment
committee determined the residual value, if any, to be used once the investment
was approved. The factors considered in determining the residual
value included, but were not limited to, the creditworthiness of the potential
lessee, the type of equipment considered, how the equipment was integrated into
the potential lessee’s business, the length of the lease and the industry in
which the potential lessee operated. Residual values are reviewed for impairment
in accordance with our impairment review policy.
The
residual value assumed, among other things, that the asset would be utilized
normally in an open, unrestricted and stable market. Short-term fluctuations in
the market place were disregarded and it was assumed that there was no necessity
either to dispose of a significant number of the assets, if held in quantity,
simultaneously or to dispose of the asset quickly. The residual value
was calculated using information from various external sources, such as trade
publications, auction data, equipment dealers, wholesalers and industry experts,
as well as inspection of the physical asset and other economic
indicators.
Asset
Impairments
The
significant assets in our portfolio are periodically reviewed, no less
frequently than annually, to determine whether events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. 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. If there is an indication of impairment, we will estimate the
future cash flows (undiscounted and without interest charges) expected from the
use of the asset and its eventual disposition. Future cash flows are the future
cash inflows expected to be generated by an asset less the future outflows
expected to be necessary to obtain those inflows. If an impairment is
determined to exist, the impairment loss will be measured as the amount by which
the carrying value of a long-lived asset exceeds its fair value and recorded in
the consolidated statement of operations in the period the determination is
made.
The
events or changes in circumstances that generally indicate that an asset may be
impaired are (i) the estimated fair value of the underlying equipment is less
than its carrying value or (ii) the lessee is experiencing financial
difficulties and it does not appear likely that the estimated proceeds from the
disposition of the asset will be sufficient to satisfy the residual position in
the asset and, if applicable, the remaining obligation to the non-recourse
lender. Generally in the latter situation, the residual position
relates to equipment subject to third-party non-recourse debt where the lessee
remits its rental payments directly to the lender and we do not recover our
residual position until the non-recourse debt is repaid in full. The preparation
of the undiscounted cash flows requires the use of assumptions and estimates,
including the level of future rents, the residual value expected to be realized
upon disposition of the asset, estimated downtime between re-leasing events and
the amount of re-leasing costs. Our Manager’s review for impairment includes a
consideration of the existence of impairment indicators including third-party
appraisals, published values for similar assets, recent transactions for similar
assets, adverse changes in market conditions for specific asset types and the
occurrence of significant adverse changes in general industry and market
conditions that could affect the fair value of the asset.
Depreciation
We record
depreciation expense on equipment when the lease is classified as an operating
lease. In order to calculate depreciation, we first determined the
depreciable equipment cost, which is the cost less the estimated residual
value. The estimated residual value is our estimate of the value of the
equipment at lease termination. Depreciation expense is recorded by
applying the straight-line method of depreciation to the depreciable equipment
cost over the lease term.
Initial
Direct Costs
We
capitalize initial direct costs associated with the origination and funding of
leased assets and other financing transactions in accordance with the accounting
pronouncement that accounts for nonrefundable fees and costs associated with
originating or acquiring loans and initial direct costs of leases. The costs are
amortized on a lease by lease basis based on the actual lease term using a
straight-line method for operating leases and the effective interest rate method
for finance leases and notes receivable. Costs related to leases or other
financing transactions that are not consummated are expensed as an acquisition
expense.
Acquisition
Fees
Pursuant
to our LLC Agreement, we paid acquisition fees to our Manager equal to 3% of the
purchase price for our investments. These fees were capitalized and included in
the cost of the investment.
Derivative
Financial Instruments
We may
enter into derivative transactions for purposes of hedging specific financial
exposures, including changes in interest rates of our non-recourse long-term
debt. We enter into these instruments only for hedging underlying exposures. We
do not hold or issue derivative financial instruments for purposes other than
hedging, except for warrants, which are not hedges. Certain derivatives may not
meet the established criteria to be designated as qualifying accounting hedges,
even though we believe that these are effective economic hedges.
We
account for derivative financial instruments in accordance with the accounting
pronouncements, which establish accounting and reporting standards for
derivative financial instruments. These accounting pronouncements require us to
recognize all derivatives as either assets or liabilities on the consolidated
balance sheets and measure those instruments at fair value. We recognize the
fair value of all derivatives as either assets or liabilities on the
consolidated balance sheets and changes in the fair value of such instruments
are recognized immediately in earnings unless certain accounting criteria
established by the accounting pronouncements are met. These criteria demonstrate
that the derivative is expected to be highly effective at offsetting changes in
the fair value or expected cash flows of the underlying exposure at both the
inception of the hedging relationship and on an ongoing basis and include an
evaluation of the counterparty risk and the impact, if any, on the effectiveness
of the derivative. If these criteria are met, which we must document and assess
at inception and on an ongoing basis, we recognize the changes in fair value of
such instruments in accumulated other comprehensive income (loss) (“AOCI”), a
component of members’ equity on the consolidated balance sheets. Changes in the
fair value of the ineffective portion of all derivatives are recognized
immediately in earnings.
Results
of Operations for the Years Ended December 31, 2009 (“2009”) and 2008
(“2008”)
We
completed our operating period on April 30, 2008 and entered our liquidation
period on May 1, 2008. During our liquidation period, we are selling and will
continue to sell our assets in the ordinary course of business. As we sell our
assets, both rental income and finance income will decrease over time, as will
expenses related to our assets, such as depreciation and amortization expense.
Additionally, interest expense should decrease as we reach the expiration of
leases that were financed and as the debt is repaid to the lenders. As leased
equipment is sold, we will incur gains or losses on these sales.
Revenue
for 2009 and 2008 is summarized as follows:
Years Ended December 31,
|
||||||||||||
2009
|
2008
|
Change
|
||||||||||
Rental
income
|
$ | 13,397,814 | $ | 16,053,175 | $ | (2,655,361 | ) | |||||
Finance
income
|
4,765,078 | 5,767,714 | (1,002,636 | ) | ||||||||
Income
(loss) from investments in joint ventures
|
101,976 | (1,996,825 | ) | 2,098,801 | ||||||||
Net
gain on sales of equipment and unguaranteed residual
values
|
540,795 | 519,729 | 21,066 | |||||||||
Interest
and other income (loss)
|
32,146 | (184,921 | ) | 217,067 | ||||||||
Total
revenue
|
$ | 18,837,809 | $ | 20,158,872 | $ | (1,321,063 | ) |
Total
revenue for 2009 decreased $1,321,063, or 6.6%, as compared to 2008. The
decrease in rental income in 2009 was primarily due to the sale of digital
mini-labs in September and October of 2008 previously on lease to Rite Aid, the
sale of medical equipment in January 2009 previously on lease to Hudson Crossing
and the sale of the equipment subject to the AMD Lease in July 2009. We
reclassified the lease with Short Hills from an operating lease to a direct
finance lease in 2008. As such, no rental income was recognized during 2009 for
that lease. In addition, no rental income was recognized from the Wildwood lease
and the FASL Leases following the impairment of those assets in December 2008
and March 2009, respectively, after which we ceased recognizing revenue. The
decrease in finance income was primarily due to the normal lifecycle of our
bareboat charters with Wilhelmsen, which experience scheduled, declining revenue
over the remaining course of the bareboat charters. The decrease in revenue
was offset by our income from investments in joint ventures of approximately
$102,000 in 2009, as compared to a loss of approximately $1,997,000 in 2008. The
loss in 2008 was primarily attributable to our 50% ownership interest in ICON
126, which recorded an impairment loss of $3,900,000 in 2008. ICON 126 did not
record a similar impairment charge in 2009. The increase in interest and other
income is attributable to the decline in loss position on cash accounts with
balances denominated in foreign currencies of approximately $185,000 as compared
to 2008.
Expenses
for 2009 and 2008 are summarized as follows:
Years Ended December 31,
|
||||||||||||
2009
|
2008
|
Change
|
||||||||||
Management
fees - Manager
|
$ | - | $ | 526,469 | $ | (526,469 | ) | |||||
Administrative
expense reimbursements - Manager
|
- | 149,844 | (149,844 | ) | ||||||||
General
and administrative
|
1,505,773 | 1,946,654 | (440,881 | ) | ||||||||
Interest
|
5,056,856 | 6,576,691 | (1,519,835 | ) | ||||||||
Depreciation
and amortization
|
5,411,040 | 5,762,239 | (351,199 | ) | ||||||||
Impairment
loss
|
163,994 | 4,149,157 | (3,985,163 | ) | ||||||||
Total
expenses
|
$ | 12,137,663 | $ | 19,111,054 | $ | (6,973,391 | ) |
Total
expenses for 2009 decreased $6,973,391, or 36.5%, as compared to 2008. The
decrease in total expenses was primarily attributable to the impairment charge
of approximately $3,900,000 recognized by ICON 128 and approximately $283,000
related to the impairment of the assets on lease to Wildwood, both in 2008. We
did not record similar impairment charges in 2009. The decrease in interest
expense was due to a reduction in the principal balance of debt outstanding
related to our leases with Cathay and our bareboat charters with Teekay and
Wilhelmsen. The decrease in both management fees-Manager and administrative
expense reimbursements-Manager was due to our Manager’s decision to waive all
future administrative expense reimbursements and management fees effective April
1, 2008 and May 1, 2008, respectively, in light of the commencement of our
liquidation period. The decrease in general and administrative expense was
primarily due to the decrease in residual interest sharing expense recognized in
2009 and the bad debt expense recorded in 2008 for the Wildwood
lease. The decrease in depreciation and amortization expense was due
to the sale of numerous assets during 2008 and 2009 as a result of being in our
liquidation period.
Net
Income Attributable to Fund Nine
As a
result of the foregoing changes from 2008 to 2009, net income attributable to us
for 2009 and 2008 was $6,700,146 and $1,047,818, respectively. Net income
attributable to us per weighted average additional Share for 2009 and 2008
was $67.72 and $10.59, respectively.
Results
of Operations for the Years Ended December 31, 2008 (“2008”) and 2007
(“2007”)
Revenue
for 2008 and 2007 is summarized as follows:
Years Ended December 31,
|
||||||||||||
2008
|
2007
|
Change
|
||||||||||
Rental
income
|
$ | 16,053,175 | $ | 13,832,058 | $ | 2,221,117 | ||||||
Finance
income
|
5,767,714 | 6,747,205 | (979,491 | ) | ||||||||
(Loss)
income from investments in joint ventures
|
(1,996,825 | ) | 2,305 | (1,999,130 | ) | |||||||
Net
gain on sales of equipment and unguaranteed residual
values
|
519,729 | 2,291,397 | (1,771,668 | ) | ||||||||
Interest
and other (loss) income
|
(184,921 | ) | 587,121 | (772,042 | ) | |||||||
Total
revenue
|
$ | 20,158,872 | $ | 23,460,086 | $ | (3,301,214 | ) |
Total
revenue for 2008 decreased $3,301,214, or 14.1%, as compared to 2007. This
decrease was primarily due to the loss from investments in joint ventures in
2008, a decrease in gain on sales of equipment, the decrease in finance income
and interest and other (loss) income, partly offset by an increase in rental
income. The decrease in investments in joint ventures was primarily due to the
impairment loss of approximately $1,950,000 recorded as of June 2008 on our
investment in Aircraft 126. The decrease in net gain on sales of equipment was
primarily due to there being several larger sales and corresponding net gains in
2007 compared to fewer and smaller sales in 2008. During 2007, the sale of the
Texas Genco railcars during May 2007 resulted in a total gain of approximately
$3,100,000, partly offset by a loss of approximately $640,000 on the sale of the
aircraft owned by Aircraft 46835 during the first quarter of 2007. During 2008,
we recorded gains on sales of equipment of approximately $313,000 for the sale
of the Railcars and approximately $204,000 for assets within our Summit Asset
Management Limited portfolio (See Note 6 in “Item 8. Consolidated Financial
Statements and Supplementary Data.”) The decrease in finance income was
primarily due to the normal lifecycle of our finance leases, which experience
scheduled, declining revenue over the course of the lease. The decrease in
interest and other income is a result of our lower cash balances in interest
bearing accounts during 2008 as compared to 2007, primarily from the use of cash
to invest in ICON Samar. Interest and other income became a loss position due to
the loss recorded on cash accounts maintaining balances denominated in foreign
currencies. The decreases in revenue were partly offset by the increase in
rental income of approximately $2,200,000. The increase in rental income was
primarily due to the addition of a bareboat charter with Teekay through ICON
Samar, which commenced on July 24, 2007. Accordingly, 2008 contains a full
twelve months of revenue whereas 2007 contained only five and one-half months of
such revenue.
Expenses
for 2008 and 2007 are summarized as follows:
Years Ended December 31,
|
||||||||||||
2008
|
2007
|
Change
|
||||||||||
Management
fees - Manager
|
$ | 526,469 | $ | 1,780,581 | $ | (1,254,112 | ) | |||||
Administrative
expense reimbursements - Manager
|
149,844 | 677,965 | (528,121 | ) | ||||||||
General
and administrative
|
1,946,654 | 751,566 | 1,195,088 | |||||||||
Interest
|
6,576,691 | 6,657,968 | (81,277 | ) | ||||||||
Depreciation
and amortization
|
5,762,239 | 5,628,072 | 134,167 | |||||||||
Impairment
loss
|
4,149,157 | 10,000 | 4,139,157 | |||||||||
Total
expenses
|
$ | 19,111,054 | $ | 15,506,152 | $ | 3,604,902 |
Total
expenses for 2008 increased $3,604,902, or 23.2%, as compared to 2007. The
increase in expenses is primarily due to the impairment charge of approximately
$3,900,000 on Aircraft 128. General and administrative expenses also increased
primarily due to the additional expense related to two residual interest sharing
agreements that began in the third quarter of 2007. The increase was partly
offset by decreases in the management fees and administrative expense
reimbursements due to our Manager as a result of the sale of assets owned by
Aircraft 46835 and ICON Rail, as well as our Manager’s decision to waive certain
fees following the commencement of our liquidation period.
Noncontrolling
Interests
Net
income attributable to noncontrolling interests for 2008
decreased $13,916, or 100%, as compared to 2007. The decrease in net income
attributable to noncontrolling interests was due to the sale of the aircraft
owned by Aircraft 46835 on March 30, 2007, which was the only remaining entity
containing a noncontrolling interest.
Net
Income Attributable to Fund Nine
As a
result of the foregoing changes from 2007 to 2008, net income attributable to us
for 2008 and 2007 was $1,047,818 and $7,940,018, respectively. Net income
attributable to us per weighted average additional Share for 2008 and 2007
was $10.59 and $80.17, respectively.
Financial
Condition
This
section discusses the major balance sheet variances from 2009 compared to
2008.
Total
Assets
Total
assets decreased $11,330,467, from $114,231,144 at December 31, 2008 to
$102,900,677 at December 31, 2009. The decrease was primarily due to
depreciation of our leased equipment at cost and the sale of various assets in
the Summit Asset Management Limited portfolio.
Current Assets
Current
assets increased $697,986, from $6,021,430 at December 31, 2008 to $6,719,416 at
December 31, 2009. The increase was primarily due to the normal lifecycle
of our bareboat charters with Wilhelmsen, which experience scheduled increases
in the current portion of our investment in finance leases over the course of
the bareboat charters. In addition, during 2009, there was a
reclassification of the equipment returned by Spansion from leased equipment at
cost, which we classified as non-current assets, to assets held for sale, which
we classify as current assets.
Total
Liabilities
Total
liabilities decreased $16,509,309, from $82,447,892 at December 31, 2008 to
$65,938,583 at December 31, 2009. The decrease was primarily due to the
scheduled repayments of our non-recourse debt in the ordinary course of
business, a decrease in the obligations associated with our interest rate swap
contracts related to the debt associated with the Samar Spirit and the
Wilhelmsen Vessels, as well as a decrease in accrued expenses and other
liabilities primarily due to the write-off of the deposits payable for the
Wildwood lease and the AMD Lease.
Current
Liabilities
Current
liabilities decreased $1,246,401, from $20,010,794 at December 31, 2008 to
$18,764,393 at December 31, 2009. The decrease was primarily due to the decrease
in the obligations associated with our interest rate swap contracts related to
the debt associated with the Samar Spirit and the Wilhelmsen Vessels, as well as
a decrease in accrued expenses and other liabilities primarily due to the
write-off of the deposits payable for the Wildwood lease and the AMD
Lease.
Members’
Equity
Members’ equity increased $5,178,842,
from $31,783,252 at December 31, 2008 to $36,962,094 at December 31, 2009. The
increase was due to the increase in net income and the change in valuation of
our interest rate swap contracts, partially offset by distributions paid to our
members.
Liquidity
and Capital Resources
Sources
and Uses of Cash
At
December 31, 2009 and December 31, 2008, we had cash and cash equivalents of
$1,033,840 and $779,544, respectively. During our operating period, which ended
on April 30, 2008, our main sources of cash were proceeds from sales of
equipment as well as from collections of rentals on non-leveraged operating and
direct finance leases. These have continued to be our main sources of cash
during our liquidation period. During our operating period, our main use of cash
was principally for distributions to our members, which we anticipate will
continue during our liquidation period.
Operating
Activities
Sources
of Cash
Sources
of cash from operating activities increased $381,074, from $1,587,516 in 2008 to
$1,968,590 in 2009. The increase was primarily due to our Manager’s decision to
waive management fees and administrative expense reimbursements following the
commencement of our liquidation period. The increase was also attributable to an
increase in the collection of excess cash from our bareboat charters with
Wilhelmsen.
Investing
Activities
Sources
of Cash
Sources
of cash from investing activities decreased $161,663, from $1,376,107 in 2008 to
$1,214,444 in 2009. The decrease was primarily due to a reduction in proceeds
from sales of equipment and distributions received from our joint ventures in
excess of profits. In 2009, we consummated four sales transactions, which
resulted in total proceeds of approximately $822,000, as compared to three
transactions, which resulted in total proceeds of approximately $941,000, during
2008. During 2009, we received approximately $393,000 in distributions from
joint ventures in excess of profits compared to approximately $435,000 received
in 2008.
Uses
of Cash
There
have been no new investing activities during 2009 and 2008, as we are in our
liquidation period.
Financing
Activities
Uses
of Cash
Uses of
cash in financing activities decreased $4,826,822, from $7,755,560 in 2008 to
$2,928,738 in 2009. The decrease was due to lower cash distributions paid to our
members during 2009 compared to 2008. Cash distributions of $2,928,738 were paid
to our members during 2009 as compared to $7,755,560 paid to our members during
2008. The lower distribution amounts resulted from having less
available cash to distribute from the remaining assets in the portfolio because
there are fewer leases and significant asset sales to generate
additional cash available for distributions.
Financings
and Borrowings
Non-Recourse
Long-Term Debt
We had
non-recourse long-term debt obligations at December 31, 2009 of
$62,437,098. Most of our non-recourse long-term debt obligations
consist of notes payable in which the lender has a security interest in the
equipment and an assignment of the rental payments under the lease, in which
case the lender is being paid directly by the lessee. In other cases, we receive
the rental payments and pay the lender. If the lessee were to default on the
non-recourse long-term debt, the equipment would be returned to the lender in
extinguishment of the non-recourse long-term debt.
