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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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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Commission
file number: 000-51916
ICON
Leasing Fund Eleven, LLC
(Exact
name of registrant as specified in its charter)
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Delaware
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20-1979428
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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.
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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 limited liability company interests of the
registrant.
Number of
outstanding shares of limited liability company interests of the registrant on
March
19, 2010 is 362,390.
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
Leasing Fund Eleven, LLC (the “LLC” or “Fund Eleven”) was formed on December 2,
2004 as a Delaware limited liability company. The LLC will continue
until December 31, 2024, 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 enter
into pursuant to the terms of our amended and restated limited liability company
agreement (our “LLC Agreement”).
We are
currently in our operating period. Our offering period began in April
2005 and ended in April 2007. Our initial capitalization of $2,000
was contributed on December 17, 2004, which consisted of $1,000 from our Manager
and $1,000 from an officer of our Manager. We subsequently redeemed
the $1,000 contributed by the officer of our Manager. We initially
offered shares of limited liability company interests (“Shares”) with the
intention of raising up to $200,000,000 of capital. On March 8, 2006,
we commenced a consent solicitation of our members to amend and restate our
limited liability company agreement in order to increase the maximum offering
amount from up to $200,000,000 to up to $375,000,000. The consent
solicitation was completed on April 21, 2006 with the requisite consents
received from our members. We filed a new registration statement (the
“New Registration Statement”) to register up to an additional $175,000,000 of
Shares with the Securities and Exchange Commission (the “SEC”) on May 2,
2006. The New Registration Statement was declared effective by the
SEC on July 3, 2006, and we commenced the offering of the additional 175,000
Shares thereafter.
Our
initial closing was on May 6, 2005, with the sale of 1,200 Shares representing
$1,200,000 of capital contributions. Through the end of our offering
period on April 21, 2007, we sold 365,199 Shares, representing $365,198,690 of
capital contributions. In addition, pursuant to the terms of our offering, we
established a reserve in the amount of 0.5% of the gross offering proceeds, or
$1,825,993. Through December 31, 2009, we repurchased 2,106 Shares,
bringing the total number of outstanding Shares to 363,093. From May 6, 2005
through April 21, 2007, we paid sales commissions to third parties and various
fees to our Manager and ICON Securities Corp., a wholly-owned subsidiary of our
Manager (“ICON Securities”). The sales commissions and fees paid to our Manager
and its affiliate are recorded as a reduction of our equity. Through
December 31, 2007, we paid (i) $29,210,870 of sales commissions to third
parties, (ii) $6,978,355 of organizational and offering expense allowance to our
Manager, and (iii) $7,304,473 of underwriting fees to ICON
Securities.
Our
Business
We
operate as an equipment leasing and finance program in which the capital our
members invested was pooled together to make investments, pay fees and establish
a small reserve. We primarily acquire equipment subject to lease, purchase
equipment and lease it to third parties, provide equipment and other financing
and, to a lesser degree, acquire ownership rights to items of leased equipment
at lease expiration. Some of our equipment leases are acquired for cash and are
expected to provide current cash flow, which we refer to as “income” leases. For
our other equipment leases, we finance 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 anticipate that the future value of the leased equipment will
exceed the cash portion of the purchase price.
We divide
the life of the program into three distinct phases:
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(1)
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)
Operating Period:
After the close of the offering period, we reinvested and continue to
reinvest the cash generated from our initial investments to the extent
that cash is not used for our expenses, reserves and distributions to
members. We anticipate that the operating period will end five years from
the end of our offering period, or April 2012. However, our
Manager may, at its sole discretion, extend the operating period for up to
an additional three years.
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(3)
Liquidation
Period: After the operating period, we will then begin 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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At
December 31, 2009 and 2008, we had total assets of $272,679,410 and
$408,178,159, respectively. For the year ended December 31, 2009, three lessees
accounted for approximately 63.0% of our total rental and finance income of
$66,647,989. We had a net loss attributable to us for the year ended December
31, 2009 of $45,095,916. For the year ended December 31, 2008, three lessees
accounted for approximately 55.4% of our total rental and finance income of
$94,660,802. We had a net loss attributable to us for the year
ended December 31, 2008 of $5,797,721. For the year ended December 31, 2007, two
lessees accounted for approximately 36.1% of our total rental and finance income
of $110,902,719. We had a net loss attributable to us for the year ended
December 31, 2007 of $2,478,993.
At
December 31, 2009, our portfolio, which we hold either directly or through joint
ventures, consisted primarily of the following investments:
Lumber
Processing Equipment
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We
own equipment, plant and machinery that is subject to a lease with The
Teal Jones Group and Teal Jones Lumber Services, Inc. (collectively, “Teal
Jones”). The lease expires in November 2013. We also hold a related
mortgage note receivable that is due on December 1,
2013.
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Marine
Vessels
Container
Vessels
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We
own four container vessels on bareboat charter to ZIM Integrated Shipping
Services Ltd. (“ZIM”), the M/V ZIM Andaman Sea (f/k/a ZIM America), the
M/V ZIM Hong Kong, the M/V ZIM Israel, and the M/V ZIM Japan Sea. We
will receive payments through September 30, 2014 in accordance with each
bareboat charter.
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Handymax
Product Tankers
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We
own four Handymax product tankers, the M/T Doubtless, the M/T Faithful,
the M/T Spotless, and the M/T Vanguard (collectively, the “Top Ships
Vessels”), which are subject to time charters. The time charters expire at
various dates ranging from May 2010 to November
2010.
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Aframax
Product Tankers
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We
own two Aframax product tankers, the M/T Senang Spirit (the “Senang
Spirit”) and the M/T Sebarok Spirit (the “Sebarok Spirit”) (collectively,
the “Teekay Vessels”), which are subject to bareboat charters with
subsidiaries of Teekay Corporation (“Teekay”) that expire in April
2012.
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Telecommunications
Equipment
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We
have a 13.26% ownership interest in ICON Global Crossing II, LLC (“ICON
Global Crossing II”), which purchased telecommunications equipment that is
subject to a lease with Global Crossing Telecommunications,
Inc. (“Global Crossing”) and Global Crossing North American Networks,
Inc (collectively, the “Global Crossing Group”). The lease expires on
October 31, 2010.
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We
own, through our wholly-owned subsidiary ICON Global Crossing III, LLC
(“ICON Global Crossing III”), telecommunications equipment that is subject
to leases with the Global Crossing Group. The leases expire on June 30,
2011 and September 30, 2011.
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We
have a 55% ownership interest in ICON Global Crossing V, LLC (“ICON Global
Crossing V”), which purchased telecommunications equipment that is subject
to a lease with Global Crossing. The lease expires on December 31,
2010.
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Manufacturing
Equipment
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We
own, through our wholly-owned subsidiary, ICON French Equipment I, LLC
(“ICON Heuliez”), auto parts manufacturing equipment, which was purchased
from and leased back to Heuliez SA (“HSA”) and Heuliez Investissements SNC
(“Heuliez”). The leases expire on March 31,
2013.
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We
own machining and metal working equipment subject to lease with MW Scott,
Inc. (“Scott”), MW General, Inc. (“General”) and AMI Manchester, LLC
(“AMI”), all of which are wholly-owned subsidiaries of MW Universal, Inc.
(“MWU”). The leases expire on December 31,
2012.
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We
have a promissory note with Cerion MPI, LLC (“Cerion MPI”), an entity
affiliated with W Forge Holdings, Inc. (“W Forge”). Cerion MPI delivered
this promissory note as part of the consideration received in connection
with the sale of our equipment previously on lease to W
Forge. The promissory note bears interest at the rate of 14%
per year and is payable monthly in arrears for the period from January 1,
2010 to December 31, 2013. The promissory note is guaranteed by
Cerion MPI’s parent company, Cerion,
LLC.
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We
have a 45% ownership interest in ICON EAR, LLC (“ICON EAR”), which
purchased and simultaneously leased back semiconductor manufacturing
equipment to Equipment Acquisition Resources, Inc. (“EAR”). The
lease was scheduled to expire on June 30, 2013; however, in October 2009,
certain facts came to light that led our Manager to believe that EAR was
perpetrating a fraud against EAR’s lenders, including ICON EAR. On October
23, 2009, EAR filed a petition for reorganization under Chapter 11 of the
U.S. Bankruptcy Code. Our Manager concluded that the net book value of the
semiconductor manufacturing equipment exceeded the fair value and, as a
result, we recognized a non-cash impairment charge. As of December 31,
2009, we have classified these assets as held for
sale.
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We
own, through our wholly-owned subsidiary ICON EAR II, LLC (“ICON EAR II”),
semiconductor manufacturing equipment, which was purchased from and leased
back to EAR. The lease was schedule to expire on June 30, 2013;
however, in October 2009, certain facts came to light that led our Manager
to believe that EAR was perpetrating a fraud against EAR’s lenders,
including ICON EAR II. On October 23, 2009, EAR filed a petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. Our Manager
concluded that the net book value of the semiconductor manufacturing
equipment exceeded the fair value and, as a result, we recognized a
non-cash impairment charge. As of December 31, 2009, we have classified
these assets as held for sale.
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We
have a 55% ownership interest in ICON Pliant, LLC (“ICON Pliant”), which
owns manufacturing equipment purchased from and simultaneously leased back
to Pliant Corporation (“Pliant”). The equipment is subject to a 60-month
lease that expires on September 30,
2013.
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Notes
Receivable Secured by Credit Card Machines
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We
have a 35% ownership interest in ICON Northern Leasing, LLC ("ICON
Northern Leasing"), which holds four promissory notes (the “Northern
Notes”) issued by Northern Capital Associates XIV, L.P., as borrower, in
favor of Merrill Lynch Commercial Finance Corp. The Northern Notes are
secured by an underlying pool of leases for credit card
machines.
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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 parties, 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 current investments and as we seek to make new
investments, we competed and 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 currently offer,
which may have affected our ability to make our current investments and may
affect our ability to make future investments, 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
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, time charters and operating
leases, and we generate revenues in geographic areas outside of the United
States. For additional information, see Note 17 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 repurchase 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 repurchase 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 repurchase your Shares, the repurchase price has been unilaterally set
and, depending upon when you request repurchase, the repurchase price may be
less than the unreturned amount of your investment. If your Shares are
repurchased, the repurchase 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. While we intend to make monthly cash distributions, our Manager may
determine it is in our best interest to periodically change the amount of the
cash distributions you receive or not make any distributions in some months.
Losses from our operations of the types described in these risk factors and
unexpected liabilities could result in a reduced level of distributions to you.
Additionally, 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.
Your
Shares may be diluted.
Some
investors, including our Manager and its officers, directors and other
affiliates, may have purchased Shares at discounted prices and generally will
share in our revenues and distributions based on the number of Shares that they
purchased, rather than the discounted subscription price paid by them for their
Shares. As a result, investors who paid discounted prices for their Shares will
receive higher returns on their Shares as compared to investors who paid the
entire $1,000 per Share.
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 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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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 receive more fees for making investments in which we incur
indebtedness to fund these investments than if indebtedness is 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 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, are 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 be as favorable to you and our other investors
as they would be if independent members were on the committee. Generally, if an
investment is appropriate for more than one fund, our Manager’s investment
committee will allocate the investment to a fund (which includes us) after
taking into consideration at least the following factors:
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whether
the fund has the cash required for the
investment;
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whether
the amount of debt to be incurred with respect to the investment is
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 is within the term of the fund;
and
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which
fund has been seeking investments for the longest period of
time.
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Notwithstanding
the foregoing, our Manager’s investment committee may make exceptions to these
general policies when, in our Manager’s judgment, other circumstances make
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 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 and its affiliates will receive expense reimbursements and substantial
fees from us.
The
expense reimbursements and fees of our Manager and its affiliates were
established by our Manager in compliance with the NASAA Guidelines (the North
American Securities Administrators Association guidelines for publicly offered,
finite-life equipment leasing and finance funds) in effect on the date of our
prospectus, are not based on arm’s-length negotiations, but are subject to the
limitations set forth in our LLC Agreement. In general, expense
reimbursements and fees are paid without regard to the amount of our cash
distributions to our additional members, and regardless of the success or
profitability of our operations. Some of those fees and expense reimbursements
will be required to be paid as we acquire our portfolio and we may pay other
expenses, such as accounting and interest expenses, costs for supplies, etc.,
even though we may not yet have begun to receive revenues from all of our
investments.
Furthermore,
we borrowed a significant portion of the purchase price of certain of our
investments. As a consequence, we paid greater fees to our Manager
than if no indebtedness were incurred because management and acquisition fees
are based upon the gross payments earned or receivable from, or the purchase
price (including any indebtedness incurred) of, our investments. The
reimbursement of expenses and payment of fees could adversely affect our ability
to make distributions to our additional members.
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, as
amended, 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 our 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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fluctuations
in the availability and cost of credit for us to borrow to make and/or
realize on some of our investments;
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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 invest 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.
Instability
in the credit markets could have a material adverse effect on our results of
operations, financial condition and ability to meet our investment
objectives.
If debt
financing is not available on terms and conditions we find acceptable, we may
not be able to obtain financing for some of our investments. Recently, domestic
and international financial markets have experienced unusual volatility and
uncertainty. If this volatility and uncertainty persists, our ability to borrow
to finance the acquisition of some of our investments could be significantly
impacted. If we are unable to borrow on terms and conditions that we find
acceptable, we may have to reduce the number of and possibly limit the type of
investments we will make, and the return on some of the investments we do make
could be lower. All of these events could have a material adverse effect on our
results of operations, financial condition and ability to meet our investment
objectives.
Because
we borrowed and may in the future borrow 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 and may in the future
borrow a substantial portion of the purchase price of certain of our
investments. While we believe the use of leverage will result in our ability to
make more investments with less risk than if leverage is 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 are 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), ICON Income Fund Eight B L.P. (“Fund Eight B”), ICON Income Fund Nine,
LLC (“Fund Nine”), ICON Income Fund Ten, LLC (“Fund Ten”), 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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if
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
invest 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 assume a residual value for the equipment at the end of the
lease or other investment that, at maturity, is 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 preserve or enhance 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 invest in is used equipment. While we plan to inspect most used
equipment prior to making an investment, there is no assurance that an
inspection of used equipment prior to purchasing it will reveal any or all
defects and problems with the equipment that may occur after it is acquired by
us.
We
typically obtain 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 is in violation of any material terms of
such agreements; and
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the
equipment is in good operating condition and repair and that, with respect
to leases, the lessee has no defenses to the payment of rent for the
equipment as a result of the condition of such
equipment.
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We would
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 enter
into transactions with parties that have senior debt rated below investment
grade or no credit rating. We do not require such parties to have a minimum
credit rating. Lessees, borrowers, and other counterparties with lower or no
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.
We
may invest in options to purchase equipment that could become worthless if the
option grantor files for bankruptcy.
We may
acquire options to purchase equipment, usually for a fixed price at a future
date. In the event of a bankruptcy by the party granting the option, we might be
unable to enforce the option or recover the option price paid, which could
negatively affect our profitability.
Investing
in equipment in foreign countries may be riskier than domestic investments and
may result in losses.
We made
and may in the future make 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 seek 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 invest 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 considers 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.
We
could incur losses as a result of foreign currency fluctuations.
We have
the ability to invest in equipment where payments to us are not made in U.S.
dollars. In these cases, we may then enter into a contract to protect these
payments from fluctuations in the currency exchange rate. These contracts, known
as hedge contracts, would allow us to receive a fixed number of U.S. dollars for
any fixed, periodic payments due under the transactional documents even if the
exchange rate between the U.S. dollar and the currency of the transaction
changes over time. If the payments to us were disrupted due to default by the
lessee, borrower or other counterparty, we would try to continue to meet our
obligations under the hedge contract by acquiring the foreign currency
equivalent of the missed payments, which may be available at unfavorable
exchange rates. If a transaction is denominated in a major foreign currency such
as the pound sterling, which historically has had a stable relationship with the
U.S. dollar, we may consider hedging to be unnecessary to protect the value of
the payments to us, but our assumptions concerning currency stability may turn
out to be incorrect. Our investment returns could be reduced in the event of
unfavorable currency fluctuation when payments to us are not made in U.S.
dollars.
Furthermore,
when we acquire a residual interest in foreign equipment, we may not be able to
hedge our foreign currency exposure with respect to the value of such residual
interests because the terms and conditions of such hedge contracts might not be
in the best interests of our members. Even with transactions requiring payments
in U.S. dollars, the equipment may be sold at maturity for an amount that cannot
be pre-determined to a buyer paying in a foreign currency. This could positively
or negatively affect our income from such a transaction when the proceeds are
converted into U.S. dollars.
Sellers
of leased equipment could use their knowledge of the lease terms for gain at our
expense.
We may
acquire 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 have
the ability to invest 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 use 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
is to enter into or acquire leases that we believe are structured so that they
avoid being deemed loans, and would therefore not be subject to usury laws, we
cannot assure you that we will be 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 seek 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
compete 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. We
compete primarily on the basis of pricing, terms and structure. To
the extent that our competitors compete aggressively on any combination of those
factors, we could fail to achieve our investment objectives.
Some of
our competitors are substantially larger and have considerably greater
financial, technical and marketing resources than either we or our Manager and
its affiliates have. For example, some competitors may have a lower
cost of funds and access to funding sources that are not available to
us. A lower cost of funds could enable a competitor to offer
financing at rates that are less than ours, potentially forcing us to lower our
rates or lose potential lessees, borrowers or other
counterparties. In addition, our competitors may have been and/or may
be in a position to offer equipment to prospective customers on other terms that
are more favorable than those that we can offer or that we will be able to offer
when liquidating our portfolio, which may affect 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.
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:
|
·
|
our
realized losses would not be passed through to
you;
|
|
·
|
our
income would be taxed at tax rates applicable to corporations, thereby
reducing our cash available to distribute to you;
and
|
|
·
|
your
distributions would be taxed as dividend income to the extent of current
and accumulated earnings and
profits.
|
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 lease. 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.
Our
investments in secured loans will not give rise to depreciation or cost recovery
deductions and may not be offset against our passive activity
losses.
We expect
that, for federal income tax purposes, we will not be treated as the owner and
lessor of the equipment that we invest in through our lending activities. Based
on our expected level of activity with respect to these types of financings, we
expect that the IRS will treat us as being in the trade or business of lending.
Generally, trade or business income can be considered passive activity income.
However, because we expect that the source of funds we lend to others will be
the capital contributed by our members and the funds generated from our
operations (rather than money we borrow from others), you may not be able to
offset your share of our passive activity losses from our leasing activities
with your share of our interest income from our lending activities. Instead,
your share of our interest income from our lending activities would be taxed as
portfolio income.
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
acquire 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 purchase may 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 acquire equipment that the Code
deems to be tax-exempt use property and the leases do 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 acquire 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. Based on the tax
rules, we expect that we will have multiple activities for purposes of the
at-risk rules. Specifically, our lending activities must be analyzed separately
from our leasing activities, and our leasing activities must be further divided
into separate year-by-year groups according to the tax year the equipment is
placed in service. As such, you cannot aggregate income and loss from our
separate activities for purposes of determining your ability to deduct your
share of our losses under the at-risk rules.
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. As stated above, we expect our lending activities to generate
portfolio income from the interest we receive, even though we expect the income
to be attributable to a lending trade or business. However, we expect any gains
or losses we recognize from those lending activities to be associated with a
trade or business and generally allowable as either passive activity income or
loss, as applicable.
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.
To the
extent that we borrow money in order to finance our lending activities, a
portion of our income from such activities will be treated as attributable to
debt-financed property and, to the extent so attributable, will constitute UBTI.
We presently do not expect to finance our lending activities with borrowed
funds. Nevertheless, the debt-financed UBTI rules are broad and there is much
uncertainty in determining when, and the extent to which, property should be
considered debt-financed. Thus, the IRS might assert that a portion of the
assets we acquire as part of our lending activities are debt-financed property
generating UBTI, especially with regard to any indebtedness we incur to fund
working capital at a time when we hold loans we have acquired or made to others.
If the IRS were to successfully assert that debt we believed should have been
attributed to our leasing activities should instead be attributed to our lending
activities, the amount of our income that constitutes UBTI would be
increased.
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. In addition, the IRS
could take the position that all or a portion of our lending activities are not
a trade or business, but rather an investment activity. If all or a portion of
our lending activities are not considered to be a trade or business, then a
portion of our management fees could be considered investment expenses rather
than trade or business expenses. To the extent that a portion of our fees are
considered investment expenses, they are not deductible for alternative minimum
tax purposes and are subject to a limitation for regular tax purposes.
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
depreciate our investments in leased equipment over the term of our existence
and/or borrowers repay the loans we make to them, it is very likely that a
portion of each distribution to you will be 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.
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Number
of Members
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|
|
Title of Class
|
as of March 19, 2010
|
|
Manager
(as a member)
|
1
|
|
Additional
members
|
8,632
|
We, at
our Manager’s discretion, pay monthly distributions to each of our members
beginning the first month after each member is admitted through the end of our
operating period, which we currently anticipate will be in April
2012. We paid distributions to additional members totaling
$33,047,095, $33,072,923 and $37,151,073, for the years ended December 31, 2009,
2008 and 2007, respectively. Additionally, we paid our Manager
distributions of $333,811, $334,071 and $375,190, 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 our 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 $347.29 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 $347.29 per Share if such a market did exist and they sold
their Shares or that they will be able to receive such amount for their Shares
in the future. Furthermore, there can be no assurance:
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·
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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;
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that
the foregoing valuation, or the method used to establish value, will
satisfy the technical requirements imposed on plan fiduciaries under
ERISA; or
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that
the foregoing valuation, or the method used to establish value, will not
be subject to challenge by the IRS if used for any tax (income, estate,
gift or otherwise) valuation purposes as an indicator of the current value
of our Shares.
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The
repurchase price we offer in our repurchase plan utilizes a different
methodology than that which we use to determine the current value of our Shares
for the ERISA and FINRA purposes described above and, therefore, the $347.29 per
Share does not reflect the amount that a member would currently receive under
our repurchase plan. However, there can be no assurance that you will
be able to redeem your Shares under our repurchase plan.
The
selected financial data should be read in conjunction with the consolidated
financial statements and related notes included in “Item 8. Consolidated
Financial Statements and Supplementary Data” contained elsewhere in this Annual
Report on Form 10-K.
| Period From May | ||||||||||||||||||||
| 6, 2005 | ||||||||||||||||||||
| (Commencement | ||||||||||||||||||||
| of Operations) | ||||||||||||||||||||
| through | ||||||||||||||||||||
|
Years Ended December 31,
|
December 31, | |||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
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2005
|
||||||||||||||||
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Total
revenue (a)
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$ | 103,194,237 | $ | 86,766,901 | $ | 117,617,106 | $ | 71,897,046 | $ | 761,758 | ||||||||||
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Net
loss attributable to Fund Eleven (b)
|
$ | (45,095,916 | ) | $ | (5,797,721 | ) | $ | (2,478,993 | ) | $ | (4,696,606 | ) | $ | (404,201 | ) | |||||
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Net
loss attributable to Fund Eleven allocable to additional
members
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$ | (44,644,957 | ) | $ | (5,739,744 | ) | $ | (2,454,203 | ) | $ | (4,649,640 | ) | $ | (400,159 | ) | |||||
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Net
loss attributable to Fund Eleven allocable to the Manager
|
$ | (450,959 | ) | $ | (57,977 | ) | $ | (24,790 | ) | $ | (46,966 | ) | $ | (4,042 | ) | |||||
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Weighted
average number of additional shares
|
||||||||||||||||||||
|
of
limited liability company interests outstanding
|
363,139 | 363,414 | 352,197 | 197,957 | 58,665 | |||||||||||||||
|
Net
loss attributable to Fund Eleven per weighted average
|
||||||||||||||||||||
|
additional
share of limited liability company interests
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$ | (122.94 | ) | $ | (15.79 | ) | $ | (6.97 | ) | $ | (23.49 | ) | $ | (6.82 | ) | |||||
|
Distributions
to additional members
|
$ | 33,047,095 | $ | 33,072,923 | $ | 37,151,073 | $ | 16,600,276 | $ | 2,556,112 | ||||||||||
|
Distributions
per weighted average additional
|
||||||||||||||||||||
|
share
of limited liability company interests
|
$ | 91.00 | $ | 91.01 | $ | 105.48 | $ | 83.86 | $ | 43.57 | ||||||||||
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Distributions
to the Manager
|
$ | 333,811 | $ | 334,071 | $ | 375,190 | $ | 167,738 | $ | 25,834 | ||||||||||
|
December 31,
|
||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
|
Total
assets (c)
|
$ | 272,679,410 | $ | 408,178,159 | $ | 595,752,005 | $ | 530,841,551 | $ | 91,701,701 | ||||||||||
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Recourse
and non-recourse debt (d)
|
$ | 117,199,058 | $ | 168,449,633 | $ | 285,494,408 | $ | 260,926,942 | $ | - | ||||||||||
|
Members'
equity
|
$ | 136,378,244 | $ | 210,185,781 | $ | 261,223,876 | $ | 232,896,485 | $ | 90,255,266 | ||||||||||
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(a)
|
During
2009, we had an increase in total revenue of approximately $16,427,000 as
compared to 2008. This increase was primarily the result of (i) the impact
of the termination of the bareboat charters with subsidiaries of Top
Ships, Inc. (“Top Ships”) in June 2009 (the “Bareboat Charter
Termination”), (ii) the impact of the sale of the net assets in the
leasing portfolio in May 2008, and (iii) the net gain recorded
on the sales of leased equipment during 2009. In 2008, we had a decrease
in total revenue of approximately $30,850,000. This was primarily
attributable to the sale of the net assets in the leasing portfolio in May
2008.
|
|
(b)
|
During
2009, we had a net loss attributable to us of $45,095,916 as compared to a
net loss attributable to us of $5,797,721 in 2008. The increase in the net
loss attributable to us in 2009 as compared to 2008
was primarily due to (i) an impairment loss recorded during
2009 in connection with the equipment on lease to ZIM and EAR and the M/T
Faithful, (ii) the impact of the Bareboat Charter Termination, (iii) the
impact of the sale of the net assets in the leasing portfolio in May 2008,
and (iv) the sales of leased equipment during 2009. In 2008, we had a net
loss attributable to us of $5,797,721 as compared to a net loss
attributable to us in 2007 of $2,478,993. This was primarily attributable
to the impact of the sale of the net assets in the leasing portfolio in
May 2008.
|
|
(c)
|
During
2009, total assets decreased $135,498,749 as compared to 2008. The
decrease was primarily due to (i) an impairment loss recorded during 2009
as discussed in footnote (b) and (ii) the impact of the Bareboat Charter
Termination.
