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: 000-53189
ICON
Leasing Fund Twelve, LLC
(Exact
name of registrant as specified in its charter)
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Delaware
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20-5651009
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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 348,510.
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 Twelve, LLC (the “LLC” or “Fund Twelve”) was formed on October 3,
2006 as a Delaware limited liability company. The LLC will continue
until December 31, 2026, 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 limited liability company agreement (our “LLC
Agreement”).
Our
offering period ended on April 30, 2009 and our operating period commenced on
May 1, 2009. Our initial capitalization was $2,000, which consisted of
contributions of $1,000 from our Manager and $1,000 from an officer of our
Manager. We offered shares of limited liability company interests (“Shares”) on
a “best efforts” basis with the intention of raising up to $410,800,000 of
capital, consisting of 400,000 Shares at a purchase price of $1,000 and an
additional 12,000 Shares, which were reserved for issuances pursuant to our
distribution reinvestment plan (our “Distribution Reinvestment
Plan”). The Distribution Reinvestment Plan allowed investors to
purchase additional Shares with distributions received from us and/or certain
other funds managed by our Manager at a discounted share price of
$900. As of April 30, 2009, approximately 11,393 Shares were issued
in connection with our Distribution Reinvestment Plan. Upon raising
the minimum of $1,200,000, additional members were
admitted. Additional members represent all members other than our
Manager.
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-party end users or finance equipment for third
parties 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 needed 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. 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 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 $620,978,386 and
$438,585,542, respectively. For the year ended December 31, 2009, we had three
lessees that accounted for approximately 56.0% of our total rental and finance
income of $66,851,398. Net income attributable to us for the year ended December
31, 2009 was $13,858,916. For the year ended December 31, 2008, we had three
lessees that accounted for approximately 55.0% of our total rental and finance
income of $26,635,823. Net income attributable to us for the year ended December
31, 2008 was $5,942,580. For the year ended December 31, 2007, four
lessees accounted for approximately 99.6% of our total rental and finance income
of $4,508,242. Net income attributable to us for the year ended December 31,
2007 was $116,852.
Our
initial closing date was May 25, 2007 (the “Commencement of Operations”), the
date at which we raised $1,200,000. From the Commencement of
Operations to April 30, 2009, we sold approximately 348,826 Shares, representing
$347,686,947 of capital contributions and admitted 6,503 additional members. In
addition, pursuant to the terms of our offering, we established a reserve in the
amount of 0.5% of the gross offering proceeds. As of December 31, 2009, the
reserve is in the amount of $1,738,435, or 0.5% of the gross offering proceeds
of $347,686,947 raised as of the end of our offering on April 30, 2009. Through
December 31, 2009, we repurchased 117 Shares pursuant to our repurchase plan.
Beginning with the Commencement of Operations through April 30, 2009, we paid
$26,995,024 of sales commissions to third parties, $5,488,440 of organizational
and offering expense allowance to our Manager and $6,748,756 of underwriting
fees to ICON Securities Corp., a wholly-owned subsidiary of our Manager (“ICON
Securities”), the dealer-manager of our offering.
At
December 31, 2009, our portfolio, which we hold either directly or through joint
ventures, consisted primarily of the following investments:
Marine
Vessels and Equipment
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We
have a 51% ownership interest in ICON Mayon, LLC (“ICON Mayon”), which
purchased an Aframax product tanker, the Mayon Spirit, from an affiliate
of the Teekay Corporation (“Teekay”) on July 24, 2007. The
Mayon Spirit has a 48-month bareboat charter that expires on July 23,
2011.
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We,
through our wholly-owned subsidiaries ICON Arabian Express, LLC (“ICON
Arabian”) and ICON Aegean Express, LLC (“ICON Aegean”), own two 1,500
twenty-foot equivalent unit (“TEU”) containership vessels that we acquired
from Vroon Group B.V. (“Vroon”) on April 24, 2008. The vessels are subject
to 72-month bareboat charters with subsidiaries of Vroon that expire on
April 23, 2014.
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We,
through our wholly-owned subsidiary, ICON Eagle Holdings, LLC (“ICON Eagle
Holdings”), own two Aframax product tankers that we acquired from Aframax
Tanker I AS, the M/V Eagle Auriga (the “Eagle Auriga”) and the M/V Eagle
Centaurus (the “Eagle Centaurus”). The Eagle Auriga and the Eagle
Centaurus are subject to 84-month bareboat charters with AET, Inc. Limited
(“AET”) that expire on November 14, 2013 and November 13, 2013,
respectively.