Revolving
Line of Credit, Recourse
We and
certain entities managed by our Manager, Fund Eight B, Fund Ten, Fund Eleven,
Fund Twelve and Fund Fourteen (collectively, the “Borrowers”), are parties to a
Commercial Loan Agreement, as amended (the “Loan Agreement”), with CB&T. The
Loan Agreement provides for a revolving line of credit of up to $30,000,000
pursuant to a senior secured revolving loan facility (the “Facility”), which is
secured by all assets of the Borrowers not subject to a first priority lien, as
defined in the Loan Agreement. Each of the Borrowers is jointly and severally
liable for all amounts borrowed under the Facility. At December 31, 2009, no
amounts were accrued related to our joint and several obligations under the
Facility. Amounts available under the Facility are subject to a borrowing base
that is determined, subject to certain limitations, on the present value of the
future receivables under certain lease agreements and loans in which the
Borrowers have a beneficial interest.
The
Facility expires on June 30, 2011 and the Borrowers may request a one year
extension to the revolving line of credit within 390 days of the then-current
expiration date, but CB&T has no obligation to extend. The interest rate for
general advances under the Facility is CB&T’s prime rate and the interest
rate on up to five separate non-prime rate advances that are permitted to
be made under the Facility is the rate at which U.S. dollar deposits can be
acquired by CB&T in the London Interbank Eurocurrency Market plus 2.5% per
year, provided that neither interest rate is permitted to be less than 4.0% per
year. The interest rate at December 31, 2009 was 4.0%. In addition, the
Borrowers are obligated to pay a quarterly commitment fee of 0.50% on unused
commitments under the Facility.
Aggregate
borrowings by all Borrowers under the Facility amounted to $2,360,000 at
December 31, 2009. We had no borrowings outstanding under the Facility as of
such date. The balances of $100,000 and $2,260,000 were borrowed by Fund Ten and
Fund Eleven, respectively. As of March 24, 2010, Fund Ten and Fund Eleven
had outstanding borrowings under the Facility of $700,000 and $0,
respectively.
Pursuant
to the Loan Agreement, the Borrowers are required to comply with certain
covenants. At December 31, 2009, the Borrowers were in compliance
with all covenants. For additional information, see Note 8 to our
consolidated financial statements.
Our
Manager believes that with the cash we currently have available, the cash being
generated from our remaining leases, and the proceeds from equipment and asset
sales, we have sufficient cash to continue our operations into the foreseeable
future. However, 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. See “Item 1A. Risk Factors.” At December 31,
2009, we had approximately $6,719,000 of current assets and approximately
$18,764,000 of current liabilities, which results in an approximately
$12,045,000 working capital deficit. Of the approximately $18,764,000 of current
liabilities, approximately $12,745,000 consisted of direct payments to a lender
made by our lessee. These direct payments are for a debt that had no
corresponding current assets due to the classification of these transactions as
operating leases. Therefore, when considering our overall working capital,
direct payments should be excluded. The exclusion of these payments yields a
working capital asset of approximately $700,000 at December 31,
2009.
Distributions
We, at
our Manager’s discretion, paid monthly distributions to each of our additional
members beginning the first month after each such member was admitted through
the end of our operating period, which was on April 30, 2008. During the
liquidation period, we plan to make distributions in accordance with the terms
of our LLC Agreement. We expect that distributions made during the liquidation
period will vary, depending on the timing of the sale of our assets, and our
receipt of rental and other income from our investments. We paid distributions
to additional members for the years ended December 31, 2009, 2008 and 2007 in
the amount of $2,899,453, $7,678,004 and $8,825,274, respectively. We paid
distributions to our Manager for the years ended December 31, 2009, 2008 and
2007 of $29,285, $77,556 and $89,144, respectively.
Commitments
and Contingencies and Off-Balance Sheet Transactions
Commitments
and Contingencies
At
December 31, 2009, we had non-recourse debt obligations in which the lender has
a security interest in our equipment and an assignment of the rental payments
under the lease. In such cases, the lender is being paid directly by the lessee.
If the lessee defaults on the lease, the equipment would be returned to the
lender in extinguishment of the non-recourse debt. At December 31,
2009, our outstanding non-recourse debt obligations were
$62,437,098.
We are a
party to the Facility, as discussed in “Financings and Borrowings” above. We had
no borrowings under the Facility at December 31, 2009.
On
February 23, 2005, ICON Cash Flow Partners L.P. Seven (“L.P. Seven”) assigned to
us 3.02% of its rights to the profits, losses, and cash flows from its limited
partnership interest in an entity that owns a 100% interest in a mobile offshore
drilling rig. L.P. Seven assigned the rights to us as repayment of its
$755,000 outstanding debt obligation pursuant to a contribution agreement that
we entered into with some of our affiliates in connection with the line of
credit agreement we had with Comerica Bank. This assignment increased our
rights to the profits, losses and cash flows from L.P. Seven’s limited
partnership interest from 2.60%, which was assigned to us in November 2004 as
repayment of L.P. Sevens's $650,000 outstanding debt obligation, to
5.62%. The repayment amount represented our Manager’s estimated fair value
of L.P. Seven's interest in the mobile offshore drilling rig at February 23,
2005. The fair value of this interest was determined using an appraisal and cash
flow analysis. During the year ended December 31, 2006, we received
approximately $253,000 in cash distributions related to this
assignment.
Principal
and interest maturities of our debt and related interest consisted of the
following at December 31, 2009:
Payments Due by Period
|
||||||||||||||||
Less
Than 1
|
1 - 3 | 3 - 5 | ||||||||||||||
Total
|
Year
|
Years
|
Years
|
|||||||||||||
Non-recourse
debt
|
$ | 62,437,098 | $ | 15,262,908 | $ | 41,774,190 | $ | 5,400,000 | ||||||||
Non-recourse
interest
|
7,380,687 | 3,874,948 | 3,314,093 | 191,646 | ||||||||||||
$ | 69,817,785 | $ | 19,137,856 | $ | 45,088,283 | $ | 5,591,646 |
We
entered into residual sharing agreements with various third parties. In
connection with these agreements, residual proceeds received in excess of
specific amounts will be shared with these third parties based on specific
formulas.
Off-Balance
Sheet Transactions
None.
Inflation
and Interest Rates
The
potential effects of inflation on us are difficult to predict. If the general
economy experiences significant rates of inflation, however, it could affect us
in a number of ways. We do not currently have rent escalation clauses tied
to inflation in our leases. The anticipated residual values to be realized upon
the sale or re-lease of equipment upon lease terminations (and thus the overall
cash flow from our leases) may increase with inflation as the cost of similar
new and used equipment increases. We are currently in our liquidation
period and, therefore, we do not currently intend to obtain additional external
financing or refinance our existing indebtedness.
If
interest rates increase significantly, leases already in place would generally
not be affected.
We, like
most other companies, are exposed to certain market risks, which include changes
in interest rates and the demand for equipment owned by us. We
believe that our exposure to other market risks, including foreign currency
exchange rate risk, commodity risk and equity price risk, are insignificant, at
this time, to both our financial position and our results of
operations.
We
currently have five outstanding notes payable, which are our non-recourse debt
obligations. Due to the fixed nature of the non-recourse debt, the
conditions in the credit markets as of December 31, 2009 have not had any impact
on us. With respect to our revolving line of credit, which is subject
to a variable interest rate, we have no outstanding amounts as of December
31, 2009. Accordingly, the condition of the credit markets will not have any
material impact on us. Furthermore, we are currently in our liquidation period
and, therefore, as we have no current intentions of obtaining additional
external financing or refinancing our existing indebtedness, we do not expect
any adverse impact on our cash flows should credit conditions in general remain
the same or deteriorate further.
In
general, we managed our exposure to interest rate risk by obtaining fixed rate
debt. The fixed rate debt was structured so as to match the cash flows required
to service the debt to the payment streams under fixed rate lease receivables.
The payments under each lease are assigned to the lender in satisfaction of the
debt.
To hedge
our variable interest rate risk, we entered into interest rate swap contracts
that effectively convert the underlying floating interest rates to a fixed
interest rate. In general, these swap agreements reduced our interest rate risk
associated with variable interest rate borrowings. However, we are
exposed to and manage credit risk associated with our counterparties to our swap
agreements by dealing only with institutions our Manager considered financially
sound.
Effective
May 18, 2006, we refinanced the non-recourse debt obligations related to the
Wilhelmsen Vessels that are subject to bareboat charters with Wilhelmsen. The
non-recourse debt accrues interest at the London Interbank Offered Rate
(“LIBOR”) plus 1.50% per year. Simultaneously with the refinancing,
we entered into three identical interest rate swap contracts, each having a
notional amount of $17,000,000, with Fortis Bank NV/SA, New York
Branch. We entered into these agreements in order to effectively fix
the variable interest rate on the non-recourse debt at 7.02% per year. On May
22, 2006, we terminated the original three interest rate swap contracts that
applied to the original financing of the Wilhelmsen Vessels.
On July
24, 2007, we, through ICON Samar, borrowed approximately $23,382,000 in
connection with a bareboat charter with Teekay. The long-term debt matures on
July 25, 2011 and accrues interest at LIBOR plus 1.00% per
year. Simultaneously with the borrowing, we entered into an interest
rate swap contract with Fortis Bank NV/SA, New York Branch in order to fix the
debt interest rate at 6.35% per year.
We manage
our exposure to equipment and residual risk by monitoring the markets our leased
equipment is in and maximizing remarketing proceeds through the re-lease or sale
of equipment.
Item 8. Consolidated Financial Statements and
Supplementary Data
Page
|
|
|
39
|
|
40
|
|
41
|
|
42
|
|
43
|
|
45
|
70
|
The
Members
ICON
Income Fund Nine, LLC
We have
audited the accompanying consolidated balance sheets of ICON Income Fund Nine,
LLC (the “Company”) as of December 31, 2009 and 2008, and the related
consolidated statements of operations, changes in equity, and cash flows for
each of the three years in the period ended December 31, 2009. Our audits also
included the financial statement schedule listed in the index at Item 15(a)(2).
These financial statements and schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We
conducted our audits 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. We were not engaged to perform an
audit of the Company’s internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit also 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.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of ICON Income Fund Nine,
LLC at December 31, 2009 and 2008, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2009, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth
therein.
As
discussed in Note 2 to the accompanying consolidated financial statements, on
January 1, 2009 the Company adopted and, for presentation and disclosure
purposes, retrospectively applied the new accounting pronouncement for
noncontrolling interests.
/s/ Ernst &
Young, LLP
March 25,
2010
New York,
New York
(A
Delaware Limited Liability Company)
|
||||||||
Consolidated
Balance Sheets
|
||||||||
Assets
|
||||||||
|
||||||||
December 31,
|
||||||||
2009
|
2008
|
|||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 1,033,840 | $ | 779,544 | ||||
Current
portion of net investment in finance leases
|
5,367,587 | 4,931,094 | ||||||
Other
current assets
|
177,989 | 310,792 | ||||||
Assets
held for sale
|
140,000 | - | ||||||
Total
current assets
|
6,719,416 | 6,021,430 | ||||||
Non-current
assets:
|
||||||||
Net
investment in finance leases, less current portion
|
17,987,288 | 23,254,147 | ||||||
Leased
equipment at cost (less accumulated depreciation of
|
||||||||
$16,513,937
and $12,060,032, respectively)
|
74,148,333 | 80,239,768 | ||||||
Investments
in joint ventures
|
1,926,926 | 2,386,093 | ||||||
Investment
in unguaranteed residual values
|
752,113 | 830,764 | ||||||
Other
non-current assets, net
|
1,366,601 | 1,498,942 | ||||||
Total
non-current assets
|
96,181,261 | 108,209,714 | ||||||
Total
Assets
|
$ | 102,900,677 | $ | 114,231,144 | ||||
|
||||||||
Liabilities
and Members' Equity
|
||||||||
Current
liabilities:
|
||||||||
Current
portion of non-recourse long-term debt
|
$ | 15,262,908 | $ | 15,011,601 | ||||
Interest
rate swap contracts
|
2,054,841 | 3,513,483 | ||||||
Deferred
revenue
|
1,124,734 | 988,634 | ||||||
Accrued
expenses and other current liabilities
|
321,910 | 497,076 | ||||||
Total
current liabilities
|
18,764,393 | 20,010,794 | ||||||
Non-current
liabilities:
|
||||||||
Non-recourse
long-term debt, less current portion
|
47,174,190 | 62,437,098 | ||||||
Total
Liabilities
|
65,938,583 | 82,447,892 | ||||||
Commitments
and contingencies (Note 13)
|
||||||||
Members'
Equity:
|
||||||||
Additional
Members
|
39,454,895 | 35,721,203 | ||||||
Manager
|
(471,070 | ) | (508,786 | ) | ||||
Accumulated
other comprehensive loss
|
(2,021,731 | ) | (3,429,165 | ) | ||||
Total
Members' Equity
|
36,962,094 | 31,783,252 | ||||||
Total
Liabilities and Members' Equity
|
$ | 102,900,677 | $ | 114,231,144 |
See
accompanying notes to consolidated financial statements.
(A
Delaware Limited Liability Company)
|
||||||||||||
Consolidated
Statements of Operations
|
||||||||||||
|
||||||||||||
Years Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Revenue:
|
||||||||||||
Rental
income
|
$ | 13,397,814 | $ | 16,053,175 | $ | 13,832,058 | ||||||
Finance
income
|
4,765,078 | 5,767,714 | 6,747,205 | |||||||||
Income
(loss) from investments in joint ventures
|
101,976 | (1,996,825 | ) | 2,305 | ||||||||
Net
gain on sales of equipment and unguaranteed residual
values
|
540,795 | 519,729 | 2,291,397 | |||||||||
Interest
and other income (loss)
|
32,146 | (184,921 | ) | 587,121 | ||||||||
Total
revenue
|
18,837,809 | 20,158,872 | 23,460,086 | |||||||||
Expenses:
|
||||||||||||
Management
fees - Manager
|
- | 526,469 | 1,780,581 | |||||||||
Administrative
expense reimbursements - Manager
|
- | 149,844 | 677,965 | |||||||||
General
and administrative
|
1,505,773 | 1,946,654 | 751,566 | |||||||||
Interest
|
5,056,856 | 6,576,691 | 6,657,968 | |||||||||
Depreciation
and amortization
|
5,411,040 | 5,762,239 | 5,628,072 | |||||||||
Impairment
loss
|
163,994 | 4,149,157 | 10,000 | |||||||||
Total
expenses
|
12,137,663 | 19,111,054 | 15,506,152 | |||||||||
Net
income
|
6,700,146 | 1,047,818 | 7,953,934 | |||||||||
Less:
Net income attributable to noncontrolling interests
|
- | - | (13,916 | ) | ||||||||
Net
income attributable to Fund Nine
|
$ | 6,700,146 | $ | 1,047,818 | $ | 7,940,018 | ||||||
Net
income attributable to Fund Nine allocable to:
|
||||||||||||
Additional
Members
|
$ | 6,633,145 | $ | 1,037,340 | $ | 7,860,618 | ||||||
Manager
|
67,001 | 10,478 | 79,400 | |||||||||
$ | 6,700,146 | $ | 1,047,818 | $ | 7,940,018 | |||||||
Weighted
average number of additional shares
|
||||||||||||
of
limited liability company interests outstanding
|
97,955 | 97,955 | 98,052 | |||||||||
Net
income attributable to Fund Nine per weighted
|
||||||||||||
average
additional share of limited liability company interests
|
$ | 67.72 | $ | 10.59 | $ | 80.17 |
See
accompanying notes to consolidated financial statements.
(A
Delaware Limited Liability Company)
|
||||||||||||||||||||||||||||
Consolidated
Statements of Changes in Equity
|
||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||
Members' Equity
|
||||||||||||||||||||||||||||
Accumulated
|
|
|||||||||||||||||||||||||||
Additional
Member
|
Additional
|
Other
Comprehensive
|
Total Members' |
Noncontrolling
|
Total
|
|||||||||||||||||||||||
Shares
|
Members
|
Manager
|
Loss
|
Equity
|
Interests
|
Equity
|
||||||||||||||||||||||
Balance,
December 31, 2006
|
98,102 | $ | 43,404,617 | $ | (431,964 | ) | $ | (639,304 | ) | $ | 42,333,349 | $ | 625,084 | $ | 42,958,433 | |||||||||||||
Net
income
|
- | 7,860,618 | 79,400 | - | 7,940,018 | 13,916 | 7,953,934 | |||||||||||||||||||||
Change
in valuation of interest rate
|
||||||||||||||||||||||||||||
swap
contracts
|
- | - | - | (1,371,390 | ) | (1,371,390 | ) | - | (1,371,390 | ) | ||||||||||||||||||
Comprehensive
income
|
6,568,628 | 13,916 | 6,582,544 | |||||||||||||||||||||||||
Redemption
of additional shares of
|
||||||||||||||||||||||||||||
limited
liability company interests
|
(147 | ) | (78,094 | ) | - | - | (78,094 | ) | - | (78,094 | ) | |||||||||||||||||
Cash
distributions
|
- | (8,825,274 | ) | (89,144 | ) | - | (8,914,418 | ) | (639,000 | ) | (9,553,418 | ) | ||||||||||||||||
Balance,
December 31, 2007
|
97,955 | 42,361,867 | (441,708 | ) | (2,010,694 | ) | 39,909,465 | - | 39,909,465 | |||||||||||||||||||
Net
income
|
- | 1,037,340 | 10,478 | - | 1,047,818 | - | 1,047,818 | |||||||||||||||||||||
Change
in valuation of interest rate
|
||||||||||||||||||||||||||||
swap
contracts
|
- | - | - | (1,418,471 | ) | (1,418,471 | ) | - | (1,418,471 | ) | ||||||||||||||||||
Comprehensive
loss
|
(370,653 | ) | - | (370,653 | ) | |||||||||||||||||||||||
Cash
distributions
|
- | (7,678,004 | ) | (77,556 | ) | - | (7,755,560 | ) | - | (7,755,560 | ) | |||||||||||||||||
Balance,
December 31, 2008
|
97,955 | 35,721,203 | (508,786 | ) | (3,429,165 | ) | 31,783,252 | - | 31,783,252 | |||||||||||||||||||
Net
income
|
- | 6,633,145 | 67,001 | - | 6,700,146 | - | 6,700,146 | |||||||||||||||||||||
Change
in valuation of interest rate
|
||||||||||||||||||||||||||||
swap
contracts
|
- | - | - | 1,407,434 | 1,407,434 | - | 1,407,434 | |||||||||||||||||||||
Comprehensive
income
|
8,107,580 | - | 8,107,580 | |||||||||||||||||||||||||
Cash
distributions
|
- | (2,899,453 | ) | (29,285 | ) | - | (2,928,738 | ) | - | (2,928,738 | ) | |||||||||||||||||
Balance,
December 31, 2009
|
97,955 | $ | 39,454,895 | $ | (471,070 | ) | $ | (2,021,731 | ) | $ | 36,962,094 | $ | - | $ | 36,962,094 |
See
accompanying notes to consolidated financial statements.