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(d)
|
During
2009, the outstanding balance of our recourse and non-recourse debt
decreased $51,250,575 as compared to 2008. The decrease was
primarily attributable to the repayment of our recourse and non-recourse
debt.
|
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 and finance program in which the capital
our members invested was pooled together to make investments, pay fees and
establish a small reserve. We primarily acquire equipment subject to lease,
purchase equipment and lease it to third parties, provide equipment and other
financing and, to a lesser degree, acquire ownership rights to items of leased
equipment at lease expiration. Some of our equipment leases are acquired
for cash and are expected to provide current cash flow, which we refer to
as “income” leases. For our other equipment leases, we finance 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 anticipate that
the future value of the leased equipment will 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
are currently in our operating period. During our operating period, additional
investments will continue to be made with the cash generated from our initial
investments and our additional investments to the extent that the cash is not
used for expenses, reserves and distributions to members. The investment in
additional equipment leases and other financing transactions in this manner is
called “reinvestment.” We anticipate investing in equipment leases,
other financing transactions, and residual ownership rights in leased equipment
from time to time until April 2012, unless that date is extended, at our
Manager’s sole discretion, for up to an additional three years.
Current
Business Environment and Outlook
Recent
trends indicate that domestic and global equipment financing volume is
correlated to overall business investments in equipment, which are typically
impacted by 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, depending on a
number of factors. These factors include the availability of liquidity to
provide equipment financing and/or provide it on terms satisfactory to
borrowers, lessees, and other counterparties, as well as the desire to upgrade
equipment and/or expand operations during times of growth, but also in times of
recession in order to, among other things, seize the opportunity to obtain
competitive advantage over distressed competitors and/or increase business as
the economy recovers.
Industry
Trends Prior to the Recent “Credit Crisis”
The U.S.
economy experienced a downturn from 2001 through 2003, resulting in a decrease
in equipment 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 financing volume. According to information
provided by the Equipment Leasing and Finance Foundation, a non-profit
foundation dedicated to providing research regarding the equipment leasing and
finance industry (“ELFF”), based on information from the United States
Department of Commerce Bureau of Economic Analysis and Global Insight, Inc., a
global forecasting company, 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 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, including
equipment loans and other types of equipment financing, increased as well during
the same period.
Current
Industry Trends
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.
Commercial and Industrial Loan
Trends. According to information provided by the U.S. Federal Deposit
Insurance Corporation (“FDIC”), the change in the volume of outstanding
commercial and industrial loans issued by FDIC-insured institutions started to
decline dramatically beginning in the fourth quarter of 2007. Thereafter,
the change in volume turned negative for the first time since 2002 in the fourth
quarter of 2008, with reductions of approximately $61 billion between the last
quarter of 2008 and the first quarter of 2009, approximately $68 billion between
the first and second quarters of 2009, and approximately $89 billion between the
second and third quarters of 2009.
While
some of the reduction is due to voluntary and involuntary deleveraging by
corporate borrowers, some of the other main factors cited for the decline in
outstanding commercial lending and financing volume include the
following:
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lack of liquidity to provide new financing and/or
refinancing;
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heightened credit standards and lending criteria (including
ever-increasing spreads, fees, and other costs, as well as lower advance
rates and shorter tenors, among other factors) that have hampered some
demand for and issuance of new financing and/or
refinancing;
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net charge offs of and write-downs on outstanding financings;
and
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many lenders being sidetracked from providing new lending by industry
consolidation, management of existing portfolios and relationships, and
amendments (principally covenant relief and “amend and
extend”).
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In
addition, the volume of issuance of high yield bonds and, to a lesser extent,
investment grade bonds has risen significantly over the past few quarters, a
significant portion of the proceeds of which have been used to pay down and/or
refinance existing commercial and industrial loans. As a result of all of
these factors affecting the commercial and industrial finance segment of the
finance industry, financial institutions and other financing providers with
liquidity to provide financing can do so selectively, at higher spreads and
other more favorable terms than have been available in many years. As
noted below, this trend in the wider financing market is also prevalent in the
specific market for equipment financing.
Equipment Financing
Trends. 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.
Prior to
the recent credit crisis, a substantial portion of equipment financing was
provided by the leasing and lending divisions of commercial and industrial
banks, large independent leasing and finance companies, and captive and vendor
leasing and finance companies. These institutions (i) generally provided
financing to companies seeking to lease small ticket and micro ticket equipment,
(ii) used credit scoring methodologies to underwrite a lessee’s
creditworthiness, and (iii) relied heavily on the issuance of commercial paper
and/or lines of credit from other financial institutions to finance new
business. Many of these financial institutions and other financing providers
have failed or significantly reduced their financing operations. By
contrast, we (i) focus on financing middle- to large-ticket, business-essential
equipment and other capital assets, (ii) generally underwrite and structure such
financing in a manner similar to providers of senior indebtedness (i.e., our
underwriting includes both creditworthiness and asset due diligence and
considerations and our structuring often includes guarantees, equity pledges,
warrants, liens on related assets, etc.), and (iii) are not significantly
reliant on receiving outside financing to meet our investment objectives. In
short, in light of the tightening of the credit markets, our Manager in its role
as the sponsor and manager of other equipment financing funds has, since the
onset of the “credit crisis,” reviewed and expects to continue to review more
potential financing opportunities than it has in its history.
Lease
and Other Significant Transactions
We
engaged in the following significant transactions during the years ended
December 31, 2009, 2008 and 2007:
Lumber
Processing Equipment
On
November 8, 2006, we, through two wholly-owned subsidiaries, ICON Teal Jones,
LLC and ICON Teal Jones, ULC (collectively, “ICON Teal Jones”), entered into a
lease financing arrangement with Teal Jones by acquiring from Teal Jones
substantially all of the equipment, plant and machinery used by Teal Jones in
its lumber processing operations in Canada and the United States and leasing it
back to Teal Jones. The 84-month lease began on December 1, 2006 and grants Teal
Jones the right to end the lease early if certain lump sum payments are made to
ICON Teal Jones. The total lease financing amount was approximately
$22,224,000. We paid an acquisition fee to our Manager of
approximately $667,000 relating to this transaction.
In
connection with the lease financing arrangement, Teal Cedar Products Ltd., an
affiliate of The Teal Jones Group, delivered a secured promissory note to
ICON Teal Jones, ULC (the “Teal Jones Note”). The Teal Jones Note is
secured by a lien on certain land located in British Columbia, Canada owned by
Teal Jones, where substantially all of the equipment is operated. The
Teal Jones Note is in the amount of approximately $13,291,000, accrues interest
at 20.629% per year and matures on December 1, 2013. The Teal Jones
Note requires quarterly payments of $568,797 through September 1, 2013. On
December 1, 2013, a balloon payment of approximately $18,519,000 is due and
payable. At December 31, 2009 and 2008, the principal balance of the
Teal Jones Note was $12,722,006 and was reflected as mortgage note
receivable on our accompanying consolidated balance sheets. We paid an
acquisition fee to our Manager of approximately $399,000 relating to this
transaction.
On
December 10, 2009, ICON Teal Jones restructured the lease payment obligations of
Teal Jones to provide Teal Jones with cash flow flexibility while at the same
time attempting to preserve our projected economic return on this
investment.
Marine
Vessels
Container
Vessels
On June
21, 2006, we, through our wholly-owned subsidiaries, ICON European Container,
LLC (“ICON European Container”) and ICON European Container II, LLC (“ICON
European Container II” and, together with ICON European Container, the “ZIM
Purchasers”), acquired four container vessels from Old Course Investments LLC
(“Old Course”). The M/V ZIM Andaman Sea (f/k/a ZIM America) and the
M/V ZIM Japan Sea (both owned by ICON European Container) are subject to
bareboat charters that expire in November 2010. The M/V ZIM Hong Kong and
the M/V ZIM Israel (both owned by ICON European Container II) are subject to
bareboat charters that expire in January 2011. These vessels
(collectively, the “ZIM Vessels”) are subject to bareboat charters with
ZIM.
The
purchase price for the ZIM Vessels was approximately $142,500,000, including (i)
the assumption of approximately $93,325,000 of non-recourse indebtedness under a
secured loan agreement (the “HSH Loan Agreement”) with HSH Nordbank AG (“HSH”)
and (ii) the assumption of approximately $12,000,000 of non-recourse
indebtedness, secured by a second priority mortgage over the ZIM Vessels in
favor of ZIM, less the acquisition of related assets of approximately
$3,273,000. The obligations under the HSH Loan Agreement are secured by a
first priority mortgage over the ZIM Vessels. We incurred
professional fees of approximately $336,000 and paid our Manager an acquisition
fee of approximately $4,236,000 relating to this transaction. These
fees were capitalized as part of the acquisition cost of the ZIM
Vessels.
Our
Manager periodically reviews the significant assets in our portfolio to
determine whether events or changes in circumstances indicate that the net book
value of an asset may not be recoverable. In light of developments in the market
for containership vessels and the related impact on the shipping industry, our
Manager reviewed our investments in the ZIM Vessels that are subject to bareboat
charters with ZIM.
At the
time of our Manager’s review, the following factors, among others, indicated
that the net book value of the ZIM Vessels might not be recoverable: (i) ZIM’s
financial condition, which prompted it to require concessions on hire payments
under charters that extend beyond June 30, 2010; (ii) the age of the ZIM
Vessels, which have less years of remaining economic useful life than comparable
assets available in the market, thereby limiting the potential for the ZIM
Vessels to benefit from a future recovery in this asset class; and (iii) a
continued unprecedented decline in charter rates and asset values for this class
of vessel in the industry as a whole, thereby undermining the value expectations
of such vessels.
Based on
our Manager’s review, the net book value exceeded the fair value of the
container vessels and, as a result, we recognized a non-cash impairment charge
of approximately $35,147,000 relating to the write down in value of the ZIM
Vessels. No amount of this impairment charge represents a cash expenditure and
our Manager does not expect that any amount of this impairment charge will
result in any future cash expenditures.
On
October 30, 2009, the ZIM Purchasers amended the bareboat charters for the ZIM
Vessels to restructure each respective charterer’s payment obligations so that
we will continue to receive payments, subsequent to the end of each
bareboat charter in November 2010 and January 2011, through
September 30, 2014 in accordance with each amended charter (the “European
Containers Charter Amendments”).
On
February 9, 2010, the ZIM Purchasers amended the HSH Loan Agreement (the
“Amended Facility Agreement”) to correspond with the revised payment schedule in
the European Containers Charter Amendments, which also cured the debt
that was in default as of December 31, 2009.
Handymax
Product Tankers
On June
16, 2006, we, through our wholly-owned subsidiaries, ICON Doubtless, LLC, ICON
Faithful, LLC, ICON Spotless, LLC, and ICON Vanguard, LLC (collectively, the
“Companies”), acquired the Top Ships Vessels from subsidiaries of Oceanbulk
Maritime, S.A. The Companies acquired the Top Ships Vessels directly, except for
ICON Vanguard, LLC, which acquired the M/T Vanguard through its wholly-owned
Cypriot subsidiary, Isomar Marine Company Limited (“Isomar” and, together with
the Companies, the “Top Ships Purchasers”).
The Top
Ships Vessels were subject to bareboat charters with subsidiaries of Top
Ships. The bareboat charters were set to expire in February
2011. The purchase price for the Top Ships Vessels was approximately
$115,097,000, including (i) the assumption of approximately $80,000,000 of
senior non-recourse debt obligations and (ii) the assumption of approximately
$10,000,000 of junior non-recourse debt obligations, less approximately
$1,222,000 of discounted interest on the junior non-recourse debt obligations.
We incurred professional fees of approximately $290,000 and paid our Manager an
acquisition fee of approximately $3,379,000 relating to these
transactions. These fees were capitalized as part of the acquisition
cost of the Top Ships Vessels.
On June
24, 2009, the Top Ships Purchasers terminated the bareboat charters with
subsidiaries of Top Ships per the request of Top Ships. As consideration for the
Bareboat Charter Termination, Top Ships (i) paid $8,500,000 as a termination
fee, which was used to pay down a portion of the outstanding balance of the
non-recourse long-term debt related to the Top Ships Vessels, (ii) paid
$2,250,000 for costs associated with repairs, upgrades and surveys of the Top
Ships Vessels, (iii) paid $1,000,000 for transaction costs, (iv) waived its
rights to the second priority non-recourse debt obligations of $10,000,000
related to the Top Ships Vessels and (v) agreed to pay all rentals due under the
current bareboat charters through June 15, 2009. Simultaneously, the Top Ships
Purchasers were assigned the rights to the underlying time charter for each
bareboat charter. The time
charters expire at various dates ranging from May 2010 to November 2010. In
connection with the Bareboat Charter Termination, the Top Ships Purchasers
assumed full responsibility for the management of the Top Ships Vessels from Top
Ships. Simultaneously with the Bareboat Charter Termination, the Top Ships
Purchasers entered into a consulting and services agreement with Empire
Navigational, Inc. (“Empire”) to manage all of the Top Ships Vessels. The Top
Ships Purchasers agreed to pay Empire a fee to manage the Top Ships Vessels and
pay any costs incurred from the operation of the vessels. As a result of the
Bareboat Charter Termination, we recorded a net gain on lease termination of
approximately $25,142,000 during the year ended December 31, 2009.
On
September 23, 2009, the Top Ships Purchasers defaulted on a two-year
non-recourse long-term loan (the “New Fortis Loan”) with Fortis Bank NV/SA
(“Fortis”) due to their failure to make required payments under the agreement.
The Top Ships Purchasers are
currently in active discussions with Fortis and are attempting to restructure
the New Fortis Loan. We have classified the balance of the
outstanding non-recourse long-term debt under this agreement as current at
December 31, 2009.
Our
Manager periodically reviews the significant assets in our portfolio to
determine whether events or changes in circumstances indicate that the net book
value of an asset may not be recoverable. In light of developments in the market
for product tankers and the related impact on the shipping industry, our Manager
reviewed our investment in the M/T Faithful, which is subject to a time
charter. As the
time charter of the M/T Faithful ends during the first half of 2010
and current market conditions are unfavorable, our Manager determined that
indicators of impairment exist. Based on
our Manager’s review, the net book value exceeded the undiscounted cash flows,
and the net book value of the product tanker exceeded the fair value and, as a
result, we recognized a non-cash impairment charge of approximately $5,827,000
relating to the write down in value of the M/T Faithful. No amount of this
impairment charge represents a cash expenditure.
Aframax
Product Tankers
On April
11, 2007, we, through our wholly-owned subsidiaries, ICON Senang, LLC and ICON
Sebarok, LLC (the “Teekay Purchasers”), acquired the Teekay Vessels from an
affiliate of Teekay. The purchase price for the Teekay Vessels was approximately
$88,000,000, including borrowings of approximately $66,660,000 of non-recourse
debt under a secured loan agreement (the “Teekay Loan Agreement”) with Fortis
Capital Corporation (“Fortis Capital”). We paid an acquisition fee to our
Manager of approximately $2,640,000 in connection with this
transaction. Simultaneously with the closing of the purchase of the
Teekay Vessels, the Teekay Purchasers entered into a bareboat charter for each
of the Teekay Vessels with an affiliate of Teekay for a term of 60 months. The
bareboat charters expire in April 2012.
Leasing
Portfolio
On March
7, 2006, we acquired substantially the entire equipment leasing portfolio (the
“Leasing Portfolio”) of Clearlink Capital Corporation
(“Clearlink”). The Leasing Portfolio was acquired, effective as of
March 1, 2006, by us from our Manager and ICON Canada, Inc., an affiliate of our
Manager, for approximately $144,591,000. Our Manager was paid an acquisition fee
of approximately $4,400,000 in connection with this transaction.
On May
19, 2008, we sold substantially all of the net assets in the Leasing Portfolio
(the “Remaining Net Assets”) to affiliates of U.S. Micro Corporation (“U.S.
Micro”), an unaffiliated third party. The gross cash purchase price
was $19,000,000 and was subject to post-closing adjustments of approximately
$11,684,000, bringing the net cash purchase price to approximately
$7,316,000. We recognized a book loss of approximately $17,476,000,
which was offset by a realized foreign currency gain of approximately
$5,593,000. As a result, we recorded a net loss of approximately $11,922,000
during the year ended December 31, 2008.
Telecommunications
Equipment
On
November 17, 2005, we, along with Fund Ten and ICON Income Fund Eight A L.P.
(“Fund Eight A”), an entity also managed by our Manager, formed ICON Global
Crossing, LLC (“ICON Global Crossing”), with ownership interests of 44%, 44% and
12%, respectively, to purchase telecommunications equipment from various
vendors. On March 31, 2006, we made an additional capital contribution of
approximately $7,733,000, which changed our, Fund Eight A’s and Fund Ten’s
ownership interests to 61.39%, 7.99% and 30.62%, respectively. The total capital
contributions made to ICON Global Crossing were approximately $25,131,000, of
which our share was approximately $15,429,000. ICON Global Crossing
purchased approximately $22,100,000 of equipment during February and March 2006
and approximately $3,200,000 of additional equipment during April 2006, all of
which is subject to a 48-month lease with Global Crossing that expires on March
31, 2010. We paid initial direct costs in the form of legal fees of
approximately $200,000. We also paid an acquisition fee to our Manager of
approximately $232,000 relating to the additional capital contribution made
during March 2006.
On
September 30, 2009, ICON Global Crossing sold certain telecommunications
equipment on lease to Global Crossing back to Global Crossing for a purchase
price of $5,493,000 and removed the equipment from the Global Crossing lease. We
recorded a gain of approximately $111,000 for the year ended December 31, 2009
in connection with the sale of the telecommunications
equipment. Accordingly, our 61.39% membership interest in ICON Global
Crossing was sold and we deconsolidated ICON Global Crossing and recorded a gain
on the sale of our investment of approximately $51,000 for the year ended
December 31, 2009, which was included in interest and other income in our
consolidated statements of operations.
On
September 27, 2006, Fund Ten and Fund Nine formed ICON Global Crossing II, with
original ownership interests of approximately 83% and 17%, respectively. The
total capital contributions made to ICON Global Crossing II were approximately
$12,000,000, of which Fund Ten’s share was approximately $10,000,000 and Fund
Nine’s share was approximately $2,000,000. On September 28, 2006,
ICON Global Crossing II purchased approximately $12,000,000
of telecommunications equipment that is subject to a 48-month lease with
the Global Crossing Group that expires on October 31, 2010. On
October 31, 2006, we made a capital contribution of approximately $1,800,000 to
ICON Global Crossing II. The contribution changed the ownership interests of
ICON Global Crossing II for Fund Nine, Fund Ten and us 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 lease with the
Global Crossing Group that expires on October 31, 2010. We paid approximately
$55,000 in acquisition fees to our Manager relating to this
transaction.
On
December 29, 2006, we purchased, through our wholly-owned subsidiary, ICON
Global Crossing III, telecommunications equipment for approximately $9,779,000.
This equipment is subject to a 48-month lease with the Global Crossing Group,
which expires on December 31, 2010. We paid an acquisition fee to our
Manager of approximately $293,000 relating to this
transaction. During February 2007, ICON Global Crossing III purchased
approximately $6,893,000 of additional equipment that is subject to a lease with
the Global Crossing Group, which expires on February 28, 2011. We paid an
acquisition fee to our Manager of approximately $207,000 relating to this
transaction. On June 27, 2008 and September 23, 2008, we acquired, through ICON
Global Crossing III, additional telecommunications equipment from various
vendors for aggregate purchase prices of approximately $5,417,000 and
$3,991,000, respectively, which was then leased to Global Crossing for a term of
36 months. The leases expire on June 30, 2011 and September 30, 2011,
respectively. We paid acquisition fees to our Manager of
approximately $163,000 and $120,000, respectively, in connection with these
transactions.
On
December 1, 2009, we, through ICON Global Crossing III, and Global Crossing
agreed to terminate certain schedules to our lease and, simultaneously with the
termination, ICON Global Crossing III sold the equipment to Global Crossing for
the aggregate purchase price of $8,390,853 and removed the equipment from our
lease. We recorded a gain of approximately $1,010,000 for the year ended
December 31, 2009 in connection with the sale of the telecommunications
equipment.
On
December 20, 2007, we, along with Fund Ten, formed ICON Global Crossing V, with
ownership interests of 55% and 45%, respectively, to purchase telecommunications
equipment from various vendors for approximately $12,982,000. This equipment is
subject to a 36-month lease with Global Crossing, which expires on December 31,
2010. The total capital contributions made to ICON Global Crossing V were
approximately $12,982,000, of which our share was approximately
$7,140,000. We paid an acquisition fee to our Manager of
approximately $214,000 relating to this transaction.
Digital
Audio/Visual Entertainment Systems
On
December 22, 2005, we and Fund Ten formed ICON AEROTV, LLC (“ICON AeroTV”) for
the purpose of owning equipment leased to AeroTV, Ltd. (“AeroTV”), a provider of
on board digital/audio visual systems for airlines, rail and coach operators in
the United Kingdom. We and Fund Ten each contributed approximately
$2,776,000 for a 50% interest in ICON AeroTV. During 2006, ICON
AeroTV purchased approximately $1,357,000 of equipment on lease to
AeroTV. The leases were scheduled to expire between December 31, 2007
and June 30, 2008.
In
February 2007, due to the termination of the services agreement with its main
customer, AeroTV notified our Manager of its inability to pay certain rent owed
to ICON AeroTV and subsequently filed for insolvency protection in the United
Kingdom. ICON AeroTV terminated the master lease agreement with
AeroTV at that time. Certain facts then came to light that gave our
Manager serious concerns regarding the propriety of AeroTV's actions during and
after the execution of the lease with AeroTV. On April 18, 2007, ICON
AeroTV filed a lawsuit in the United Kingdom’s High Court of Justice, Queen’s
Bench Division against AeroTV and one of its directors for fraud. On
April 17, 2008, the default judgment against the AeroTV director, which had
previously been set aside, was reinstated. ICON AeroTV is attempting to collect
on the default judgment against the AeroTV director in Australia, his country of
domicile. At this time, it is not possible to determine ICON AeroTV’s ability to
collect the judgment.
On
February 20, 2007, ICON AeroTV wrote off its leased assets with a remaining cost
basis of approximately $438,000, which was offset by the recognition of the
relinquished security deposit and deferred income of approximately $286,000,
resulting in a net loss of approximately $152,000, of which our share was
approximately $76,000. A final rental payment of approximately
$215,000 was collected in March 2007. In May 2007, the unexpended amount
previously contributed to ICON AeroTV, inclusive of accreted interest, of
approximately $5,560,000 was returned to us and Fund Ten, of which our share was
approximately $2,780,000.
Industrial
Gas Meters
On
November 9, 2005, we and Fund Ten formed ICON EAM, LLC (“ICON EAM”) for the
purpose of leasing gas meters and accompanying data gathering equipment to EAM
Assets, Ltd. (“EAM”), a meter asset manager whose business is maintaining
industrial gas meters in the United Kingdom. We and Fund Ten each
contributed approximately $5,620,000 for a 50% ownership interest in ICON
EAM. EAM was unable to meet its conditions precedent to our
obligations to perform under the master lease agreement. Our Manager
determined it was not in our best interest to enter into a work-out situation
with EAM at that time. All amounts funded to ICON EAM, in
anticipation of purchasing the aforementioned equipment, had been deposited into
an interest-bearing escrow account (the “Account”) controlled by ICON EAM's
legal counsel. In May 2007, the balance of the Account, inclusive of
accreted interest, of approximately $13,695,000 was returned to us and Fund Ten,
of which our share was approximately $6,848,000.
On March
9, 2006, pursuant to the master lease agreement, the shareholders of Energy
Asset Management plc, the parent company of EAM, approved the issuance of and
issued warrants to ICON EAM to acquire 7,403,051 shares of Energy Asset
Management plc’s stock. The warrants are exercisable for five years
after issuance and have a strike price of 1.50p. At December 31,
2009, our Manager determined that the fair value of these warrants was
$0.
Manufacturing
Equipment
On June
30, 2008, we and Fund Twelve formed ICON Pliant, which entered into an agreement
with Pliant to acquire manufacturing equipment for a purchase price of
$12,115,000, of which we paid approximately $6,663,000. On July 16, 2008, we and
Fund Twelve completed the acquisition of and simultaneously leased back the
manufacturing equipment to Pliant. We and Fund Twelve have ownership interests
in ICON Pliant of 55% and 45%, respectively. The lease expires on September 30,
2013. ICON Pliant paid an acquisition fee to our Manager of approximately
$363,000, of which our share was approximately $200,000.
On
February 11, 2009, Pliant commenced a voluntary Chapter 11 proceeding in U.S.
Bankruptcy Court to eliminate all of its high-yield debt. In connection with
this action, Pliant submitted a financial restructuring plan to eliminate its
debt as part of a pre-negotiated package with its high yield creditors. On
September 22, 2009, Pliant assumed its lease with ICON Pliant and on December 3,
2009, Pliant emerged from bankruptcy. To date, Pliant has made all of its lease
payments.
On
December 11, 2007, we and Fund Twelve formed ICON EAR, with ownership interests
of 45% and 55%, respectively. On December 28, 2007, ICON EAR purchased and
simultaneously leased back semiconductor manufacturing equipment to EAR for a
purchase price of $6,935,000, of which our share was approximately $3,121,000.
During June 2008, we and Fund Twelve made additional contributions to ICON EAR,
which were used to complete another purchase and simultaneous leaseback of
additional semiconductor manufacturing equipment to EAR for a total purchase
price of approximately $8,795,000, of which our share was approximately
$3,958,000. We and Fund Twelve retained ownership interests of 45% and 55%,
respectively, subsequent to this transaction. The lease term commenced on July
1, 2008 and expires on June 30, 2013. We paid acquisition fees to our Manager of
approximately $212,000 relating to these transactions.
On April
24, 2008, we, through our wholly-owned subsidiary ICON EAR II, completed the
purchase and simultaneous leaseback of semiconductor manufacturing equipment to
EAR for a purchase price of approximately $6,348,000. We paid an
acquisition fee of approximately $190,000 to our Manager in connection with this
transaction. The equipment is subject to a 60-month lease that
expires on June 30, 2013. As additional security for the above mentioned
transactions, ICON EAR and ICON EAR II received mortgages on certain parcels of
real property located in Jackson Hole, Wyoming.
In
October 2009, certain facts came to light that led our Manager to believe that
EAR was perpetrating a fraud against EAR’s lenders, including ICON EAR and ICON
EAR II. On October 23, 2009, EAR filed a petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. Although we believe that we are
adequately secured under the transaction documents, due to the bankruptcy filing
and ongoing investigation regarding the alleged fraud, at this time it is not
possible to determine our ability to collect the amounts due to us in accordance
with the leases or the additional security we received. As of December 31, 2009,
we have classified the remaining ICON EAR II assets as assets held for sale as a
result of the involuntary bankruptcy of EAR in the current year.
Our
Manager periodically reviews the significant assets in our portfolio to
determine whether events or changes in circumstances indicate that the net book
value of an asset may not be recoverable. In light of the developments
surrounding the semiconductor manufacturing equipment on lease to EAR, our
Manager determined that the net book value of such equipment may not be
recoverable.
At the
time of our Manager’s review, the following factors, among others, indicated
that the net book value of the equipment owned by ICON EAR and ICON EAR II may
not be recoverable: (i) EAR’s failure to pay rental payments for the period from
August 2009 through the date it filed for bankruptcy and (ii) EAR’s filing of a
petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in
October 2009.