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We
have a 64.3% ownership interest in ICON Eagle Carina Holdings, LLC (“ICON
Carina Holdings”), which owns ICON Eagle Carina Pte. Ltd. (“ICON Eagle
Carina”), which purchased the Aframax product tanker M/V Eagle Carina (the
“Eagle Carina”) from Aframax Tanker II AS. The Eagle Carina is subject to
an 84-month bareboat charter with AET that expires on November 14,
2013.
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We
have a 64.3% ownership interest in ICON Eagle Corona Holdings, LLC (“ICON
Corona Holdings”), which owns ICON Eagle Corona Pte. Ltd. (“ICON Eagle
Corona”), which purchased the Aframax product tanker M/V Eagle Corona (the
“Eagle Corona”) from Aframax Tanker II AS. The Eagle Corona is subject to
an 84-month bareboat charter with AET that expires on November 14,
2013.
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We,
through Victorious, LLC (“Victorious”), a Marshall Islands limited
liability company controlled by us through our wholly-owned subsidiary,
ICON Victorious, LLC (“ICON Victorious”), own a 300-man accommodation and
work barge (the “Barge”) that was purchased from Swiber Engineering Ltd.
(“Swiber”). The Barge is subject to a 96-month bareboat charter with
Swiber Offshore Marine Pte. Ltd. (the “Charterer”) that expires on March
23, 2017.
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We,
through our wholly-owned subsidiaries, ICON Diving Marshall Islands, LLC
(“ICON Diving Marshall Islands”) and ICON Diving Netherlands, B.V., own
certain marine diving equipment (the “Diving Equipment”) that was
purchased from Swiber. The Diving Equipment is subject to a 60-month lease
with Swiber Offshore Construction Pte. Ltd. that expires on June 30,
2014.
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We,
through our wholly-owned subsidiaries, ICON Mynx Pte. Ltd. (“ICON Mynx”),
ICON Stealth Pte. Ltd. (“ICON Stealth”) and ICON Eclipse Pte. Ltd. (“ICON
Eclipse”), own three barges (each a “Leighton Vessel” and, collectively,
the “Leighton Vessels”). Each of the Leighton Vessels is subject to a
96-month bareboat charter that expires on June 25,
2017.
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We,
through our wholly-owned subsidiary, ICON Ionian, LLC (“ICON Ionian”), a
Marshall Islands limited liability company, own a product tanker vessel,
the Ocean Princess (the “Ocean Princess”). The Ocean Princess
is subject to a 60-month bareboat charter that expires on October 30,
2014.
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Manufacturing
Equipment
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We
own machining and metal working equipment subject to lease with MW Crow,
Inc. (“Crow”), a wholly-owned subsidiary of MW Universal, Inc. (“MWU”),
and Metavation, LLC, an affiliate of Crow (“Metavation”). The equipment is
subject to 60-month leases that expire on December 31,
2012.
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We
have a 55% 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 of approximately
$3,429,000.
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We,
through our wholly-owned subsidiary, ICON French Equipment II, LLC (“ICON
French Equipment II”), own auto parts manufacturing equipment on lease to
Sealynx Automotive Transieres SAS (“Sealynx”). The equipment is subject to
a 60-month lease that expires on February 28,
2013.
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We
have a 45% 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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Mining
Equipment
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We,
through our wholly-owned subsidiary, ICON Magnum, LLC (“ICON Magnum”), own
a Bucyrus Erie model 1570 Dragline (the “Dragline”). The Dragline is
subject to a 60-month lease that expires on May 31,
2013.
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We,
through our wholly-owned subsidiary, ICON Murray, LLC (“ICON Murray”), own
mining equipment that is subject to a 24-month lease that expires on March
31, 2011.
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We,
through our wholly-owned subsidiary, ICON Murray II, LLC (“ICON Murray
II”), own mining equipment that is subject to a 30-month lease that
expires on December 31, 2011.
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Telecommunications
Equipment
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We,
through our wholly-owned subsidiary, ICON Global Crossing IV, LLC (“ICON
Global Crossing IV”), own telecommunications equipment that is subject to
two 36-month leases and one 48-month lease with Global Crossing
Telecommunications, Inc. (“Global Crossing”). The leases expire in March
2011, November 2011 and March 2012.
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Motor
Coaches
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We,
through our wholly-owned subsidiary, ICON Coach, LLC (“ICON Coach”), have
title to certain motor coaches purchased from CUSA PRTS, LLC (“CUSA”), an
affiliate of Coach America Holdings, Inc. (“Coach America”). The motor
coaches are subject to a 60-month lease that expires on March 31,
2014.