(A
Delaware Limited Liability Company)
|
||||||||||||
Consolidated
Statements of Cash Flows
|
||||||||||||
Years Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
income
|
$ | 6,700,146 | $ | 1,047,818 | $ | 7,953,934 | ||||||
Adjustments
to reconcile net income to net cash
|
||||||||||||
provided
by operating activities:
|
||||||||||||
Rental
income paid directly to lenders by lessees
|
(12,745,000 | ) | (12,762,000 | ) | (11,756,059 | ) | ||||||
Finance
income
|
(4,765,078 | ) | (5,767,714 | ) | (6,747,205 | ) | ||||||
(Income)
loss from investments in joint ventures
|
(101,976 | ) | 1,996,825 | (2,305 | ) | |||||||
Net
gain on sale of equipment and unguaranteed residual values
|
(540,795 | ) | (519,729 | ) | (2,291,397 | ) | ||||||
Depreciation
and amortization
|
5,411,040 | 5,762,239 | 5,628,072 | |||||||||
Uncollectible
receivables
|
- | 200,547 | - | |||||||||
Interest
expense on non-recourse financing paid directly
|
||||||||||||
to
lenders by lessees
|
4,849,914 | 6,118,572 | 6,500,557 | |||||||||
Interest
expense from amortization of debt financing costs
|
198,980 | 450,205 | 145,817 | |||||||||
Impairment
loss
|
163,994 | 4,149,157 | 10,000 | |||||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Collection
of finance leases
|
2,380,536 | 867,898 | 2,498,952 | |||||||||
Other
assets, net
|
40,742 | (111,882 | ) | (1,525,590 | ) | |||||||
Deferred
revenue
|
136,100 | (9,762 | ) | 997,116 | ||||||||
Due
to (from) Manager and affiliates
|
- | (87,476 | ) | (106,005 | ) | |||||||
Accrued
expenses and other current liabilities
|
71,578 | 82,093 | (477,995 | ) | ||||||||
Distributions
from joint ventures
|
168,409 | 170,725 | 263,537 | |||||||||
Net
cash provided by operating activities
|
1,968,590 | 1,587,516 | 1,091,429 | |||||||||
Cash
flows from investing activities:
|
||||||||||||
Proceeds
from sales of equipment
|
821,710 | 941,011 | 9,356,762 | |||||||||
Purchase
of equipment
|
- | - | (16,867,667 | ) | ||||||||
Investment
in joint venture
|
- | - | (11,415 | ) | ||||||||
Distributions
received from joint ventures
|
392,734 | 435,096 | 1,264,284 | |||||||||
Net
cash provided by (used in) investing activities
|
1,214,444 | 1,376,107 | (6,258,036 | ) | ||||||||
Cash
flows from financing activities:
|
||||||||||||
Cash
distributions to members
|
(2,928,738 | ) | (7,755,560 | ) | (8,914,418 | ) | ||||||
Shares
of limited liability company interests redeemed
|
- | - | (78,094 | ) | ||||||||
Net
cash used in financing activities
|
(2,928,738 | ) | (7,755,560 | ) | (8,992,512 | ) | ||||||
Net
increase (decrease) in cash and cash equivalents
|
254,296 | (4,791,937 | ) | (14,159,119 | ) | |||||||
Cash
and cash equivalents, beginning of the year
|
779,544 | 5,571,481 | 19,730,600 | |||||||||
Cash
and cash equivalents, end of the year
|
$ | 1,033,840 | $ | 779,544 | $ | 5,571,481 |
See
accompanying notes to consolidated financial statements.
ICON
Income Fund Nine, LLC
|
||||||||||||
(A
Delaware Limited Liability Company)
|
||||||||||||
Consolidated
Statements of Cash Flows
|
||||||||||||
|
Years Ended December 31,
|
|||||||||||
2009
|
2008
|
2007
|
||||||||||
Supplemental
disclosure of non-cash investing and financing activities:
|
||||||||||||
Principal
and interest on non-recourse long-term debt paid
|
|
|||||||||||
directly
to lenders by lessees
|
$ | 19,922,463 | $ | 24,762,786 | $ | 22,243,188 | ||||||
Borrowings
assumed on acquisition of leased equipment
|
$ | - | $ | - | $ | 23,382,333 | ||||||
Reclassification
of net assets from investments in leased equipment
|
||||||||||||
to
investment in finance leases
|
$ | - | $ | 240,000 | $ | - | ||||||
Reclassification
of net assets from investment in finance leases
|
||||||||||||
to
leased equipment
|
$ | - | $ | - | $ | 848,166 | ||||||
Sale
proceeds paid directly to noncontrolling interest from
lessee
|
$ | - | $ | - | $ | 639,000 |
See accompanying notes to consolidated financial
statements.
44
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
(1)
|
Organization
|
ICON
Income Fund Nine, LLC (the “LLC”) was formed on July 11, 2001 as a Delaware
limited liability company. The LLC is engaged in one business segment, the
business of purchasing equipment and leasing it to third-party end users,
providing equipment and other financing, acquiring equipment subject to lease
and, to a lesser degree, acquiring ownership rights to items of leased equipment
at lease expiration. The LLC will continue until December 31, 2020, unless
terminated sooner.
The LLC’s
principal investment objective is to obtain the maximum economic return from its
investments for the benefit of its members. To achieve this objective, the LLC:
(i) acquired a diversified portfolio of leases and financing transactions; (ii)
made monthly cash distributions, at the Manager’s discretion, to its members
commencing with each member's admission to the LLC, continuing through the
liquidation period, which commenced on May 1, 2008; (iii) re-invested
substantially all undistributed cash from operations and cash from sales of
equipment and financing transactions during the operating period; and (iv) began
to dispose of its investments and distribute the excess cash from sales of such
investments to its members with the commencement of the liquidation
period.
The LLC’s
operating period ended on April 30, 2008 and the LLC commenced its liquidation
period on May 1, 2008. During the liquidation period, the LLC is distributing
substantially all of its distributable cash from operations and equipment sales
to the members and will continue the orderly termination of its operations and
affairs. The LLC will not invest in any additional finance or lease transactions
during the liquidation period.
The
manager of the LLC is ICON Capital Corp., a Delaware corporation (the
“Manager”). The Manager manages and controls the business affairs of the LLC,
including, but not limited to, the equipment leases and other financing
transactions that the LLC entered into pursuant to the terms of the LLC’s
amended and restated operating agreement (the “LLC Agreement”). Additionally,
the Manager has a 1% interest in the profits, losses, cash distributions and
liquidation proceeds of the LLC.
The
initial capitalization of the LLC was $1,000 contributed by the
Manager. The LLC offered shares of limited liability company
interests (“Shares”) with the intention of raising up to $100,000,000 of capital
from additional members. The LLC commenced business operations on its
initial closing date, December 18, 2001, when it sold 1,250 Shares, representing
$1,249,910 of capital contributions. Between December 19, 2001 and April 30,
2003, the final closing date, the LLC admitted additional members owning 98,416
Shares, representing $98,403,564 of capital contributions and bringing the total
sale of Shares to 99,666 representing $99,653,474 of capital
contributions. For the year ended December 31, 2009, the LLC did not
redeem any additional Shares, leaving 97,955 additional Shares outstanding as of
such date.
The LLC
invested most of the net proceeds from its offering in equipment subject to
leases, other financing transactions and residual ownership rights in leased
equipment. After the net offering proceeds were invested, additional investments
were made with the cash generated from the LLC’s initial investments to the
extent that cash was not needed for expenses, reserves and distributions to
members. The investment in additional equipment in this manner is called
"reinvestment."
45
ICON
Income Fund Nine, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
(1)
|
Organization
- continued
|
Members’
capital accounts are increased for their initial capital contribution plus their
proportionate share of earnings and decreased by their proportionate share of
losses and distributions. Profits, losses, cash distributions and liquidation
proceeds are allocated 99% to the additional members and 1% to the Manager until
each additional member has (a) received cash distributions and liquidation
proceeds sufficient to reduce its adjusted capital account to zero and (b)
received, in addition, other distributions and allocations that would provide an
8% per year cumulative return, compounded daily, on its outstanding adjusted
capital account. After such time, distributions will be allocated 90%
to the additional members and 10% to the Manager.
(2)
|
Summary
of Significant Accounting Policies
|
Basis of
Presentation and Consolidation
The
accompanying consolidated financial statements of the LLC have been prepared in
accordance with U.S. generally accepted accounting principles (“US GAAP”). In
the opinion of the Manager, all adjustments considered necessary for a fair
presentation have been included.
The
consolidated financial statements include the accounts of the LLC and its
majority-owned subsidiaries and other controlled entities. All intercompany
accounts and transactions have been eliminated in consolidation. In joint
ventures where the LLC has majority ownership, the financial condition and
results of operations of the joint venture are consolidated. Noncontrolling
interest represents the minority owner’s proportionate share of its equity in
the joint venture. The noncontrolling interest is adjusted for the minority
owner’s share of the earnings, losses, investments and distributions of the
joint venture.
The LLC
accounts for its noncontrolling interests in joint ventures where the LLC has
influence over financial and operational matters, generally 50% or less
ownership interest, under the equity method of accounting. In such cases, the
LLC's original investments are recorded at cost and adjusted for its share of
earnings, losses and distributions. The LLC accounts for investments in joint
ventures where the LLC has virtually no influence over financial and operational
matters using the cost method of accounting. In such cases, the LLC's
original investments are recorded at cost and any distributions received are
recorded as revenue. All of the LLC's investments in joint ventures
are subject to its impairment review policy.
Effective
January 1, 2009, the LLC adopted and, for presentation and disclosure purposes,
retrospectively applied the accounting pronouncement relating to noncontrolling
interests in consolidated financial statements. As a result,
noncontrolling interests are reported as a separate component of consolidated
equity and net income attributable to the noncontrolling interest is included in
consolidated net income (loss). Accordingly, the prior year consolidated
financial statements have been revised to conform to the current year
presentation.
Cash and
Cash Equivalents
Cash and
cash equivalents include cash in banks and highly liquid investments with
original maturity dates of three months or less.
The LLC's
cash and cash equivalents are held principally at two financial institutions and
at times may exceed insured limits. The LLC has placed these funds in high
quality institutions in order to minimize risk relating to exceeding insured
limits.
46
ICON
Income Fund Nine, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
(2)
|
Summary
of Significant Accounting Policies –
continued
|
Risks and
Uncertainties
In the
normal course of business, the LLC is exposed to two significant types of
economic risk: credit and market. Credit risk is the risk of a
lessee, borrower or other counterparty’s inability or unwillingness to make
contractually required payments. See Note 12 for a discussion of concentrations
of risk.
Market
risk reflects the change in the value of debt instruments, derivatives and
credit facilities due to changes in interest rate spreads or other market
factors. The LLC believes that the carrying value of its investments
and derivative obligations is reasonable, taking into consideration these risks,
along with estimated collateral values, payment history and other relevant
information.
Allowance
for Doubtful Accounts
When
evaluating the adequacy of the allowance for doubtful accounts, the LLC
estimates the uncollectibility of receivables by analyzing lessee, borrower and
other counterparty concentrations, creditworthiness and current economic trends.
The LLC records an allowance for doubtful accounts when the analysis indicates
that the probability of full collection is unlikely. At December 31, 2009 and
2008, the LLC recorded an allowance of $0 and $155,318,
respectively.
Debt
Financing Costs
Expenses
associated with the incurrence of debt are capitalized and amortized over the
term of the debt instrument using the effective interest rate
method. These costs are included in other current and other
non-current assets.
Leased
Equipment at Cost
Investments
in leased equipment are stated at cost less accumulated depreciation. Leased
equipment is depreciated on a straight-line basis over the lease term, which
typically ranges from 4 to 5 years, to the asset’s residual value.
The
Manager has an investment committee that approved each new equipment lease and
other financing transaction. As part of its process, the investment
committee determined the residual value, if any, to be used once the investment
was approved. The factors considered in determining the residual
value included, but were not limited to, the creditworthiness of the potential
lessee, the type of equipment considered, how the equipment was integrated into
the potential lessee’s business, the length of the lease and the industry in
which the potential lessee operated. Residual values are reviewed for
impairment in accordance with the LLC’s impairment review policy.
The
residual value assumes, among other things, that the asset is utilized normally
in an open, unrestricted and stable market. Short-term fluctuations in the
market place are disregarded and it is assumed that there is no necessity either
to dispose of a significant number of the assets, if held in quantity,
simultaneously or to dispose of the asset quickly. The residual value
is calculated using information from various external sources, such as trade
publications, auction data, equipment dealers, wholesalers and industry experts,
as well as inspection of the physical asset and other economic
indicators.
47
ICON
Income Fund Nine, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
(2)
|
Summary
of Significant Accounting Policies –
continued
|
Asset
Impairments
The
significant assets in the LLC’s portfolio are periodically reviewed, no less
frequently than annually, to determine whether events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. 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. If there is an indication of impairment, the LLC will estimate
the future cash flows (undiscounted and without interest charges) expected from
the use of the asset and its eventual disposition. Future cash flows are the
future cash inflows expected to be generated by an asset less the future
outflows expected to be necessary to obtain those inflows. If an
impairment is determined to exist, the impairment loss will be measured as the
amount by which the carrying value of a long-lived asset exceeds its fair value
and recorded in the consolidated statement of operations in the period the
determination is made.
The
events or changes in circumstances that generally indicate that an asset may be
impaired are (i) the estimated fair value of the underlying equipment is less
than its carrying value or (ii) the lessee is experiencing financial
difficulties and it does not appear likely that the estimated proceeds from the
disposition of the asset will be sufficient to satisfy the residual position in
the asset and, if applicable, the remaining obligation to the non-recourse
lender. Generally in the latter situation, the residual position
relates to equipment subject to third-party non-recourse debt where the lessee
remits its rental payments directly to the lender and the LLC does not recover
its residual position until the non-recourse debt is repaid in full. The
preparation of the undiscounted cash flows requires the use of assumptions and
estimates, including the level of future rents, the residual value expected to
be realized upon disposition of the asset, estimated downtime between re-leasing
events and the amount of re-leasing costs. The Manager’s review for impairment
includes a consideration of the existence of impairment indicators including
third-party appraisals, published values for similar assets, recent transactions
for similar assets, adverse changes in market conditions for specific asset
types and the occurrence of significant adverse changes in general industry and
market conditions that could affect the fair value of the asset.
Equipment
Held for Sale
Equipment
held for sale is recorded at the lower of cost or estimated fair value, less
anticipated costs to sell, and consists of equipment previously leased to end
users which has been returned to the LLC following lease
expiration.
Equipment
held for sale is not depreciated and related deferred costs are not amortized.
Subsequent changes to the asset’s fair value, either increases or decreases, are
recorded as adjustments to the carrying value of the equipment; however, any
such adjustment would not exceed the original carrying value of the equipment
held for sale.
Unguaranteed
Residual Values
The LLC
carries its investments in estimated unguaranteed residual values at cost. The
net book value is equal to or less than fair value at each reporting period and
is subject to the LLC's impairment review policy.
48
ICON
Income Fund Nine, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
(2)
|
Summary
of Significant Accounting Policies –
continued
|
Revenue
Recognition
The LLC
leased equipment to third parties and each such lease is classified as either a
finance lease or an operating lease, which is based upon the terms of each
lease. For a finance lease, initial direct costs are capitalized and amortized
over the term of the related lease. For an operating lease, the
initial direct costs are included as a component of the cost of the equipment
and depreciated over the lease term.
For
finance leases, the LLC recorded, at lease inception, the total minimum lease
payments receivable from the lessee, the estimated unguaranteed residual value
of the equipment upon 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. Billed operating lease receivables are included in
accounts receivable until collected. Accounts receivable are stated
at their estimated net realizable value. Deferred revenue is the
difference between the timing of the receivables billed and the income
recognized on a straight-line basis.
Initial
Direct Costs
The LLC
capitalizes initial direct costs associated with the origination and funding of
leased assets and other financing transactions in accordance with the accounting
pronouncement that accounts for nonrefundable fees and costs associated with
originating or acquiring loans and initial direct costs of leases. The costs are
amortized on a lease by lease basis based on actual lease term using a
straight-line method for operating leases and the effective interest rate method
for finance leases and notes receivable. Costs related to leases or other
financing transactions that are not consummated are expensed as an acquisition
expense.
Acquisition
Fees
Pursuant
to the LLC Agreement, the LLC paid acquisition fees to the Manager equal to 3%
of the purchase price of the LLC’s investments. These fees were capitalized and
included in the cost of the investment.
Income
Taxes
The LLC
is taxed as a partnership for federal and State income tax
purposes. No provision for income taxes has been recorded since the
liability for such taxes is that of each of the individual members rather than
the LLC. The LLC's income tax returns are subject to examination by
the federal and State taxing authorities, and changes, if any, could adjust the
individual income tax of the members.
Per Share
Data
Net
income attributable to the LLC per weighted average additional Share is
based upon the weighted average number of additional Shares outstanding during
the year.
49
ICON
Income Fund Nine, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
(2)
|
Summary
of Significant Accounting Policies –
continued
|
Share
Redemption
The LLC
may, at its discretion, redeem Shares from a limited number of its additional
members, as provided for in its LLC Agreement. The redemption price for any
Shares approved for redemption is based upon a formula, as provided in the LLC
Agreement. Additional members are required to hold their Shares for
at least one year before redemptions will be permitted.
Comprehensive
Income (Loss)
Comprehensive
income (loss) is reported in the accompanying consolidated statements of changes
in equity and consists of net income (loss) and other gains and losses affecting
members’ equity that are excluded from net income (loss).
Derivative
Financial Instruments
The LLC
may enter into derivative transactions for purposes of hedging specific
financial exposures, including changes in interest rates of its non-recourse
long-term debt. The LLC enters into these instruments only for hedging
underlying exposures. The LLC does not hold or issue derivative financial
instruments for purposes other than hedging, except for warrants, which are not
hedges. Certain derivatives may not meet the established criteria to be
designated as qualifying accounting hedges, even though the LLC believes that
these are effective economic hedges.
Use of
Estimates
The
preparation of financial statements in conformity with US GAAP requires the
Manager to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities as
of the date of the consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. Significant estimates
primarily include the determination of allowance for doubtful accounts,
depreciation and amortization, impairment losses, estimated useful lives and
residual values. Actual results could differ from those estimates.
Reclassifications
Certain
reclassifications have been made to the accompanying consolidated financial
statements in prior years to conform to the current presentation.
Recently
Adopted Accounting Pronouncements
In 2009,
the LLC adopted the accounting pronouncement relating to accounting for fair
value measurements, which establishes a framework for measuring fair value and
enhances fair value measurement disclosure for non-financial assets and
liabilities. The adoption of this accounting pronouncement for non-financial
assets and liabilities did not have a significant impact on the LLC's
consolidated financial statements.
In 2009,
the LLC adopted the accounting pronouncement that amended the current accounting
and disclosure requirements for derivative instruments. The requirements were
amended to enhance how: (a) an entity uses derivative instruments; (b)
derivative instruments and related hedged items are accounted for; and (c)
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. The LLC was required to provide
such disclosures beginning with the quarter ended March 31, 2009.
50
ICON
Income Fund Nine, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
(2)
|
Summary
of Significant Accounting Policies –
continued
|
In 2009,
the LLC adopted the accounting pronouncement that provides additional guidance
for estimating fair value in accordance with the accounting standard for fair
value measurements when the volume and level of activity for the asset or
liability have significantly decreased. This pronouncement also provides
guidance for identifying transactions that are not orderly. This pronouncement
was effective prospectively for all interim and annual reporting periods ending
after June 15, 2009. The adoption of this accounting pronouncement did not
have a significant impact on the LLC's consolidated financial
statements.
In 2009,
the LLC adopted the accounting pronouncement that amends the requirements for
disclosures about fair value of financial instruments, regarding the fair value
of financial instruments for annual, as well as interim, reporting periods. This
pronouncement was effective prospectively for all interim and annual reporting
periods ending after June 15, 2009. The adoption of this accounting
pronouncement did not have a significant impact on the LLC's consolidated
financial statements.
In 2009,
the LLC adopted the accounting pronouncement regarding the general standards of
accounting for, and disclosure of, events that occur after the balance sheet
date, but before the financial statements are issued. This pronouncement was
effective prospectively for interim and annual reporting periods ending after
June 15, 2009. The adoption of this accounting pronouncement did not have
a significant impact on the LLC's consolidated financial
statements.