Based on
our Manager’s review, the net book value of the semiconductor manufacturing
equipment owned by ICON EAR and ICON EAR II exceeded the undiscounted cash flows
and exceeded the fair value. As a result, ICON EAR and ICON EAR II recognized
non-cash impairment charges of approximately $3,429,000 and $1,235,000,
respectively, relating to the write down in value of the semiconductor
manufacturing equipment. No amount of these impairment charges represents a cash
expenditure. Our share of the impairment loss recorded by ICON EAR was
approximately $1,543,000 and was included in the (loss) income from investments
in joint ventures in our consolidated statement of operations for the year ended
December 31, 2009.
In
addition, ICON EAR and ICON EAR II had net accounts receivable balances
outstanding of approximately $573,000 and $51,000, respectively, which were
charged to bad debt expense during the year ended December 31, 2009 in
accordance with their respective accounting policies and the above mentioned
factors. Our share of the bad debt expense from ICON EAR was approximately
$258,000 and was included in the (loss) income from investments in joint
ventures in our consolidated statement of operations for the year ended December
31, 2009. Bad debt expense of approximately $51,000 from ICON EAR II is included
in general and administrative expenses in our consolidated statements of
operations for the year ended December 31, 2009.
On
September 28, 2007, we completed the acquisition of and simultaneously leased
back substantially all of the machining and metal working equipment of W Forge
Holdings, Inc. (“W Forge”), Scott, and MW Gilco, LLC (“Gilco”), wholly-owned
subsidiaries of MWU, for purchase prices of $21,000,000, $600,000 and $600,000,
respectively. We paid acquisition fees to our Manager for the W
Forge, Scott, and Gilco transactions of approximately $630,000, $18,000 and
$18,000, respectively. Each of the leases commenced on January 1,
2008 and continues for a period of 60 months. On December 10, 2007, we completed
the acquisition of and simultaneously leased back substantially all of the
machining and metal working equipment of General and AMI, wholly-owned
subsidiaries of MWU, for purchase prices of $400,000 and $1,700,000,
respectively. We paid acquisition fees to our Manager for the General
and AMI transactions of approximately $12,000 and $51,000,
respectively. Each of the leases’ base terms commenced on January 1,
2008 and continues for a period of 60 months.
Simultaneously
with the closing of the transactions with W Forge, Scott, Gilco, General and
AMI, Fund Ten and Fund Twelve (together with us, the “Participating Funds”)
completed similar acquisitions with four other subsidiaries of MWU pursuant to
which the funds purchased substantially all of the machining and metal working
equipment of each subsidiary. The MWU subsidiaries’ obligations under
their leases (including the leases of W Forge, Scott, Gilco, General and AMI)
are cross-collateralized and cross-defaulted, and all of the subsidiaries’
obligations are guaranteed by MWU. The Participating Funds have also
entered into a credit support agreement, pursuant to which losses incurred by a
Participating Fund with respect to any MWU subsidiary are shared among the
Participating Funds in proportion to their respective capital
investments.
On June
9, 2008, the Participating Funds entered into a forbearance agreement with MWU,
W Forge, Scott, Gilco, General, AMI and four other subsidiaries of MWU
(collectively, the “MWU entities”) to cure certain defaults under their
lease covenants with us. The terms of the forbearance agreement
included, among other things, the pledge of additional collateral
and the grant of a warrant to us for the purchase of 300 shares of capital
stock of W Forge for a purchase price of $0.01 per share, exercisable for a
period of five years beginning June 9, 2008. On September 5, 2008, the
Participating Funds and IEMC Corp., a subsidiary of our Manager (“IEMC”),
entered into an amended forbearance agreement with the MWU entities to cure
certain non-payment related defaults by the MWU entities under their lease
covenants. The terms of the agreement included, among other things, the pledge
of additional collateral and the grant of a warrant for the purchase of 12% of
the fully diluted common stock of MWU at an aggregate exercise price of $1,000,
exercisable until March 31, 2015. As of December 31, 2009, our proportionate
share of the MWU warrant was 57.3%. At December 31, 2009, our Manager determined
that the fair value of the MWU warrant was $0.
On
January 26, 2009, we sold the manufacturing equipment that was on lease to Gilco
for approximately $591,000 and recognized a gain on the sale of approximately
$85,000 during the year ended December 31, 2009.
On
February 27, 2009, we, Fund Ten, Fund Twelve and IEMC entered into a further
amended forbearance agreement with the MWU entities to cure certain lease
defaults. In consideration for restructuring W Forge’s lease payment schedule,
we received, among other things, a $200,000 arrangement fee payable at the
conclusion of the lease term and a warrant to purchase 20% of the fully diluted
common stock of W Forge, at an exercise price of $0.01 per share exercisable for
a period of five years from the grant date. In April 2009, we further
restructured the payment obligations of W Forge to give it additional
flexibility while at the same time attempting to preserve our projected economic
return on our investment. In consideration for this restructuring, we received a
warrant from W Forge to purchase an additional 20% of its fully diluted common
stock, at an aggregate exercise price of $1,000, exercisable until March 31,
2015.
On
December 31, 2009, we and W Forge agreed to terminate our lease and
simultaneously with the termination, we sold the equipment to W Forge for
approximately $9,437,000 and removed the equipment from the W Forge Holdings
lease. In conjunction with the sale of the equipment, Cerion MPI,
delivered a promissory note to us in the principal amount of approximately
$10,015,000. The promissory note bears interest at the rate of 14%
per year and is payable monthly in arrears for the period beginning January 1,
2010 and ending December 31, 2013. The promissory note is guaranteed
by Cerion MPI’s parent company, Cerion, LLC. We recorded a gain of
approximately $844,000 for the year ended December 31, 2009 in connection with
the sale of the manufacturing equipment. In connection with the
termination of the lease arrangement with W Forge, we also cancelled the
warrants received from W Forge. We did not record a gain or loss in connection
with the cancellation of the warrants.
On March
30, 2007, we, through our wholly-owned subsidiary, ICON Heuliez, entered into a
purchase and sale agreement (the “Heuliez Agreement”) with HSA and Heuliez to
purchase certain auto parts manufacturing equipment from Heuliez. In
connection with the Heuliez Agreement, ICON Heuliez agreed to lease back the
equipment to HSA and Heuliez, respectively, for an initial term of 60
months. The purchase price for the equipment was approximately
$11,994,000 (€9,000,000) at March 30, 2007. We incurred professional
fees of approximately $42,000 and paid an acquisition fee to our Manager of
approximately $360,000 relating to this transaction. These fees were
capitalized as part of the acquisition cost of the equipment. The leases
expire on March 30, 2012.
On
October 26, 2007, HSA and Groupe Henri Heuliez (“GHH”), the guarantor of the
leases with ICON Heuliez, filed for “procedure de sauvegarde,” a procedure only
available to a solvent company seeking to reorganize its business affairs under
French law. HSA and Heuliez paid all amounts due under the leases through
January 1, 2008. As of February 1, 2008, ICON Heuliez entered into an
agreement with the administrator of the “procedure de sauvegarde” to accept
reduced payments from HSA and Heuliez for the period beginning February 1, 2008
and ending July 31, 2008. On August 13, 2008, the administrator of the
“procedure de sauvegarde” confirmed a continuation plan for HSA, Heuliez and
GHH. The terms of such plan included HSA and Heuliez making reduced payments to
ICON Heuliez until January 31, 2009. Beginning February 1, 2009, full
payments under the leases would resume. In addition, each lease with
ICON Heuliez would be extended for an additional year. During the one
year extension, HSA and Heuliez made monthly payments to repay the shortfall
resulting from the reduced payments ICON Heuliez received between February 1,
2008 and January 31, 2009.
Due to
the global downturn in the automotive industry, on April 15, 2009, GHH and HSA
filed for “Redressement Judiciaire,” a proceeding under French law similar to a
Chapter 11 reorganization under the U.S. Bankruptcy Code. Heuliez subsequently
filed for Redressement Judiciaire on June 10, 2009. Since the time of the
Redressement Judiciaire filings, two French government agencies agreed to
provide Heuliez with financial support and a third party, Bernard Krief
Consultants (“BKC”), has agreed to purchase Heuliez. On July 8, 2009, the French
Commercial Court approved the sale of Heuliez to BKC, which approval included
the transfer of our leases. Subsequently, Heuliez requested a
restructuring of its lease payments, which has been negotiated, but not
finalized. Due to the uncertainty regarding our ability to collect all amounts
which are due in accordance with the leases, we will prospectively recognize
revenue on a cash basis. In addition, our Manager has assessed that
the collectability of the outstanding accounts receivable balance at December
31, 2009 of approximately $513,000 was doubtful and established a reserve
against the receivable.
Notes
Receivable Secured by Credit Card Machines
On
November 25, 2008, ICON Northern Leasing, a joint venture among us, Fund Ten and
Fund Twelve, purchased the Northern Notes and received an assignment of the
underlying master loan and security agreement (the "MLSA"), dated July 28, 2006.
We, Fund Ten and Fund Twelve have ownership interests of 35%, 12.25% and 52.75%,
respectively, in ICON Northern Leasing. The aggregate purchase price for the
Northern Notes was approximately $31,573,000, net of a discount of approximately
$5,165,000. The Northern Notes are secured by an underlying pool of leases for
credit card machines. Northern Leasing Systems, Inc., the originator and
servicer of the Northern Notes, provided a limited guarantee of the MLSA for
payment deficiencies up to approximately $6,355,000. The Northern Notes accrue
interest at rates ranging from 7.97% to 8.40% per year and require monthly
payments ranging from approximately $183,000 to $422,000. The Northern Notes
mature between October 15, 2010 and August 14, 2011 and require balloon payments
at the end of each note ranging from approximately $594,000 to $1,255,000. Our
share of the purchase price of the Northern Notes was approximately $11,051,000
and we paid an acquisition fee to our Manager of approximately $332,000 relating
to this transaction.
Note
Receivable on Financing Facility
On August
13, 2007, we, along with a consortium of other lenders, entered into an
equipment financing facility with Solyndra, Inc. (“Solyndra”), a privately-held
manufacturer of solar panels, for the building of a new production
facility. The financing facility was set to mature on June 30, 2013
and was secured by the equipment as well as all other assets of
Solyndra. The equipment was comprised of two fully-automated
manufacturing lines that combine glass tubes and thin film semiconductors to
produce solar panels. In connection with the transaction, we received
a warrant for the purchase of up to 40,290 shares of Solyndra common stock at an
exercise price of $4.96 per share. The warrant is set to expire on
April 6, 2014. The financing facility was for a maximum amount of
$93,500,000, of which we committed to invest up to $5,000,000. As of June 30,
2008, we had loaned approximately $4,367,000. On July 27, 2008,
Solyndra fully repaid the outstanding note receivable and the entire financing
facility was terminated. We received approximately $4,437,000 from
the repayment, which consisted of principal and accrued interest. The
repayment does not affect the warrant held by us and we retain our rights
thereunder. At December 31, 2009, our Manager determined that the
fair value of this warrant was $79,371.
Recently
Adopted Accounting Pronouncements
In 2009,
we adopted and, for presentation and disclosure purposes, retrospectively
applied the accounting pronouncement which relates to noncontrolling interests
in consolidated financial statements. As a result, noncontrolling interests are
reported as a separate component of consolidated equity and income (loss)
attributable to the noncontrolling interest is included in consolidated net
income (loss). The attribution of income (loss) between controlling and
noncontrolling interests is disclosed on the accompanying consolidated
statements of operations. 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 the 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;
|
|
·
|
Notes
receivable;
|
|
·
|
Initial
direct costs;
|
|
·
|
Acquisition
fees;
|
|
·
|
Foreign
currency translation;
|
|
·
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Warrants;
and
|
|
·
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Derivative
financial instruments.
|
Lease
Classification and Revenue Recognition
Each
equipment lease we enter into is classified as a finance lease, an operating
lease or a time charter, which is determined based upon the terms of each
lease. For a finance lease, initial direct costs are capitalized and
amortized over the lease term. For an operating lease and a time charter,
initial direct costs are included as a component of the cost of the equipment
and depreciated over the lease term.
For time
charters, the vessels are stated at cost. Expenditures subsequent to acquisition
for conversions and major improvements are capitalized when such expenditures
appreciably extend the life, increase the earning capacity or improve the
efficiency or safety of the vessels. Repairs and maintenance are charged to
expense as incurred, are included in vessel operating expenses in our
consolidated statements of operations and are included in accrued expenses
and other liabilities in our consolidated balance sheets.
For
finance leases, we record, 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.
For time
charters, we recognize revenue ratably over the period of such charters. Vessel
operating expenses are recognized as incurred.
Our
Manager has an investment committee that approves each new equipment lease and
other financing transaction. As part of its process, the investment
committee determines the residual value, if any, to be used once the investment
has been approved. The factors considered in determining the residual
value include, but are not limited to, the creditworthiness of the potential
lessee, the type of equipment considered, how the equipment is integrated into
the potential lessee’s business, the length of the lease and the industry in
which the potential lessee operates. Residual values are reviewed for
impairment in accordance with our impairment review policy.
The
residual value assumes, among other things, that the asset would be 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.
For notes
receivable, we use the effective interest rate method to recognize interest
income, which produces a constant periodic rate of return on the investment,
when earned.
The
recognition of revenue may be suspended when deemed appropriate by our Manager
based on uncollectability, creditworthiness and other considerations, after
which revenue will be recognized on a cash basis.
Asset
Impairments
The
significant assets in our portfolio are periodically reviewed, no less
frequently than annually or when indicators of impairment exist, 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, in our consolidated statements of operations, on equipment
when the lease is classified as an operating lease. In order to calculate
depreciation, we first determine 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.
Notes
Receivable
Notes
receivable are reported in our consolidated balance sheets at the outstanding
principal balance net of any unamortized deferred fees, premiums or discounts on
purchased loans. Costs on originated loans are reported as other current and
other non-current assets in our consolidated balance sheets. Unearned income,
discounts and premiums are amortized to income as a component of interest income
using the effective interest rate method in our consolidated statements of
operations. Any interest receivable related to the unpaid principal is recorded
separately from the outstanding balance in our consolidated balance
sheets.
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 direct finance leases and notes receivable in our consolidated statements of
operations. Costs related to leases or other financing transactions that are not
consummated are expensed as an acquisition expense in our consolidated
statements of operations.
Acquisition
Fees
Pursuant
to our LLC Agreement, we pay acquisition fees to our Manager equal to 3% of the
purchase price for our investments. These fees are capitalized and included in
the cost of the investment in our consolidated balance sheets.
Foreign
Currency Translation
Assets
and liabilities having non-U.S. dollar functional currencies are translated at
month-end exchange rates. Contributed capital accounts are translated at the
historical rate of exchange when the capital was contributed or distributed.
Revenues, expenses and cash flow items are translated at the weighted average
exchange rate for the period. Resulting translation adjustments are recorded as
a separate component of accumulated other comprehensive income or loss (“AOCI”)
in our consolidated balance sheets.
Warrants
Warrants
held by us are not registered for public sale and are revalued on a quarterly
basis. The revaluation of warrants is calculated using the
Black-Scholes option pricing model. The assumptions utilized in the
Black-Scholes model include share price, strike price, expiration date,
risk-free rate and the volatility percentage. The change in the fair
value of warrants is recognized in our consolidated statements of
operations.
Derivative
Financial Instruments
We may
enter into derivative transactions for purposes of hedging specific financial
exposures, including movements in foreign currency exchange rates and changes in
interest rates on 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 that established 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 AOCI, a component of equity on the
consolidated balance sheets. Changes in the fair value of the ineffective
portion of all derivatives are recognized immediately in earnings.
Other
Recent Events
Since the
onset of the recession in December 2007, the rate of payment defaults by
lessees, borrowers and other financial counterparties has generally risen
significantly. Our Manager continuously reviews and evaluates our
transactions to take such action as it deems necessary to mitigate any adverse
developments on our liquidity, cash flows or profitability, which may include
agreeing to restructure a transaction with one or more of our lessees, borrowers
or other financial counterparties. In the event of a restructuring of
a transaction, our Manager generally expects that the lessee, borrower and/or
other financial counterparty will ultimately be able to satisfy its obligations
to us. As a result thereof, our Manager has discussed and continues
to discuss restructuring options with some of our lessees, borrowers and other
financial counterparties. In many instances, the transaction is not
restructured and continues as initially structured. Nevertheless,
none of the other equipment leasing and financing funds managed by our Manager
has experienced any material defaults in payment that would materially impact
such fund’s liquidity, cash flows or profitability. There can be no
assurance that any future restructurings will not have an adverse effect on our
financial position, results of operations or cash flows. Except as otherwise
disclosed in this Annual Report on Form 10-K, our Manager has not agreed to
restructure any of our transactions and we have not taken any impairment charges
and there is no information that would cause our Manager to take an impairment
charge on any of our transactions at this time.
Results
of Operations for the Years Ended December 31, 2009 (“2009”) and 2008
(“2008”)
We are
currently in our operating period, which is anticipated to last until April
2012, unless that date is extended, at our Manager’s sole discretion, for up to
an additional three years. During our operating period, we will
continue to make investments with the cash generated from our initial
investments and our additional investments to the extent that the cash is not
needed for expenses, reserves and distributions to members. As our investments
mature, we may reinvest the proceeds in additional investments in equipment or
other financing transactions. We anticipate incurring gains or losses on our
investments during our operating period. Additionally, we expect to
see our rental income and finance income increase, as well as related expenses,
such as depreciation and amortization expense and interest expense. We
anticipate that the fees we pay our Manager to manage our investment portfolio
will increase during this period as the size and volume of activity in our
investment portfolio will increase. Our results of operations for 2009 differed
from our expectations due to (i) the impact of the Bareboat Charter Termination,
(ii) the sales of leased equipment, and (iii) impairments that were made during
the year. The impact of the transactions discussed above and other
significant factors that drove the changes in our results of operations for 2009
as compared to 2008 are discussed below.
Revenue
for 2009 and 2008 is summarized as follows:
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
Change
|
||||||||||
|
Rental
income
|
$ | 64,099,850 | $ | 90,009,529 | $ | (25,909,679 | ) | |||||
|
Time
charter revenue
|
5,559,524 | - | 5,559,524 | |||||||||
|
Finance
income
|
2,548,139 | 4,651,273 | (2,103,134 | ) | ||||||||
|
Income
from investments in joint ventures
|
345,938 | 2,071,019 | (1,725,081 | ) | ||||||||
|
Net
gain on lease termination
|
25,141,909 | - | 25,141,909 | |||||||||
|
Net
gain on sales of new equipment
|
- | 278,082 | (278,082 | ) | ||||||||
|
Net
gain (loss) on sales of leased equipment
|
2,050,594 | (720,385 | ) | 2,770,979 | ||||||||
|
Net
loss on sale of portfolio
|
- | (11,921,785 | ) | 11,921,785 | ||||||||
|
Interest
and other income
|
3,448,283 | 2,399,168 | 1,049,115 | |||||||||
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Total
revenue
|
$ | 103,194,237 | $ | 86,766,901 | $ | 16,427,336 | ||||||
Total
revenue for 2009 increased $16,427,336, or 18.9%, as compared to 2008. The
increase in total revenue was primarily the result of (i) the net gain on lease
termination of $25,141,909 recorded in connection with the Bareboat Charter
Termination during 2009, (ii) the impact of the net loss on the sale of
portfolio of $11,921,785 recorded in connection with the sale of the Remaining
Net Assets during 2008, (iii) the time charter revenue of $5,559,524 recorded as
a result of the assumption of the underlying time charters in connection with
the Bareboat Charter Termination during 2009, and (iv) the net gain recorded on
the sales of leased equipment of $2,050,594 during 2009. The increase in total
revenue was partially offset by a decrease in rental income, finance income and
income from investments in joint ventures. The decrease in rental income was the
result of (i) the sale of the Remaining Net Assets, (ii) management’s decision
to put the leases with ICON Heuliez on a cash basis, (iii) the amendment of the
lease with W Forge, (iv) the Bareboat Charter Termination, and (v) the
liquidation of our investment in ICON Global Crossing, whose results of
operations were deconsolidated as of September 30, 2009. These factors accounted
for a cumulative decrease of approximately $27,480,000 during 2009. These
decreases were partially offset by an increase in rental income of approximately
$2,033,000 related to (i) the telecommunications equipment acquired by ICON
Global Crossing III in June 2008 and (ii) the manufacturing equipment acquired
by ICON Pliant in June 2008. The decrease in finance income was primarily the
result of the sale of the Remaining Net Assets, which accounted for
approximately $1,839,000 of the decrease in finance income during 2009. The
decrease in income from investments in joint ventures was due to (i) our
investment in ICON EAR, which recorded an impairment loss, bad debt expense and
anticipated selling costs for the asset held for sale in connection with EAR’s
bankruptcy filing that accounted for a decrease of approximately $1,930,000 for
2009 and (ii) a gain on foreign currency translation of approximately $1,147,000
recorded during 2008. These decreases in income from investments in joint
ventures were partially offset by an increase in income from investments in
joint ventures from ICON Northern Leasing in the amount of approximately
$1,696,000 during 2009 as compared to 2008.
Expenses
for 2009 and 2008 are summarized as follows:
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
Change
|
||||||||||
|
Management
fees - Manager
|
$ | 2,185,858 | $ | 5,110,375 | $ | (2,924,517 | ) | |||||
|
Administrative
expense reimbursements - Manager
|
1,951,850 | 3,586,973 | (1,635,123 | ) | ||||||||
|
General
and administrative
|
3,683,435 | 3,711,909 | (28,474 | ) | ||||||||
|
Vessel
operating expense
|
13,926,255 | - | 13,926,255 | |||||||||
|
Depreciation
and amortization
|
73,052,380 | 65,065,983 | 7,986,397 | |||||||||
|
Interest
|
9,937,136 | 13,674,261 | (3,737,125 | ) | ||||||||
|
Impairment
loss
|
42,208,124 | - | 42,208,124 | |||||||||
|
(Gain)
loss on financial instruments
|
(346,739 | ) | 830,336 | (1,177,075 | ) | |||||||
|
Total
expenses
|
$ | 146,598,299 | $ | 91,979,837 | $ | 54,618,462 | ||||||
Total
expenses for 2009 increased $54,618,462, or 59.4%, as compared to 2008. The
increase in total expenses was primarily due to an increase in (i) impairment
loss, (ii) vessel operating expense, and (iii) depreciation and amortization.
The impairment loss of $42,208,124 was due to the impairment on our equipment on
lease to ZIM and EAR and the M/T Faithful. The increase in vessel operating
expense of $13,926,255 during 2009 was a result of our management of the Top
Ships Vessels, which commenced in June 2009. The increase in depreciation
and amortization expense was primarily due to approximately $20,552,000 of
additional depreciation and amortization expense recorded during 2009, which
included depreciation and amortization expense for (i) the Top Ships Vessels as
a result of the Bareboat Charter Termination and (ii) the full year impact of
the 2008 acquisitions of equipment by ICON Global Crossing III and ICON Pliant.
This increase in depreciation and amortization expense was partially offset by a
decrease in depreciation and amortization expense related to (i) the sale of the
Remaining Net Assets and (ii) the liquidation of our investment in ICON Global
Crossing. These factors resulted in a decrease of approximately $12,435,000
during 2009. The increase in total expenses was offset by a decrease in interest
expense, management fees – Manager, administrative expense reimbursements –
Manager and general and administrative expenses recorded during 2009. In
addition, the increase in total expenses was partially offset by a gain on
financial instruments recorded during 2009 as compared to a loss recorded during
2008. The decrease in interest expense was due to (i) the continued
repayment of our outstanding non-recourse debt balance during 2009, (ii) a
payment of $8,500,000 of our outstanding non-recourse debt in connection with
the termination payments received in connection with the Bareboat Charter
Termination, and (iii) the transfer of all of the non-recourse debt outstanding
in connection with the sale of the Remaining Net Assets. The decrease in
management fees – Manager was due to our Manager’s suspension of its collection
of a portion of management fees through December 31, 2009. The decrease in
administrative expense reimbursements – Manager and general and administrative
expenses were primarily attributable to the sale of the Remaining Net Assets in
the prior year.
Benefit
for Income Taxes
Certain
of our direct and indirect wholly-owned subsidiaries are unlimited liability
companies and are taxed as corporations under the laws of Canada. Other indirect
wholly-owned subsidiaries are taxed as corporations in Barbados. For 2009, the
(provision) benefit for income taxes was comprised of $(495,291) in current
taxes and $648,771 in deferred taxes.
Noncontrolling
Interests
Net
income attributable to noncontrolling interests for 2009 decreased $202,103 as
compared to 2008.
Net
Loss Attributable to Fund Eleven
As a
result of the foregoing changes from 2008 to 2009, net loss attributable to us
for 2009 and 2008 was $45,095,916 and $5,797,721, respectively. Net loss
attributable to us per weighted average additional Share for 2009 and 2008 was
$122.94 and $15.79, 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
|
$ | 90,009,529 | $ | 103,487,305 | $ | (13,477,776 | ) | |||||
|
Finance
income
|
4,651,273 | 7,415,414 | (2,764,141 | ) | ||||||||
|
Income
from investments in joint ventures
|
2,071,019 | 80,502 | 1,990,517 | |||||||||
|
Net
gain on sales of new equipment
|
278,082 | 772,799 | (494,717 | ) | ||||||||
|
Net
loss on sales of leased equipment
|
(720,385 | ) | (112,167 | ) | (608,218 | ) | ||||||
|
Net
loss on sale of portfolio
|
(11,921,785 | ) | - | (11,921,785 | ) | |||||||
|
Interest
and other income
|
2,399,168 | 5,973,253 | (3,574,085 | ) | ||||||||
|
Total
revenue
|
$ | 86,766,901 | $ | 117,617,106 | $ | (30,850,205 | ) | |||||
Total
revenue for 2008 decreased $30,850,205, or 26.2%, as compared to
2007. The decrease in total revenue was primarily attributable to the
sale of the Remaining Net Assets on May 19, 2008, which resulted in a net loss
of approximately $11,922,000 in 2008. The decrease in rental income was
primarily attributable to the sale of the Remaining Net Assets, which accounted
for approximately $25,797,000 of the decrease in rental income. The decrease was
partially offset by an increase in rental income of approximately $12,318,000
related to (i) the manufacturing equipment owned by ICON Heuliez, which was
acquired in March 2007, (ii) the Teekay Vessels, which were acquired in April
2007, (iii) the manufacturing equipment on lease with the subsidiaries of MWU,
which was acquired during September and December 2007, (iv) the manufacturing
equipment owned by ICON EAR II, which was acquired in April 2008, (v) the
telecommunications equipment owned by ICON Global Crossing III, which was
acquired in June 2008 and (vi) the manufacturing equipment owned by ICON Pliant,
which was acquired in July 2008. The decrease in interest and other income was
primarily attributable to (i) lower cash balances in interest-bearing accounts
during 2008 and (ii) the sale of the Remaining Net Assets. The decrease in
finance income was primarily attributable to the sale of the Remaining Net
Assets, which accounted for approximately $4,276,000 of the decrease in finance
income. The decrease was partially offset by an increase in finance income of
approximately $1,450,000 related to the telecommunications equipment owned by
ICON Global Crossing V, which was acquired in December 2007. The decrease in
total revenue was partially offset by increase in income from investments in
joint ventures, primarily due to the recognition of a gain on foreign currency
translation of approximately $1,147,000 in 2008; no such gain was
recognized in 2007. In addition, this increase related to approximately $680,000
of income generated from our investments in ICON Northern Leasing and ICON
EAR.
Expenses
for 2008 and 2007 are summarized as follows:
|
Years Ended December 31,
|
||||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
Management
fees - Manager
|
$ | 5,110,375 | $ | 6,662,395 | $ | (1,552,020 | ) | |||||
|
Administrative
expense reimbursements - Manager
|
3,586,973 | 5,423,388 | (1,836,415 | ) | ||||||||
|
General
and administrative
|
3,711,909 | 2,172,591 | 1,539,318 | |||||||||
|
Interest
|
13,674,261 | 17,467,704 | (3,793,443 | ) | ||||||||
|
Depreciation
and amortization
|
65,065,983 | 82,127,392 | (17,061,409 | ) | ||||||||
|
Impairment
loss
|
- | 122,774 | (122,774 | ) | ||||||||
|
Loss
on financial instruments
|
830,336 | 2,846,069 | (2,015,733 | ) | ||||||||
|
Total
expenses
|
$ | 91,979,837 | $ | 116,822,313 | $ | (24,842,476 | ) | |||||
Total
expenses for 2008 decreased $24,842,476, or 21.3%, as compared to 2007. The
decrease was primarily due to the sale of the Remaining Net Assets, which
resulted in an overall reduction in expenses and a decrease in the loss on
financial instruments recognized in 2008. The decrease in depreciation and
amortization expense was largely attributable to the sale of the Remaining Net
Assets, which resulted in a decrease of approximately $24,169,000 in
depreciation and amortization expense. This decrease was partially offset by an
increase in depreciation and amortization expense of approximately $6,940,000
related to (i) the Teekay Vessels, which were acquired in April 2007, (ii) the
manufacturing equipment owned by ICON Heuliez, which was acquired in March 2007,
(iii) the telecommunications equipment owned by ICON Global Crossing V, which
was acquired in December 2007, (iv) the manufacturing equipment on lease with
the subsidiaries of MWU, which was acquired during September and December 2007,
(v) the manufacturing equipment owned by ICON EAR II, which was acquired in
April 2008, (vi) the telecommunications equipment owned by ICON Global Crossing
III, which was acquired in June 2008, and (vii) the manufacturing equipment
owned by ICON Pliant, which was acquired in July 2008. The decrease in interest
expense was due to the continued repayment of our non-recourse debt on the ZIM
Vessels and the Top Ships Vessels, which were acquired in June 2006, and the
transfer of all of the non-recourse debt outstanding related to and in
connection with the sale of the Remaining Net Assets, partly offset by an
increase due to a full year’s impact from the acquisition of the Teekay Vessels
in April 2007. The decrease in total expenses was partly offset by an increase
in general and administrative expense, primarily related to professional
fees.
Benefit
for Income Taxes
Certain
of our direct and indirect wholly-owned subsidiaries are unlimited liability
companies and are taxed as corporations under the laws of Canada. Some of our
other indirect wholly-owned subsidiaries are taxed as corporations in Barbados.
For 2008, the benefit (provision) for income taxes was comprised of $2,057,668
in current taxes and $(595,016) in deferred taxes.
Noncontrolling
Interests
Net
income attributable to noncontrolling interests for 2008 increased $977,878 as
compared to 2007. The increase in the net income attributable to noncontrolling
interests was primarily due to our investments in (i) ICON Global Crossing V
during December 2007 and (ii) ICON Pliant during July 2008.
Net
Loss Attributable to Fund Eleven
As a
result of the foregoing changes from 2007 to 2008, net loss attributable to us
for 2008 and 2007 was $5,797,721 and $2,478,993, respectively. Net loss
attributable to us per weighted average additional Share for 2008 and 2007 was
$15.79 and $6.97, respectively.
Financial
Condition
This
section discusses the major balance sheet variances from 2009 compared to
2008.
Total
Assets
Total
assets decreased $135,498,749, from $408,178,159 at December 31, 2008 to
$272,679,410 at December 31, 2009. The decrease was primarily due to
approximately $72,634,000 of continued depreciation of our leased
equipment, $29,572,000 of repayment of our non-recourse debt, approximately
$39,041,000 of cash distributions to our members and noncontrolling interests,
approximately $42,208,000 of impairment losses on our equipment on lease to ZIM
and EAR and the M/T Faithful, approximately $10,200,000 in vessel operating
expenses paid in connection with the operations of the Top Ships Vessels,
approximately $2,740,000 in net repayments of our revolving line of credit, and
the presentation of assets held for sale of approximately $3,814,000 relating to
the involuntary bankruptcy of EAR in 2009. These decreases were
partially offset by approximately $62,700,000 of cash collected from rental
payments with respect to our operating leases and the termination payments
received in connection with the Bareboat Charter Termination.
Current
Assets
Current
assets increased $19,829,395, from $17,188,686 at December 31, 2008 to
$37,018,081 at December 31, 2009. The increase was primarily due to
(i) the collection of approximately $49,800,000 of rental payments with respect
to our operating leases, (ii) approximately $23,911,000 of
proceeds received from the sale of equipment on lease to W Forge,
Gilco, Global Crossing and Global
Crossing Group, (iii) termination payments of approximately $12,900,000 received
in connection with the Bareboat Charter Termination, (iv) approximately
$9,100,000 in finance lease payments received with respect to our finance
leases, (v) approximately $7,400,000 in cash distributions received from joint
ventures, and (vi) the presentation of assets held for sale of approximately
$3,814,000 relating to the involuntary bankruptcy of EAR in 2009. These
increases were partially offset by (i) $29,570,000 of repayment of our
non-recourse debt, (ii) approximately $39,041,000 of cash distributions to our
members and noncontrolling interests, (iii) approximately $10,200,000 in vessel
operating expenses paid in connection with the operations of the Top Ships
Vessels, (iv) approximately $5,196,000 in interest payments on long-term debt,
(v) and approximately $2,740,000 in net repayments of our revolving line of
credit.
Total
Liabilities
Total
liabilities decreased $54,434,829, from $183,531,732 at December 31, 2008 to
$129,096,903 at December 31, 2009. The decrease was primarily due to (i)
approximately $30,600,000 of scheduled repayments of our non-recourse debt, (ii)
approximately $8,500,000 in payments made on our outstanding non-recourse debt
in connection with the termination payments received in connection with the
Bareboat Charter Termination, (iii) approximately $2,740,000 in net repayments
of our revolving line of credit, (iv) a decrease of approximately $4,209,000 in
the fair value of our derivative instruments, and (v) a decrease of
approximately $3,788,000 in deferred revenue that was primarily due to the
Bareboat Charter Termination and the European Containers Charter
Amendments. In addition, Top Ships waived its rights to the second
priority non-recourse debt outstanding in connection with the Bareboat Charter
Termination, which accounted for a decrease of approximately $9,548,000 in our
total non-recourse debt balance. These decreases in total liabilities were
partially offset by an increase of approximately $4,801,000 in accrued expenses
and other current liabilities. The increase in accrued expenses and other
liabilities was primarily attributable to accrued vessel operating expenses for
the operations of the Top Ships Vessels.
Current
Liabilities
Current
liabilities decreased $5,316,042, from $63,077,445 at December 31, 2008 to
$57,761,403 at December 31, 2009. The decrease was primarily due to a decrease
(i) of approximately $4,209,000 in the fair value of our derivative instruments,
(ii) of approximately $2,740,000 in net repayments of our revolving line of
credit, and (iii) in deferred revenue of approximately $3,788,000 that was
primarily due to the Bareboat Charter Termination and the European Containers
Charter Amendments. These decreases were partially offset by an
increase related to the outstanding non-recourse debt balance for the Top Ships
Purchasers as a result of the default of the New Fortis Loan and approximately
$4,128,000 in accrued expenses and other current liabilities that relates to
accrued vessel operating expenses for the operations of the Top Ships
Vessels.
Equity
Equity
decreased $81,063,920, from $224,646,427 at December 31, 2008 to $143,582,507 at
December 31, 2009. The decrease was primarily due to (i) the net loss recorded
during 2009, (ii) the deconsolidation of our noncontrolling interest in ICON
Global Crossing, and (iii) distributions to our members and noncontrolling
interests. These decreases were partially offset by the unrealized gain recorded
on our derivative instruments and currency translation adjustments.
Liquidity
and Capital Resources
Summary
At
December 31, 2009 and 2008, we had cash and cash equivalents of $18,615,323 and
$7,670,929, respectively. During our operating period, our main source of cash
has been from rental and finance lease payments and our main use of cash has
been in (i) investments in leasing and other financing transactions, (ii)
distributions to our members and noncontrolling interests and (iii) repayment of
our non-recourse long-term debt. Our liquidity will vary in the future,
increasing to the extent cash flows from investments and proceeds from the sale
of our investments exceed expenses and decreasing as we enter into new
investments, pay distributions to our members and to the extent that expenses
exceed cash flows from operations and the proceeds from the sale of our
investments.
We
currently have adequate cash balances and generate a sufficient amount of cash
flow from operations to meet our short-term working capital requirements. We
expect to generate sufficient cash flows from operations to sustain our working
capital requirements in the foreseeable future. In the event that our working
capital is not adequate to fund our short-term liquidity needs, we could borrow
against our revolving line of credit, with $27,640,000 available at December 31,
2009, to meet such requirements. Our revolving line of credit is discussed in
further detail in “Financings and Borrowings” below.
We
anticipate that our liquidity requirements for the remaining life of the fund
will be financed by the expected results of operations, as well as cash received
from our investments at maturity.
We
anticipate being able to meet our liquidity requirements 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’ and borrowers’ businesses that are beyond our
control. See “Item 1A. Risk Factors.”
Cash
Flows
The
following table sets forth summary cash flow data:
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Net
cash provided by (used in):
|
||||||||||||
|
Operating
activities
|
$ | 53,024,219 | $ | 70,054,623 | $ | 101,718,667 | ||||||
|
Investing
activities
|
29,461,051 | (39,218,252 | ) | (111,004,385 | ) | |||||||
|
Financing
activities
|
(71,472,911 | ) | (65,745,239 | ) | (11,521,969 | ) | ||||||
|
Effects
of exchange rates on cash and cash equivalents
|
(67,965 | ) | 240,248 | 1,946,561 | ||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
$ | 10,944,394 | $ | (34,668,620 | ) | $ | (18,861,126 | ) | ||||
Note:
See the Consolidated Statements of Cash Flows included in “Item 8. Consolidated
Financial Statements and Supplementary Data” of this Annual Report on Form 10-K
for additional information.
Operating
Activities
Cash
provided by operating activities decreased $17,030,404, from $70,054,623 in 2008
to $53,024,219 in 2009. The decrease was primarily due to (i) the sale of the
Remaining Net Assets (primarily a reduction in the collection of rental and
finance lease payments) during 2008, and (ii) a decrease in the rental payments
collected related to the equipment subject to lease by the ZIM Purchasers, ICON
Heuliez and the Top Ships Purchasers. These decreases were partially offset by
the termination payments received in connection with the Bareboat Charter
Termination and the increase in the collection of rental and finance lease
payments received by ICON Global Crossing III, ICON EAR II and ICON
Pliant.
Investing
Activities
Cash
provided by investing activities increased $68,679,303, from $(39,218,252) in
2008 to $29,461,051 in 2009. The increase was primarily due to (i) a decrease in
investments in equipment subject to lease and investments in joint ventures, as
no new investments in equipment subject to lease or investments in joint
ventures were made during 2009, (ii) an increase in the amount of proceeds we
received from sales of new and leased equipment in 2009 as compared to 2008 and
(iii) an increase in the distributions we received from our joint ventures in
excess of their profits during 2009. Our proceeds from the sales of new and
leased equipment during 2009 were from equipment leased to the Global Crossing
Group, Gilco and W Forge, which proceeds were greater than the proceeds from
sales of new and leased equipment during 2008 from the sale of the Remaining Net
Assets.
Financing
Activities
Cash used
in financing activities increased $5,727,672, from $65,745,239 in 2008 to
$71,472,911 in 2009. The increase was primarily related to (i) a
decrease in long-term debt following the sale of the Remaining Net Assets, (ii)
a net increase in the amount of cash used to repay our revolving line of credit,
and (iii) a decrease in the proceeds received from investments in joint ventures
by noncontrolling interests. These amounts were partially offset by the decline
in the amount of non-recourse debt obligations repaid during 2009 following the
sale of the Remaining Net Assets.
Financings
and Borrowings
Non-Recourse
Long-Term Debt
We had
non-recourse long-term debt obligations at December 31, 2009 of $114,939,058.
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.
On
September 23, 2009, the Top Ships Purchasers defaulted on the New Fortis Loan
due to their failure to make required payments under the agreement. The Top
Ships Purchasers are currently in active discussions with Fortis and are
attempting to restructure the New Fortis Loan. We have classified the
balance of the outstanding non-recourse long-term debt under this agreement as
current at December 31, 2009.
Revolving
Line of Credit, Recourse
We and
certain entities managed by our Manager, Fund Eight B, Fund Nine, Fund Ten, 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. The balances of $100,000 and $2,260,000 were borrowed by Fund
Ten and us, respectively. The borrowing of $2,260,000 by us includes borrowings
of $2,260,000 during the year ended December 31, 2009. As of March 24, 2010,
Fund Ten and we 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 9 to our
consolidated financial statements.
Distributions
We, at
our Manager’s discretion, pay monthly distributions to our members and
noncontrolling interests starting with the first month after each member’s
admission and the commencement of our joint venture operations, respectively,
and we expect to continue to pay such distributions until the end of our
operating period. We paid distributions to our additional members of
$33,047,095, $33,072,923 and $37,151,073, respectively, for the years ended
December 31, 2009, 2008 and 2007. We paid distributions to our Manager of
$333,811, $334,071 and $375,190, respectively, for the years ended December 31,
2009, 2008 and 2007. We paid distributions to our noncontrolling interests of
$5,659,651, $5,591,936 and $2,834,480, respectively, for the years ended
December 31, 2009, 2008 and 2007.
Commitments
and Contingencies and Off-Balance Sheet Transactions
Commitments
and Contingencies
At
December 31, 2009, we had non-recourse debt obligations. The lender has a
security interest in the majority of the equipment collateralizing each
non-recourse long-term debt instrument and an assignment of the rental payments
under the lease associated with the equipment. 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 long-term indebtedness,
inclusive of certain accrued interest, was $114,939,058. We are a party to the
Facility as discussed in “Financings and Borrowings” above. We had $2,260,000 in
outstanding borrowings under the Facility at December 31, 2009. Subsequent to
December 31, 2009, we repaid $2,260,000, which reduced our outstanding loan
balance to $0.
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
|
$ | 114,939,058 | $ | 43,603,558 | $ | 34,927,500 | $ | 36,408,000 | ||||||||
|
Non-recourse
interest
|
19,301,345 | 6,851,966 | 8,127,341 | 4,322,038 | ||||||||||||
|
Revolving
line of credit
|
2,260,000 | 2,260,000 | - | - | ||||||||||||
| $ | 136,500,403 | $ | 52,715,524 | $ | 43,054,841 | $ | 40,730,038 | |||||||||
The
Participating Funds have entered into a credit support agreement, pursuant to
which losses incurred by a Participating Fund with respect to any MWU subsidiary
are shared among the Participating Funds in proportion to their respective
capital investments. The term of the credit support agreement matches
the term of the schedules to the master lease agreement. No amounts
are due under the credit support agreement at December 31,
2009.
We have
entered into a remarketing agreement with a third party. In connection with this
agreement, residual proceeds received in excess of specific amounts will be
shared with this third party based on specific formulas. The obligation related
to this agreement is recorded at fair value.
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, it could affect us
in a number of ways. We do not currently have or expect to 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
termination (and thus the overall cash flow from our leases) may increase with
inflation as the cost of similar new and used equipment increases. 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 eleven outstanding notes payable, of which ten are non-recourse
long-term debt and the other is associated with our recourse revolving line of
credit. With respect to the non-recourse long-term debt that is
subject to variable interest, the interest rate for each non-recourse debt
obligation is fixed pursuant to an interest rate swap to allow us to mitigate
interest rate fluctuations. As a result, we consider this a fixed
position and, therefore, the conditions in the credit markets as of December 31,
2009 have not had any impact on us. In addition, we have considered the risk of
counterparty performance of our interest rate swaps by considering, among other
things, the credit agency ratings of our counterparties. Based on this
assessment, we believe that the risk of counterparty non-performance is minimal.
We had $2,260,000 in outstanding borrowings under our revolving line of credit,
which is subject to a variable interest rate, at December 31, 2009. Subsequent
to December 31, 2009, we repaid $2,260,000, which decreased our outstanding loan
balance to $0. Our Manager has evaluated the impact of the condition of the
credit markets on our future cash flows and we do not expect any adverse impact
on our cash flows should credit conditions in general remain the same or
deteriorate further.
We
engaged in leasing and other financing transactions relating to the use of
equipment by domestic and foreign lessees and borrowers outside of the United
States. Although certain of our transactions are denominated in Euros, pounds
sterling and Canadian dollars, substantially all of our transactions are
denominated in the U.S. dollar, therefore reducing our risk to currency
translation exposures. In addition, to further
reduce this risk, we at times enter into currency hedges to reduce our risk to
currency translation exposure on our foreign denominated
transactions. To date, our exposure to exchange rate volatility has
not been significant. We have also considered the risk of
counterparty performance on our foreign currency hedges by considering, among
other things, the credit ratings of our counterparties. Nevertheless,
there can be no assurance that currency translation exposures will not have a
material impact on our financial position, results of operations or cash flow in
the future.
To hedge
our variable interest rate risk, we have and may in the future enter into
interest rate swap contracts that will effectively convert the underlying
floating interest rates to a fixed interest rate. In general, these swap
agreements will reduce our interest rate risk associated with variable interest
rate borrowings. However, we will be exposed to and will manage
credit risk associated with our counterparties to our swap agreements by dealing
only with institutions our Manager considers financially sound.
On April
11, 2007, we entered into two interest rate swap contracts with Fortis Bank
(Nederland) N.V. (“Fortis Nederland”) in order to fix the variable interest rate
on our non-recourse debt obligations with regards to the Teekay Vessels and to
minimize our risk for interest rate fluctuations. After giving effect to the
swap agreements, we have a fixed interest rate of 6.125% per year. On April 28,
2008, we entered into two interest rate swap contracts with HSH in order to fix
the variable interest rate on our non-recourse debt obligations with regards to
the ZIM Vessels and to minimize our risk for interest rate fluctuations. After
giving effect to the swap agreements, we have a fixed interest rate of 5.75% for
the M/V ZIM Andaman Sea and the M/V ZIM Japan Sea and 5.99% for the M/V ZIM Hong
Kong and the M/V ZIM Israel, respectively, per year. On June 24, 2009, we also
entered into an interest rate swap contract with Fortis Nederland in order to
fix the variable interest rate on our non-recourse debt obligations with regards
to the Top Ships Vessels and to minimize our risk for interest rate
fluctuations. After giving effect to the swap agreement, we have a fixed
interest rate of 7.62% per year.
We manage
our exposure to equipment and residual risk by monitoring the markets our
equipment is in and maximizing remarketing proceeds through the re-lease or sale
of equipment.
|
Page
|
|
|
|
50
|
|
|
51
|
|
|
52
|
|
|
53
|
|
|
54
|
|
|
56
|
| Schedule II – Valuation and Qualifying Accounts | 94 |
The
Members
ICON
Leasing Fund Eleven, LLC
We have
audited the accompanying consolidated balance sheets of ICON Leasing Fund
Eleven, 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 Leasing Fund
Eleven, 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, the
Company adopted and, for presentation and disclosure purposes, retrospectively
applied the new accounting pronouncement for noncontrolling interests on January
1, 2009.
/s/ Ernst
& Young, LLP
March 31,
2010
New York,
New York
|
(A
Delaware Limited Liability Company)
|
||||||||
|
Consolidated
Balance Sheets
|
||||||||
|
Assets
|
||||||||
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 18,615,323 | $ | 7,670,929 | ||||
|
Current
portion of net investment in finance leases
|
9,613,853 | 7,576,361 | ||||||
|
Accounts
receivable, net
|
594,082 | 719,365 | ||||||
|
Current
portion of note receivable
|
725,049 | - | ||||||
|
Assets
held for sale, net
|
3,813,647 | - | ||||||
|
Other
current assets
|
3,656,127 | 1,222,031 | ||||||
|
Total
current assets
|
37,018,081 | 17,188,686 | ||||||
|
Non-current
assets:
|
||||||||
|
Net
investment in finance leases, less current portion
|
15,067,299 | 23,908,072 | ||||||
|
Leased
equipment at cost (less accumulated depreciation of
|
||||||||
|
$158,488,912
and $120,637,537, respectively)
|
183,614,179 | 333,224,351 | ||||||
|
Mortgage
note receivable
|
12,722,006 | 12,722,006 | ||||||
|
Note
receivable, less current portion
|
9,289,951 | - | ||||||
|
Investments
in joint ventures
|
11,578,687 | 18,659,329 | ||||||
|
Deferred
income taxes, net
|
943,053 | 206,101 | ||||||
|
Other
non-current assets, net
|
2,446,154 | 2,269,614 | ||||||
|
Total
non-current assets
|
235,661,329 | 390,989,473 | ||||||
|
Total
Assets
|
$ | 272,679,410 | $ | 408,178,159 | ||||
|
Liabilities
and Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Current
portion of non-recourse long-term debt
|
$ | 43,603,558 | $ | 42,995,346 | ||||
|
Revolving
line of credit, recourse
|
2,260,000 | 5,000,000 | ||||||
|
Derivative
instruments
|
5,049,327 | 9,257,854 | ||||||
|
Deferred
revenue
|
706,656 | 4,494,922 | ||||||
|
Due
to Manager and affiliates
|
300,223 | 288,802 | ||||||
|
Accrued
expenses and other liabilities
|
5,841,639 | 1,040,521 | ||||||
|
Total
current liabilities
|
57,761,403 | 63,077,445 | ||||||
|
Non-current
liabilities:
|
||||||||
|
Non-recourse
long-term debt, less current portion
|
71,335,500 | 120,454,287 | ||||||
|
Total
Liabilities
|
129,096,903 | 183,531,732 | ||||||
|
Commitments
and contingencies (Note 19)
|
||||||||
|
Equity:
|
||||||||
|
Members'
Equity:
|
||||||||
|
Additional
members
|
139,684,262 | 217,496,668 | ||||||
|
Manager
|
(1,820,378 | ) | (1,035,608 | ) | ||||
|
Accumulated
other comprehensive loss
|
(1,485,640 | ) | (6,275,279 | ) | ||||
|
Total
Members' Equity
|
136,378,244 | 210,185,781 | ||||||
|
Noncontrolling
Interests
|
7,204,263 | 14,460,646 | ||||||
|
Total
Equity
|
143,582,507 | 224,646,427 | ||||||
|
Total
Liabilities and Equity
|
$ | 272,679,410 | $ | 408,178,159 | ||||
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
|
$ | 64,099,850 | $ | 90,009,529 | $ | 103,487,305 | ||||||
|
Time
charter revenue
|
5,559,524 | - | - | |||||||||
|
Finance
income
|
2,548,139 | 4,651,273 | 7,415,414 | |||||||||
|
Income
from investments in joint ventures
|
345,938 | 2,071,019 | 80,502 | |||||||||
|
Net
gain on lease termination
|
25,141,909 | - | - | |||||||||
|
Net
gain on sales of new equipment
|
- | 278,082 | 772,799 | |||||||||
|
Net
gain (loss) on sales of leased equipment
|
2,050,594 | (720,385 | ) | (112,167 | ) | |||||||
|
Net
loss on sale of portfolio
|
- | (11,921,785 | ) | - | ||||||||
|
Interest
and other income
|
3,448,283 | 2,399,168 | 5,973,253 | |||||||||
|
Total
revenue
|
103,194,237 | 86,766,901 | 117,617,106 | |||||||||
|
Expenses:
|
||||||||||||
|
Management
fees - Manager
|
2,185,858 | 5,110,375 | 6,662,395 | |||||||||
|
Administrative
expense reimbursements - Manager
|
1,951,850 | 3,586,973 | 5,423,388 | |||||||||
|
General
and administrative
|
3,683,435 | 3,711,909 | 2,172,591 | |||||||||
|
Vessel
operating expense
|
13,926,255 | - | - | |||||||||
|
Depreciation
and amortization
|
73,052,380 | 65,065,983 | 82,127,392 | |||||||||
|
Interest
|
9,937,136 | 13,674,261 | 17,467,704 | |||||||||
|
Impairment
loss
|
42,208,124 | - | 122,774 | |||||||||
|
(Gain)
loss on financial instruments
|
(346,739 | ) | 830,336 | 2,846,069 | ||||||||
|
Total
expenses
|
146,598,299 | 91,979,837 | 116,822,313 | |||||||||
|
(Loss)
income before income taxes
|
(43,404,062 | ) | (5,212,936 | ) | 794,793 | |||||||
|
Benefit
(provision) for income taxes
|
153,480 | 1,462,652 | (2,204,227 | ) | ||||||||
|
Net
loss
|
(43,250,582 | ) | (3,750,284 | ) | (1,409,434 | ) | ||||||
|
Less:
Net income attributable to noncontrolling interests
|
(1,845,334 | ) | (2,047,437 | ) | (1,069,559 | ) | ||||||
|
Net
loss attributable to Fund Eleven
|
$ | (45,095,916 | ) | $ | (5,797,721 | ) | $ | (2,478,993 | ) | |||
|
Net
loss attributable to Fund Eleven allocable to:
|
||||||||||||
|
Additional
members
|
$ | (44,644,957 | ) | $ | (5,739,744 | ) | $ | (2,454,203 | ) | |||
|
Manager
|
(450,959 | ) | (57,977 | ) | (24,790 | ) | ||||||
| $ | (45,095,916 | ) | $ | (5,797,721 | ) | $ | (2,478,993 | ) | ||||
|
Weighted
average number of additional shares of
|
||||||||||||
|
limited
liability company interests outstanding
|
363,139 | 363,414 | 352,197 | |||||||||
|
Net
loss attributable to Fund Eleven per weighted
|
||||||||||||
|
average
additional share of limited liability company interests
|
$ | (122.94 | ) | $ | (15.79 | ) | $ | (6.97 | ) | |||
See
accompanying notes to consolidated financial statements.