In 2009,
the LLC adopted Accounting Standards Codification 105, “Generally Accepted
Accounting Principles,” which establishes the Financial Accounting Standards
Board Accounting Standards Codification (the “Codification”), which supersedes
all existing accounting standard documents and is the single source of
authoritative non-governmental US GAAP. All other accounting
literature not included in the Codification is considered
non-authoritative. This accounting standard is effective for interim
and annual periods ending after September 15, 2009. The Codification did not
change or alter existing US GAAP and it did not result in a change in
accounting practices for the LLC upon adoption. The LLC has conformed
its consolidated financial statements and related notes to the new Codification
for the year ended December 31, 2009.
(3)
|
Net
Investment in Finance
Leases
|
Net
investment in finance leases consisted of the following at December 31, 2009 and
2008:
December 31,
|
||||||||
2009
|
2008
|
|||||||
|
||||||||
Minimum
rents receivable
|
$ | 31,946,625 | $ | 41,504,866 | ||||
Estimated
residual values
|
- | 37,201 | ||||||
Unearned
income
|
(8,591,750 | ) | (13,356,826 | ) | ||||
Net
investment in finance leases
|
23,354,875 | 28,185,241 | ||||||
Less: Current
portion of net
|
||||||||
investment
in finance leases
|
5,367,587 | 4,931,094 | ||||||
Net
investment in finance leases,
|
||||||||
less
current portion
|
$ | 17,987,288 | $ | 23,254,147 |
During
August and September of 2003, the LLC acquired various manufacturing equipment
on lease to Wildwood Industries, Inc. (“Wildwood”) for approximately $986,000
and $1,200,000, respectively. At lease expiration, each lease was
typically extended for an additional twelve month period, most recently on
September 1, 2008 and October 1, 2008, respectively.
51
ICON
Income Fund Nine, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
(3)
|
Net
Investment in Finance Leases -
continued
|
At
December 31, 2008, the Manager determined that both assets were impaired based
upon the estimate that lease proceeds would be insufficient to cover the
residual value and recorded an aggregate impairment loss of approximately
$205,000 and bad debt expense for uncollectable receivables of approximately
$136,000.
On
January 21, 2009, the LLC filed a lawsuit in the U.S. District Court for the
Southern District of New York against Wildwood and its owners who guaranteed
Wildwood’s obligations to the LLC. The LLC’s claims are for breaches
of the leases and guarantees for Wildwood’s failure to pay rents. On March 5,
2009, an involuntary petition under Chapter 11 of the United States Bankruptcy
Code was filed against Wildwood by three of Wildwood’s creditors in United
States Bankruptcy Court. On September 18, 2009, the involuntary petition under
Chapter 11 of the United States Bankruptcy Code was converted to a Chapter 7
case by the United States Bankruptcy Trustee. The LLC does not expect to receive
any further proceeds from Wildwood.
During
September 2002, the LLC acquired three car and truck carrying vessels
(“Wilhelmsen Vessels”) on bareboat charter to Wilhelmsen Lines Shipowning AS
(“Wilhelmsen”) through December 22, 2008. Effective March 14, 2006, the LLC
extended the terms of its bareboat charters with Wilhelmsen through December 22,
2013. Each charter extension includes a provision that permits Wilhelmsen to
acquire the respective Wilhelmsen Vessel at the expiration of the charter
extension for a nominal amount. Accordingly, the LLC reclassified the net book
value of the Wilhelmsen Vessels of approximately $45,399,000 from operating
leases to investments in finance leases. The non-recourse long-term debt
associated with the Wilhelmsen Vessels was refinanced on May 18, 2006 (see Note
7).
Non-cancelable
minimum annual amounts due on investments in finance leases consisted of the
following at December 31, 2009:
Years
Ending
|
||||
December 31,
|
||||
2010
|
$ | 9,061,125 | ||
2011
|
8,322,000 | |||
2012
|
8,322,000 | |||
2013
|
6,241,500 | |||
$ | 31,946,625 |
(4)
|
Leased
Equipment at Cost
|
Leased
equipment at cost consisted of the following at December 31, 2009 and
2008:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Aircraft
|
$ | 48,453,180 | $ | 48,453,180 | ||||
Marine
vessel
|
40,285,787 | 40,285,787 | ||||||
Manufacturing,
telecommunications
|
||||||||
and
computer equipment
|
1,923,303 | 3,560,833 | ||||||
90,662,270 | 92,299,800 | |||||||
Less:
Accumulated depreciation
|
16,513,937 | 12,060,032 | ||||||
$ | 74,148,333 | $ | 80,239,768 |
52
ICON
Income Fund Nine, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
(4)
|
Leased
Equipment at Cost -
continued
|
Depreciation
expense was $5,385,000, $5,701,646 and $5,435,083 for the years ended December
31, 2009,
2008 and 2007, respectively.
Aircraft
During
December 2002, the LLC and ICON Income Fund Eight B L.P. (“Fund Eight B”), an
entity also managed by the Manager, formed a joint venture, ICON Aircraft 46835
LLC (“Aircraft 46835”), with ownership interests of 85% and 15%, respectively.
Aircraft 46835 was formed for the purpose of acquiring an investment in a
McDonnell Douglas DC10-30F aircraft on lease with Federal Express Corporation
(“FedEx”). On December 27, 2002, Aircraft 46835 acquired the aircraft for
approximately $25,292,000, including approximately $22,292,000 of non-recourse
debt. The Manager was paid an acquisition fee of approximately $759,000 relating
to this transaction, of which the LLC paid approximately $645,000. On March 30,
2007, Aircraft 46835 sold the aircraft to FedEx for
$4,260,000 and recognized a loss on the sale of approximately $640,000. The
final lease payment was paid to the lender, satisfying all remaining debt
obligations.
During
July 2002, the LLC formed a wholly-owned subsidiary, ICON Aircraft 128 LLC
(“ICON 128”), for the purpose of acquiring an Airbus A340-313X aircraft
(“Aircraft 128”) on lease to Cathay Pacific Airways Limited (“Cathay”) for
approximately $69,000,000, including the assumption of approximately $64,800,000
of non-recourse debt. The lease with Cathay was initially scheduled
to expire in June 2006, but has been extended until December 1, 2011.
Simultaneously with the lease extension of the aircraft, the LLC refinanced the
non-recourse debt associated with the aircraft (see Note 7).
In light
of unprecedented high fuel prices during 2008 and the related impact on the
airline industry, the Manager reviewed the LLC’s investment in Aircraft 128 as
of June 30, 2008. In accordance with the accounting pronouncement that
accounts for the impairment or disposal of long-lived assets, and based upon
changes in the airline industry, the Manager determined that Aircraft 128 was
impaired.
Based on
the Manager’s review, the carrying value of Aircraft 128 exceeded its
expected undiscounted future cash flows and, as a result, ICON 128 recorded an
impairment charge representing the difference between the aircraft carrying
value and the expected discounted future cash flows of Aircraft 128. The
expected discounted future cash flows of Aircraft 128 were generally determined
using a market approach, a recent appraisal for Aircraft 128 and recent sales of
similar aircraft, as well as other factors, including those discussed
below. As a result, ICON 128 recorded an impairment loss on
Aircraft 128 of approximately $3,900,000 as of June 30, 2008.
The
following factors in 2008, among others, indicated that the full carrying value
of Aircraft 128 might not be recoverable: (i) indications that lenders were
willing to finance less of the acquisition cost of four-engine aircraft, which
increased with each dollar rise of the price of fuel, thereby undermining
the carrying value expectations of such aircraft; (ii) the rising cost of
fuel was increasing the operating costs of four-engine aircraft and similar
capacity twin-engine aircraft, thereby making such aircraft less attractive
investments at the time and thereby depressing the market for Aircraft 128; and
(iii) the likelihood of aircraft operators switching to more efficient aircraft,
thereby depressing the market for Aircraft 128.
53
ICON
Income Fund Nine, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
(4)
|
Leased
Equipment at Cost -
continued
|
Marine
vessel
On July
24, 2007, the LLC, through its wholly-owned subsidiary, ICON Samar, LLC (“ICON
Samar”), purchased a 98,640 deadweight ton (“DWT”) Aframax product tanker
(“Samar Spirit”) from an affiliate of the Teekay Corporation (“Teekay”). The
purchase price for the Samar Spirit was $40,250,000, including the assumption of
approximately $23,382,000 of non-recourse debt under a secured loan agreement
with Fortis Capital Corp. (“Fortis”). In addition, ICON Samar paid an
arrangement fee to Fortis of approximately $175,000 and has a payable to the
Manager for approximately $54,000 related to legal fees incurred. Simultaneously
with the purchase of the Samar Spirit, a bareboat charter was entered into with
Teekay for a term of 48 months. The charter commenced on July 24, 2007 and is
scheduled to expire on July 23, 2011. The Manager waived acquisition fees
payable in connection with the purchase.
Manufacturing,
telecommunications and computer equipment
During
November 2002, the LLC acquired 324 railcars on lease to Texas Genco
LP. On May 7, 2007, the LLC sold the equipment to an unrelated third
party for $4,960,000, of which approximately $1,500,000 was used to repay the
related long-term debt. The LLC recognized a gain on the sale of approximately
$3,100,000.
On
January 28, 2008, ICON Railcar I, LLC (“ICON Rail”), the LLC’s wholly-owned
subsidiary, sold its entire interest in 110 railcars (the “Railcars”) to an
unrelated third party that was leasing and operating the
Railcars. The LLC recognized a gain on the sale of approximately
$313,000.
On April
30, 2003, the LLC acquired a Double Kraft Paper Forming Tubing Unit on lease to
Wildwood through February 2007 for approximately $1,350,000. Effective March 1,
2007, the lease was extended for an additional twelve
months. Effective March 1, 2008, this lease was again extended for an
additional twelve months and was reclassified as an operating lease. Subject to
the terms of the lease renewal, there is a residual interest sharing agreement
with a third-party broker, payable upon attainment of a minimum return on
investment, whereby all sales proceeds received above $150,000 will be shared
equally with the third party. For the years ended December 31, 2009, 2008 and
2007, approximately $0, $130,000 and $87,000, respectively, was distributed to
the third party in accordance with the residual interest sharing
agreement.
At
December 31, 2008, the Manager determined that the asset was impaired based upon
the estimate that lease proceeds would be insufficient to cover the residual
position and recorded an impairment loss of approximately $77,000 and bad debt
expense for uncollectable receivables of approximately $65,000.
Subsequently,
on January 21, 2009, the LLC filed a lawsuit in the U.S. District Court for the
Southern District of New York against Wildwood and its owners who guaranteed
Wildwood’s obligations to the LLC (see Note 3).
54
ICON
Income Fund Nine, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
(4)
|
Leased
Equipment at Cost -
continued
|
On June
20, 2003, the LLC acquired a manufacturing device previously on lease (the “AMD
Lease”) to Spansion LLC (“Spansion”) for approximately $6,391,000. On
August 1, 2003, the LLC acquired semi-conductor memory testing equipment subject
to two leases (the “FASL Leases”) with Spansion for approximately $4,561,000.
The FASL Leases were each renewed for a 15-month period commencing on April 1,
2008.
On March
1, 2009, Spansion filed a petition for reorganization under Chapter 11 in United
States Bankruptcy Court. On March 12, 2009, Spansion rejected the
FASL Leases and affirmed the AMD Lease. On June 3, 2009, Spansion
returned the equipment subject to the FASL Leases, which has been classified on
the consolidated balance sheets as assets held for sale and has been recorded at
the lower of its carrying value or fair market value less estimated costs to
sell. Based on the Manager’s assessment of the equipment and
knowledge of the market for such equipment, the LLC recorded an impairment
charge of approximately $164,000 on the consolidated financial statements for
the year ended December 31, 2009.
In July
2009, the equipment subject to the AMD Lease was sold for approximately $585,000
and the LLC recognized a gain on sale of the equipment and lease termination of
approximately $432,000.
Each
Spansion lease has a related residual interest sharing agreement with a
third-party that is triggered when a minimum return on investment has been
attained by the LLC. Subject to the original terms, all proceeds received above
approximately $633,000 will be shared 35% with the third party. For the years
ended December 31, 2009, 2008 and 2007, approximately $350,000, $739,000 and
$56,000 was distributed to the third party or accrued in accordance with the
residual interest sharing agreements.
On
February 22, 2010, the U.S. Bankruptcy Court approved a stipulation between the
LLC and Spansion allowing the LLC’s administrative expense claim in the amount
of approximately $90,000 and unsecured claim in the amount of
approximately $269,000. On March 22, 2010, the LLC sold its unsecured
claim to a third party for approximately $161,000.
During
December 2004, the LLC acquired four Noritsu QSS 3011 digital mini-labs on lease
to Rite Aid Corporation (“Rite Aid”) for approximately $399,000 in
cash. The Manager was paid acquisition fees of approximately $12,000
relating to this transaction. During 2008, Rite Aid notified the Manager of its
intent to return to the LLC all the digital mini-labs that were subject to
lease. One of the digital mini-labs was returned to the LLC in August 2008 and
the remaining three units were returned in September 2008. The Rite Aid lease
was then terminated. All four units were subsequently sold for an amount that
closely approximated carrying value resulting in an immaterial
gain.
During
December 2004, the LLC acquired from Varilease Technology Finance Group, Inc. a
portfolio of medical equipment subject to a lease with Hudson Crossing Surgery
Center (“Hudson Crossing”) and a lease with Short Hills Surgery Center (“Short
Hills”) for an aggregate amount of approximately $2,046,000 in cash. The
lease with Hudson Crossing expired on December 31, 2007 and was renewed for a
six-month period commencing on January 1, 2008. Effective July 1,
2008, Hudson Crossing’s lease continued on a month-to-month basis. In January
2009, the medical equipment on lease to Hudson Crossing was sold for $152,000
and the LLC recognized a gain of approximately $49,000.
On
December 18, 2009, the lease with Short Hills expired and Short Hills purchased
the medical equipment for approximately $40,000.
Aggregate
annual minimum future rentals receivable from the LLC’s non-cancelable leases
consisted of the following at December 31, 2009:
For
the year ending December 31, 2010
|
$ | 12,490,388 | ||
For
the year ending December 31, 2011
|
$ | 8,913,000 |
55
ICON
Income Fund Nine, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
(5)
|
Investments
in Joint Ventures
|
The LLC
and certain of its affiliates, entities also managed by the Manager, formed the
joint ventures discussed below for the purpose of acquiring and managing various
leased equipment. The LLC and these affiliates have substantially
identical investment objectives and participate on identical terms and
conditions. The LLC and the other joint venture members have a right
of first refusal to purchase the equipment, on a pro-rata basis, if any of the
other joint venture members desires to sell its interests in the equipment or
joint venture.
ICON
Global Crossing II, LLC
On
September 27, 2006, the LLC and ICON Income Fund Ten, LLC, an entity also
managed by the Manager (“Fund Ten”), formed ICON Global Crossing II, LLC
(“Global Crossing II”), with original ownership interests of approximately 17%
and 83%, respectively. The total capital contributions made to Global Crossing
II were approximately $12,044,000, of which the LLC’s share was approximately
$2,000,000.
On
September 28, 2006, Global Crossing II purchased telecommunications equipment
for approximately $12,044,000. This equipment is subject to a 48-month lease
with Global Crossing Telecommunications, Inc. (“Global Crossing”) and Global
Crossing North American Networks, Inc. (together with Global Crossing, “Global
Crossing Group”) that commenced on November 1, 2006. The Manager was paid an
acquisition fee of $60,000 relating to this transaction. On October 31, 2006,
ICON Leasing Fund Eleven, LLC, an entity also managed by the Manager (“Fund
Eleven”), made a capital contribution of approximately $1,841,000 to Global
Crossing II. The contribution changed the ownership interests of the
LLC, Fund Ten and Fund Eleven at October 31, 2006 to 14.40%, 72.34% and 13.26%,
respectively. The additional contribution was used to purchase
telecommunications equipment subject to a 48-month base lease term with Global
Crossing Group that commenced on November 1, 2006.
Information
as to the results of operations of Global Crossing II is summarized
below:
December
31,
|
||||||||||||
2009
|
2008
|
|||||||||||
Current
Assets
|
$ | 67,580 | $ | 52,255 | ||||||||
Non-current
Assets
|
$ | 5,046,104 | $ | 7,769,064 | ||||||||
Current
Liabilities
|
$ | 49,888 | $ | 30,205 | ||||||||
Non-current
Liabilities
|
$ | - | $ | - | ||||||||
Members'
Equity
|
$ | 5,063,796 | $ | 7,791,114 | ||||||||
LLC's
share of equity
|
$ | 729,187 | $ | 1,121,920 | ||||||||
December
31,
|
||||||||||||
2009
|
2008 | 2007 | ||||||||||
Revenue
|
$ | 3,923,808 | $ | 3,923,808 | $ | 3,923,808 | ||||||
Expenses
|
2,754,302 | 2,750,370 | 2,865,456 | |||||||||
Net
income
|
$ | 1,169,506 | $ | 1,173,438 | $ | 1,058,352 | ||||||
LLC's
share of net income
|
$ | 168,409 | $ | 168,975 | $ | 152,403 |
56
ICON
Income Fund Nine, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
(5)
|
Investments
in Joint Ventures - continued
|
ICON
SPK 2023-A LLC
On
December 31, 2001, the LLC and Fund Eight B formed ICON SPK 2023-A LLC (“ICON
SPK”) for the purpose of acquiring and managing a portfolio of equipment leases
consisting of materials handling, telecommunications and computer
equipment. The LLC paid approximately $3,953,000 for its investment
in ICON SPK. The LLC and Fund Eight B originally had ownership
interests of 51% and 49%, respectively. ICON SPK completed the transaction, with
a total cost of approximately $7,750,000 in cash. The Manager was
paid an acquisition fee totaling approximately $233,000 relating to this
transaction, of which the LLC paid approximately $119,000.
During
2006, ICON SPK sold various pieces of its portfolio of equipment for
approximately $460,000 in cash and recognized a loss of approximately $106,000
on these sales. During the second quarter of 2007, ICON SPK sold all of its
remaining equipment to a third party for total sales proceeds of approximately
$348,000. ICON SPK recognized a gain on the sale of approximately
$264,000.
ICON
GeicJV
On March
31, 2004, the LLC, along with Fund Ten, formed a joint venture, ICON GeicJV, for
the purpose of purchasing information technology equipment subject to a lease
with Government Employees Insurance Company (“GEICO”). The LLC paid
approximately $1,522,000 for its investment in the joint venture. The
LLC and Fund Ten have ownership interests of 26% and 74%,
respectively. On April 30, 2004, the joint venture acquired the
information technology equipment subject to lease for a total cost of
approximately $5,853,000 in cash. The LLC paid the Manager an
acquisition fee totaling approximately $46,000 relating to this
transaction.
During
2007, GEICO returned equipment with a cost basis of approximately $5,798,000 and
extended on a month-to-month basis other equipment with a cost basis of
approximately $55,000. Of the equipment that was returned, the Manager has sold
equipment with a net book value of approximately $781,000. The joint venture
realized proceeds of approximately $775,000 and recognized a loss of
approximately $6,000 on the sale of the equipment. The remaining returned
equipment had a net book value of approximately $58,000. During 2008, the joint
venture sold all of the remaining equipment previously on lease to
GEICO. The joint venture realized proceeds of approximately $96,000
and recognized a gain on the sale of equipment of approximately
$31,000.