|
(A
Delaware Limited Liability Company)
|
||||||||||||||||||||||||||||
|
Consolidated
Statements of Changes in Equity
|
||||||||||||||||||||||||||||
|
Members'
Equity
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Additional
|
|
Accumulated
|
|
|
|
|||||||||||||||||||||||
|
Shares
of Limited Liability |
Additional Members |
Manager
|
Other
Comprehensive Income
(Loss)
|
Total Members'
Equity |
Noncontrolling Interests |
Total Equity |
||||||||||||||||||||||
|
Balance,
December 31, 2006
|
292,164 | $ | 232,868,044 | $ | (243,580 | ) | $ | 272,021 | $ | 232,896,485 | $ | 8,312,503 | $ | 241,208,988 | ||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||
|
Net
(loss) income
|
- | (2,454,203 | ) | (24,790 | ) | - | (2,478,993 | ) | 1,069,559 | (1,409,434 | ) | |||||||||||||||||
|
Unrealized
loss on warrants
|
- | - | - | (538,072 | ) | (538,072 | ) | - | (538,072 | ) | ||||||||||||||||||
|
Change
in valuation of derivative instruments
|
- | - | - | (1,734,951 | ) | (1,734,951 | ) | - | (1,734,951 | ) | ||||||||||||||||||
|
Currency
translation adjustments
|
- | - | - | 7,114,343 | 7,114,343 | - | 7,114,343 | |||||||||||||||||||||
|
Total
comprehensive income
|
4,841,320 | 2,362,327 | 1,069,559 | 3,431,886 | ||||||||||||||||||||||||
|
Proceeds
from issuance of additional shares
|
||||||||||||||||||||||||||||
|
of
limited liability company interests
|
72,982 | 72,981,829 | - | - | 72,981,829 | - | 72,981,829 | |||||||||||||||||||||
|
Shares
of limited liability company interests repurchased
|
(1,287 | ) | (1,097,980 | ) | - | - | (1,097,980 | ) | - | (1,097,980 | ) | |||||||||||||||||
|
Sales
and offering expenses
|
- | (8,392,522 | ) | - | - | (8,392,522 | ) | - | (8,392,522 | ) | ||||||||||||||||||
|
Cash
distributions
|
- | (37,151,073 | ) | (375,190 | ) | - | (37,526,263 | ) | (2,834,480 | ) | (40,360,743 | ) | ||||||||||||||||
|
Investment
in joint venture by noncontrolling interest
|
- | - | - | - | - | 5,841,830 | 5,841,830 | |||||||||||||||||||||
|
Balance,
December 31, 2007
|
363,859 | 256,754,095 | (643,560 | ) | 5,113,341 | 261,223,876 | 12,389,412 | 273,613,288 | ||||||||||||||||||||
|
Comprehensive
(loss) income:
|
||||||||||||||||||||||||||||
|
Net
(loss) income
|
- | (5,739,744 | ) | (57,977 | ) | - | (5,797,721 | ) | 2,047,437 | (3,750,284 | ) | |||||||||||||||||
|
Change
in valuation of derivative instruments
|
- | - | - | (3,769,112 | ) | (3,769,112 | ) | - | (3,769,112 | ) | ||||||||||||||||||
|
Currency
translation adjustments
|
- | - | - | (7,619,508 | ) | (7,619,508 | ) | - | (7,619,508 | ) | ||||||||||||||||||
|
Total
comprehensive (loss) income
|
(11,388,620 | ) | (17,186,341 | ) | 2,047,437 | (15,138,904 | ) | |||||||||||||||||||||
|
Shares
of limited liability company interests repurchased
|
(603 | ) | (444,760 | ) | - | - | (444,760 | ) | - | (444,760 | ) | |||||||||||||||||
|
Cash
distributions
|
- | (33,072,923 | ) | (334,071 | ) | - | (33,406,994 | ) | (5,591,936 | ) | (38,998,930 | ) | ||||||||||||||||
|
Investment
in joint venture by noncontrolling interest
|
- | - | - | - | - | 5,615,733 | 5,615,733 | |||||||||||||||||||||
|
Balance,
December 31, 2008
|
363,256 | 217,496,668 | (1,035,608 | ) | (6,275,279 | ) | 210,185,781 | 14,460,646 | 224,646,427 | |||||||||||||||||||
|
Comprehensive
(loss) income:
|
||||||||||||||||||||||||||||
|
Net
(loss) income
|
- | (44,644,957 | ) | (450,959 | ) | - | (45,095,916 | ) | 1,845,334 | (43,250,582 | ) | |||||||||||||||||
|
Change
in valuation of derivative instruments
|
- | - | - | 4,570,879 | 4,570,879 | - | 4,570,879 | |||||||||||||||||||||
|
Currency
translation adjustments
|
- | - | - | 218,760 | 218,760 | - | 218,760 | |||||||||||||||||||||
|
Total
comprehensive (loss) income
|
4,789,639 | (40,306,277 | ) | 1,845,334 | (38,460,943 | ) | ||||||||||||||||||||||
|
Shares
of limited liability company interests repurchased
|
(163 | ) | (120,354 | ) | - | - | (120,354 | ) | - | (120,354 | ) | |||||||||||||||||
|
Deconsolidation
of a noncontrolling interest
|
- | - | - | - | - | (3,442,066 | ) | (3,442,066 | ) | |||||||||||||||||||
|
Cash
distributions
|
- | (33,047,095 | ) | (333,811 | ) | - | (33,380,906 | ) | (5,659,651 | ) | (39,040,557 | ) | ||||||||||||||||
|
Balance,
December 31, 2009
|
363,093 | $ | 139,684,262 | $ | (1,820,378 | ) | $ | (1,485,640 | ) | $ | 136,378,244 | $ | 7,204,263 | $ | 143,582,507 | |||||||||||||
See
accompanying notes to consolidated financial statements.
|
Consolidated
Statements of Cash Flows
|
||||||||||||
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
loss
|
$ | (43,250,582 | ) | $ | (3,750,284 | ) | $ | (1,409,434 | ) | |||
|
Adjustments
to reconcile net loss to net cash
|
||||||||||||
|
provided
by operating activities:
|
||||||||||||
|
Rental
income paid directly to lenders by lessees
|
(12,478,000 | ) | (12,872,440 | ) | (11,494,960 | ) | ||||||
|
Finance
income
|
(2,548,139 | ) | (4,651,273 | ) | (7,415,414 | ) | ||||||
|
Income
from investments in joint ventures
|
(345,938 | ) | (2,071,019 | ) | (80,502 | ) | ||||||
|
Net
gain on sales of new equipment
|
- | (278,082 | ) | (772,799 | ) | |||||||
|
Net
(gain) loss on sales of leased equipment
|
(2,050,594 | ) | 720,385 | 112,167 | ||||||||
|
Net
gain on lease termination
|
(12,468,659 | ) | - | - | ||||||||
|
Net
loss on sale of portfolio
|
- | 11,921,785 | - | |||||||||
|
Depreciation
and amortization
|
73,052,376 | 65,065,983 | 82,127,392 | |||||||||
|
Amortization
of deferred time charter expense
|
2,235,738 | - | - | |||||||||
|
Impairment
loss
|
42,208,124 | - | 122,774 | |||||||||
|
Bad
debt expense
|
1,569,221 | - | - | |||||||||
|
Interest
expense on non-recourse financing paid directly to lenders by
lessees
|
4,062,952 | 3,815,247 | 2,720,385 | |||||||||
|
Interest
expense from amortization of debt financing costs
|
356,227 | 523,882 | 168,309 | |||||||||
|
(Gain)
loss on financial instruments
|
(755,739 | ) | 710,938 | 2,821,045 | ||||||||
|
Deferred
tax (benefit) provision
|
(648,771 | ) | 595,016 | 1,911,210 | ||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Collection
of finance leases
|
9,142,256 | 19,820,439 | 32,589,325 | |||||||||
|
Accounts
receivable
|
(2,756,653 | ) | (1,768,596 | ) | (1,432,011 | ) | ||||||
|
Other
assets, net
|
(2,829,868 | ) | 2,968,201 | (929,005 | ) | |||||||
|
Payables,
deferred revenue and other current liabilities
|
(1,331,415 | ) | (11,591,135 | ) | 2,859,590 | |||||||
|
Due
to/from Manager and affiliates
|
11,421 | 59,610 | (319,742 | ) | ||||||||
|
Distributions
from joint ventures
|
1,850,262 | 835,966 | 140,337 | |||||||||
|
Net
cash provided by operating activities
|
53,024,219 | 70,054,623 | 101,718,667 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Investments
in equipment subject to lease
|
- | (45,040,317 | ) | (144,227,277 | ) | |||||||
|
Proceeds
from sales of new and leased equipment
|
23,911,312 | 7,842,386 | 30,978,193 | |||||||||
|
Proceeds
from sale of portfolio
|
- | 7,316,137 | - | |||||||||
|
Investment
in financing facility
|
- | (164,822 | ) | (4,202,233 | ) | |||||||
|
Repayment
of financing facility
|
- | 4,367,055 | - | |||||||||
|
Investments
in joint ventures
|
- | (15,458,255 | ) | (3,214,373 | ) | |||||||
|
Distributions
received from joint ventures in excess of profits
|
5,576,318 | 1,432,688 | 10,375,896 | |||||||||
|
Other
assets, net
|
(26,579 | ) | 486,876 | (714,591 | ) | |||||||
|
Net
cash provided by (used in) investing activities
|
29,461,051 | (39,218,252 | ) | (111,004,385 | ) | |||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from non-recourse long-term debt
|
- | 14,044,437 | 37,178,099 | |||||||||
|
Repayments
of non-recourse long-term debt
|
(29,572,000 | ) | (50,961,719 | ) | (77,577,846 | ) | ||||||
|
Proceeds
from revolving line of credit, recourse
|
2,260,000 | 5,000,000 | - | |||||||||
|
Repayments
of revolving line of credit, recourse
|
(5,000,000 | ) | - | - | ||||||||
|
Issuance
of additional shares of limited liabilty company
|
||||||||||||
|
interests,
net of sales and offering expenses
|
- | - | 64,589,307 | |||||||||
|
Repurchase
of additional shares of limited liability company
interests
|
(120,354 | ) | (444,760 | ) | (1,097,980 | ) | ||||||
|
Due
to Manager and affiliates
|
- | - | (94,636 | ) | ||||||||
|
Cash
distributions to members
|
(33,380,906 | ) | (33,406,994 | ) | (37,526,263 | ) | ||||||
|
Investments
in joint ventures by noncontrolling interests
|
- | 5,615,733 | 5,841,830 | |||||||||
|
Distributions
to noncontrolling interests
|
(5,659,651 | ) | (5,591,936 | ) | (2,834,480 | ) | ||||||
|
Net
cash used in financing activities
|
(71,472,911 | ) | (65,745,239 | ) | (11,521,969 | ) | ||||||
|
Effects
of exchange rates on cash and cash equivalents
|
(67,965 | ) | 240,248 | 1,946,561 | ||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
10,944,394 | (34,668,620 | ) | (18,861,126 | ) | |||||||
|
Cash
and cash equivalents, beginning of the year
|
7,670,929 | 42,339,549 | 61,200,675 | |||||||||
|
Cash
and cash equivalents, end of the year
|
$ | 18,615,323 | $ | 7,670,929 | $ | 42,339,549 | ||||||
See
accompanying notes to consolidated financial statements.
|
ICON
Leasing Fund Eleven, LLC
|
||||||||||||
|
(A
Delaware Limited Liability Company)
|
||||||||||||
|
Consolidated
Statements of Cash Flows
|
||||||||||||
|
Years Ended December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||||
|
Cash
paid during the year for interest
|
$ | 5,195,787 | $ | 9,338,831 | $ | 14,399,452 | ||||||
|
Cash
paid during the year for income taxes
|
$ | 629,763 | $ | 177,252 | $ | 4,390,849 | ||||||
|
Supplemental
disclosure of non-cash investing and financing activities:
|
||||||||||||
|
Non-cash
portion of equipment purchased with non-recourse long-term
debt
|
$ | - | $ | - | $ | 66,656,754 | ||||||
|
Principal
and interest paid on non-recourse long term debt
|
||||||||||||
|
directly
to lenders by lessees
|
$ | 12,478,000 | $ | 12,872,440 | $ | 12,630,780 | ||||||
|
Transfer
of non-recourse debt in connection with the
|
||||||||||||
|
sale
of a leasing portfolio
|
$ | - | $ | 73,187,369 | $ | - | ||||||
|
Deconsolidation
of noncontrolling interest in connection with
|
||||||||||||
|
the
sale of a controlling interest in ICON Global Crossing,
LLC
|
$ | 3,442,066 | $ | - | $ | - | ||||||
|
Deconsolidation
of the carrying value of leased equipment in connection
|
||||||||||||
|
with
the sale of a controlling interest in ICON Global Crossing,
LLC
|
$ | 3,370,458 | $ | - | $ | - | ||||||
|
Note
receivable received in connection with the sale of
manufacturing
|
||||||||||||
|
equipment
to W Forge Holdings, Inc.
|
$ | 10,015,000 | $ | - | $ | - | ||||||
|
Transfer
of leased equipment at cost to assets held for sale
|
$ | 3,914,775 | $ | - | $ | - | ||||||
See
accompanying notes to consolidated financial statements.
55
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(1)
|
Organization
|
ICON
Leasing Fund Eleven, LLC (the “LLC”) was formed on December 2, 2004 as a
Delaware limited liability company. The LLC is engaged in one
business segment, the business of purchasing equipment and leasing it to third
parties, 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,
2024, 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) acquires a diversified portfolio by making investments
in leases, notes receivable and other financing transactions; (ii) makes monthly
cash distributions, at the LLC’s manager’s discretion, to its members commencing
with each member’s admission to the LLC, continuing until the end of the
operating period; (iii) reinvests substantially all undistributed cash from
operations and cash from sales of equipment and other financing transactions
during the operating period; and (iv) will dispose of its investments and
distribute the excess cash from such dispositions to its members beginning with
the commencement of the liquidation period. The LLC is currently in its
operating period, which commenced in April 2007.
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 enters into pursuant to the terms of the LLC’s amended
and restated limited liability company 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 of $2,000 was contributed on December 17,
2004, which consisted of $1,000 from the Manager and $1,000 from an officer of
the Manager. The LLC subsequently repurchased the $1,000 contributed
by the officer of the Manager. The LLC initially offered shares of limited
liability company interests (the “Shares”) with the intention of raising up to
$200,000,000 of capital. On March 8, 2006, the LLC commenced a
consent solicitation of its additional members to amend and restate its limited
liability company agreement in order to increase the maximum offering amount
from up to $200,000,000 to up to $375,000,000. The consent
solicitation was completed on April 21, 2006 with the requisite consents
received from the LLC’s members. The LLC filed a new registration
statement (the “New Registration Statement”) to register up to an additional
$175,000,000 of Shares with the Securities and Exchange Commission (the “SEC”)
on May 2, 2006. The New Registration Statement was declared effective
by the SEC on July 3, 2006, and the LLC commenced the offering of the additional
175,000 Shares thereafter.
The LLC
commenced business operations on its initial closing date, May 6, 2005, with
admission of investors holding 1,200 Shares representing $1,200,000 of capital
contributions. Through April 21, 2007, the final closing date, the
LLC admitted investors holding 365,199 Shares, representing $365,198,690 of
capital contributions. Through December 31, 2009, the LLC repurchased
2,106 Shares, bringing the total number of Shares outstanding to
363,093. From May 6, 2005 through April 21, 2007, the LLC paid sales
commissions to third parties and various fees to the Manager and ICON Securities
Corp. (“ICON Securities”), a wholly-owned subsidiary of the
Manager. These sales commissions and fees paid to the Manager and its
affiliate were recorded as a reduction to the LLC’s equity. Through
December 31, 2007, the LLC paid $29,210,870 of sales commissions to third
parties, $6,978,355 of organizational and offering expenses to the Manager, and
$7,304,473 of underwriting fees to ICON Securities.
56
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(1)
|
Organization
- continued
|
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 have been and will continue to be made with the cash generated from
the LLC’s initial investments to the extent that cash is not used for expenses,
reserves and distributions to members. The investment in additional equipment
leases and other financing transactions in this manner is called “reinvestment.”
The LLC currently anticipates investing in equipment leases, other financing
transactions and residual ownership rights in leased equipment from time to time
until April 2012, unless that date is extended, at the Manager’s sole
discretion, for up to an additional three years. After the operating
period, the LLC will sell its assets in the ordinary course of business during
the liquidation period.
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 (loss) income. The attribution of (loss) 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.
57
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(2)
|
Summary
of Significant Accounting Policies -
continued
|
Cash and
Cash Equivalents and Restricted Cash
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 three 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.
Restricted
cash consists primarily of proceeds received for (i) costs associated with
repairs, upgrades and surveys of certain Handymax product tankers and (ii) the
disposal of equipment that can be replaced with similar equipment before the end
of the relevant lease term, as well as the holdback of amounts for certain
foreign tax obligations. Restricted cash is included in other current and
non-current assets.
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. Concentrations of credit risk with
respect to lessees, borrowers or other counterparties are dispersed across
different industry segments within the United States of America and throughout
the world. Although the LLC does not currently foresee a concentrated
credit risk associated with its lessees, borrowers or other counterparties,
contractual payments are dependent upon the financial stability of the industry
segments in which such counterparties operate. See Note 16 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.
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 3 to 8 years, to the asset’s residual value.
The
Manager has an investment committee that approves each new equipment lease and
other financing transaction. As part of its process, the investment
committee determines the residual value, if any, to be used once the investment
has been approved. The factors considered in determining the residual
value include, but are not limited to, the creditworthiness of the potential
lessee, the type of equipment considered, how the equipment is integrated into
the potential lessee’s business, the length of the lease and the industry in
which the potential lessee operates. Residual values are reviewed for
impairment in accordance with the LLC’s impairment review policy.
58
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(2)
|
Summary
of Significant Accounting Policies -
continued
|
The
residual value assumes, among other things, that the asset would be 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.
For time
charters, the vessels are stated at cost. Expenditures subsequent to acquisition
for conversions and major improvements are capitalized when such expenditures
appreciably extend the life, increase the earning capacity or improve the
efficiency or safety of the vessels. Repairs and maintenance are charged to
expense as incurred and are included in vessel operating expenses in the
consolidated statements of operations.
Asset
Impairments
The
significant assets in the LLC’s portfolio are periodically reviewed, no
less frequently than annually or when indicators of impairment exist, 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.
Assets
Held for Sale, Net
Assets
held for sale or lease is recorded at the lower of cost or estimated fair value,
less anticipated costs to sell, and consists of assets previously leased to end
users that has been returned to the LLC following lease expiration or upon lease
termination.
59
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(2)
|
Summary
of Significant Accounting Policies -
continued
|
Assets
held for sale are 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 assets held
for sale.
Revenue
Recognition
The LLC
leases equipment to third parties and each such lease is classified as a finance
lease, an operating lease or a time charter, which is determined 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 and a time charter, 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 records, 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.
For time
charters, the LLC recognizes revenue ratably over the period of such
charters. Vessel operating expenses are recognized as incurred and
are included in the LLC’s consolidated statement of operations. At December 31,
2009, the LLC had approximately $4,128,000 of accrued vessel operating expenses
that are included in accrued expenses and other liabilities in the LLC’s
consolidated balance sheets.
For notes
receivable, the LLC uses the effective interest rate method to recognize
interest income, which produces a constant periodic rate of return on the
investment, when earned.
The
recognition of revenue may be suspended when deemed appropriate by the Manager
based on uncollectablility, creditworthiness and other considerations, after
which revenue will be recognized on a cash basis.
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 for doubtful accounts of $1,506,313
and $0, respectively.
60
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(2)
|
Summary
of Significant Accounting Policies -
continued
|
Inventory
Inventories
consist of bunkers, lubricants and consumable stores, which are stated at the
lower of cost or market. Cost is determined by the first in, first out method.
Inventories are included in other current assets in the consolidated balance
sheet.
Dry-Docking
Costs
All
dry-docking costs are accounted for under the direct expense method, under which
such costs are expensed as incurred and are included in vessel operating
expenses in the consolidated statements of operations.
Notes
Receivable
Notes
receivable are reported in the LLC’s consolidated balance sheets at the
outstanding principal balance net of any unamortized deferred fees, premiums or
discounts on purchased loans. Costs on originated loans are reported as other
current and other non-current assets in the LLC’s consolidated balance sheets.
Unearned income, discounts and premiums are amortized to interest income using
the effective interest rate method in the LLC’s consolidated statements of
operations. Any interest receivable related to the unpaid principal is recorded
separately from the outstanding balance in the LLC’s consolidated balance
sheets.
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 the actual lease term using a
straight-line method for operating leases and the effective interest rate method
for finance leases and notes receivable in the LLC’s consolidated statements of
operations. Costs related to leases or other financing transactions that are not
consummated are expensed as an acquisition expense in the LLC’s consolidated
statements of operations.
Acquisition
Fees
Pursuant
to the LLC Agreement, the LLC pays acquisition fees to the Manager equal to 3%
of the purchase price of the LLC’s investments. These fees are capitalized and
included in the cost of the investment in the LLC’s consolidated balance
sheets.
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.
61
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(2)
|
Summary
of Significant Accounting Policies -
continued
|
Some
of the LLC’s wholly-owned foreign subsidiaries are taxed as corporations in
their local tax jurisdictions. For these entities, the LLC uses the liability
method of accounting for income taxes as required by the accounting
pronouncement for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax basis of assets and liabilities. Deferred tax assets and liabilities are
measured using enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Valuation allowances are established when
it is determined that it is more likely than not that the deferred tax assets
will not be realized.
In
accordance with the accounting standard on accounting for uncertainty of income
taxes, the LLC records a liability for unrecognized tax benefits resulting from
uncertain tax positions taken or expected to be taken in a tax return. The LLC
recognizes interest and penalties, if any, related to unrecognized tax benefit
in income tax expense.
Per Share
Data
Net
(loss) income attributable to the LLC per weighted average additional Share is
based upon the weighted average number of additional Shares outstanding during
the year.
Share
Repurchase
The LLC
may, at its discretion, repurchase Shares from a limited number of its
additional members, as provided for in the LLC Agreement. The
repurchase price for any Shares approved for repurchase 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 repurchases will be
permitted.
Comprehensive
(Loss) Income
Comprehensive
(loss) income is reported in the accompanying consolidated statements of changes
in equity and consists of net (loss) income and other gains and losses affecting
equity that are excluded from net (loss) income.
Warrants
Warrants
held by the LLC are not registered for public sale and are revalued on a
quarterly basis. The revaluation of warrants is calculated using the
Black-Scholes option pricing model. The assumptions utilized in the
Black-Scholes model include share price, strike price, expiration date,
risk-free rate and the volatility percentage. The change in the fair
value of warrants is recognized in the consolidated statements of
operations.
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.
62
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(2)
|
Summary
of Significant Accounting Policies -
continued
|
Derivative
Financial Instruments
The LLC
may enter into derivative transactions for purposes of hedging specific
financial exposures, including movements in foreign currency exchange rates and
changes in interest rates on 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.
The LLC
accounts for derivative financial instruments in accordance with the accounting
pronouncements that established accounting and reporting standards for
derivative financial instruments. These accounting pronouncements
require the LLC to recognize all derivatives as either assets or liabilities on
the consolidated balance sheets and measure those instruments at fair
value. The LLC recognizes 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 the LLC must document and assess at inception and on an
ongoing basis, the LLC recognizes the changes in fair value of such instruments
in accumulated other comprehensive income (“AOCI”), a component of equity on the
consolidated balance sheets. Changes in the fair value of the
ineffective portion of all derivatives are recognized immediately in
earnings.
Foreign
Currency Translation
Assets
and liabilities having non-U.S. dollar functional currencies are translated at
month-end exchange rates. Contributed capital accounts are translated at the
historical rate of exchange when the capital was contributed or
distributed. Revenues, expenses and cash flow items are translated at
the weighted average exchange rate for the period. Resulting
translation adjustments are recorded as a separate component of AOCI in the
LLC’s consolidated balance sheets.
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 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.
63
ICON
Leasing Fund Eleven, 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 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)
|
Leasing
Portfolio
|
On
March 7, 2006, the LLC acquired substantially the entire equipment leasing
portfolio (the “Leasing Portfolio”) of Clearlink Capital Corporation
(“Clearlink”), based in Mississauga, Ontario, Canada. At the time of
the acquisition, the Leasing Portfolio consisted of approximately 1,100
equipment schedules originated by Clearlink. This equipment was
leased in both the United States of America (approximately 20 separate lessees)
and Canada (approximately 90 separate lessees). The Leasing Portfolio
had a weighted average remaining lease term of approximately 18 months at the
time of acquisition.
Effective
as of March 1, 2006, the Leasing Portfolio was acquired by the LLC from the
Manager and ICON Canada, Inc., an affiliate of the Manager, for approximately
$144,591,000, which included a cash payment of approximately $49,361,000 and the
assumption of non-recourse debt and other assets and liabilities related to
the Leasing Portfolio of approximately $95,230,000. The Manager was
paid an acquisition fee of approximately $4,400,000 in connection with this
transaction.
On May
19, 2008, the LLC sold substantially all of the remaining net assets in the
Leasing Portfolio (the “Remaining Net Assets”) to affiliates of U.S. Micro
Corporation (“U.S. Micro”), an unaffiliated third party. The gross
cash purchase price was $19,000,000 and was subject to post-closing adjustments
of approximately $11,684,000, bringing the net cash purchase price to
approximately $7,316,000. The LLC recognized a book loss of
approximately $17,476,000, which was offset by a realized foreign currency gain
of approximately $5,593,000. As a result, the LLC recorded a net loss
of approximately $11,922,000 during the year ended December 31,
2008.
64
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(4)
|
Net
Investment in Finance Leases
|
Net
investment in finance leases consisted of the following at December 31, 2009 and
2008:
|
2009
|
2008
|
|||||||
|
Minimum
rents receivable
|
$ | 24,311,785 | $ | 33,350,205 | ||||
|
Estimated
residual values
|
3,070,295 | 3,070,295 | ||||||
|
Initial
direct costs, net
|
361,899 | 571,064 | ||||||
|
Unearned
income
|
(3,062,827 | ) | (5,507,131 | ) | ||||
|
Net
investment in finance leases
|
24,681,152 | 31,484,433 | ||||||
|
Less:
Current portion of net investment in finance leases
|
9,613,853 | 7,576,361 | ||||||
|
Net
investment in finance leases, less current portion
|
$ | 15,067,299 | $ | 23,908,072 | ||||
Telecommunications
Equipment
On
December 20, 2007, the LLC, along with ICON Income Fund Ten, LLC (“Fund Ten”),
an entity also managed by the Manager, formed ICON Global Crossing V, LLC (“ICON
Global Crossing V”), with ownership interests of 55% and 45%, respectively, to
purchase telecommunications equipment from various vendors for approximately
$12,982,000. This equipment is subject to a 36-month lease with Global Crossing
Telecommunications, Inc. (“Global Crossing”), which expires on December 31,
2010. The total capital contributions made to ICON Global Crossing V were
approximately $12,982,000, of which the LLC’s share was approximately
$7,140,000. The LLC paid an acquisition fee to the Manager of approximately
$214,000 relating to this transaction.
On
September 23, 2008, the LLC, through its wholly-owned subsidiary ICON Global
Crossing III, LLC (“ICON Global Crossing III”), acquired additional
telecommunications equipment for a purchase price of approximately
$3,991,000. The equipment is subject to a 36-month lease with Global
Crossing, which expires on September 30, 2011. The LLC paid acquisition
fees to the Manager of approximately $120,000 in connection with this
transaction.