ICON
Aircraft 47820 LLC
During
March 2003, the LLC and Fund Eight B formed a joint venture, ICON Aircraft 47820
LLC (“Aircraft 47820”), in which the LLC and Fund Eight B had ownership
interests of 10% and 90%, respectively. Aircraft 47820 was formed for the
purpose of acquiring an investment in a McDonnell Douglas DC10-30F aircraft and
two spare engines (the “Aircraft and Engines”) on lease to Federal Express
Corporation (“FedEx”). On March 11, 2003, Aircraft 47820 acquired the Aircraft
and Engines for approximately $27,288,000, including approximately $24,211,000
of non-recourse debt. The LLC’s portion of the cash purchase price was
approximately $308,000. On March 30, 2007, Aircraft 47820 sold the Aircraft and
Engines to FedEx for $5,475,000 and recognized a loss on the sale of
approximately $1,025,000.
57
ICON
Income Fund Nine, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
(5)
|
Investments
in Joint Ventures - continued
|
ICON
Aircraft 126 LLC
During
February 2002, the LLC and Fund Eight B formed ICON Aircraft 126 LLC (“ICON
126”) for the purpose of acquiring all of the outstanding shares of Delta
Aircraft Leasing Limited, a Cayman Islands registered company that owns, through
an owner trust, an Airbus A340-313X MSN 126 (“Aircraft 126”). Aircraft 126 was
subject to a lease with Cathay at the time of purchase, which was consummated
during March 2002. The lease was initially scheduled to expire in March 2006,
but has been extended to July 1, 2011. The LLC and Fund Eight B each have a 50%
ownership interest in ICON 126.
Effective
March 27, 2006, in connection with the lease extension, approximately
$52,850,000 of non-recourse debt associated with Aircraft 126 was refinanced
after applying $583,000 from a reserve account established in connection with
the original lease with Cathay. The refinanced non-recourse debt matures on July
1, 2011 and requires a balloon payment of approximately $33,000,000 at maturity.
The interest rate of the debt is fixed at 6.104%.
ICON 126 had a commitment with respect
to Aircraft 126 to pay certain maintenance costs, which were incurred on or
prior to March 27, 2006. ICON 126 established a maintenance reserve cash account
under the original lease to pay for its portion of these costs. This account was
funded by free cash from the lease payments in accordance with the terms of the
original lease. During 2006, ICON 126 received $182,021 of capital contributions
from both of its members, of which $50,000 was for amounts
relating to the maintenance reserve cash account and $132,021 was related to
costs paid by its members relating to the refinancing of ICON
126's non-recourse debt. During September 2006, approximately $1,153,000
was paid for maintenance costs. The maintenance account for Aircraft 126 was
cross-collateralized with the maintenance account for ICON Aircraft 123 LLC
(“ICON 123”), a wholly-owned subsidiary of Fund Eight B, pursuant to two first
priority charge on cash deposit agreements entered into in connection with the
purchase of an Airbus A340-313X aircraft on lease to Cathay (“Aircraft 123”).
Under the terms of these agreements, ICON 126 was required to pay on behalf of
ICON 123 any maintenance cost shortfalls incurred by the affiliate. On January
30, 2007, ICON 126 paid approximately $143,000 in maintenance costs from its
maintenance account on behalf of ICON 123. The maintenance account
and related security interests were then terminated. ICON 123 will
reimburse ICON 126 when the aircraft is sold. The excess cash remaining in ICON
126’s account at December 31, 2009 is approximately $97,000, which includes
accreted interest in the amount of approximately $38,000 through December 31,
2009.
Each of
ICON 123 and ICON 126 is a party to a residual sharing agreement (the “Airtrade
Residual Sharing Agreement”) with Airtrade Capital Corp.
(“Airtrade”). Pursuant to the terms of the Airtrade Residual Sharing
Agreement, all proceeds received in connection with the sale or
lease renewal of Aircraft 123 or Aircraft 126 in excess of
$8,500,000 of the applicable loan balance associated with each
aircraft will be allocated 55% to ICON 123 or ICON 126, as applicable, and 45%
to Airtrade.
In light
of unprecedented high fuel prices during 2008 and the related impact on the
airline industry, the Manager reviewed the LLC’s investment in Aircraft 126 as
of June 30, 2008. In accordance with the accounting
pronouncement that accounts for the impairment or disposal of long-lived
assets, and based upon changes in the airline industry, the Manager determined
that Aircraft 126 was impaired.
58
ICON
Income Fund Nine, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
(5)
|
Investments
in Joint Ventures -
continued
|
Based on
the Manager’s review, the carrying value of Aircraft 126 exceeded the expected
undiscounted future cash flows and, as a result, ICON 126 recorded an
impairment charge representing the difference between the
aircraft carrying value and the expected discounted future cash flows of
Aircraft 126. The expected discounted future cash flows of the aircraft were
generally determined using a market approach, a recent appraisal for Aircraft
126 and recent sales of similar aircraft, as well as other factors, including
those discussed below. As a result, as of June 30, 2008, ICON 126
recorded an impairment loss on Aircraft 126 of approximately $3,900,000, of
which the LLC’s share was approximately $1,950,000.
The
following factors in 2008, among others, indicated that the full carrying value
of Aircraft 126 might not be recoverable: (i) indications that lenders were
willing to finance less of the acquisition cost of four-engine aircraft, which
increased with each dollar rise of the price of fuel, thereby undermining the
carying value expectations of such aircraft; (ii) the rising cost of fuel was
increasing the operating costs of four-engine aircraft and similar capacity
twin-engine aircraft, thereby making such aircraft less attractive investments
at the time and thereby depressing the market for Aircraft 126; and (iii) the
likelihood of aircraft operators switching to more efficient aircraft, thereby
depressing the market for Aircraft 126.
(6)
|
Investments
in Unguaranteed Residual Values
|
On
December 31, 2003, the LLC entered into an agreement with Summit Asset
Management Limited to acquire a 90% interest in the unguaranteed residual values
of manufacturing and technology equipment valued at approximately $37,713,000
and on lease to various lessees located in the United Kingdom for approximately
$4,454,000. The LLC’s investment return is contingent upon
the
residual value of the equipment after repayment of the debt. The
Manager was paid an acquisition fee of approximately $1,131,000 related to this
transaction.
At
December 31, 2009, 2008 and 2007, the LLC received approximately $45,000,
$686,000 and $710,000, respectively, in proceeds from the sale of various pieces
of equipment and recognized a loss of approximately $33,000 for year ended
December 31, 2009, a gain of approximately $204,000 for the year ended December
31, 2008 and a loss of approximately $157,000 for the year ended December 31,
2007.
Additionally,
for the years ended December 31, 2009, 2008 and 2007, the LLC received
approximately $1,000, $20,000 and $250,000, respectively, in renewal income that
is classified as rental income in the accompanying consolidated statements of
operations.
59
ICON
Income Fund Nine, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
(7)
|
Non-Recourse
Long-Term Debt
|
The LLC
acquired the Wilhelmsen Vessels on bareboat charter to Wilhelmsen for cash and
non-recourse long-term debt (see Note 3). On May 18, 2006, in connection
with the charter extension through December 22, 2013, the LLC refinanced the
non-recourse long-term debt related to the Wilhelmsen Vessels and borrowed an
additional $22,043,000. The principal amount of the refinanced debt is
$51,000,000, which debt matures on December 22, 2013 and accrues interest at
London Interbank Offered Rate (“LIBOR”) plus 1.50% per year. The refinanced
non-recourse long-term debt requires quarterly payments ranging from $450,000 to
$800,000. The lender has a security interest in the Wilhelmsen Vessels and an
assignment of the rental payments under the charters. The LLC paid approximately
$630,000 in costs associated with the non-recourse long-term debt refinancing,
which were capitalized as debt financing costs and are being amortized as
interest expense over the term of the non-recourse long-term debt. As of
December 31, 2009, approximately $73,000 was recorded to interest expense
related to the amortization of the non-recourse long-term debt financing
costs.
Simultaneously
with the execution of the refinancing of the non-recourse long-term debt of the
Wilhelmsen Vessels, the LLC entered into three interest rate swap contracts with
Fortis Bank NV/SA, New York Branch (“Fortis Bank”) in the aggregate notional
amount of $51,000,000 in order to fix the variable interest rate on the
non-recourse long-term debt and minimize the risk of interest rate fluctuation.
The interest rate swap contracts fixed the refinanced debt interest rate at
7.02% per year.
On July
24, 2007, the LLC, through ICON Samar, borrowed approximately $23,382,000 in
connection with a bareboat charter with Teekay. The non-recourse long-term debt
matures on July 25, 2011 and accrues interest at LIBOR plus 1.00% per
year. The non-recourse long-term debt requires monthly payments
ranging from $480,000 to $530,000. The lender has a security interest in the
vessel and an assignment of the rental payments under the bareboat charter.
Simultaneously with the borrowing, the LLC entered into an interest rate swap
contract with Fortis Bank in order to fix the debt interest rate at 6.35% per
year. The LLC paid approximately $175,000 in costs associated with the debt,
which was capitalized as debt financing costs. As of December 31, 2009,
approximately $46,000 was recorded to interest expense related to the
amortization of the non-recourse long-term debt financing costs.
The LLC
designated its interest rate swaps as cash flow hedges and accounts for them in
accordance with the accounting pronouncement for derivative instruments and
hedging activities, by recording the interest rate swap contracts at their
estimated fair market values, and recognizing the periodic change in their fair
market values of effective hedges as other comprehensive income. At December
31, 2009 and 2008, the fair value of the interest rate swap contracts was a
liability of $2,054,841 and $3,513,483, respectively.
60
ICON
Income Fund Nine, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
(7)
|
Non-Recourse
Long-Term Debt – continued
|
The LLC
acquired its interest in Aircraft 128 for cash and the assumption of
non-recourse long-term debt (see Note 4). Effective
June 12, 2006, the owner trustee, in connection with the Cathay lease extension
for ICON 128, refinanced the non-recourse long-term debt related to the aircraft
(the “Initial Refinancing”). The Initial Refinancing was entered into because
the original non-recourse long-term debt of approximately $44,250,000 was due to
be repaid on June 12, 2006. The LLC was required by the lender to pay down
approximately $6,754,000 of the balloon payment as part of the Initial
Refinancing. The principal balance of the Initial Refinancing was approximately
$37,495,000. The non-recourse debt incurred in the Initial
Refinancing was scheduled to mature on December 1, 2011, required a balloon
payment of approximately $11,550,000 and accrued interest at LIBOR plus 0.80%
per year. The Initial Refinancing required monthly payments of approximately
$545,000 through May 2010 and approximately $495,000 through December 2011. The
LLC incurred approximately $197,000 of costs in connection with the Initial
Refinancing. The non-recourse long-term debt lender had a security interest in
the aircraft and an assignment of the lease payments. The LLC expensed these
costs to interest expense during the year ended December 31, 2006.
On August
1, 2006, the owner trustee was able to negotiate more favorable terms with a new
lender and refinanced the Initial Refinancing (the “Second Refinancing”). In
connection with the Second Refinancing, the LLC was able to borrow an additional
amount of approximately $6,242,000. The principal balance of the Second
Refinancing was approximately $43,800,000, and matures on December 1, 2011,
requires a balloon payment of approximately $22,750,000 and accrues interest at
6.85% per year. The Second Refinancing requires monthly payments of
approximately $545,000 through May 2010 and approximately $495,000 through
December 2011. The LLC paid approximately $438,000 of costs in connection with
the Second Refinancing, which were capitalized as debt financing costs and will
be amortized to operations over the term of the Second Refinancing. As
of December 31, 2009, approximately $80,000 was recorded to interest expense
related to the amortization of the non-recourse long-term debt financing
costs.
As of
December 31, 2009 and 2008, the LLC had net debt financing costs of $290,852 and
$489,835, respectively. For the years ended December 31, 2009, 2008 and 2007,
the LLC recognized amortization expense of $198,980, $450,205 and $145,817,
respectively.
The
aggregate maturities of non-recourse long-term debt, including the effects of
refinancing discussed above, consisted of the following at December 31,
2009:
For
the year ending December 31, 2010
|
$ | 15,262,908 | ||
For
the year ending December 31, 2011
|
36,374,190 | |||
For
the year ending December 31, 2012
|
5,400,000 | |||
For
the year ending December 31, 2013
|
5,400,000 | |||
$ | 62,437,098 |
61
ICON
Income Fund Nine, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
(8)
|
Revolving
Line of Credit, Recourse
|
The LLC
and certain entities managed by the Manager, Fund Eight B, Fund Ten, Fund
Eleven, ICON Leasing Fund Twelve, LLC (“Fund Twelve”) and ICON Equipment and
Corporate Infrastructure Fund Fourteen, L.P. (“Fund Fourteen” and, together with
the LLC, Fund Eight B, Fund Ten, Fund Eleven and Fund Twelve, the “Borrowers”),
are parties to a Commercial Loan Agreement, as amended (the “Loan Agreement”),
with California Bank & Trust (“CB&T”). The Loan
Agreement provides for a revolving line of credit of up to $30,000,000 pursuant
to a senior secured revolving loan facility (the “Facility”), which is secured
by all assets of the Borrowers not subject to a first priority lien, as defined
in the Loan Agreement. Each of the Borrowers is jointly and severally liable for
all amounts borrowed under the Facility. At December 31, 2009, no amounts were
accrued related to the LLC’s joint and several obligations under the Facility.
Amounts available under the Facility are subject to a borrowing base that is
determined, subject to certain limitations, on the present value of the future
receivables under certain lease agreements and loans in which the Borrowers have
a beneficial interest.
The
Facility expires on June 30, 2011 and the Borrowers may request a one year
extension to the revolving line of credit within 390 days of the then-current
expiration date, but CB&T has no obligation to extend. The interest rate for
general advances under the Facility is CB&T’s prime rate and the interest
rate on up to five separate non-prime rate advances that are permitted to be
made under the Facility is the rate at which U.S. dollar deposits can be
acquired by CB&T in the London Interbank Eurocurrency Market plus 2.5% per
year, provided that neither interest rate is permitted to be less than 4.0% per
year. The interest rate at December 31, 2009 was 4.0%. In addition, the
Borrowers are obligated to pay a quarterly commitment fee of 0.50% on unused
commitments under the Facility.
The
Borrowers are also parties to a Contribution Agreement (the “Contribution
Agreement”) that provides that, in the event that a Borrower pays an amount
in excess of its share of total obligations under the Facility, the other
Borrowers will contribute to such Borrower so that the aggregate amount paid by
each Borrower reflects its allocable share of the aggregate obligations under
the Facility.
Aggregate
borrowings by all Borrowers under the Facility amounted to $2,360,000 at
December 31, 2009. The LLC had no borrowings outstanding under the Facility as
of such date. The balances of $100,000 and $2,260,000 were borrowed by Fund Ten
and Fund Eleven, respectively. As of March 24, 2010, Fund Ten and Fund Eleven
had outstanding borrowings under the Facility of $700,000 and $0,
respectively.
The
Borrowers were in compliance with all covenants under the Loan Agreement at
December 31, 2009. As of such date, no amounts were due to or payable by the LLC
under the Contribution Agreement.
(9)
|
Transactions
with Related Parties
|
In
accordance with the terms of the LLC Agreement, the LLC paid the Manager (i)
management fees ranging from 1% to 5% based on a percentage of the rentals
recognized either directly by the LLC or through its joint ventures, and (ii)
acquisition fees, through the end of the operating period, of 3% of the purchase
price of the LLC’s investments. In addition, the Manager was
reimbursed for administrative expenses incurred in connection with the LLC’s
operations. The Manager also has a 1% interest in the LLC’s profits,
losses, cash distributions and liquidation proceeds.
62
ICON
Income Fund Nine, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
(9)
|
Transactions
with Related Parties - continued
|
The
Manager performs certain services relating to the management of the LLC’s
equipment leasing and financing activities. Such services include, but are not
limited to, the collection of lease payments from the lessees of the equipment,
re-leasing services in connection with equipment which is off-lease, inspections
of the equipment, liaising with and general supervision of lessees to ensure
that the equipment is being properly operated and maintained, monitoring
performance by the lessees of their obligations under the leases and the payment
of operating expenses.
Administrative
expense reimbursements are costs incurred by the Manager or its affiliates that
are necessary to the LLC’s operations. These costs include the Manager’s
and its affiliates’ legal, accounting, investor relations and operations
personnel, as well as professional fees and other costs that are charged to the
LLC based upon the percentage of time such personnel dedicate to the
LLC. Excluded are salaries and related costs, office rent, travel expenses
and other administrative costs incurred by individuals with a controlling
interest in the Manager.
The LLC
paid distributions to the Manager of $29,285, $77,556 and $89,144 for the years
ended December 31, 2009, 2008 and 2007, respectively. The Manager’s
interest in the LLC’s net income was $67,001, $10,478 and $79,400 for the years
ended December 31, 2009, 2008 and 2007, respectively.
Fees and
other expenses paid or accrued by the LLC to the Manager or its affiliates for
the years ended December 31, 2009, 2008 and 2007 were as follows:
Years Ended December 31,
|
||||||||||||||||
Entity
|
Capacity
|
Description
|
2009
|
2008
|
2007
|
|||||||||||
ICON
Capital Corp.
|
Manager
|
Management
fees (1)
|
$ | - | $ | 526,469 | $ | 1,780,581 | ||||||||
ICON
Capital Corp.
|
Manager
|
Administrative
expense reimbursements (1)
|
- | 149,844 | 677,965 | |||||||||||
$ | - | $ | 676,313 | $ | 2,458,546 | |||||||||||
(1)
Amount charged directly to operations.
|
Effective
April 1, 2008 and May 1, 2008, the Manager waived its rights to all future
administrative expense reimbursements and management fees,
respectively. As of December 31, 2009, the Manager waived $344,958 of
administrative expense reimbursements and $1,082,524 of management fees. As of
December 31, 2008, the Manager waived $364,877 of administrative expense
reimbursements and $1,018,551 of management fees.
(10)
|
Derivative
Financial Instruments
|
The LLC
may enter into derivative transactions for purposes of hedging specific
financial exposures, including changes in interest rates of its non-recourse
long-term debt. The LLC enters into these instruments only for hedging
underlying exposures. The LLC does not hold or issue derivative financial
instruments for purposes other than hedging, except for warrants, which are not
hedges. Certain derivatives may not meet the established criteria to be
designated as qualifying accounting hedges, even though the LLC believes that
these are effective economic hedges.
63
ICON
Income Fund Nine, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
(10)
|
Derivative
Financial Instruments - continued
|
Interest
Rate Risk
The LLC’s
objectives in using interest rate derivatives are to add stability to interest
expense and to manage its exposure to interest rate movements on its
variable non-recourse debt. The LLC’s hedging strategy to accomplish this
objective is to match the projected future business cash flows with the
underlying debt service. Interest rate swaps designated as cash flow hedges
involve the receipt of floating-rate interest payments from a counterparty in
exchange for the LLC making fixed interest rate payments over the life of the
agreements without exchange of the underlying notional amount.
At
December 31, 2009 and 2008, the LLC had four floating-to-fixed interest rate
swaps relating to the three Wilhelmsen Vessels on lease to Wilhelmsen and the
Samar Spirit on lease to Teekay that were designated as cash flow
hedges with an aggregate notional amount of $32,121,174 and $42,859,805,
respectively. These interest rate swaps have maturity dates ranging
from July 25, 2011 to September 23, 2013.
For these
derivatives, the LLC reports the gain or loss from the effective portion of
changes in the fair value of derivatives designated and qualifying as cash flow
hedges in accumulated other comprehensive income (loss) (“AOCI”) and such gain
or loss is subsequently reclassified into earnings in the period that the hedged
forecasted transaction affects earnings and within the same line item on the
statement of operations as the impact of the hedged transaction. During the year
ended December 31, 2009, the LLC recorded no hedge ineffectiveness in
earnings. At December 31, 2009, there was no total unrealized loss
recorded to AOCI related to the change in fair value of interest rate
swaps. For the year ended December 31, 2008, a loss of $78,982 was
recorded in earnings representing the ineffective portion of the
hedge. At December 31, 2008, the total amount recorded to AOCI
related to the change in fair value of the interest rate swaps was
$3,429,165.
During
the twelve months ending December 31, 2010, the LLC estimates that approximately
$1,354,470 will be transferred from AOCI to interest expense.
The table
below presents the fair value of the LLC’s derivative financial instruments and
classification within the LLC’s consolidated balance sheet as of December 31,
2009:
Derivatives
designated as hedging instruments:
|
Liability
Derivative
|
||||
Balance Sheet
Location
|
Fair Value
|
||||
Interest
rate swaps
|
Interest
rate swap contracts
|
$ | 2,054,841 |
64
ICON
Income Fund Nine, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
(10)
|
Derivative
Financial Instruments - continued
|
The table
below presents the effect of the LLC’s derivative financial instruments
designated as cash flow hedging instruments on the consolidated statements of
operations for the year ended December 31, 2009:
Twelve
months ended December 31, 2009
|
||||||||||||||
Derivatives
|
Amount
of Gain (Loss) Recognized in AOCI on Derivative (Effective
Portion)
|
Location
of Gain (Loss) Reclassified from AOCI into Income (Effective
Portion)
|
Amount
of Gain (Loss) Reclassified from AOCI into Income (Effective
Portion)
|
Location
of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and
Amount Excluded from Effectiveness Testing)
|
Gain
(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount
Excluded from Effectiveness Testing)
|
|||||||||
Interest
rate swaps
|
$ | (776,750 | ) |
Interest
expense
|
$ | (2,184,184 | ) |
Gain
(loss) on financial instruments
|
$ | - |
Derivative
Risks
The LLC manages exposure to possible
defaults on derivative financial instruments by monitoring the concentration of
risk that the LLC has with any individual bank and through the use of minimum
credit quality standards for all counterparties. The LLC does not require
collateral or other security in relation to derivative financial instruments.
Since it is the LLC’s policy to enter into derivative contracts with banks of
internationally acknowledged standing only, the LLC considers the counterparty
risk to be remote.
As of
December 31, 2009 and 2008, the fair value of the derivatives in a liability
position was $2,054,841 and $3,513,483, respectively. In the event that the LLC
would be required to settle its obligations under the agreements as of December
31, 2009, the termination value would be $2,169,411.
(11)
|
Fair
Value Measurements
|
The LLC
accounts for the fair value of financial instruments in accordance with the
accounting pronouncements, which require assets and liabilities carried at fair
value to be classified and disclosed in one of the following three
categories:
·
|
Level
1: Quoted market prices available in active markets for identical assets
or liabilities as of the reporting
date.
|
·
|
Level
2: Pricing inputs other than quoted prices in active markets included in
Level 1, which are either directly or indirectly observable as of the
reporting date.
|
·
|
Level
3: Pricing inputs that are generally unobservable and cannot be
corroborated by market data.
|
Financial
Assets and Liabilities Measured on a Recurring Basis
Financial
assets and liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value measurement. The Manager’s
assessment, on the LLC’s behalf, of the significance of a particular input to
the fair value measurement requires judgment and may affect the valuation of the
assets and liabilities being measured and their placement within the fair value
hierarchy.
65
ICON
Income Fund Nine, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
(11)
|
Fair
Value Measurements - continued
|
The
following table summarizes the valuation of the LLC’s material financial assets
and liabilities measured at fair value on a recurring basis as of December 31,
2009:
Level
1(1)
|
Level
2(2)
|
Level
3(3)
|
Total
|
|||||||||||||
Liabilities:
|
||||||||||||||||
Derivative
liabilities
|
$ | - | $ | 2,054,841 | $ | - | $ | 2,054,841 | ||||||||
(1)
Quoted prices in active markets for identical assets or
liabilities.
|
||||||||||||||||
(2)
Observable inputs other than quoted prices in active markets for identical
assets and liabilities.
|
||||||||||||||||
(3)
No observable pricing inputs in the market.
|
The LLC’s
derivative contracts, including interest rate swaps, are valued using models
based on readily observable market parameters for all substantial terms of the
LLC’s derivative contracts and are classified within Level 2. As permitted by
the accounting pronouncements, the LLC uses market prices and pricing models for
fair value measurements of its derivative instruments. The fair value of the
derivative liabilities was recorded in derivative instruments within the
consolidated balance sheets.
Fair
value information with respect to the LLC’s leased assets and liabilities is not
separately provided since (i) the current accounting pronouncements do not
require fair value disclosures of lease arrangements and (ii) the carrying value
of financial assets, other than lease-related investments, and the recorded
value of recourse debt approximate fair value due to their short-term maturities
and variable interest rates. The estimated fair value of the LLC’s
non-recourse long-term debt was based on the discounted value of future cash
flows expected to be received from the loan based on terms consistent with the
range of the LLC’s internal pricing strategies for transactions of this
type.
Carrying Amount
|
Fair Value
|
|||||||
Fixed
rate non-recourse long-term debt
|
$ | 30,315,921 | $ | 31,614,676 |
(12)
|
Concentrations
of Risk
|
At times,
the LLC's cash and cash equivalents may exceed insured limits. The LLC has
placed these funds in high quality institutions in order to minimize the risk of
loss relating to exceeding insured limits.
Concentrations
of credit risk with respect to lessees are dispersed across different industry
segments within the United States of America and throughout the
world. Accordingly, the LLC may be exposed to business and economic
risk. Although the LLC does not currently foresee a concentrated credit risk
associated with these lessees, lease payments are dependent upon the financial
stability of the lessees.
For the
year ended December 31, 2009, the LLC had three lessees that accounted for
approximately 95% of its rental and finance income. Wilhelmsen,
Cathay and Teekay accounted for approximately 26%, 35% and 34%, respectively.
For the year ended December 31, 2008, the LLC had three lessees that accounted
for approximately 83% of its rental and finance income. Wilhelmsen,
Cathay and Teekay accounted for approximately 25%, 29% and 29%, respectively.
For the year ended December 31, 2007, the LLC had three lessees that accounted
for approximately 77% of its rental and finance income. Wilhelmsen
accounted for approximately 32%.
66
ICON
Income Fund Nine, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
(12)
|
Concentrations
of Risk - continued
|
As of
December 31, 2009, the LLC had one aircraft that accounted for approximately
53.3% of operating assets and one vessel that accounted for approximately 45.7%.
As of December
31, 2008, the LLC had one aircraft that accounted for approximately 52% of
operating assets and one vessel that accounted for approximately 45%. As of
December 31, 2007, the LLC had one aircraft that accounted for approximately 53%
of operating assets and one vessel that accounted for approximately
43%.
(13)
|
Commitments
and Contingencies and Off-Balance Sheet
Transactions
|
The LLC
has entered into certain residual sharing and remarketing agreements with
various third parties. In connection with these agreements, residual
proceeds received in excess of specific amounts may be shared with these third
parties based on specific formulas. The obligation related to these agreements
is recorded at fair value.
ICON 128
is a party to a residual sharing agreement with Airfleet Credit Corporation
(“Airfleet”) and HXO Leasing Limited. Pursuant to the terms of this
residual sharing agreement, all proceeds received in connection with the sale or
lease extension of Aircraft 128 in excess of $4,250,000 of the loan balance
associated with the aircraft will be allocated 55% to ICON 128 and 45% to
Airfleet.
ICON 128
had a commitment with respect to Aircraft 128 to pay certain maintenance costs,
which were incurred during June 2006. The total estimated costs were
approximately $1,300,000. During November 2006, the LLC paid
approximately $1,300,000 for these costs.
On
February 23, 2005, ICON Cash Flow Partners L.P. Seven (“L.P. Seven”) assigned to
the LLC 3.02% of its rights to the profits, losses, and cash flows from its
limited partnership interest in an entity that owns a 100% interest in a mobile
offshore drilling rig. L.P. Seven assigned the rights to the LLC as
repayment of its $755,000 outstanding debt obligation pursuant to a contribution
agreement that the LLC entered into with some of its affiliates in connection
with the line of credit agreement the LLC had with Comerica Bank. This
assignment increased the LLC’s rights to the profits, losses and cash flows from
L.P. Seven’s limited partnership interest from 2.60%, which was assigned to the
LLC in November 2004 as repayment of L.P. Seven's $650,000 outstanding debt
obligation, to 5.62%. The repayment amount represented the Manager’s
estimated fair value of L.P. Seven's interest in the mobile offshore drilling
rig at February 23, 2005. The fair value of this interest was determined using
an appraisal and cash flow analysis. During the year ended December 31,
2006, the LLC received approximately $253,000 in cash distributions related to
this assignment.
At the
time the LLC acquires or divests of its interest in an equipment lease or other
financing transaction, the LLC may, under very limited circumstances, agree to
indemnify the seller or buyer for specific contingent liabilities. The Manager
believes that any liability that may arise as a result of any such
indemnification obligations will not have a material adverse effect on the
consolidated financial condition of the LLC taken as a whole.
(14)
|
Share
Redemptions
|
The LLC
redeemed no Shares during the years ended December 31, 2009 and 2008 and
redeemed 147 Shares during the year ended December 31, 2007. The redemption
amounts are calculated according to a specified redemption formula pursuant to
the LLC Agreement. Redeemed Shares have no voting rights and do not
share in distributions. The LLC Agreement limits the number of Shares
that can be redeemed in any one year and redeemed Shares may not be
reissued. Redeemed Shares are accounted for as a reduction of
members' equity.
67
ICON
Income Fund Nine, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
(15)
|
Geographic
Information
|
Geographic
information for revenue, based on the country of origin, and long-lived assets,
which include finance leases, operating leases (net of accumulated
depreciation), investments in joint ventures and investment in unguaranteed
residual values, were as follows:
Year Ended December 31,
2009
|
||||||||||||||||||||
United
|
United
|
|
Marine
|
|||||||||||||||||
States
|
Kingdom
|
Asia
|
Vessels (a)
|
Total
|
||||||||||||||||
Revenue:
|
||||||||||||||||||||
Rental
income
|
$ | 175,352 | $ | - | $ | 7,015,654 | $ | 6,206,808 | $ | 13,397,814 | ||||||||||
Finance
income
|
$ | 91,030 | $ | - | $ | - | $ | 4,674,048 | $ | 4,765,078 | ||||||||||
Income
(loss) from investments in joint ventures
|
$ | 168,382 | $ | - | $ | (66,406 | ) | $ | - | $ | 101,976 |
At December 31, 2009
|
||||||||||||||||||||
United
|
United
|
|
Marine
|
|||||||||||||||||
States
|
Kingdom
|
Asia
|
Vessels (a)
|
Total
|
||||||||||||||||
Long-lived
assets:
|
||||||||||||||||||||
Investment
in finance leases
|
$ | - | $ | - | $ | - | $ | 23,354,875 | $ | 23,354,875 | ||||||||||
Leased
equipment at cost, net
|
$ | 712,336 | $ | - | $ | 39,528,145 | $ | 33,907,852 | $ | 74,148,333 | ||||||||||
Investments
in joint ventures
|
$ | 725,942 | $ | - | $ | 1,200,984 | $ | - | $ | 1,926,926 | ||||||||||
Investment
in unguaranteed residual values
|
$ | - | $ | 752,113 | $ | - | $ | - | $ | 752,113 |
Year Ended December 31,
2008
|
||||||||||||||||||||
United
|
United
|
|
Marine
|
|||||||||||||||||
States
|
Kingdom
|
Asia
|
Vessels (a)
|
Total
|
||||||||||||||||
Revenue:
|
||||||||||||||||||||
Rental
income
|
$ | 2,510,464 | $ | 22,473 | $ | 7,313,430 | $ | 6,206,808 | $ | 16,053,175 | ||||||||||
Finance
income
|
$ | 269,091 | $ | - | $ | - | $ | 5,498,623 | $ | 5,767,714 | ||||||||||
Income
(loss) from investments in joint ventures
|
$ | 170,726 | $ | - | $ | (2,167,551 | ) | $ | - | $ | (1,996,825 | ) |
At December 31, 2008
|
||||||||||||||||||||
United
|
United
|
|
Marine
|
|||||||||||||||||
States
|
Kingdom
|
Asia
|
Vessels (a)
|
Total
|
||||||||||||||||
Long-lived
assets:
|
||||||||||||||||||||
Investment
in finance leases
|
$ | 196,910 | $ | - | $ | - | $ | 27,988,331 | $ | 28,185,241 | ||||||||||
Leased
equipment at cost, net
|
$ | 1,658,297 | $ | - | $ | 42,048,924 | $ | 36,532,547 | $ | 80,239,768 | ||||||||||
Investments
in joint ventures
|
$ | 1,118,703 | $ | - | $ | 1,267,390 | $ | - | $ | 2,386,093 | ||||||||||
Investment
in unguaranteed residual values
|
$ | - | $ | 830,764 | $ | - | $ | - | $ | 830,764 |
(a)
|
Three
of the LLC’s vessels are chartered to Wilhelmsen, a Norway based company.
The fourth vessel is chartered to Teekay, a Canada based company. When the
LLC charters a vessel to a charterer, the charterer is free to trade the
vessel worldwide.
|
68
ICON
Income Fund Nine, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
(16)
|
Selected
Quarterly Financial Data
(unaudited)
|
The
following table is a summary of selected financial data by quarter:
Quarters Ended in 2009
|
Year
Ended
|
|||||||||||||||||||
|
March 31,
|
June 30,
|
September 30,
|
December 31,
|
December 31, 2009
|
|||||||||||||||
Total
revenue
|
$ | 4,889,594 | $ | 4,549,146 | $ | 4,967,040 | $ | 4,432,029 | $ | 18,837,809 | ||||||||||
Net
income attributable to Fund Nine
|
||||||||||||||||||||
allocable
to additional members
|
$ | 1,832,610 | $ | 1,005,497 | $ | 2,213,104 | $ | 1,581,934 | $ | 6,633,145 | ||||||||||
Weighted
average number of additional shares
|
||||||||||||||||||||
of
limited liability company interests outstanding
|
97,955 | 97,955 | 97,955 | 97,955 | 97,955 | |||||||||||||||
Net
income attributable to Fund Nine per weighted
|
||||||||||||||||||||
average
additional share of limited liability company interests
|
$ | 18.71 | $ | 10.26 | $ | 22.59 | $ | 16.15 | $ | 67.72 |
Quarters Ended in 2008
|
Year
Ended
|
|||||||||||||||||||
|
March 31,
|
June 30,
|
September 30,
|
December 31,
|
December 31, 2008
|
|||||||||||||||
Total
revenue
|
$ | 6,258,478 | $ | 3,697,958 | $ | 5,178,898 | $ | 5,023,538 | $ | 20,158,872 | ||||||||||
Net
income (loss) attributable to Fund Nine
|
||||||||||||||||||||
allocable
to additional members
|
$ | 2,114,888 | $ | (3,964,750 | ) | $ | 1,968,762 | $ | 918,440 | $ | 1,037,340 | |||||||||
Weighted
average number of additional shares
|
||||||||||||||||||||
of
limited liability company interests outstanding
|
97,955 | 97,955 | 97,955 | 97,955 | 97,955 | |||||||||||||||
Net
income (loss) attributable to Fund Nine per weighted
|
||||||||||||||||||||
average
additional share of limited liability company interests
|
$ | 21.59 | $ | (40.48 | ) | $ | 20.10 | $ | 9.38 | $ | 10.59 |
(17)
|
Income
Tax Reconciliation (unaudited)
|
No
provision for income taxes has been recorded by the LLC since the liability for
such taxes is the responsibility of each of the individual members rather than
the LLC. The LLC’s income tax returns are subject to examination by
federal and State taxing authorities, and changes, if any, could adjust the
individual income taxes of the members.
At
December 31, 2009 and 2008, the members’ equity included in the consolidated
financial statements totaled $36,962,094 and $31,783,252,
respectively. The members’ capital for federal income tax purposes at
December 31, 2009 and 2008 totaled $78,515,164 and $73,590,494,
respectively. The difference arises primarily from sales and offering
expenses reported as a reduction in the additional members’ capital accounts for
financial reporting purposes, but not for federal income tax reporting purposes,
and differences in depreciation and amortization between financial reporting
purposes and federal income tax purposes.
69
ICON
Income Fund Nine, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
(17)
|
Income
Tax Reconciliation (unaudited) -
continued
|
The
following table reconciles net income attributable to Fund Nine for
financial statement reporting purposes to the net income attributable to Fund
Nine for federal income tax purposes for the years ended December 31, 2009,
2008 and 2007:
Years Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Net
income attributable to Fund Nine per consolidated financial
statements
|
$ | 6,700,146 | $ | 1,047,818 | $ | 7,940,018 | ||||||
Finance
leases
|
5,480,683 | 7,004,410 | 6,733,396 | |||||||||
Depreciation
expense
|
(4,179,146 | ) | (5,206,714 | ) | 7,063,467 | |||||||
Interest
expense - consolidating joint venture
|
- | - | (2,235,890 | ) | ||||||||
Maintenance
expense - consolidating joint venture
|
- | - | (1,476,431 | ) | ||||||||
Gain
(loss) on sale of equipment
|
- | 302,371 | (1,917,987 | ) | ||||||||
Rent
- consolidating joint venture
|
1,434,805 | - | (5,196,661 | ) | ||||||||
Tax
gain from joint venture
|
- | 4,571,741 | 993,943 | |||||||||
Fixed
asset impairment
|
446,601 | - | - | |||||||||
Other
|
(2,029,681 | ) | 917,781 | (852,823 | ) | |||||||
Net
income attributable to Fund Nine for federal income tax
purposes
|
$ | 7,853,408 | $ | 8,637,407 | $ | 11,051,032 | ||||||
Additions
|
||||||||||||||||
|
Charged
|
|
||||||||||||||
Description
|
Balance
at Beginning of Year |
to Cost, Expenses,
Revenues
|
Deductions
|
Balance
at End of Year |
||||||||||||
Year
Ended
|
||||||||||||||||
December
31, 2009
|
|
|||||||||||||||
Allowance
for
|
||||||||||||||||
Doubtful
Accounts
|
$ | 155,318 | - | $ | (155,318 | ) | - | |||||||||
Year
Ended
|
||||||||||||||||
December
31, 2008
|
||||||||||||||||
Allowance
for
|
||||||||||||||||
Doubtful
Accounts
|
- | $ | 155,318 | - | $ | 155,318 | ||||||||||
Year
Ended
|
||||||||||||||||
December
31, 2007
|
||||||||||||||||
Allowance
for
|
||||||||||||||||
Doubtful
Accounts
|
- | - | - | - |
None.
Evaluation of disclosure controls
and procedures
In
connection with the preparation of this Annual Report on Form 10-K for the
period ended December 31, 2009, as well as the financial statements for our
Manager, our Manager carried out an evaluation, under the supervision and with
the participation of the management of our Manager, including its Co-Chief
Executive Officers and the Chief Financial Officer, of the effectiveness of the
design and operation of our Manager’s disclosure controls and procedures as of
the end of the period covered by this report pursuant to the Securities Exchange
Act of 1934, as amended. Based on the foregoing evaluation, the Co-Chief
Executive Officers and the Chief Financial Officer concluded that our Manager’s
disclosure controls and procedures were effective.