Lumber
Processing Equipment
On
November 8, 2006, the LLC, through its wholly-owned subsidiaries, ICON Teal
Jones, LLC and ICON Teal Jones, ULC (collectively, “ICON Teal Jones”), entered
into a lease financing arrangement with The Teal Jones Group and Teal Jones
Lumber Services, Inc. (collectively, “Teal Jones”) by acquiring from Teal Jones
substantially all of the equipment, plant and machinery used by Teal Jones in
its lumber processing operations in Canada and the United States and leasing it
back to Teal Jones. The 84-month lease began on December 1, 2006 and grants Teal
Jones the right to end the lease early if certain lump sum payments are made to
ICON Teal Jones. The total lease financing amount was approximately
$22,224,000. The LLC paid an acquisition fee to the Manager of
approximately $667,000 relating to this transaction.
65
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(4)
|
Net
Investment in Finance Leases -
continued
|
In
connection with the lease financing arrangement, Teal Cedar Products Ltd., an
affiliate of The Teal Jones Group, delivered a secured promissory note to
ICON Teal Jones, ULC (the “Teal Jones Note”). The Teal Jones Note is
secured by a lien on certain land located in British Columbia, Canada owned by
Teal Jones, where substantially all of the equipment is operated. The
Teal Jones Note is in the amount of approximately $13,291,000, accrues interest
at 20.629% per year and matures on December 1, 2013. The Teal
Jones Note requires quarterly payments of $568,797 through September 1, 2013. On
December 1, 2013, a balloon payment of approximately $18,519,000 is due and
payable. At December 31, 2009 and 2008, the principal balance of the
Teal Jones Note was $12,722,006 and was reflected as mortgage note
receivable on the accompanying consolidated balance sheets. At December 31, 2009
and 2008, the balance of the deferred costs was approximately $303,357 and
$372,000, respectively. The LLC paid an acquisition fee to the Manager of
approximately $399,000 relating to this transaction.
On
December 10, 2009, ICON Teal Jones restructured the lease payment obligations of
Teal Jones. The restructuring preserves the LLC’s projected economic
return.
Non-cancelable
minimum annual amounts due on investment in finance leases over the next five
years were as follows at December 31, 2009. There will be no amounts due after
2013.
|
Years Ending December 31,
|
||||
|
2010
|
$ | 11,126,066 | ||
|
2011
|
5,296,222 | |||
|
2012
|
4,378,828 | |||
|
2013
|
3,510,669 | |||
| $ | 24,311,785 | |||
66
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(5)
|
Leased
Equipment at Cost
|
Leased
equipment at cost consisted of the following at December 31, 2009 and
2008:
|
2009
|
2008
|
|||||||
|
Marine
vessels
|
||||||||
|
Container
vessels
|
$ | 107,353,324 | $ | 142,500,324 | ||||
|
Handymax
product tankers
|
109,270,860 | 115,097,430 | ||||||
|
Aframax
product tankers
|
90,798,632 | 90,798,632 | ||||||
|
Manufacturing
equipment
|
29,100,777 | 57,199,289 | ||||||
|
Telecommunications
equipment
|
5,579,498 | 48,266,213 | ||||||
| 342,103,091 | 453,861,888 | |||||||
|
Less:
Accumulated depreciation
|
(158,488,912 | ) | (120,637,537 | ) | ||||
| $ | 183,614,179 | $ | 333,224,351 | |||||
Depreciation
expense related to leased equipment was approximately $72,634,000, $64,420,000
and $79,841,000 for the years ended December 31, 2009, 2008 and 2007,
respectively.
Container
Vessels
On June
21, 2006, the LLC, through its wholly-owned subsidiaries, ICON European
Container, LLC (“ICON European Container”) and ICON European Container II, LLC
(“ICON European Container II” and, together with ICON European Container, the
“ZIM Purchasers”), acquired four container vessels from Old Course Investments
LLC (“Old Course”). The M/V ZIM Andaman Sea (f/k/a ZIM America) and
the M/V ZIM Japan Sea (both owned by ICON European Container) are subject to
bareboat charters that expire in November 2010. The M/V ZIM Hong Kong and
the M/V ZIM Israel (both owned by ICON European Container II) are subject to
bareboat charters that expire in January 2011. These vessels (collectively,
the “ZIM Vessels”) are subject to bareboat charters with ZIM.
The
purchase price for the ZIM Vessels was approximately $142,500,000, including (i)
the assumption of approximately $93,325,000 of non-recourse indebtedness under a
secured loan agreement (the “HSH Loan Agreement”) with HSH Nordbank AG (“HSH”)
and (ii) the assumption of approximately $12,000,000 of non-recourse
indebtedness, secured by a second priority mortgage over the ZIM Vessels in
favor of ZIM, less the acquisition of related assets of approximately
$3,273,000. The obligations under the HSH Loan Agreement are secured by a
first priority mortgage over the ZIM Vessels. The LLC incurred
professional fees of approximately $336,000 and paid the Manager an acquisition
fee of approximately $4,236,000 relating to this transaction. These fees
were capitalized as part of the acquisition cost of the ZIM
Vessels.
The
Manager periodically reviews the significant assets in the LLC’s portfolio to
determine whether events or changes in circumstances indicate that the net book
value of an asset may not be recoverable. In light of developments in the market
for containership vessels and the related impact on the shipping industry, the
Manager reviewed the LLC’s investments in the ZIM Vessels that are subject to
bareboat charters with ZIM.
At the
time of our Manager’s review, the following factors, among others, indicated
that the net book value of the ZIM Vessels might not be recoverable: (i) ZIM’s
financial condition, which prompted it to require concessions on hire payments
under charters that extend beyond June 30, 2010; (ii) the age of the ZIM
Vessels, which have less years of remaining economic useful life than comparable
assets available in the market, thereby limiting the potential for the ZIM
Vessels to benefit from a future recovery in this asset class; and (iii) a
continued unprecedented decline in charter rates and asset values for this class
of vessel in the industry as a whole, thereby undermining the value expectations
of such vessels.
67
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(5)
|
Leased
Equipment at Cost - continued
|
Based on
the Manager’s review, the net book value exceeded the fair value of the
container vessels and, as a result, the LLC recognized a non-cash impairment
charge of approximately $35,147,000 relating to the write down in value of the
ZIM Vessels. No amount of this impairment charge represents a cash
expenditure.
On
October 30, 2009, the ZIM Purchasers amended the bareboat charters for the ZIM
Vessels to restructure each respective charterer’s payment obligations so that
the LLC will continue to receive payments, subsequent to the end of each
bareboat charter in November 2010 and January 2011, through September 30,
2014 in accordance with each amended charter (the “European Containers Charter
Amendments”).
Handymax
Product Tankers
On June
16, 2006, the LLC, through its wholly-owned subsidiaries, ICON Doubtless, LLC,
ICON Faithful, LLC, ICON Spotless, LLC, and ICON Vanguard, LLC (collectively,
the “Companies”), acquired four Handymax product tankers, the M/T Doubtless, the
M/T Faithful, the M/T Spotless, and the M/T Vanguard (collectively, the “Top
Ships Vessels”), from subsidiaries of Oceanbulk Maritime, S.A. The Companies
acquired the Top Ships Vessels directly, except for ICON Vanguard, LLC, which
acquired the M/T Vanguard through its wholly-owned Cypriot subsidiary, Isomar
Marine Company Limited (“Isomar” and, together with the Companies, the “Top
Ships Purchasers”).
The Top
Ships Vessels were subject to bareboat charters with subsidiaries of Top Ships,
Inc. (“Top Ships”). The bareboat charters were set to expire in February
2011. The purchase price for the Top Ships Vessels was approximately
$115,097,000, including (i) the assumption of approximately $80,000,000 of
senior non-recourse debt obligations and (ii) the assumption of approximately
$10,000,000 of junior non-recourse debt obligations, less approximately
$1,222,000 of discounted interest on the junior non-recourse debt obligations.
The LLC incurred professional fees of approximately $290,000 and paid the
Manager an acquisition fee of approximately $3,379,000 relating to these
transactions. These fees were capitalized as part of the acquisition cost
of the Top Ships Vessels.
On
June 24, 2009, the Top Ships Purchasers terminated the bareboat charters with
subsidiaries of Top Ships per the request of Top Ships (the “Bareboat Charter
Termination”). As consideration for the Bareboat Charter Termination, Top Ships
(i) paid $8,500,000 as a termination fee, which was used by the LLC to pay down
a portion of the outstanding balance of the non-recourse long-term debt related
to the Top Ships Vessels, (ii) paid $2,250,000 for costs associated with
repairs, upgrades and surveys of the Top Ships Vessels, (iii) paid $1,000,000
for transaction costs, (iv) waived its rights to the second priority
non-recourse debt obligations of $10,000,000 related to the Top Ships Vessels
and (v) agreed to pay all rentals due under the current bareboat charters
through June 15, 2009. Simultaneously, the Top Ships Purchasers were assigned
the rights to the underlying time charter for each bareboat charter. The time
charters expire at various dates ranging from May 2010 to November 2010. In
connection with the assumed time charters, the LLC recorded a deferred time
charter expense of approximately $5,076,000, representing the portion of the
time charter that is above current market rates. The balance of the unamortized
deferred time charter expense of approximately $685,000 is included in the
accompanying consolidated balance sheet as part of other current assets, is
amortized over the remaining term of the underlying time charters and will
reduce the related time charter revenue. The LLC recorded a net gain on lease
termination of approximately $25,142,000 for the year ended December 31,
2009.
68
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(5)
|
Leased
Equipment at Cost - continued
|
In
connection with the Bareboat Charter Termination, the Top Ships Purchasers
assumed full responsibility for the management of the Top Ships Vessels from Top
Ships. Simultaneously with the Bareboat Charter Termination, the Top Ships
Purchasers entered into a consulting and services agreement with Empire
Navigational, Inc. (“Empire”) to manage all of the Top Ships Vessels. The Top
Ships Purchasers agreed to pay Empire a fee to manage the Top Ships Vessels and
pay any costs incurred from the operation of the vessels. In addition, the LLC
terminated a first priority non-recourse secured loan (the “Fortis Loan”) with
Fortis Bank NV/SA (“Fortis”) and entered into a new two-year non-recourse
long-term loan with Fortis (the “New Fortis Loan”) for $26,500,000. In addition,
the LLC terminated the four interest rate swap contracts (“Original Swap
Contracts”) and simultaneously entered into a new interest rate swap contract
with Fortis Bank (Nederland) N.V. (“Fortis Nederland”) (see Note
8).
The
Manager periodically reviews the significant assets in the LLC’s portfolio to
determine whether events or changes in circumstances indicate that the net book
value of an asset may not be recoverable. In light of developments in the market
for product tankers and the related impact on the shipping industry, the Manager
reviewed the LLC’s investment in the M/T Faithful, which is subject to a time
charter. As the time charter of the M/T Faithful
ends during the first half of 2010 and current market conditions
are unfavorable, the Manager determined that indicators of impairment
exist.
Based on
the Manager’s review, the net book value exceeded the undiscounted cash flows,
and the net book value of the product tanker exceeded the fair value and, as a
result, the LLC recognized a non-cash impairment charge of approximately
$5,827,000 relating to the write down in value of the M/T Faithful. No amount of
this impairment charge represents a cash expenditure.
Aframax
Product Tankers
On April
11, 2007, the LLC, through its wholly-owned subsidiaries, ICON Senang, LLC and
ICON Sebarok, LLC (the “Teekay Purchasers”), acquired two Aframax product
tankers, the M/T Senang Spirit and the M/T Sebarok Spirit (collectively, the
“Teekay Vessels”), from an affiliate of Teekay Corporation (“Teekay”). The
purchase price for the Teekay Vessels was approximately $88,000,000, including
borrowings of approximately $66,660,000 of non-recourse debt under a secured
loan agreement (the “Teekay Loan Agreement”) with Fortis Capital Corporation
(“Fortis Capital”). The LLC paid an acquisition fee to the Manager of
approximately $2,640,000 in connection with this
transaction. Simultaneously with the closing of the purchase of the
Teekay Vessels, the Teekay Purchasers entered into a bareboat charter for each
of the Teekay Vessels with an affiliate of Teekay for a term of 60 months. The
bareboat charters expire in April 2012.
69
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(5)
|
Leased
Equipment at Cost - continued
|
Manufacturing
Equipment
On
March 30, 2007, the LLC, through its wholly-owned subsidiary, ICON French
Equipment I, LLC (“ICON Heuliez”), entered into a purchase and sale agreement
(the “Heuliez Agreement”) with Heuliez SA (“HSA”) and Heuliez Investissements
SNC (“Heuliez”) to purchase certain auto parts manufacturing equipment from
Heuliez. In connection with the Heuliez Agreement, ICON Heuliez agreed to
lease back the equipment to HSA and Heuliez, respectively, for an initial term
of 60 months. The purchase price for the equipment was approximately
$11,994,000 (€9,000,000) at March 30, 2007. The LLC incurred
professional fees of approximately $42,000 and paid an acquisition fee to the
Manager of approximately $360,000 relating to this transaction. These
fees were capitalized as part of the acquisition cost of the equipment. The
leases expire on March 30, 2012.
On
October 26, 2007, HSA and Groupe Henri Heuliez (“GHH”), the guarantor of the
leases with ICON Heuliez, filed for “procedure de sauvegarde,” a procedure only
available to a solvent company seeking to reorganize its business affairs under
French law. HSA and Heuliez paid all amounts due under the leases through
January 1, 2008. As of February 1, 2008, ICON Heuliez entered into an
agreement with the administrator of the “procedure de sauvegarde” to accept
reduced payments from HSA and Heuliez for the period beginning February 1, 2008
and ending July 31, 2008. On August 13, 2008, the administrator of the
“procedure de sauvegarde” confirmed a continuation plan for HSA, Heuliez and
GHH. The terms of such plan included HSA and Heuliez making reduced payments to
ICON Heuliez until January 31, 2009. Beginning February 1, 2009, full
payments under the leases would resume. In addition, each lease with
ICON Heuliez would be extended for an additional year. During the one
year extension, HSA and Heuliez made monthly payments to repay the shortfall
resulting from the reduced payments ICON Heuliez received between February 1,
2008 and January 31, 2009.
Due to
the global downturn in the automotive industry, on April 15, 2009, GHH and HSA
filed for “Redressement Judiciaire,” a proceeding under French law similar to a
Chapter 11 reorganization under the U.S. Bankruptcy Code. Heuliez subsequently
filed for Redressement Judiciaire on June 10, 2009. Since the time of the
Redressement Judiciaire filings, two French government agencies agreed to
provide Heuliez with financial support and a third party, Bernard Krief
Consultants (“BKC”), has agreed to
purchase Heuliez. On July 8, 2009, the French Commercial Court approved the sale
of Heuliez to BKC, which approval included the transfer of the LLC’s leases.
Subsequently, Heuliez requested a restructuring of its lease payments, which has
been negotiated, but not finalized. Due to the uncertainty regarding the LLC’s
ability to collect all amounts which are due in accordance with the leases,
it will prospectively recognize revenue on a cash basis. In
addition, the Manager has assessed that the collectability of the outstanding
accounts receivable balance at December 31, 2009 of approximately $513,000 was
doubtful and established a reserve against the receivable.
70
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(5)
|
Leased
Equipment at Cost - continued
|
On
September 28, 2007, the LLC completed the acquisition of and simultaneously
leased back substantially all of the machining and metal working equipment of W
Forge Holdings, Inc. (“W Forge”), MW Scott, Inc. (“Scott”), and MW Gilco, LLC
(“Gilco”), wholly-owned subsidiaries of MW Universal, Inc. (“MWU”), for purchase
prices of $21,000,000, $600,000 and $600,000, respectively. The LLC paid
acquisition fees to the Manager for the W Forge, Scott, and Gilco transactions
of approximately $630,000, $18,000 and $18,000, respectively. Each of
the leases commenced on January 1, 2008 and continues for a period of 60 months.
On December 10, 2007, the LLC completed the acquisition of and simultaneously
leased back substantially all of the machining and metal working equipment of MW
General, Inc. (“General”) and AMI Manchester, LLC (“AMI”), wholly-owned
subsidiaries of MWU, for purchase prices of $400,000 and $1,700,000,
respectively. The LLC paid acquisition fees to the Manager for the General
and AMI transactions of approximately $12,000 and $51,000,
respectively. Each of the leases’ base terms commenced on
January 1, 2008 and continues for a period of 60 months.
Simultaneously
with the closing of the transactions with W Forge, Scott, Gilco, General and
AMI, Fund Ten and ICON Leasing Fund Twelve, LLC, an entity also managed by the
Manager (“Fund Twelve” and, together with the LLC and Fund Ten, the
“Participating Funds”), completed similar acquisitions with four other
subsidiaries of MWU pursuant to which the funds purchased substantially all of
the machining and metal working equipment of each subsidiary. The MWU
subsidiaries’ obligations under their leases (including the leases of W Forge,
Scott, Gilco, General and AMI) are cross-collateralized and cross-defaulted, and
all of the subsidiaries’ obligations are guaranteed by MWU. The
Participating Funds have also entered into a credit support agreement, pursuant
to which losses incurred by a Participating Fund with respect to any MWU
subsidiary are shared among the Participating Funds in proportion to their
respective capital investments.
On June
9, 2008, the Participating Funds entered into a forbearance agreement with MWU,
W Forge, Scott, Gilco, General, AMI and four other subsidiaries of MWU
(collectively, the “MWU entities”) to cure certain defaults under their
lease covenants with the LLC. The terms of the forbearance agreement
included, among other things, the pledge of additional collateral
and the grant of a warrant to the LLC for the purchase of 300 shares of
capital stock of W Forge for a purchase price of $0.01 per share, exercisable
for a period of five years beginning June 9, 2008. On September 5, 2008, the
Participating Funds and IEMC Corp., a subsidiary of the Manager (“IEMC”),
entered into an amended forbearance agreement with the MWU entities to cure
certain non-payment related defaults by the MWU entities under their lease
covenants with the LLC. The terms of the agreement included, among other things,
the pledge of additional collateral and the grant of a warrant for the purchase
of 12% of the fully diluted common stock of MWU at an aggregate exercise price
of $1,000, exercisable until March 31, 2015. As of December 31, 2009, the LLC’s
proportionate share of the MWU warrant was 57.3%. At December 31, 2009, the
Manager determined that the fair value of the MWU warrant was $0.
On
January 26, 2009, the LLC sold the manufacturing equipment that was on lease to
Gilco for approximately $591,000 and recognized a gain on the sale of
approximately $85,000 during the year ended December 31, 2009.
On
February 27, 2009, the Participating Funds and IEMC entered into a further
amended forbearance agreement with the MWU entities to cure certain lease
defaults. In consideration for restructuring W Forge’s lease payment schedule,
the LLC received, among other things, a $200,000 arrangement fee payable at the
conclusion of the lease term and a warrant to purchase 20% of the fully diluted
common stock of W Forge, at an exercise price of $0.01 per share exercisable for
a period of five years from the grant date. In April 2009, the LLC further
restructured the payment obligations of W Forge to give it additional
flexibility while at the same time attempting to preserve the LLC’s projected
economic return on the LLC’s investment. In consideration for this
restructuring, the LLC received a warrant from W Forge to purchase an additional
20% of its fully diluted common stock, at an aggregate exercise price of $1,000,
exercisable until March 31, 2015.
71
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(5)
|
Leased
Equipment at Cost - continued
|
On
December 31, 2009, the LLC and W Forge agreed to terminate their lease and
simultaneously with the termination, the LLC sold the equipment to W Forge for
approximately $9,437,000 and removed the equipment from the W Forge Holdings
lease. In conjunction with the sale of the equipment, Cerion MPI, LLC, an entity
affiliated with W Forge (“Cerion MPI”), delivered a promissory note to the LLC
in the principal amount of approximately $10,015,000. The promissory
note bears interest at the rate of 14% per year and is payable monthly in
arrears for the period beginning January 1, 2010 and ending December 31,
2013. The promissory note is guaranteed by Cerion MPI’s parent
company, Cerion, LLC. The LLC recorded a gain of approximately $844,000 for the
year ended December 31, 2009 in connection with the sale of the manufacturing
equipment. In connection with the termination of the lease arrangement
with W Forge, the LLC also cancelled the warrants received from W Forge. The LLC
did not record a gain or loss in connection with the cancellation of the
warrants.
On April
24, 2008, the LLC, through its wholly-owned subsidiary ICON EAR II, LLC (“ICON
EAR II”), completed the purchase and simultaneous leaseback of semiconductor
manufacturing equipment to Equipment Acquisition Resources, Inc. (“EAR”) for
approximately $6,348,000. The LLC paid acquisition fees of approximately
$190,000 to the Manager in connection with this transaction. The base lease term
is 60 months and expires on June 30, 2013. As additional security for the
purchase and lease, ICON EAR II received mortgages on certain parcels of real
property located in Jackson Hole, Wyoming.
In
October 2009, certain facts came to light that led the Manager to believe
that EAR was perpetrating a fraud against EAR’s lenders, including ICON EAR
II. On October 23, 2009, EAR filed a petition for reorganization under Chapter
11 of the U.S. Bankruptcy Code. Although the LLC believes that it is adequately
secured under the transaction documents, due to the bankruptcy filing and
ongoing investigation regarding the alleged fraud, at this time it is not
possible to determine the LLC’s ability to collect the amounts due to it in
accordance with the leases or the additional security it received. As of
December 31, 2009, the LLC has classified the remaining ICON EAR II assets as
assets held for sale as a result of the involuntary bankruptcy of EAR in the
current year.
The
Manager periodically reviews the significant assets in the LLC’s portfolio to
determine whether events or changes in circumstances indicate that the net book
value of an asset may not be recoverable. In light of the developments
surrounding the semiconductor manufacturing equipment on lease to EAR, the
Manager determined that the net book value of such equipment may not be
recoverable.
At the
time of the Manager’s review, the following factors, among others, indicated
that the net book value of the equipment may not be recoverable: (i) EAR’s
failure to pay rental payments for the period from August 2009 through the date
it filed for bankruptcy and (ii) EAR’s filing of a petition for reorganization
under Chapter 11 of the U.S. Bankruptcy Code in October 2009.
Based on
the Manager’s review, the net book value of the semiconductor manufacturing
equipment exceeded the undiscounted cash flows and exceeded the fair value. As a
result, the LLC recognized
a non-cash impairment charge of approximately $1,235,000 relating to the write
down in value of the semiconductor manufacturing equipment.
72
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(5)
|
Leased
Equipment at Cost - continued
|
In
addition, ICON EAR II had a net accounts receivable balance outstanding of
approximately $51,000, which was charged to bad debt expense during the year
ended December 31, 2009 in accordance with the LLC’s accounting policies and the
above mentioned factors. Bad debt expense is included in general and
administrative expenses in the consolidated statements of
operations.
On
June 30, 2008, the LLC and Fund Twelve formed ICON Pliant, LLC (“ICON Pliant”),
which entered into an agreement with Pliant Corporation (“Pliant”) to acquire
manufacturing equipment for a purchase price of $12,115,000, of which the LLC
paid approximately $6,663,000. On July 16, 2008, the LLC and Fund Twelve
completed the acquisition of and simultaneously leased back the manufacturing
equipment to Pliant. The LLC and Fund Twelve have ownership interests in ICON
Pliant of 55% and 45%, respectively. The lease expires on September 30, 2013.
ICON Pliant paid an acquisition fee to the Manager of approximately $363,000, of
which the LLC’s share was approximately $200,000.
On
February 11, 2009, Pliant commenced a voluntary Chapter 11 proceeding in U.S.
Bankruptcy Court to eliminate all of its high-yield debt. In connection with
this action, Pliant submitted a financial restructuring plan to eliminate its
debt as part of a pre-negotiated package with its high yield creditors. On
September 22, 2009, Pliant assumed its lease with ICON Pliant and on December 3,
2009, Pliant emerged from bankruptcy. To date, Pliant has made all of its lease
payments.
Telecommunications
Equipment
On
November 17, 2005, the LLC, along with ICON Income Fund Eight A L.P. (“Fund
Eight A”) and Fund Ten, both entities managed by the Manager, formed ICON Global
Crossing, LLC (“ICON Global Crossing”), with ownership interests of 44%, 12% and
44%, respectively, to purchase telecommunications equipment from various
vendors. On March 31, 2006, the LLC made an additional capital contribution to
ICON Global Crossing of approximately $7,733,000, which changed the LLC’s, Fund
Eight A’s and Fund Ten’s ownership interests to 61.39%, 7.99% and 30.62%,
respectively. Accordingly, the LLC consolidated the balance sheet of ICON Global
Crossing as of March 31, 2006. The total capital contributions made to ICON
Global Crossing were approximately $25,131,000.
ICON
Global Crossing purchased approximately $22,100,000 of equipment during February
and March 2006 and approximately $3,200,000 of additional equipment during April
2006, all of which is subject to a 48-month lease with Global Crossing that
expires on March 31, 2010. The LLC paid initial direct costs in the form of
legal fees of approximately $200,000. The LLC also paid an acquisition fee to
the Manager of approximately $232,000 relating to the additional capital
contribution made during March 2006.
On
September 30, 2009, ICON Global Crossing sold certain telecommunications
equipment on lease to Global Crossing back to Global Crossing for a purchase
price of $5,493,000. The LLC recorded a gain of approximately $111,000 for the
year ended December 31, 2009 in connection with the sale of the
telecommunications equipment. Accordingly, the LLC's 61.39%
membership interest in ICON Global Crossing was sold and the
LLC deconsolidated ICON Global Crossing and recorded a gain on the sale of
its investment of approximately $51,000 for the year ended December 31, 2009,
which was included in interest and other income in the consolidated statements
of operations.
73
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(5)
|
Leased
Equipment at Cost - continued
|
On
December 29, 2006, the LLC, through its wholly-owned subsidiary, ICON Global
Crossing III, purchased telecommunications equipment for approximately
$9,779,000. This equipment is subject to a 48-month lease with Global
Crossing and Global Crossing North American Networks, Inc. (collectively, the
“Global Crossing Group”), which expires on December 31, 2010. The LLC paid an
acquisition fee to the Manager of approximately $293,000 relating to this
transaction. On June 26, 2008 and June 27, 2008, the LLC, through its
wholly-owned subsidiary ICON Global Crossing III, acquired additional
telecommunications equipment for an aggregate purchase price of approximately
$5,417,000. The equipment is subject to a 36-month lease with Global
Crossing, which expires on June 30, 2011. The LLC paid acquisition fees to
the Manager of approximately $163,000 in connection with this
transaction.
On
December 1, 2009, the LLC, through ICON Global Crossing III, and Global Crossing
agreed to terminate certain schedules to their lease and, simultaneously with
the termination, ICON Global Crossing III sold the equipment to Global Crossing
for the aggregate purchase price of $8,390,853 and removed the equipment from
the lease. The LLC recorded a gain of approximately $1,010,000 for the year
ended December 31, 2009 in connection with the sale of the telecommunications
equipment.