In
designing and evaluating our Manager’s disclosure controls and procedures, our
Manager recognized that disclosure controls and procedures, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the disclosure controls and procedures are met. Our
Manager’s disclosure controls and procedures have been designed to meet
reasonable assurance standards. Disclosure controls and procedures cannot detect
or prevent all error and fraud. Some inherent limitations in disclosure controls
and procedures include costs of implementation, faulty decision-making, simple
error and mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the controls. The design of any system of controls is based, in
part, upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all anticipated and unanticipated future conditions. Over time, controls
may become inadequate because of changes in conditions, or the degree of
compliance with established policies or procedures.
Our
Manager’s Co-Chief Executive Officers and Chief Financial Officer have
determined that no weakness in disclosure controls and procedures had any
material effect on the accuracy and completeness of our financial reporting and
disclosure included in this Annual Report on Form 10-K.
Evaluation
of internal control over financial reporting
Our
Manager is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934, as amended, as a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures that (1)
pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Our
Manager assessed the effectiveness of its internal control over financial
reporting as of December 31, 2009. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in "Internal Control — Integrated
Framework."
Based on
its assessment, our Manager believes that, as of December 31, 2009, its internal
control over financial reporting is effective.
This
Annual Report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting. Our
Manager’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this Annual
Report.
Not
applicable.
Our
Manager, ICON Capital Corp., a Delaware corporation (“ICON”), was formed in
1985. Our Manager's principal offices are located at 100 Fifth
Avenue, 4th Floor, New York, New York 10011, and its telephone number is (212)
418-4700.
In
addition to the primary services related to our making and disposing of
investments, our Manager provides services relating to the day-to-day management
of our equipment. These services include collecting payments due from lessees,
borrowers and other counterparties; remarketing equipment that is off-lease;
inspecting equipment; serving as a liaison with lessees, borrowers, and other
counterparties; supervising equipment maintenance; and monitoring performance by
lessees, borrowers and other counterparties of their obligations, including
payment of contractual payments and all operating expenses.
Name
|
Age
|
Title
|
||
Michael
A. Reisner
|
39
|
Co-Chairman,
Co-Chief Executive Officer and Co-President
|
||
Mark
Gatto
|
37
|
Co-Chairman,
Co-Chief Executive Officer and Co-President
|
||
Joel
S. Kress
|
37
|
Executive
Vice President — Business and Legal Affairs
|
||
Anthony
J. Branca
|
41
|
Senior
Vice President and Chief Financial Officer
|
||
H.
Daniel Kramer
|
58
|
Senior
Vice President and Chief Marketing Officer
|
||
David
J. Verlizzo
|
37
|
Senior
Vice President — Business and Legal Affairs
|
||
Craig
A. Jackson
|
51
|
Senior
Vice President — Remarketing and Asset Management
|
||
Harry
Giovani
|
35
|
Senior
Vice President — Credit
|
Michael A.
Reisner, Co-Chairman, Co-Chief Executive Officer and Co-President, joined
ICON in 2001. Mr. Reisner has been a Director since May 2007. Mr.
Reisner was formerly Chief Financial Officer from January 2007 through April
2008. Mr. Reisner was also formerly Executive Vice President – Acquisitions from
February 2006 through January 2007. Mr. Reisner was Senior Vice
President and General Counsel from January 2004 through January
2006. Mr. Reisner was Vice President and Associate General Counsel
from March 2001 until December 2003. Previously, from 1996 to 2001,
Mr. Reisner was an attorney with Brodsky Altman & McMahon, LLP in New York,
concentrating on commercial transactions. Mr. Reisner received a J.D.
from New York Law School and a B.A. from the University of Vermont.
Mark Gatto,
Co-Chairman, Co-Chief Executive Officer and Co-President, has been a Director
since May 2007. Mr. Gatto originally joined ICON in 1999 and was
previously Executive Vice President and Chief Acquisitions Officer from May 2007
to January 2008. Mr. Gatto was formerly Executive Vice President –
Business Development from February 2006 to May 2007 and Associate General
Counsel from November 1999 through October 2000. Before serving as
Associate General Counsel, Mr. Gatto was an attorney with Cella & Goldstein
in New Jersey, concentrating on commercial transactions and general litigation
matters. From November 2000 to June 2003, Mr. Gatto was Director of Player
Licensing for the Topps Company and, in July 2003, he co-founded ForSport
Enterprises, LLC, a specialty business consulting firm in New York City, and
served as its managing partner before re-joining ICON in April
2005. Mr. Gatto received an M.B.A. from the W. Paul Stillman School
of Business at Seton Hall University, a J.D. from Seton Hall University School
of Law, and a B.S. from Montclair State University.
Joel S.
Kress, Executive Vice President – Business and Legal Affairs, started his
tenure with ICON in August 2005 as Vice President and Associate General
Counsel. In February 2006, he was promoted to Senior Vice President
and General Counsel, and in May 2007, he was promoted to his current
position. Previously, from September 2001 to July 2005, Mr. Kress was
an attorney with Fried, Frank, Harris, Shriver & Jacobson LLP in New York
and London, England, concentrating on mergers and acquisitions, corporate
finance and financing transactions (including debt and equity issuances) and
private equity investments. Mr. Kress received a J.D. from Boston
University School of Law and a B.A. from Connecticut College.
Anthony J.
Branca has
been Chief
Financial Officer since May 2008. Mr. Branca was formerly Senior Vice
President – Accounting and Finance from January 2007 through April 2008.
Mr. Branca was Director of Corporate Reporting & Analysis for The
Nielsen Company (formerly VNU) from March 2004 until January 2007, was
International Controller of an internet affiliate from May 2002 to March 2004
and held various other management positions with The Nielsen Company from July
1997 through May 2002. Previously, from 1995 through 1997,
Mr. Branca was employed at Fortune Brands. Mr. Branca started
his career as an auditor with KPMG Peat Marwick in
1991. Mr. Branca received a B.B.A. from Pace
University.
H. Daniel
Kramer, Senior Vice President and Chief Marketing Officer, joined ICON in
February 2008. Mr. Kramer has more than 30 years of equipment leasing
and structured finance experience. Most recently, from October 2006 to February
2008, Mr. Kramer was part of CIT Commercial Finance, Equipment Finance Division,
offering equipment leasing and financing solutions to complement public and
private companies’ capital structure. Prior to that role, from
February 2003 to October 2006, Mr. Kramer was Senior Vice President, National
Sales Manager with GMAC Commercial Equipment Finance, leading a direct sales
organizational team; from 2001 to 2003, Senior Vice President and National Sales
Manager for ORIX Commercial Structured Equipment Finance division; and President
of Kramer, Clark & Company for 12 years, providing financial consulting
services to private and public companies, including structuring and syndicating
private placements, equipment leasing and recapitalizations. Mr.
Kramer received a B.S. from Glassboro State College.
David J.
Verlizzo has been Senior Vice President – Business and Legal Affairs
since July 2007. Mr. Verlizzo was formerly Vice President and Deputy
General Counsel from February 2006 to July 2007 and was Assistant Vice President
and Associate General Counsel from May 2005 until January
2006. Previously, from May 2001 to May 2005, Mr. Verlizzo was an
attorney with Cohen Tauber Spievack & Wagner LLP in New York,
concentrating on public and private securities offerings, securities law
compliance and corporate and commercial
transactions. Mr. Verlizzo received a J.D. from Hofstra
University School of Law and a B.S. from The University of
Scranton.
Craig A.
Jackson has been Senior Vice President – Remarketing and Asset Management
since March 2008. Mr. Jackson was previously Vice President – Remarketing and
Portfolio Management from February 2006 through March 2008. Previously, from
October 2001 to February 2006, Mr. Jackson was President and founder of
Remarketing Services, Inc., a transportation equipment remarketing company.
Prior to 2001, Mr. Jackson served as Vice President of Remarketing and Vice
President of Operations for Chancellor Fleet Corporation (an equipment leasing
company). Mr. Jackson received a B.A. from Wilkes
University.
Harry
Giovani, Senior Vice President – Credit, joined ICON in April 2008. Most
recently, from March 2007 to January 2008, Mr. Giovani was Vice President for
FirstLight Financial Corporation, responsible for underwriting and syndicating
middle market leveraged loan transactions. Previously, from April 2004 to March
2007, he worked at GE Commercial Finance, initially as an Assistant Vice
President in the Intermediary Group, where he was responsible for executing
middle market transactions in a number of industries including manufacturing,
steel, paper, pharmaceutical, technology, chemicals and automotive, and later as
a Vice President in the Industrial Project Finance Group, where he originated
highly structured project finance transactions. Mr. Giovani started his career
in 1997 at Citigroup’s Citicorp Securities and CitiCapital divisions, where he
spent six years in a variety of roles of increasing responsibility including
underwriting, origination and strategic marketing/business development. Mr.
Giovani graduated from Cornell University in 1996 with a B.S. in
Finance.
Code
of Ethics
Our
Manager, on our behalf, has adopted a code of ethics for its Co-Chief Executive
Officers and Chief Financial Officer. The Code of Ethics is available
free of charge by requesting it in writing from our Manager. Our
Manager's address is 100 Fifth Avenue, 4th
Floor, New York, New York 10011.
We have
no directors or officers. Our Manager and its affiliates were paid or accrued
the following compensation and reimbursement for costs and expenses for the
years ended December 31, 2009, 2008 and 2007:
Entity
|
Capacity
|
Description
|
2009
|
2008
|
2007
|
|||||||||||
ICON
Capital Corp.
|
Manager
|
Management
fees (1)
|
$ | - | $ | 526,469 | $ | 1,780,581 | ||||||||
ICON
Capital Corp.
|
Manager
|
Administrative
expense reimbursements (1)
|
- | 149,844 | 677,965 | |||||||||||
$ | - | $ | 676,313 | $ | 2,458,546 | |||||||||||
(1)
Amount charged directly to operations.
|
Our
Manager also has a 1% interest in our profits, losses, cash distributions and
liquidation proceeds. We paid distributions to our Manager of $29,285, $77,556
and $89,144, respectively, for the years ended December 31, 2009, 2008 and
2007. Additionally, our Manager’s interest in our net income was
$67,001, $10,478 and $79,400 for the years ended December 31, 2009, 2008 and
2007, respectively.
|
(a)
|
We
do not have any securities authorized for issuance under any equity
compensation plan. No person of record owns, or is known by us to own,
beneficially more than 5% of any class of our
securities.
|
|
(b)
|
As
of March 19,
2010, no directors or officers of our Manager own any of our equity
securities.
|
|
(c)
|
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.
|
See “Item
11. Executive Compensation” for a discussion of our related party
transactions. See Notes 5, 9 and 13 to our consolidated financial
statements for a discussion of our investments in joint ventures and
transactions with related parties.
Because
we are not listed on any national securities exchange or inter-dealer quotation
system, we have elected to use the Nasdaq Stock Market’s definition of
“independent director” in evaluating whether any of our Manager’s directors are
independent. Under this definition, the board of directors of our Manager has
determined that our Manager does not have any independent directors, nor are we
required to have any.
During
the years ended December 31, 2009 and 2008, our auditors provided audit services
relating to our Annual Report on Form 10-K and our Quarterly Reports on Form
10-Q. Additionally, our auditors provided other services in the form of
tax compliance work.
The
following table presents the fees for both audit and non-audit services rendered
by Ernst & Young LLP for the years ended December 31, 2009 and
2008:
2009
|
2008
|
|||||||
Audit
fees
|
$ | 314,000 | $ | 298,565 | ||||
Tax
fees
|
61,813 | 55,750 | ||||||
$ | 375,813 | $ | 354,315 |
(a)
|
1.
Financial Statements
|
See
index to financial statements included as Item 8 to this Annual Report on
Form 10-K hereof.
|
|
2.
Financial Statement Schedules
|
|
|
|
Financial
Statement Schedule II – Valuation and Qualifying Accounts is filed with
this Annual Report on Form 10-K. Schedules not listed above
have been omitted because they are not applicable or the information
required to be set forth therein is included in the financial statements
or notes thereto.
|
|
3.
Exhibits:
|
|
3.1
Certificate
of Limited Liability Company of Registrant (Incorporated by reference
to Exhibit 4.3 to Pre-Effective Amendment No. 1 to Registrant’s
Registration Statement on Form S-1 filed with the SEC on October 12, 2001
(File No. 333-67638)).
|
|
4.1
Amended
and Restated Operating Agreement of Registrant (Incorporated by
reference to Exhibit 4.1 to Pre-Effective Amendment No. 2 to Registrant’s
Registration Statement on Form S-1 filed with the SEC on November 20, 2001
(File No. 333-67638)).
|
|
4.2
Amendment
to the Registrant’s Amended and Restated Operating Agreement (Incorporated
by reference to Exhibit 4.1.1 to Post-Effective Amendment No. 1 to
Registrant’s Registration Statement on Form S-1 filed with the SEC on
August 19, 2002 (File No.
333-67638)).
|
|
10.1 Commercial
Loan Agreement, by and between California Bank & Trust, ICON Income
Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON Income Fund Ten,
LLC and ICON Leasing Fund Eleven, LLC, dated August 31, 2005 (Incorporated
by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K
dated August 31, 2005).
|
|
10.2 Loan
Modification Agreement, by and between California Bank & Trust and
ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON
Income Fund Ten, LLC and ICON Leasing Fund Eleven, LLC, dated December 26,
2006 (Incorporated by reference to Exhibit 10.1 to Registrant’s Current
Report on Form 8-K dated December 26, 2006).
|
|
10.3
Loan
Modification Agreement, by and between California Bank & Trust and
ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON
Income Fund Ten, LLC, ICON Leasing Fund Eleven, LLC, and ICON Leasing Fund
Twelve, LLC, dated June 20, 2007 (Incorporated by reference to Exhibit
10.3 to Registrant’s Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2009, filed November 6,
2009).
|
|
10.4
Third
Loan Modification Agreement, by and between California Bank & Trust,
ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON
Income Fund Ten, LLC, ICON Leasing Fund Eleven, LLC and ICON Leasing Fund
Twelve, LLC, dated as of May 1, 2008 (Incorporated by reference to Exhibit
10.3 to Registrant’s Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2008, filed May 20,
2008).
|
|
10.5
Fourth
Loan Modification Agreement, by and between California Bank & Trust
and ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON
Income Fund Ten, LLC, ICON Leasing Fund Eleven, LLC, ICON Leasing Fund
Twelve, LLC and ICON Equipment and Corporate Infrastructure Fund Fourteen,
L.P., dated August 12, 2009 (Incorporated by reference to Exhibit 10.4 to
Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2009, filed August 13, 2009).
|
|
31.1
Rule 13a-14(a)/15d-14(a) Certification of Co-Chief Executive
Officer.
|
|
31.2
Rule 13a-14(a)/15d-14(a) Certification of Co-Chief Executive
Officer.
|
|
31.3
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer.
|
|
32.1
Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. §
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2
Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. § 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.3
Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
(b)
|
1.
Consolidated Financial Statements of ICON Aircraft 126
LLC
|
77
ICON
Aircraft 126 LLC
(A
Delaware Limited Liability Company)
Table of
Contents
The
Members
ICON
Aircraft 126 LLC
We have
audited the accompanying balance sheet of ICON Aircraft 126 LLC (the “Company”)
as of December 31, 2008, and the related statements of operations, changes in
members’ equity, and cash flows for each of the two years in the period ended
December 31, 2008. 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 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. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also 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.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of ICON Aircraft 126 LLC at December
31, 2008, and the results of its operations and its cash flows for each of the
two years in the period ended December 31, 2008 in conformity with U.S.
generally accepted accounting principles.
/s/ Ernst & Young,
LLP
March 24,
2009
New York,
New York
(A
Delaware Limited Liability Company)
|
||||||||
Consolidated
Balance Sheets
|
||||||||
Assets
|
||||||||
|
||||||||
December 31,
|
||||||||
2009
|
2008
|
|||||||
(unaudited) | ||||||||
Leased
equipment at cost (less accumulated depreciation of $36,431,244 and
$28,543,495, respectively)
|
$ | 41,092,340 | $ | 45,080,089 | ||||
Other
non-current assets, net
|
278,073 | 304,823 | ||||||
Total
Assets
|
$ | 41,370,413 | $ | 45,384,912 | ||||
|
||||||||
|
||||||||
Liabilities
and Members’ Equity
|
||||||||
Current
liabilities
|
||||||||
Current
portion of non-recourse long-term debt
|
$ | 3,684,449 | $ | 4,044,096 | ||||
Deferred
rental income
|
642,857 | 471,428 | ||||||
Accrued
interest
|
219,676 | 228,697 | ||||||
|
||||||||
Total
current liabilities
|
4,546,982 | 4,744,221 | ||||||
Non-current
liabilities
|
||||||||
Non-recourse
long-term debt, less current portion
|
34,421,461 | 38,105,910 | ||||||
Total
Liabilities
|
38,968,443 | 42,850,131 | ||||||
Commitments
and contingencies
|
||||||||
|
||||||||
Members’
Equity
|
2,401,970 | 2,534,781 | ||||||
Total
Liabilities and Members’ Equity
|
$ | 41,370,413 | $ | 45,384,912 |
See
accompanying notes to consolidated financial statements.
(A
Delaware Limited Liability Company)
|
||||||||||||
Consolidated
Statements of Operations
|
||||||||||||
|
Years Ended December 31,
|
|||||||||||
2009
|
2008
|
2007
|
||||||||||
(unaudited) | ||||||||||||
Revenue:
|
|
|
||||||||||
Rental
income
|
$ | 6,368,571 | $ | 6,368,571 | $ | 6,368,571 | ||||||
Interest
and other income
|
- | 2,328 | 5,615 | |||||||||
Total
revenue
|
6,368,571 | 6,370,899 | 6,374,186 | |||||||||
Expenses:
|
||||||||||||
General
and administrative
|
- | 45,000 | 22,829 | |||||||||
Interest
|
2,509,861 | 2,772,778 | 2,924,382 | |||||||||
Depreciation
and amortization
|
3,991,521 | 3,990,347 | 4,003,772 | |||||||||
Impairment
loss
|
- | 3,900,000 | - | |||||||||
|
||||||||||||
Total
expenses
|
6,501,382 | 10,708,125 | 6,950,983 | |||||||||
Net
loss
|
$ | (132,811 | ) | $ | (4,337,226 | ) | $ | (576,797 | ) |
See
accompanying notes to consolidated financial statements.
(A
Delaware Limited Liability Company)
|
||||
Consolidated
Statements of Changes in Members’ Equity
|
||||
Members'
|
||||
Equity
|
||||
Balance,
December 31, 2006
|
$ | 7,380,975 | ||
Net
loss
|
(576,797 | ) | ||
Investment
from members
|
22,829 | |||
Balance,
December 31, 2007
|
6,827,007 | |||
Net
loss
|
(4,337,226 | ) | ||
Investment
from members
|
45,000 | |||
Balance,
December 31, 2008
|
2,534,781 | |||
Net
loss (unaudited)
|
(132,811 | ) | ||
Balance,
December 31, 2009 (unaudited)
|
$ | 2,401,970 |
See
accompanying notes to consolidated financial statements.