Aggregate
annual minimum future rentals receivable from the LLC’s non-cancelable leases
over the next five years consisted of the following at December 31, 2009. There
will be no additional rents receivable after 2014.
|
Years Ending December 31,
|
||||
|
2010
|
$ | 31,087,882 | ||
|
2011
|
$ | 22,032,210 | ||
|
2012
|
$ | 14,580,816 | ||
|
2013
|
$ | 11,117,165 | ||
|
2014
|
$ | 7,170,072 | ||
|
(6)
|
Note
Receivable
|
On August
13, 2007, the LLC, along with a consortium of other lenders, entered into an
equipment financing facility with Solyndra, Inc. (“Solyndra”), a privately-held
manufacturer of solar panels, for the building of a new production
facility. The financing facility was set to mature on June 30, 2013
and was secured by the equipment as well as all other assets of
Solyndra. The equipment was comprised of two fully-automated
manufacturing lines that combine glass tubes and thin film semiconductors to
produce solar panels. In connection with the transaction, the LLC
received a warrant for the purchase of up to 40,290 shares of Solyndra common
stock at an exercise price of $4.96 per share. The warrant is set to
expire on April 6, 2014. The financing facility was for a maximum
amount of $93,500,000, of which the LLC committed to invest up to $5,000,000. As
of June 30, 2008, the LLC had loaned approximately $4,367,000. On
July 27, 2008, Solyndra fully repaid the outstanding note receivable and the
entire financing facility was terminated. The LLC received
approximately $4,437,000 from the repayment, which consisted of principal and
accrued interest. The repayment does not affect the warrant held by
the LLC and the LLC retains its rights thereunder. At December 31,
2009, the Manager determined that the fair value of this warrant was
$79,371.
74
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(7)
|
Investments
in Joint Ventures
|
The LLC
and certain of its affiliates, entities also managed and controlled by the
Manager, formed five joint ventures, discussed below, for the purpose of
acquiring and managing various assets. The LLC and these affiliates have
substantially identical investment objectives and participate on the same 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.
The five
joint ventures described below are minority owned and accounted for under
the equity method.
ICON
EAM, LLC
On
November 9, 2005, the LLC and Fund Ten formed ICON EAM, LLC (“ICON EAM”) for the
purpose of leasing gas meters and accompanying data gathering equipment to EAM
Assets, Ltd. (“EAM”), a meter asset manager whose business is maintaining
industrial gas meters in the United Kingdom. The LLC and Fund Ten
each contributed approximately $5,620,000 for a 50% ownership interest in ICON
EAM. EAM was unable to meet its conditions precedent to the LLC’s
obligations to perform under the master lease agreement. The Manager
determined it was not in the LLC’s best interest to enter into a work-out
situation with EAM at that time. All amounts funded to ICON EAM, in
anticipation of purchasing the aforementioned equipment, had been deposited into
an interest-bearing escrow account (the “Account”) controlled by ICON EAM's
legal counsel. In May 2007, the balance of the Account, inclusive of
accreted interest, of approximately $13,695,000 was returned to the LLC and Fund
Ten, of which the LLC’s share was approximately $6,848,000.
On March
9, 2006, pursuant to the master lease agreement, the shareholders of Energy
Asset Management plc, the parent company of EAM, approved the issuance of and
issued warrants to ICON EAM to acquire 7,403,051 shares of Energy Asset
Management plc’s stock. The warrants are exercisable for five years
after issuance and have a strike price of 1.50p. At December 31,
2009, the Manager determined that the fair value of these warrants was
$0.
ICON
AEROTV, LLC
On
December 22, 2005, the LLC and Fund Ten formed ICON AEROTV, LLC (“ICON AeroTV”)
for the purpose of owning equipment leased to AeroTV, Ltd. (“AeroTV”), a
provider of on board digital/audio visual systems for airlines, rail and coach
operators in the United Kingdom. The LLC and Fund Ten each
contributed approximately $2,776,000 for a 50% ownership interest in ICON
AeroTV. During 2006, ICON AeroTV purchased approximately $1,357,000
of leased equipment with lease terms that were set to expire between December
31, 2007 and June 30, 2008.
75
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(7)
|
Investments
in Joint Ventures - continued
|
In
February 2007, due to the termination of the services agreement with its main
customer, AeroTV notified the Manager of its inability to pay certain rent owed
to ICON AeroTV and subsequently filed for insolvency protection in the United
Kingdom. ICON AeroTV terminated the master lease agreement with
AeroTV at that time. Certain facts then came to light that gave the Manager
serious concerns regarding the propriety of AeroTV's actions during and after
the execution of the lease with AeroTV. On April 18, 2007, ICON
AeroTV filed a lawsuit in the United Kingdom’s High Court of Justice, Queen’s
Bench Division against AeroTV and one of its directors for fraud. On
April 17, 2008, the default judgment against the AeroTV director, which had
previously been set aside, was reinstated. ICON AeroTV is attempting to collect
on the default judgment against the AeroTV director in Australia, his country of
domicile. At this time, it is not possible to determine ICON AeroTV’s ability to
collect the judgment.
On
February 20, 2007, ICON AeroTV wrote off its leased assets with a remaining cost
basis of approximately $438,000, which was offset by the recognition of the
relinquished security deposit and deferred income of approximately $286,000,
resulting in a net loss of approximately $152,000, of which the LLC’s share was
approximately $76,000. A final rental payment of approximately $215,000 was
collected in March 2007. In May 2007, the unexpended amount
previously contributed to ICON AeroTV, inclusive of accreted interest, of
approximately $5,560,000 was returned to the LLC and Fund Ten, of which the
LLC’s share was approximately $2,780,000.
ICON
Global Crossing II, LLC
On
September 27, 2006, Fund Ten and ICON Income Fund Nine, LLC (“Fund Nine”) formed
ICON Global Crossing II, LLC (“ICON Global Crossing II”), with original
ownership interests of approximately 83% and 17%, respectively. The total
capital contributions made to ICON Global Crossing II were approximately
$12,000,000, of which Fund Ten’s share was approximately $10,000,000 and Fund
Nine’s share was approximately $2,000,000. On September 28, 2006,
ICON Global Crossing II purchased approximately $12,000,000
of telecommunications equipment that is subject to a 48-month lease with
the Global Crossing Group that expires on October 31, 2010. On
October 31, 2006, the LLC made a capital contribution of approximately
$1,800,000 to ICON Global Crossing II. The contribution changed the ownership
interests of ICON Global Crossing II for the LLC, Fund Nine and Fund Ten at
October 31, 2006 to 13.26%, 14.40% and 72.34%, respectively. The additional
contribution was used to purchase telecommunications equipment subject to a
48-month lease with the Global Crossing Group that expires on October 31, 2010.
The LLC paid approximately $55,000 in acquisition fees to the Manager relating
to this transaction.
ICON
EAR, LLC
On
December 11, 2007, the LLC and Fund Twelve formed ICON EAR, LLC (“ICON EAR”),
with ownership interests of 45% and 55%, respectively. On December
28, 2007, ICON EAR purchased and simultaneously leased back semiconductor
manufacturing equipment to EAR for a purchase price of $6,935,000, of which
the LLC’s share was approximately $3,121,000. During June 2008, the LLC and Fund
Twelve made additional contributions to ICON EAR, which were used to complete
another purchase and simultaneous leaseback of additional semiconductor
manufacturing equipment to EAR for a total purchase price of approximately
$8,795,000, of which the LLC’s share was approximately $3,958,000. The LLC and
Fund Twelve retained ownership interests of 45% and 55%, respectively,
subsequent to this transaction. The lease term commenced on July 1,
2008 and expires on June 30, 2013. The LLC paid acquisition fees to the Manager
of approximately $212,000 relating to these transactions. As additional security
for the purchase and lease, ICON EAR received mortgages on certain parcels of
real property located in Jackson Hole, Wyoming.
76
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(7)
|
Investments
in Joint Ventures - continued
|
In
October 2009, certain facts came to light that led the Manager to believe that
EAR was perpetrating a fraud against EAR’s lenders, including ICON EAR. On
October 23, 2009, EAR filed a petition for reorganization under Chapter 11 of
the U.S. Bankruptcy Code. Although ICON EAR believes that it is adequately
secured under the transaction documents, due to the bankruptcy filing and
ongoing investigation regarding the alleged fraud, at this time it is not
possible to determine ICON EAR’s ability to collect the amounts due to it in
accordance with the leases or the additional security it received.
The
Manager periodically reviews the significant assets in the LLC’s portfolio to
determine whether events or changes in circumstances indicate that the net book
value of an asset may not be recoverable. In light of the developments
surrounding the semiconductor manufacturing equipment on lease to EAR, the
Manager determined that the net book value of such equipment may not be
recoverable.
At the
time of the Manager’s review, the following factors, among others, indicated
that the net book value of the equipment may not be recoverable: (i) EAR’s
failure to pay rental payments for the period from August 2009 through the date
it filed for bankruptcy and (ii) EAR’s filing of a petition for reorganization
under Chapter 11 of the U.S. Bankruptcy Code in October 2009.
Based on
the Manager’s review, the net book value of the semiconductor manufacturing
equipment exceeded the undiscounted cash flows and exceeded the fair value. As a
result, ICON EAR recognized a non-cash impairment charge of approximately
$3,429,000 relating to the write down in value of the semiconductor
manufacturing equipment. The LLC’s share of the impairment loss was
approximately $1,543,000 and was included in the (loss) income from investments
in joint ventures in the consolidated statements of operations for the year
ended December 31, 2009.
In
addition, ICON EAR had a net accounts receivable balance outstanding of
approximately $573,000, which was charged to bad debt expense during the year
ended December 31, 2009 in accordance with ICON EAR’s accounting policies and
the above mentioned factors. The LLC’s share of the bad debt expense was
approximately $258,000 and was included in the (loss) income from investments in
joint ventures in the consolidated statements of operations for the year ended
December 31, 2009.
ICON
Northern Leasing, LLC
On
November 25, 2008, ICON Northern Leasing, LLC (“ICON Northern Leasing”), a joint
venture among the LLC, Fund Ten and Fund Twelve, purchased four promissory notes
(the “Northern Notes”) made by Northern Capital Associates XIV, L.P., as
borrower, in favor of Merrill Lynch Commercial Finance Corp. and received an
assignment of the underlying master loan and security agreement (the "MLSA"),
dated July 28, 2006. The LLC, Fund Ten and Fund Twelve have ownership interests
of 35%, 12.25%, and 52.75%, respectively, in ICON Northern Leasing. The
aggregate purchase price for the Northern Notes was approximately $31,573,000,
net of a discount of approximately $5,165,000. The Northern Notes are secured by
an underlying pool of leases for credit card machines. Northern Leasing Systems,
Inc. (“Northern Leasing Systems”), the originator and servicer of the Northern
Notes, provided a limited guarantee of the MLSA for payment deficiencies up to
approximately $6,355,000. The Northern Notes accrue interest at rates ranging
from 7.97% to 8.40% per year and require monthly payments ranging from
approximately $183,000 to $422,000.
The
Northern Notes mature between October 15, 2010 and August 14, 2011 and require
balloon payments at the end of each note ranging from approximately $594,000 to
$1,255,000. The LLC’s share of the purchase price of the Northern Notes was
approximately $11,051,000 and the LLC paid an acquisition fee to the Manager of
approximately $332,000 relating to this transaction.
77
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(8)
|
Non-Recourse
Long-Term Debt
|
The LLC
had the following non-recourse long-term debt at December 31, 2009 and
2008:
|
2009
|
2008
|
|||||||
|
ICON
European Container, LLC
|
$ | 19,112,200 | $ | 25,850,000 | ||||
|
ICON
European Container II, LLC
|
26,905,800 | 33,240,000 | ||||||
|
ICON
Doubtless, LLC (1)
|
6,625,000 | 12,688,471 | ||||||
|
ICON
Spotless, LLC (1)
|
6,625,000 | 12,688,471 | ||||||
|
ICON
Faithful, LLC (1)
|
6,625,000 | 13,348,285 | ||||||
|
Isomar
Marine Company Limited (1)
|
6,625,000 | 13,698,002 | ||||||
|
ICON
Senang, LLC
|
21,210,529 | 25,968,202 | ||||||
|
ICON
Sebarok, LLC
|
21,210,529 | 25,968,202 | ||||||
|
Total
non-recourse long-term debt
|
114,939,058 | 163,449,633 | ||||||
|
Less:
Current portion of non-recourse long-term debt
|
43,603,558 | 42,995,346 | ||||||
|
Total
non-recourse long-term debt, less current portion
|
$ | 71,335,500 | $ | 120,454,287 | ||||
|
(1) Currently
in default and attempting to be restructured, see discussion
below.
|
||||||||
Container
Vessels
In
connection with the acquisition of the ZIM Vessels on June 21, 2006, the LLC
assumed approximately $93,325,000 of senior non-recourse long-term
debt. Pursuant to the terms of the HSH Loan
Agreement, there are two separate tranches to the senior non-recourse long-term
debt obligation. HSH has first priority security interest in the ZIM
Vessels. The ZIM Purchasers are jointly and severally liable for the
obligations under the loan agreement and the ZIM Vessels are
cross-collateralized. The LLC may, at its discretion, make periodic prepayments
of the outstanding principal balance without penalty.
The
tranche of the senior non-recourse long-term debt obligation relating to the
acquisition of the M/V ZIM Japan Sea and M/V ZIM Andaman Sea (f/k/a ZIM America)
(collectively, “Tranche I”) matures on November 18, 2010 and accrues interest at
the London Interbank Offered Rate (“LIBOR”) plus 1.25% per year. The
tranche of the senior non-recourse long-term debt obligation relating to the
acquisition of the M/V ZIM Hong Kong and M/V ZIM Israel (collectively, “Tranche
II”) matures on January 27, 2011 and accrues interest at LIBOR plus 1.25% per
year.
On April
24, 2008, the LLC amended the loan agreement with HSH, changing the payment
terms from quarterly payments to monthly payments. The LLC will be required
to make monthly payments on Tranche I ranging from $240,000 to $1,680,000 and
will have a balloon payment due November 18, 2010 of approximately $7,300,000,
and the LLC will be required to make monthly payments on Tranche II ranging from
$210,000 to $2,110,000 and will have a balloon payment due January 27, 2011 of
approximately $13,900,000.
As
part of the acquisition of the ZIM Vessels, the LLC assumed three interest rate
swap contracts. These interest rate swap contracts were established in order to
fix the variable interest rates on the senior non-recourse long-term debt
obligation and minimize the LLC’s risk of interest rate
fluctuations. The interest rate swap contracts had a fixed interest
rate of 5.41% for M/V ZIM Japan Sea, 5.97% for M/V ZIM Andaman Sea (f/k/a ZIM
America), and 5.99% for M/V ZIM Hong Kong and M/V ZIM Israel.
78
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(8)
|
Non-Recourse
Long-Term Debt - continued
|
On April
28, 2008, the LLC terminated these three interest rate swap contracts and
entered into two new interest rate swaps. These transactions resulted
in a gain of approximately $160,000. After giving effect to the swap agreements,
the LLC has a fixed interest rate of 5.75% (for the M/V ZIM Andaman Sea and the
M/V ZIM Japan Sea) and 5.99% (for the M/V ZIM Hong Kong and the M/V ZIM Israel),
respectively, per year. At December 31, 2009 and 2008, the outstanding balance
of the senior and junior non-recourse long-term debt obligations related to the
ZIM Vessels was $46,018,000 and $59,090,000, respectively.
On
February 9, 2010, the LLC, through its wholly-owned subsidiaries, amended the
HSH Loan Agreement (the “Amended Facility Agreement”) to correspond with the
revised payment schedule in the European Containers Charter Amendments, which
also cured the debt that was in default as of December 31,
2009.
Handymax
Product Tankers
In
connection with the acquisition of the Top Ships Vessels (see Note 5), the Top
Ships Purchasers entered into the Fortis Loan with Fortis for approximately
$80,000,000. The LLC paid and capitalized approximately $480,000 in debt
financing costs. Pursuant to the terms of the Fortis Loan, there were four
separate advances: (i) approximately $19,364,000 for the acquisition of the M/T
Doubtless, (ii) approximately $19,364,000 for the acquisition of the M/T
Spotless, (iii) approximately $20,363,000 for the acquisition of the M/T
Faithful, and (iv) approximately $20,909,000 for the acquisition of the M/T
Vanguard. The advances are all cross-collateralized, have a maturity
date of June 22, 2011 and accrue interest at LIBOR plus 1.125% per
year.
The
advances for the acquisitions of the M/T Doubtless and the M/T Spotless each
require quarterly principal payments ranging from approximately
$847,000 to $1,089,000. The advance for the acquisition of the M/T
Faithful requires quarterly payments ranging from approximately $891,000 to
$1,145,000. The advance for the acquisition of the M/T Vanguard requires
quarterly payments ranging from approximately $915,000 to
$1,176,000.
On June
16, 2006, the LLC also entered into four interest rate swap contracts with
Fortis Nederland in order to fix the variable interest rate on the LLC’s
non-recourse debt with regards to the Top Ships Vessels and to minimize the
LLC’s risk for interest rate fluctuations. After giving effect to the swap
agreements, the LLC has a fixed interest rate of 6.715% per year. The LLC
accounts for these swap contracts as cash flow hedges and recognize the change
in the fair value in other comprehensive (loss) income.
In
connection with the acquisition of the Top Ships Vessels, the Top Ships
Purchasers assumed the second priority non-recourse debt of approximately
$10,000,000 with Top Ships, consisting of (i) approximately $2,420,000 relating
to the acquisition of the M/T Doubtless, (ii) approximately $2,420,000 relating
to the acquisition of the M/T Spotless, (iii) approximately $2,550,000 relating
to the acquisition of the M/T Faithful and (iv) approximately $2,610,000
relating to the acquisition of the M/T Vanguard. The second priority
non-recourse debt will mature on March 14, 2011 and does not accrue interest.
The LLC has recorded the second priority non-recourse debt at its net present
value at June 16, 2006, which was approximately $8,778,000, and imputes interest
at 2.75% per year, which is the rate of interest on similar second priority
non-recourse debt that the LLC had. Top Ships has a second priority security
interest in the Top Ships Vessels as security for the junior non-recourse
long-term debt obligations.
79
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(8)
|
Non-Recourse
Long-Term Debt - continued
|
In
connection with the Bareboat Charter Termination, the LLC prepaid $8,500,000 of
the outstanding senior non-recourse long-term debt, which reduced the
outstanding balance to $26,500,000. Simultaneously, the LLC terminated the
Fortis Loan and entered into the New Fortis Loan for $26,500,000. The New Fortis
Loan cross-collateralizes the Top Ships Vessels, has a maturity date of June 16,
2011 and accrues interest at LIBOR or LIBOR equivalent plus 2.75% per year. The
LLC paid and capitalized $265,000 in debt financing costs in connection with the
New Fortis Loan and paid approximately $170,000 in fees in connection with the
terminated Fortis Loan, which costs and fees were expensed during the year ended
December 31, 2009.
In
connection with the termination of the Fortis Loan, the LLC terminated the
Original Swap Contracts during the year ended December 31, 2009. Simultaneously
with the execution of the New Fortis
Loan, the LLC entered into a new interest rate swap contract with Fortis
Nederland in order to fix the variable interest rate on the non-recourse
long-term debt with regard to the Top Ships Vessels and to minimize the risk to
interest rate fluctuations. After giving effect to the new swap contract, the
LLC has a fixed interest rate of 7.62% per year. The LLC accounts for the
new swap contract as a non-designated derivative instrument and will recognize
any change in the fair value directly in earnings.
As a
result of the Bareboat Charter Termination, the LLC recognized a gain on
extinguishment of debt of approximately $9,548,000 in connection with Top Ships
waiving its rights to the second priority non-recourse debt obligations, which
is included in the gain on lease termination in the accompanying consolidated
statement of operations for the year ended December 31, 2009.
On
September 23, 2009, the Top Ships Purchasers defaulted on the New Fortis Loan
due to their failure to make required payments under the agreement. The Top
Ships Purchasers are
currently in active discussions with Fortis and are attempting to restructure
the New Fortis Loan. The LLC has classified the balance
of the outstanding non-recourse long-term debt under this agreement as current
at December 31, 2009.
At
December 31, 2009 and 2008, the outstanding balance of the senior and junior
non-recourse long-term debt obligations related to the Top Ships Vessels
was $26,500,000 and $52,423,000, respectively.
Aframax
Product Tankers
In
connection with the acquisition of the Teekay Vessels (see Note 5), the Teekay
Purchasers borrowed approximately $66,660,000 of non-recourse debt under the
Teekay Loan Agreement with Fortis Capital. Pursuant to the terms of the Teekay
Loan Agreement, there were two advances of approximately $33,330,000 each for
the acquisition of the M/T Senang Spirit and the M/T Sebarok Spirit,
respectively. The LLC paid and capitalized approximately $880,000 in debt
financing costs. The advances are both cross-collateralized, have a maturity
date of April 11, 2012 and accrue interest at LIBOR plus 1.00% per
year.
The
advances require monthly principal payments ranging from approximately $202,000
to $1,006,000. On April 11, 2012, a balloon payment of approximately
$18,800,000 is due. The LLC may, at its discretion, make periodic
prepayments of the outstanding principal balance without penalty. At December
31, 2009 and 2008, the outstanding balance of the non-recourse long-term debt
obligations related to the Teekay Vessels was approximately $42,421,000 and
$51,936,000, respectively.
80
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(8)
|
Non-Recourse
Long-Term Debt - continued
|
On April
11, 2007, the LLC entered into two additional interest rate swap contracts with
Fortis Nederland in order to fix the variable interest rate on the LLC’s
non-recourse long-term debt with regards to the Teekay Vessels and to minimize
the LLC’s risk for interest rate fluctuations. After giving effect to the swap
agreements, the LLC has a fixed interest rate of 6.125% per year. The LLC
accounted for these swap contracts as cash flow hedges.
As of
December 31, 2009 and 2008, the LLC had net deferred financing costs
of $563,955 and $630,598, respectively. For the years ended December 31, 2009,
2008 and 2007, the LLC recognized amortization expense of $418,762,
$532,882 and $168,309, respectively.
The
aggregate maturities of non-recourse long-term debt over the next five years
were as follows at December 31, 2009. There will be no additional maturities on
non-recourse long term debt after 2014.
|
Years Ending December 31,
|
||||
|
2010
|
$ | 43,603,558 | ||
|
2011
|
11,116,800 | |||
|
2012
|
23,810,700 | |||
|
2013
|
5,325,000 | |||
|
2014
|
31,083,000 | |||
| $ | 114,939,058 | |||
|
(9)
|
Revolving
Line of Credit, Recourse
|
The LLC
and certain entities managed by the Manager, ICON Income Fund Eight B L.P.
(“Fund Eight B”), Fund Nine, Fund Ten, Fund Twelve and ICON Equipment and
Corporate Infrastructure Fund Fourteen, L.P. (“Fund Fourteen”) (collectively,
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.
81
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(9)
|
Revolving
Line of Credit, Recourse -
continued
|
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 balances of $100,000 and $2,260,000 were borrowed by Fund
Ten and the LLC, respectively. As of March 24, 2010, Fund Ten and the LLC 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.
|
(10)
|
Foreign
Income Taxes
|
Certain
of the LLC’s direct and indirect wholly-owned subsidiaries are unlimited
liability companies and are taxed as corporations under the laws of
Canada. Other indirect wholly-owned subsidiaries are taxed as
corporations in Barbados.
The
components of loss before income taxes were:
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Non-taxable (1)
|
$ | (44,793,430 | ) | $ | (859,198 | ) | $ | 732,236 | ||||
|
Taxable (1)
|
1,389,368 | (4,353,738 | ) | 62,557 | ||||||||
|
(Loss)
income before income taxes
|
$ | (43,404,062 | ) | $ | (5,212,936 | ) | $ | 794,793 | ||||
|
(1)
The distinction of the taxable and non-taxable activities were determined
based on the locations of the taxing authorities.
|
||||||||||||
The
components of the benefit (provision) for income taxes are as
follows:
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Current:
|
||||||||||||
|
Foreign
national and provincial (provision) benefit
|
$ | (495,291 | ) | $ | 2,057,668 | $ | (293,016 | ) | ||||
|
Deferred:
|
||||||||||||
|
Foreign
national and provincial benefit (provision)
|
648,771 | (595,016 | ) | (1,911,211 | ) | |||||||
|
Benefit
(provision) for income taxes
|
$ | 153,480 | $ | 1,462,652 | $ | (2,204,227 | ) | |||||
During
2008, the LLC elected to carry back certain cumulative net operating losses to
prior periods to recover income taxes paid for the year ended December 31, 2006,
resulting in the recognition of a benefit of approximately $2,551,000. As of
December 31, 2009, the LLC has a deferred tax asset of approximately $3,022,000
relating to (i) net operating losses that are currently expected to expire
starting in 2027 through 2028 and (ii) a net unrealized capital loss on foreign
currency for a net note receivable. This deferred tax asset has a full valuation
allowance. The remaining components of the deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and for income tax
purposes.
82
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(10)
|
Foreign
Income Taxes -
continued
|
The
significant components of deferred taxes consisted of the
following:
|
December 31,
|
||||||||
|
Non-current
deferred tax assets:
|
2009
|
2008
|
||||||
|
Leased
equipment at cost, less accumulated depreciation
|
$ | 4,675,969 | $ | 4,464,693 | ||||
|
Unrealized
taxable capital loss
|
298,051 | 125,106 | ||||||
|
Net
operating loss carryforward, net of current portion
|
2,945,597 | 2,529,455 | ||||||
|
Total
non-current deferred tax assets before valuation allowance
|
7,919,617 | 7,119,254 | ||||||
|
Valuation
allowance
|
(3,021,502 | ) | (2,529,455 | ) | ||||
|
Total
deferred tax assets
|
$ | 4,898,115 | $ | 4,589,799 | ||||
|
Non-current
deferred tax liabilities:
|
||||||||
|
Net
investment in finance leases
|
$ | (3,732,916 | ) | $ | (4,292,885 | ) | ||
|
Unrealized
taxable capital gain
|
(222,146 | ) | (90,813 | ) | ||||
|
Total
deferred tax liabilities
|
(3,955,062 | ) | (4,383,698 | ) | ||||
|
Net
deferred tax assets
|
$ | 943,053 | $ | 206,101 | ||||
Reconciliations
from the benefit (provision) for income taxes at the U.S. federal statutory tax
rate to the effective tax rate for the benefit (provision) for income taxes are
as follows:
|
2009
|
2008
|
2007
|
||||||||||
|
U.S.
Federal statutory income tax rate
|
(34.0 | )% | (34.0 | )% | (34.0 | )% | ||||||
|
Rate
benefit for U.S. partnership operations
|
34.0 | % | 34.0 | % | 34.0 | % | ||||||
|
Foreign
taxes
|
(0.4 | )% | 20.1 | % | (802.2 | )% | ||||||
| 0.4 | % | 20.1 | % | (802.2 | )% | |||||||
The LLC’s
Canadian subsidiaries, under the laws of Canada, are subject to income tax
examination for the 2006 through 2009 periods. The LLC has not identified any
uncertain tax positions as of December 31, 2009.
|
(11)
|
Transactions
with Related Parties
|
In
accordance with the terms of the LLC Agreement, the LLC pays or paid the Manager
(i) management fees ranging from 1% to 7% based on a percentage of the rentals
and other contractual payments 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 is 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.
The
Manager performs certain services relating to the management of the LLC’s
equipment leasing and other financing activities. Such services
include, but are not limited to, the collection of lease payments from the
lessees of the equipment or loan payments from borrowers, re-leasing services in
connection with equipment which is off-lease, inspections of the equipment,
liaising with and general supervision of lessees and borrowers 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.