(A
Delaware Limited Liability Company)
|
||||||||||||
Consolidated
Statements of Cash Flows
|
||||||||||||
Years Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
(unaudited) | ||||||||||||
Cash
flows from operating activities:
|
|
|||||||||||
Net
loss
|
$ | (132,811 | ) | $ | (4,337,226 | ) | $ | (576,797 | ) | |||
Adjustments
to reconcile net loss to net cash
|
||||||||||||
used
in operating activities:
|
||||||||||||
Rental
income paid directly to lender by lessee
|
(6,540,000 | ) | (6,540,000 | ) | (6,540,000 | ) | ||||||
Interest
and other income on maintenance reserve
|
- | (2,328 | ) | (5,615 | ) | |||||||
Depreciation
and amortization
|
3,991,521 | 3,990,347 | 4,003,772 | |||||||||
Impairment
loss
|
- | 3,900,000 | - | |||||||||
Interest
expense from amortization of debt financing costs
|
22,978 | 47,892 | (6,737 | ) | ||||||||
Interest
expense on non-recourse financing paid
|
||||||||||||
directly
to lender by lessee
|
2,495,904 | 2,729,973 | 2,948,336 | |||||||||
Change
in operating assets and liabilities:
|
||||||||||||
Other
non-current assets
|
- | - | - | |||||||||
Deferred
rental income
|
171,429 | 171,429 | 171,429 | |||||||||
Accrued
interest
|
(9,021 | ) | (5,087 | ) | (17,217 | ) | ||||||
Net
cash used in operating activities
|
- | (45,000 | ) | (22,829 | ) | |||||||
Cash
flows from financing activities:
|
||||||||||||
Contributions
received
|
- | 45,000 | 22,829 | |||||||||
|
||||||||||||
Net
increase in cash
|
- | - | - | |||||||||
Cash,
beginning of the year
|
- | - | - | |||||||||
|
||||||||||||
Cash,
end of the year
|
$ | - | $ | - | $ | - |
Years Ended December 31,
|
||||||||||||
2009 | 2008 | 2007 | ||||||||||
(unaudited) | ||||||||||||
Supplemental
disclosure of non-cash investing and financing activities:
|
|
|||||||||||
Principal
and interest paid on non-recourse long-term debt
|
||||||||||||
directly
to lender by lessee
|
$ | 6,540,000 | $ | 6,540,000 | $ | 6,540,000 |
See
accompanying notes to consolidated financial statements.
83
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
(unaudited
with regard to December 31, 2009)
(1)
|
Organization
|
ICON
Aircraft 126 LLC (the “LLC”) was formed on February 15, 2002 as a Delaware
limited liability company. The LLC is a joint venture between two affiliated
entities, ICON Income Fund Eight B L.P. (“Fund Eight B”) and ICON Income Fund
Nine, LLC (“Fund Nine”) (collectively, the “LLC’s Members”). Fund Eight B and
Fund Nine each have a 50% ownership interest in the LLC’s profits, losses and
cash distributions.
On March
4, 2002, the LLC acquired all of the outstanding shares of Delta Aircraft
Leasing Limited (“D.A.L.”), a Cayman Islands registered company, for
approximately $75,288,000, which was largely comprised of approximately
$4,250,000 of cash and the assumption of approximately $70,280,000 of
non-recourse debt. D.A.L. owns, through an owner trust, an Airbus A340-313X
aircraft (“Aircraft 126”) that is on lease to Cathay Pacific Airways Limited
(“Cathay”). The lender has a security interest in the aircraft and an assignment
of the rental payments under the lease. The lease was initially scheduled to
expire in March 2006, but was extended to July 1, 2011.
The
Manager of the LLC’s Members is ICON Capital Corp., a Delaware corporation (the
“Manager”). The Manager manages and controls the business affairs of the LLC,
including, but not limited to, the equipment leases and other financing
transactions that the LLC entered into pursuant to the terms of the respective
limited partnership and limited liability company agreements with the LLC’s
Members.
(2)
|
Summary
of Significant Accounting
Policies
|
Basis of
Presentation and Consolidation
The
accompanying consolidated financial statements of the LLC have been prepared in
accordance with U.S. generally accepted accounting principles (“US
GAAP”).
The
consolidated financial statements include the accounts of the LLC and its
wholly-owned subsidiary. All intercompany accounts and transactions
have been eliminated in consolidation.
Debt
Financing Costs
Expenses
associated with the issuance of debt are capitalized and amortized over the term
of the debt instrument using the effective interest rate
method. These costs are included in other non-current
assets.
Leased
Equipment at Cost
Investments
in leased equipment are stated at cost less accumulated depreciation. Leased
equipment is depreciated on a straight-line basis over the lease term, which
typically ranges from 4 to 5 years, to the asset’s residual
value.
The
Manager has an investment committee that approved each new equipment lease and
other financing transaction. As part of its process, the investment committee
determined the residual value, if any, to be used once the investment was
approved. The factors considered in determining the residual value
included, but were not limited to, the creditworthiness of the potential lessee,
the type of equipment considered, how the equipment was integrated into the
potential lessee’s business, the length of the lease and the industry in which
the potential lessee operated. Residual values are reviewed for impairment in
accordance with each LLC’s Member’s impairment review policy.
84
ICON
Aircraft 126 LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
(unaudited
with regard to December 31, 2009)
(2)
|
Summary
of Significant Accounting Policies -
continued
|
The
residual value assumes, among other things, that the asset is utilized normally
in an open, unrestricted and stable market. Short-term fluctuations in the
marketplace are disregarded and it is assumed that there is no necessity either
to dispose of a significant number of the assets, if held in quantity,
simultaneously or to dispose of the asset quickly. The residual value
is calculated using information from various external sources, such as trade
publications, auction data, equipment dealers, wholesalers and industry experts,
as well as inspection of the physical asset and other economic
indicators.
Asset
Impairments
The asset
in the LLC’s portfolio is periodically reviewed, no less frequently than
annually, to determine whether events or changes in circumstances indicate that
the carrying value of an asset may not be recoverable. 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. If there is an
indication of impairment, the LLC will estimate the future cash flows
(undiscounted and without interest charges) expected from the use of the asset
and its eventual disposition. Future cash flows are the future cash inflows
expected to be generated by an asset less the future outflows expected to be
necessary to obtain those inflows. If an impairment is determined to
exist, the impairment loss will be measured as the amount by which the carrying
value of a long-lived asset exceeds its fair value and recorded in the
consolidated statement of operations in the period the determination is
made.
The
events or changes in circumstances that generally indicate that an asset may be
impaired are (i) the estimated fair value of the underlying equipment is less
than its carrying value or (ii) the lessee is experiencing financial
difficulties and it does not appear likely that the estimated proceeds from the
disposition of the asset will be sufficient to satisfy the residual position in
the asset and, if applicable, the remaining obligation to the non-recourse
lender. Generally in the latter situation, the residual position
relates to equipment subject to third-party non-recourse debt where the lessee
remits its rental payments directly to the lender and the LLC does not recover
its residual position until the non-recourse debt is repaid in full. The
preparation of the undiscounted cash flows requires the use of assumptions and
estimates, including the level of future rents, the residual value expected to
be realized upon disposition of the asset, estimated downtime between re-leasing
events and the amount of re-leasing costs. The Manager’s review for impairment
includes a consideration of the existence of impairment indicators including
third-party appraisals, published values for similar assets, recent transactions
for similar assets, adverse changes in market conditions for specific asset
types and the occurrence of significant adverse changes in general industry and
market conditions that could affect the fair value of the asset.
Revenue
Recognition
Each
equipment lease the LLC enters into is classified as either a finance lease or
an operating lease, which is based upon the terms of each lease. For
a finance lease, initial direct costs are capitalized and amortized over the
term of the related lease. For an operating lease, initial direct
costs are included as a component of the cost of the equipment and depreciated
over the lease term. The LLC has not entered into any finance
leases.
85
ICON
Aircraft 126 LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
(unaudited
with regard to December 31, 2009)
(2)
|
Summary
of Significant Accounting Policies -
continued
|
For
operating leases, rental income is recognized on a straight-line basis over the
lease term. Billed operating lease receivables are included in
accounts receivable until collected. Accounts receivable are stated
at their estimated net realizable value. Deferred income is the
difference between the timing of the cash payments and the income recognized on
a straight-line basis.
Initial
Direct Costs
The LLC
capitalized initial direct costs associated with the origination and funding of
leased assets and other financing transactions in accordance with the accounting
pronouncement relating to accounting for nonrefundable fees and costs
associated with originating or acquiring loans and initial direct costs of
leases. The costs are amortized on a lease by lease basis based on
the actual lease term using a straight-line method for operating leases and the
effective interest rate method for finance leases. Costs related to leases or
other financing transactions that were not consummated are expensed as an
acquisition expense.
Income
Taxes
The LLC
is taxed as a partnership for federal and State income tax
purposes. No provision for income taxes has been recorded since the
liability for such taxes is that of each of the members of the LLC’s Members
rather than the LLC. The LLC’s income tax returns are subject to examination by
the federal and State taxing authorities, and changes, if any, could adjust the
individual income tax of the members of the LLC’s Members.
Use of Estimates
The
preparation of financial statements in conformity with US GAAP requires the
Manager to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
as of the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Significant estimates
primarily include the determination of allowance for doubtful accounts,
depreciation and amortization, impairment losses, estimated useful lives and
residual values. Actual results could differ from those
estimates.
Recently
Adopted Accounting Pronouncements
In 2009,
the LLC adopted the accounting pronouncement relating to accounting for fair
value measurements, which establishes a framework for measuring fair value and
enhances fair value measurement disclosure for non-financial assets and
liabilities. The adoption of this accounting pronouncement for non-financial
assets and liabilities did not have a significant impact on the LLC’s
consolidated financial statements.
In 2009,
the LLC adopted the accounting pronouncement that provides additional guidance
for estimating fair value in accordance with the accounting standard for fair
value measurements when the volume and level of activity for the asset or
liability have significantly decreased. This pronouncement also provides
guidance for identifying transactions that are not orderly. This pronouncement
was effective prospectively for all interim and annual reporting periods ending
after June 15, 2009. The adoption of this accounting pronouncement did not have
a significant impact on the LLC’s consolidated financial
statements.
86
ICON
Aircraft 126 LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
(unaudited
with regard to December 31, 2009)
(2)
|
Summary
of Significant Accounting Policies -
continued
|
In 2009,
the LLC adopted the accounting pronouncement that amends the requirements for
disclosures about fair value of financial instruments, regarding the fair value
of financial instruments for annual, as well as interim, reporting periods. This
pronouncement was effective prospectively for all interim and annual reporting
periods ending after June 15, 2009. The adoption of this accounting
pronouncement did not have a significant impact on the
LLC's consolidated financial statements.
In 2009,
the LLC adopted the accounting pronouncement regarding the general standards of
accounting for, and disclosure of, events that occur after the balance sheet
date, but before the financial statements are issued. This pronouncement was
effective prospectively for interim and annual reporting periods ending after
June 15, 2009. The adoption of this accounting pronouncement did not have a
significant impact on the LLC’s consolidated financial statements.
In
2009, the LLC adopted Accounting Standards Codification 105, “Generally Accepted
Accounting Principles,” which establishes the Financial Accounting Standards
Board Accounting Standards Codification (the “Codification”), which supersedes
all existing accounting standard documents and is the single source of
authoritative non-governmental US GAAP. All other accounting
literature not included in the Codification is considered
non-authoritative. This accounting standard is effective for interim
and annual periods ending after September 15, 2009. The Codification
did not change or alter existing US GAAP and it did not result in a change in
accounting practices for the LLC upon adoption. The LLC has conformed its
consolidated financial statements and related notes to the new Codification for
the year ended December 31, 2009.
(3)
|
Leased
Equipment at Cost
|
The LLC’s
sole investment at December 31, 2009 and 2008 is Aircraft 126, which is on lease
to Cathay. The lease was initially scheduled to expire in March 2006, but was
extended to July 1, 2011.
The LLC had a commitment with respect
to Aircraft 126 to pay certain maintenance costs, which were incurred on or
prior to March 27, 2006. The LLC established a maintenance reserve cash account
under the original lease to pay for its portion of these costs. This account was
funded by free cash from the lease payments in accordance with the terms of the
original lease. During 2006, the LLC received $182,021 of capital contributions
from the LLC’s Members, of which $50,000 was for amounts relating to the
maintenance reserve cash account and $132,021 was related to costs paid by its
members relating to the refinancing of the LLC's non-recourse debt. During
September 2006, approximately $1,153,000 was paid for the maintenance costs. The
maintenance account for Aircraft 126 was cross-collateralized with the
maintenance account for ICON Aircraft 123 LLC (“ICON 123”), a wholly-owned
subsidiary of Fund Eight B, pursuant to two first priority charge on cash
deposit agreements entered into in connection with the purchase of an Airbus
A340-313X aircraft on lease to Cathay (“Aircraft 123”). Under the terms of these
agreements, the LLC was required to pay on behalf of ICON 123 any maintenance
cost shortfalls incurred by ICON 123. On January 30, 2007, the LLC paid
approximately $143,000 in maintenance costs from its maintenance account on
behalf of ICON 123. The maintenance account and related security
interests were then terminated. ICON 123 will reimburse the LLC when Aircraft
123 is sold. The excess cash remaining in the LLC’s account of approximately
$97,000 is included in other non-current assets at December 31, 2009 and
2008.
Each of ICON 123 and the LLC is a party
to a residual sharing agreement with respect to its aircraft.
87
ICON
Aircraft 126 LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
(unaudited
with regard to December 31, 2009)
(3)
|
Leased
Equipment at Cost - continued
|
In light
of unprecedented high fuel prices during 2008 and the related impact on the
airline industry, the Manager reviewed the LLC’s Members’ investments in
Aircraft 126 as of June 30, 2008. In accordance with the accounting
pronouncement that accounts for the impairment or disposal of long-lived assets
and based upon changes in the airline industry, the Manager determined that
Aircraft 126 was impaired.
Based on
the Manager’s review, the carrying value of Aircraft 126 exceeded the expected
undiscounted future cash flows of Aircraft 126 and, as a result, the LLC
recorded an impairment charge representing the difference between the carrying
value and the expected discounted future cash flows of
Aircraft 126. The expected discounted future cash flows of Aircraft
126 were determined using a market approach, a recent appraisal for Aircraft 126
and recent sales of similar aircraft, as well as
other factors, including those discussed below. As a result, as of
June 30, 2008, the LLC recorded an impairment loss on Aircraft 126 of
approximately $3,900,000.
The
following factors in 2008, among others, indicated that the full carrying
value of Aircraft 126 might not be recoverable: (i) indications that lenders
were willing to finance less of the acquisition cost of four-engine aircraft,
which increased with each dollar rise of the price of fuel, thereby undermining
the carrying value expectations of such aircraft; (ii) the rising cost of fuel
was increasing the operating costs of four-engine aircraft and similar capacity
twin-engine aircraft, thereby making such aircraft less attractive investments
at the time and thereby depressing the market for Aircraft 126; and (iii) the
likelihood of aircraft operators switching to more efficient aircraft, thereby
depressing the market for Aircraft 126.
Depreciation
expense was $3,987,749, $3,986,575 and $4,000,000 for the years ended December
31, 2009, 2008, and 2007, respectively.
Aggregate annual minimum future rentals
receivable from the LLC’s non-cancelable lease for the next two years consisted
of the following as of December 31, 2009. There will be no additional
rentals receivable after 2011.
Years
Ending
|
||||
December 31,
|
||||
2010
|
$ | 5,940,000 | ||
2011
|
$ | 2,970,000 | ||
(4)
|
Non-recourse
Long-Term Debt
|
Effective
March 27, 2006, in connection with the lease extension, approximately
$52,850,000 of non-recourse debt associated with Aircraft 126 was refinanced
after applying $583,000 from a reserve account established in connection with
the original lease with Cathay. The refinanced non-recourse debt matures on July
1, 2011 and requires a balloon payment of approximately $33,000,000 at maturity.
The interest rate of the debt is fixed at 6.104%.
88
ICON
Aircraft 126 LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
(unaudited
with regard to December 31, 2009))
(4)
|
Non-recourse
Long-Term Debt – continued
|
The aggregate maturities of
non-recourse long-term debt, including the effects of refinancing discussed
above, consisted of the following as of December 31, 2009. There are
no amounts due after 2011.
Years
Ending
|
||||
December 31,
|
||||
2010
|
$ | 3,684,449 | ||
2011
|
34,421,461 | |||
$ | 38,105,910 |
(5)
|
Residual
Sharing Agreement
|
The LLC
is a party to a residual sharing agreement (the “Airtrade Residual Sharing
Agreement”) with ICON 123 and Airtrade Capital Corp. (“Airtrade”). Pursuant to
the terms of the Airtrade Residual Sharing Agreement, all proceeds received in
connection with the sale or lease renewal of Aircraft 123 or Aircraft 126
in excess of $8,500,000 of the applicable loan balance associated with
each aircraft will be allocated 55% to the LLC or ICON 123, as applicable, and
45% to Airtrade.
(6)
|
Fair
Value Measurements
|
The
LLC is required, on a nonrecurring basis, to adjust the carrying value or
provide valuation allowances for certain assets and liabilities using fair value
measurements. Fair value information with respect to the LLC’s leased
assets and liabilities is not separately provided since (i) the current
accounting pronouncements do not require fair value disclosures of lease
arrangements and (ii) the carrying value of financial assets, other than
lease-related investments, and the recorded value of recourse debt approximate
fair value due to their short-term maturities and variable interest rates. The
fair value of the LLC’s non-recourse debt is estimated using a discounted cash
flow analysis, based on the current incremental borrowing rate of the most
recent borrowings by the LLC and the other programs sponsored by the
Manager.
Carrying Amount
|
Fair Value
|
|||||||
Fixed
rate non-recourse long-term debt
|
$ | 38,105,910 | $ | 39,171,374 |
(7)
|
Transactions
with Related Parties
|
The LLC
does not maintain a separate bank account and, therefore, in the normal course
of operations, the LLC’s Members will pay certain operating and general and
administrative expenses on behalf of the LLC in proportion to their membership
interests.
The financial condition and results of
operations of the LLC, as reported, are not necessarily indicative of the
results that would have been reported had the LLC operated completely
independently.
(8)
|
Concentrations
of Risk
|
For the
years ended December 31, 2009, 2008, and 2007, the LLC had one lessee that
accounted for 100% of total rental income and one lender that accounted for 98%
of total liabilities.
Pursuant
to the requirements of 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.
ICON
Income Fund Nine, LLC
(Registrant)
By: ICON
Capital Corp.
(Manager
of the Registrant)
March 25,
2010
By:
/s/ Michael A.
Reisner
|
Michael
A. Reisner
|
Co-Chief
Executive Officer and Co-President
(Co-Principal
Executive Officer)
|
By:
/s/
Mark Gatto
|
Mark
Gatto
|
Co-Chief
Executive Officer and Co-President
(Co-Principal
Executive Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
ICON
Income Fund Nine, LLC
(Registrant)
By: ICON
Capital Corp.
(Manager
of the Registrant)
March 25,
2010
By:
/s/ Michael A.
Reisner
|
Michael
A. Reisner
|
Co-Chief
Executive Officer, Co-President and Director
(Co-Principal
Executive Officer)
|
By:
/s/ Mark Gatto
|
Mark
Gatto
|
Co-Chief
Executive Officer, Co-President and Director
(Co-Principal
Executive Officer)
|
By:
/s/ Anthony J.
Branca
|
Anthony
J. Branca
|
Chief
Financial Officer
|
(Principal
Accounting and Financial Officer)
|
90
|