83
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(11)
|
Transactions
with Related Parties- continued
|
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 costs, 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.
Effective
July 1, 2009, the Manager suspended its collection of a portion of its
management fees through December 31, 2009. The Manager will review this
suspension on a month-to-month basis.
The LLC
paid distributions to the Manager of $333,811, $334,071 and $375,190 for the
years ended December 31, 2009, 2008 and 2007,
respectively. Additionally, the Manager’s interest in the net
loss attributable to Fund Eleven was $450,959, $57,977 and $24,790 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:
|
Entity
|
Capacity
|
Description
|
2009
|
2008
|
2007
|
|||||||||||
|
|
|
|
||||||||||||||
| ICON Capital Corp. | Manager |
Organization
and offering
expenses (1)
|
$ | - | $ | - | $ | 1,095,103 | ||||||||
|
ICON
Securities Corp.
|
Managing
broker-dealer
|
Underwriting
fees (1)
|
- | - | 1,460,137 | |||||||||||
|
ICON
Capital Corp.
|
Manager
|
Acquisition
fees (2)
|
- | 1,204,384 | 4,624,646 | |||||||||||
|
ICON
Capital Corp.
|
Manager
|
Management
fees (3) (4)
|
2,185,858 | 5,110,375 | 6,662,395 | |||||||||||
|
ICON
Capital Corp.
|
Manager
|
Administrative
expense reimbursements (3)
|
1,951,850 | 3,586,973 | 5,423,388 | |||||||||||
|
Total
fees paid to related parties
|
$ | 4,137,708 | $ | 9,901,732 | $ | 19,265,669 | ||||||||||
|
(1) Charged
directly to members' equity.
|
||||||||||||||||
|
(2) Capitalized
and amortized to operations over the estimated service period in
accordance with the LLC's accounting policies.
|
||||||||||||||||
|
(3) Charged
directly to operations.
|
||||||||||||||||
|
(4) The
Manager suspended the collection of its management fees in the amount of
$1,355,498 during the year ended December 31, 2009.
|
||||||||||||||||
At
December 31, 2009, the LLC had a payable of $300,223 due to the Manager and its
affiliates that consisted primarily of an accrual due to the Manager for
administrative expense reimbursements. At December 31, 2008, the LLC had a net
payable of $288,802 due to the Manager and its affiliates that consisted
primarily of accruals due to the Manager for administrative expense
reimbursements and management fees.
|
(12)
|
Derivative
Financial Instruments
|
The LLC
may enter into derivative transactions for purposes of hedging specific
financial exposures, including movements in foreign currency exchange rates and
changes in interest rates on 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.
84
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(12)
|
Derivative
Financial Instruments - continued
|
The LLC
accounts for derivative financial instruments in accordance with the accounting
pronouncements that established accounting and reporting standards for
derivative financial instruments. These accounting pronouncements
require the LLC to recognize all derivatives as either assets or liabilities on
the consolidated balance sheets and measure those instruments at fair value. The
LLC recognizes 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 the LLC must
document and assess at inception and on an ongoing basis, the LLC recognizes the
changes in fair value of such instruments in AOCI, a component of equity on the
consolidated balance sheets. Changes in the fair value of the ineffective
portion of all derivatives are recognized immediately in earnings.
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 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.
As of
December 31, 2009, the LLC had four floating-to-fixed interest rate swaps
relating to ICON Senang, LLC, ICON Sebarok, LLC, ICON European Container and
ICON European Container II designated as cash flow hedges with an aggregate
notional amount of approximately $78,131,000. These interest rate swaps have
maturity dates ranging from November 19, 2010 to April 11, 2012.
As of
December 31, 2008, the LLC had eight floating-to-fixed interest rate swaps
relating to ICON Faithful, LLC, ICON Doubtless, LLC, Isomar Marine Company
Limited, ICON Spotless, LLC, ICON Senang, LLC, ICON Sebarok, LLC, ICON European
Container and ICON European Container II designated as cash flow hedges with an
aggregate notional amount of approximately $146,026,000. These interest rate
swaps have maturity dates ranging from November 19, 2010 to April 11,
2012.
For these
derivatives, the LLC records the gain or loss from the effective portion of
changes in the fair value of derivatives designated and qualifying as cash flow
hedges in 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 statements of operations as the impact of the hedged
transaction. During the year ended December 31, 2008, the LLC recorded hedge
ineffectiveness in the amount of approximately $12,000, as a component of the
(gain) loss on financial instruments in the consolidated statements of
operations. During the years ended December 31, 2009 and 2007, the LLC recorded
no hedge ineffectiveness in earnings.
During
the twelve months ending December 31, 2010, the LLC estimates that approximately
$2,849,000 will be transferred from AOCI to interest expense.
85
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(12)
|
Derivative
Financial Instruments - continued
|
Non-designated
Derivatives
The LLC
holds an interest rate swap with a notional balance of approximately $22,845,000
that is not speculative and is used to meet the LLC’s objectives in using
interest rate derivatives to add stability to interest expense and to manage its
exposure to interest rate movements. The LLC’s hedging strategy to
accomplish this objective is to match the projected future cash flows with the
underlying debt service. The interest rate swap involves 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 agreement without
exchange of the underlying notional amount. Additionally, the LLC holds
warrants that are held for purposes other than hedging. All changes in the
fair value of the interest rate swap not designated as a hedge and the warrants
are recorded directly in earnings.
The table
below presents the fair value of the LLC’s derivative financial instruments as
well as their classification within the LLC’s consolidated balance sheet as of
December 31, 2009:
|
Asset Derivatives
|
Liability Derivatives
|
|||||||||
|
Balance Sheet Location
|
Fair Value
|
Balance Sheet Location
|
Fair Value
|
|||||||
|
Derivatives
designated as hedging instruments:
|
||||||||||
|
Interest
rate swaps
|
$ | - |
Derivative
instruments
|
$ | 3,942,837 | |||||
|
Derivatives
not designated as hedging instruments:
|
||||||||||
|
Interest
rate swaps
|
$ | - |
Derivative
instruments
|
$ | 1,106,490 | |||||
|
Warrants
|
Other
non-current assets
|
$ | 79,371 | $ | - | |||||
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:
|
Derivatives
|
Amount
of Gain (Loss) Recognized
in
AOCI
on Derivative
(Effective
Portion)
|
Location
of Gain (Loss) Reclassified
from
AOCIinto Income (Effective Portion)
|
Gain
(Loss) Reclassified from
AOCI
into Income (Effective Portion)
|
Location
of Gain (Loss) Recognized in Income on
Derivative (Ineffective
Portion
and Amounts Excluded
from
Effectiveness Testing)
|
Gain
(Loss) Recognized in Income
on
Derivative (Ineffective Portion and Amounts Excluded from Effectiveness
Testing)
|
|||||||||
|
Interest
rate swaps
|
$ | 454,962 |
Interest
expense
|
$ | (4,115,917 | ) |
Gain
(loss) on financial instruments
|
$ | - | |||||
The LLC’s
derivative financial instruments not designated as hedging instruments generated
a gain on the statements of operations for the year ended December 31, 2009 of
$346,739. This gain was recorded as a component of (gain) loss on financial
instruments. The gain recorded for the year ended December 31, 2009 was
comprised of $328,947 relating to interest rate swap contracts and $17,792
relating to warrants.
The LLC’s
derivative financial instruments not designated as hedging instruments generated
a loss on the statements of operations for the year ended December
31, 2008 of $830,336. The loss was recorded as a component of (gain) loss
on financial instruments. The loss recorded for the year ended December 31, 2008
was comprised of $802,274 relating to interest rate swap contracts and $28,062
relating to warrants.
86
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(12)
|
Derivative
Financial Instruments - continued
|
The LLC’s
derivative financial instruments not designated as hedging instruments generated
a loss on the statements of operations for the year ended December
31, 2007 of $2,846,069. The loss was recorded as a component of (gain)
loss on financial instruments. The loss recorded for the year ended December 31,
2007 was comprised of $2,821,045 relating to interest rate swap contracts and
$25,024 relating to warrants.
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 $5,049,327 and $9,257,854, 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 $5,242,504.
|
(13)
|
Accumulated
Other Comprehensive Loss
|
AOCI
includes accumulated losses on derivative financial instruments and accumulated
gains on currency translation adjustments of $1,861,934 and $376,294,
respectively, at December 31, 2009 and accumulated losses on derivative
financial instruments and accumulated gains on currency translation adjustments
of $6,432,813 and $157,534, respectively, at December 31, 2008.
|
(14)
|
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.
87
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(14)
|
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
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Warrants
|
$ | - | $ | 79,371 | $ | - | $ | 79,371 | ||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivative
Liabilities
|
$ | - | $ | 5,049,327 | $ | - | $ | 5,049,327 | ||||||||
|
(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 and warrants, 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 warrants was recorded in other
non-current assets and the fair value of the derivative liabilities was recorded
in derivative instruments within the consolidated balance sheets.
Assets
and Liabilities Measured at Fair Value on a Nonrecurring Basis
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. The LLC’s non-financial assets, such as leased
equipment at cost, are measured at fair value when there is an indicator of
impairment and recorded at fair value only when an impairment charge is
recognized. The following table summarizes the valuation of the LLC’s
material non-financial assets and liabilities measured at fair value on a
nonrecurring basis for the year ended December 31, 2009:
|
December 31, 2009 (1)
|
Level 1(2)
|
Level 2(3)
|
Level 3(4)
|
Total Impairment Loss
|
||||||||||||||||
|
Leased
equipment at cost
|
$ | 49,113,909 | - | $ | 7,934,802 | $ | 46,000,000 | $ | 40,973,570 | |||||||||||
|
Assets
held for sale, net
|
$ | 3,813,647 | - | $ | 3,914,775 | - | $ | 1,234,554 | ||||||||||||
|
Investment
in joint venture
|
$ | 4,181,236 | - | $ | 4,182,833 | - | $ | 1,543,192 | ||||||||||||
|
(1)
Represents the carrying value of the assets.
|
||||||||||||||||||||
|
(2)
Quoted prices in active markets for identical assets or
liabilities.
|
||||||||||||||||||||
|
(3)
Observable inputs other than quoted prices in active markets for identical
assets and liabilities.
|
||||||||||||||||||||
|
(4)
No observable pricing inputs in the market.
|
||||||||||||||||||||
88
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(14)
|
Fair
Value Measurements - continued
|
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 mortgage note
receivable 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.
|
December
31, 2009
|
||||||||
|
Carrying Amount
|
Fair Value
|
|||||||
|
Mortgage
note receivable
|
$ | 12,722,006 | $ | 14,962,253 | ||||
|
(15)
|
Share
Repurchase
|
The LLC
repurchased 163, 603, and 1,287 Shares for the years ended December 31, 2009,
2008 and 2007, respectively. The repurchase amounts are calculated according to
a specified repurchase formula pursuant to the LLC
Agreement. Repurchased Shares have no voting rights and do not share
in distributions. The LLC Agreement limits the number of Shares that can be
repurchased in any one year and repurchased Shares may not be reissued.
Repurchased Shares are accounted for as a reduction of members'
equity.
|
(16)
|
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.
For the
year ended December 31, 2009, the LLC had three lessees that accounted for
approximately 63.0% of its total rental and finance income. For the year ended
December 31, 2008, the LLC had three lessees that accounted for approximately
55.4% of rental and finance income. For the year ended December 31,
2007, the LLC had two lessees that accounted for approximately 36.1% of rental
and finance income. No other lessees accounted for more than 10% of rental
and finance income.
At
December 31, 2009, the LLC had three lessees that accounted for approximately
59.9% of total assets and one lender that accounted for approximately 53.4% of
total liabilities.
At
December 31, 2008, the LLC had three lessees that accounted for approximately
63.6% of total assets and one lender that accounted for approximately 51.9% of
total liabilities.
89
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(17)
|
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 mortgage notes receivable, are
as follows:
|
Year Ended December 31,
2009
|
||||||||||||||||||||
|
United
|
||||||||||||||||||||
|
States
|
Canada
|
Europe
|
Vessels (a)
|
Total
|
||||||||||||||||
|
Revenue:
|
||||||||||||||||||||
|
Rental
income
|
$ | 21,174,455 | $ | - | $ | 923,749 | $ | 42,001,646 | $ | 64,099,850 | ||||||||||
|
Time
charter income
|
$ | - | $ | - | $ | - | $ | 5,559,524 | $ | 5,559,524 | ||||||||||
|
Finance
income
|
$ | 1,626,327 | $ | 921,812 | $ | - | $ | - | $ | 2,548,139 | ||||||||||
|
Income
from investments in joint ventures
|
$ | 345,938 | $ | - | $ | - | $ | - | $ | 345,938 | ||||||||||
|
At December 31, 2009
|
||||||||||||||||||||
|
United
|
||||||||||||||||||||
|
States
|
Canada
|
Europe
|
Vessels (a)
|
Total
|
||||||||||||||||
|
Long-lived
assets:
|
||||||||||||||||||||
|
Net
investment in finance leases
|
$ | 9,749,463 | $ | 14,931,689 | $ | - | $ | - | $ | 24,681,152 | ||||||||||
|
Leased
equipment at cost, net
|
$ | 15,853,373 | $ | - | $ | 9,120,432 | $ | 158,640,374 | $ | 183,614,179 | ||||||||||
|
Mortgage
note receivable
|
$ | - | $ | 12,722,006 | $ | - | $ | - | $ | 12,722,006 | ||||||||||
|
Investments
in joint ventures
|
$ | 11,578,687 | $ | - | $ | - | $ | - | $ | 11,578,687 | ||||||||||
|
Note
receivable
|
$ | 10,015,000 | $ | - | $ | - | $ | - | $ | 10,015,000 | ||||||||||
|
Assets
held for sale, net
|
$ | 3,813,647 | $ | - | $ | - | $ | - | $ | 3,813,647 | ||||||||||
| (a) | The LLC's vessels are chartered to four separate companies: four vessels are chartered to ZIM, the Top Ships Vessels are time chartered to two companies, and two vessels are chartered to Teekay. When the LLC charters a vessel to a charterer, the charterer is free to trade the vessel worldwide. |
90
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(17)
|
Geographic
Information - continued
|
|
Year Ended December 31,
2008
|
||||||||||||||||||||
|
United
|
||||||||||||||||||||
|
States
|
Canada
|
Europe
|
Vessels (a)
|
Total
|
||||||||||||||||
|
Revenue:
|
||||||||||||||||||||
|
Rental
income
|
$ | 27,283,234 | $ | 6,769,185 | $ | 3,512,451 | $ | 52,444,659 | $ | 90,009,529 | ||||||||||
|
Finance
income
|
$ | 2,461,206 | $ | 2,190,067 | $ | - | $ | - | $ | 4,651,273 | ||||||||||
|
Income
from investments in joint ventures
|
$ | 835,966 | $ | - | $ | 1,235,053 | $ | - | $ | 2,071,019 | ||||||||||
|
At December 31, 2008
|
||||||||||||||||||||
|
United
|
||||||||||||||||||||
|
States
|
Canada
|
Europe
|
Vessels (a)
|
Total
|
||||||||||||||||
|
Long-lived
assets:
|
||||||||||||||||||||
|
Net
investment in finance leases
|
$ | 14,983,518 | $ | 16,500,915 | $ | - | $ | - | $ | 31,484,433 | ||||||||||
|
Leased
equipment at cost, net
|
$ | 65,898,284 | $ | - | $ | 10,347,519 | $ | 256,978,548 | $ | 333,224,351 | ||||||||||
|
Investments
in joint ventures
|
$ | 18,659,329 | $ | - | $ | - | $ | - | $ | 18,659,329 | ||||||||||
|
Mortgage
note receivable
|
$ | - | $ | 12,722,006 | $ | - | $ | - | $ | 12,722,006 | ||||||||||
| (a) |
The
LLC's vessels are chartered to three separate companies: four vessels
are chartered to ZIM, four vessels are chartered to Top Ships and two
vessels are chartered to Teekay. When the LLC charters a vessel to a
charterer, the charterer is free to trade the vessel
worldwide.
|
91
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(18)
|
Selected
Quarterly Financial Data
|
The
following table is a summary of selected financial data by quarter:
|
(unaudited)
|
Year ended | |||||||||||||||||||
|
Quarters Ended in 2009
|
December 31, | |||||||||||||||||||
|
March 31,
|
June 30,
|
September 30,
|
December 31,
|
2009
|
||||||||||||||||
|
Total
revenue
|
$ | 22,025,271 | $ | 47,778,040 | $ | 17,746,329 | $ | 15,644,597 | $ | 103,194,237 | ||||||||||
|
Net
income (loss) attributable to Fund Eleven allocable to additional
members
|
$ | 2,508,338 | $ | 26,936,132 | $ | (53,056,688 | ) | $ | (21,032,739 | ) | $ | (44,644,957 | ) | |||||||
|
Weighted
average number of additional shares of
|
||||||||||||||||||||
|
limited
liability company interests outstanding
|
363,188 | 363,152 | 363,120 | 363,099 | 363,139 | |||||||||||||||
|
Net
income (loss) attributable to Fund Eleven per weighted average
|
||||||||||||||||||||
|
additional
share of limited liability company interests
|
$ | 6.91 | $ | 74.17 | $ | (146.11 | ) | $ | (57.93 | ) | $ | (122.94 | ) | |||||||
|
(unaudited)
|
Year ended December 31,
2008
|
|||||||||||||||||||
|
Quarters Ended in 2008
|
||||||||||||||||||||
|
March 31,
|
June 30,
|
September 30,
|
December 31,
|
|||||||||||||||||
|
Total
revenue
|
$ | 30,204,703 | $ | 14,067,736 | $ | 20,980,849 | $ | 21,513,613 | $ | 86,766,901 | ||||||||||
|
Net
(loss) income attributable to Fund Eleven allocable to additional
members
|
$ | (364,888 | ) | $ | (5,333,498 | ) | $ | 1,313,247 | $ | (1,354,605 | ) | $ | (5,739,744 | ) | ||||||
|
Weighted
average number of additional shares of
|
||||||||||||||||||||
|
limited
liability company interests outstanding
|
363,563 | 363,486 | 363,355 | 363,268 | 363,414 | |||||||||||||||
|
Net
(loss) income attributable to Fund Eleven per weighted
average
|
||||||||||||||||||||
|
additional
share of limited liability company interests
|
$ | (1.00 | ) | $ | (14.67 | ) | $ | 3.61 | $ | (3.73 | ) | $ | (15.79 | ) | ||||||
|
(19)
|
Commitments
and Contingencies and Off-Balance Sheet
Transactions
|
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 of the LLC 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.
The
Participating Funds have entered into a credit support agreement, pursuant to
which losses incurred by a Participating Fund with respect to any MWU subsidiary
are shared among the Participating Funds in proportion to their respective
capital investments. The term of the credit support agreement matches the term
of the schedules to the master lease agreement. No amounts are due
under the credit support agreement at December 31, 2009.
The LLC
has entered into a remarketing agreement with a third party. In connection with
this agreement, residual proceeds received in excess of specific amounts will be
shared with this third party based on specific formulas. The obligation related
to this agreement is recorded at fair value.
92
ICON
Leasing Fund Eleven, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(20)
|
Income
Tax Reconciliation (Unaudited)
|
At
December 31, 2009 and 2008, the members’ capital accounts included in the
consolidated financial statements totaled $136,378,244 and $210,185,781,
respectively. The members’ capital for federal income tax purposes at
December 31, 2009 and 2008 totaled $269,480,692 and $277,243,722,
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 the differences in gain (loss) on the sales of equipment and portfolio,
depreciation and amortization between financial reporting purposes and federal
income tax purposes.
The
following table reconciles net loss attributable to Fund Eleven for financial
statement reporting purposes to the net income (loss) attributable to Fund
Eleven for federal income tax purposes for the years ended December 31, 2009,
2008 and 2007:
|
2009
|
2008
|
2007
|
||||||||||
|
Net
loss attributable to Fund Eleven per consolidated financial
statements
|
$ | (45,095,916 | ) | $ | (5,797,721 | ) | $ | (2,478,993 | ) | |||
|
Depreciation
and amortization
|
37,333,436 | (8,242,341 | ) | 2,165,886 | ||||||||
|
Rental
income
|
(9,208,865 | ) | (29,135,836 | ) | 9,129,723 | |||||||
|
Gain
on sale of portfolio
|
- | 26,261,885 | - | |||||||||
|
Gain
on consolidated joint venture
|
6,101,571 | - | - | |||||||||
|
Loss
on sale of leased equipment
|
(7,469,387 | ) | - | (2,795,099 | ) | |||||||
|
Impairment
loss
|
42,208,124 | - | - | |||||||||
|
Bad
debt expense
|
2,389,977 | - | - | |||||||||
|
Other
items
|
(451,939 | ) | (2,952,423 | ) | (2,949,089 | ) | ||||||
|
Net
income (loss) attributable to Fund Eleven for federal income tax
purposes
|
$ | 25,807,001 | $ | (19,866,436 | ) | $ | 3,072,428 | |||||
|
Schedule
II - Valuation and Qualifying Accounts
|
||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||
|
|
Additions
|
Additions
|
|
|||||||||||||||||||||||
|
Balance
at
|
Charged
to
|
Charged
to
|
Other
Charges
|
Balance
at
|
||||||||||||||||||||||
|
Description
|
Beginning of
Year |
Costs
and Expenses |
Deferred
Tax Asset |
Deductions
|
Additions (Deductions)
|
End of
Year |
||||||||||||||||||||
|
Valuation
allowance for deferred tax assets:
|
||||||||||||||||||||||||||
|
Year
ended December 31, 2009
|
||||||||||||||||||||||||||
|
Valuation
allowance for deferred tax assets
|
||||||||||||||||||||||||||
|
(deducted
from deferred tax asset)
|
$ | 2,529,455 | - | $ | 75,905 | - | $ | 416,142 |
(b)
|
$ | 3,021,502 | |||||||||||||||
|
Year
ended December 31, 2008
|
||||||||||||||||||||||||||
|
Valuation
allowance for deferred tax assets
|
||||||||||||||||||||||||||
|
(deducted
from deferred tax asset)
|
$ | 2,716,674 | - | $ | (187,219 | ) | - | - | $ | 2,529,455 | ||||||||||||||||
|
Year
ended December 31, 2007
|
||||||||||||||||||||||||||
|
Valuation
allowance for deferred tax assets
|
||||||||||||||||||||||||||
|
(deducted
from deferred tax assets)
|
- | - | $ | 2,716,674 |
(a)
|
- | - | $ | 2,716,674 | |||||||||||||||||
|
Allowance
for doubtful accounts:
|
||||||||||||||||||||||||||
|
Year
ended December 31, 2009
|
||||||||||||||||||||||||||
|
Allowance
for doubtful accounts
|
||||||||||||||||||||||||||
|
(deducted
from accounts receivable)
|
- | $ | 1,569,221 | - | - | $ | (62,908 | ) |
(b)
|
$ | 1,506,313 | |||||||||||||||
|
Year
ended December 31, 2008
|
||||||||||||||||||||||||||
|
Allowance
for doubtful accounts
|
||||||||||||||||||||||||||
|
(deducted
from accounts receivable)
|
$ | 73,321 | - | - | $ | (73,321 | ) | - | - | |||||||||||||||||
|
Year
ended December 31, 2007
|
||||||||||||||||||||||||||
|
Allowance
for doubtful accounts
|
||||||||||||||||||||||||||
|
(deducted
from accounts receivable)
|
$ | 70,015 | - | - | - | $ | 3,306 |
(b)
|
$ | 73,321 | ||||||||||||||||
|
(a)
Management has determined that it is less than likely that the net
operating loss from one of the LLC’s wholly-owned subsidiaries in Canada
will be recovered.
|
||||||||||||||||||||||||||
|
(b)
Currency translation adjustment.
|
||||||||||||||||||||||||||
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 investments. 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 |
Organization
and offering
expenses (1)
|
$ | - | $ | - | $ | 1,095,103 | ||||||||
|
ICON
Securities Corp.
|
Managing
broker-dealer
|
Underwriting
fees (1)
|
- | - | 1,460,137 | |||||||||||
|
ICON
Capital Corp.
|
Manager
|
Acquisition
fees (2)
|
- | 1,204,384 | 4,624,646 | |||||||||||
|
ICON
Capital Corp.
|
Manager
|
Management
fees (3) (4)
|
2,185,858 | 5,110,375 | 6,662,395 | |||||||||||
|
ICON
Capital Corp.
|
Manager
|
Administrative
expense reimbursements (3)
|
1,951,850 | 3,586,973 | 5,423,388 | |||||||||||
|
Total
fees paid to related parties
|
$ | 4,137,708 | $ | 9,901,732 | $ | 19,265,669 | ||||||||||
|
(1) Charged
directly to members' equity.
|
||||||||||||||||
|
(2) Capitalized
and amortized to operations over the estimated service period in
accordance with our accounting policies.
|
||||||||||||||||
|
(3) Charged
directly to operations.
|
||||||||||||||||
|
(4) The
Manager suspended the collection of its management fees in the amount of
$1,355,498 during the year ended December 31, 2009.
|
||||||||||||||||
Our
Manager also has a 1% interest in our profits, losses, cash distributions and
liquidation proceeds. We paid distributions to our Manager of
$333,811, $334,071 and $375,190 for the years ended December 31, 2009, 2008 and
2007, respectively. Additionally, our Manager’s interest in the
net loss attributable to us was $450,959, $57,977 and $24,790 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 7 and 11 to our consolidated financial statements
for a discussion of our investments in joint ventures and transactions with
related parties, respectively.
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
|
$ | 466,000 | $ | 527,792 | ||||
|
Tax
fees
|
108,714 | 81,500 | ||||||
| $ | 574,714 | $ | 609,292 | |||||
|
(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 Formation of Registrant
(Incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the
Registration Statement on Form S-1 filed with the SEC on February 15, 2005
(File No.
333-121790)).
|
|
|
4.1
Amended and Restated Limited Liability Company
Agreement of Registrant (Incorporated by reference to Exhibit 4.1 to
Amendment No. 1 to the Registration Statement on Form S-1 filed with the
SEC on June 29, 2006 (File No.
333-133730)).
|
|
|
4.2
Amendment No. 1 to the Amended and Restated
Limited Liability Company Agreement of Registrant (Incorporated by
reference to Exhibit 4.3 to Registrant’s Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2006, filed August 23,
2006).
|
|
|
10.1
Commercial Loan Agreement, dated as of August 31,
2005, 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 (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, dated as of December
26, 2006, 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 (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, dated as of June 20,
2007, 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 (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 16,
2009).
|
|
|
10.4
Third Loan Modification Agreement, dated as of May
1, 2008, 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 (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 June 6, 2008).
|
|
|
10.5
Fourth Loan Modification Agreement, dated as of
August 12, 2009, 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.
(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 14, 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.
|
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
Leasing Fund Eleven, LLC
(Registrant)
By: ICON
Capital Corp.
(Manager
of the Registrant)
March 31,
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
Leasing Fund Eleven, LLC
(Registrant)
By: ICON
Capital Corp.
(Manager
of the Registrant)
March 31,
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)
|
|
101
|