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Gas
Compressors
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We
have a 55% ownership interest in ICON Atlas, LLC (“ICON Atlas”), which
owns eight Ariel natural gas compressors (the “Gas Compressors”) that were
purchased from AG Equipment Co. (“AG”). The Gas Compressors are subject to
48-month leases with Atlas Pipeline Mid-Continent, LLC (“APMC”) that
expire on August 31, 2013.
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Note
Receivable Secured by a Machine Paper Coating Manufacturing Line
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We,
through our wholly-owned subsidiary, ICON Appleton, LLC (“ICON Appleton”),
provided a secured term loan to Appleton Papers, Inc. (“Appleton”). The
loan is secured by a machine paper coating manufacturing
line.
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Notes
Receivable Secured by Credit Card Machines
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We
have a 52.75% ownership interest in ICON Northern Leasing, LLC (“ICON
Northern Leasing”), which holds four promissory notes (the “Notes”) issued
by Northern Capital Associates XIV, L.P. (“NCA XIV”), as borrower, in
favor of Merrill Lynch Commercial Finance Corp. The Notes are secured by
an underlying pool of leases for credit card
machines.
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We,
through our wholly-owned subsidiary, ICON Northern Leasing II, LLC (“ICON
Northern Leasing II”), provided a senior secured loan to Northern Capital
Associates XV, L.P. (“NCA XV”) and NCA XIV. The loan is secured by an
underlying pool of leases for credit card
machines.
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Notes
Receivable Secured by Analog Seismic System Equipment
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We
have a 55% ownership interest in ICON ION, LLC (“ICON ION”), which
provided secured term loans (the “ION Loans”) to ARAM Rentals Corporation,
a Canadian bankruptcy remote Nova Scotia unlimited liability company
(“ARC”) and ARAM Seismic Rentals Inc., a U.S. bankruptcy remote Texas
corporation (“ASR,” together with ARC, collectively referred to as the
“ARAM Borrowers”). The ION Loans are secured by (i) a first priority
security interest in all of the ARAM analog seismic system equipment owned
by the ARAM Borrowers and (ii) a pledge of all of the equity interests in
the ARAM Borrowers.
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Note
Receivable Secured by Rail Support Construction Equipment
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We
have a 55% ownership interest in ICON Quattro, LLC (“ICON Quattro”), which
participted in a £24,800,000 loan facility by making a second priority
secured term loan to Quattro Plant Limited (“Quattro Plant”) in the amount
of £5,800,000. The loan is secured by (i) all of Quattro Plant’s
rail support construction equipment, which consists of railcars,
attachments to railcars, bulldozers, excavators, tractors, lowboy
trailers, street sweepers, service trucks, forklifts (collectively, the
“Construction Equipment”) and any other existing or future asset owned by
Quattro Plant, (ii) all of Quattro Plant’s accounts receivable, and (iii)
a mortgage over certain real estate in London, England owned by the
majority shareholder of Quattro Plant. In addition, ICON
Quattro will receive a key man insurance policy insuring the life of the
majority shareholder of ICON Quattro in an amount not less than £5,500,000
and not more than £5,800,000.
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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 Securities
and Exchange Commission (the “SEC”). The information contained on our Manager’s
website is not deemed part of this Annual Report on Form 10-K. Our reports are
also available on the SEC’s website at http://www.sec.gov.
Financial
Information Regarding Geographic Areas
We have
long-lived assets, which include finance leases and operating leases, and we
generate revenues in geographic areas outside of the United States. For
additional information, see Note 14 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
purchase, rather than the discounted subscription price paid by them for their
Shares. As a result, investors who paid discounted prices for their investments
will receive higher returns on their investments in us 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 will send to fiduciaries of plans
subject to ERISA and to certain other parties is only an estimate and may not
reflect the actual value of our Shares.
The
statements of estimated value are based on the estimated value of each Share (i)
as of the close of our fiscal year, for the annual statements included in this
and future Annual Reports on Form 10-K and (ii) as of September 30 of each
fiscal year, for annual statements sent to fiduciaries of plans subject to ERISA
and certain other parties. Management, in part, will rely upon third-party
sources and advice in arriving at this estimated value. No independent
appraisals on the particular value of our Shares will be obtained and the value
will be based upon an estimated fair market value as of the referenced date for
such value. Because this is only an estimate, we may subsequently revise any
valuation that is provided. We cannot assure that:
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this
estimate of value could actually be realized by us or by our members upon
liquidation;
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members
could realize this estimate of value if they were to attempt to sell their
Shares;
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this
estimate of value reflects the price or prices that our Shares would or
could trade at if they were listed on a national stock exchange or
included for quotation on a national market system, because no such market
exists or is likely to develop; or
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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 and those reimbursements and fees are likely to exceed the income
portion of distributions made to you during our early years.
Before
making any distributions to our members, we will reimburse our Manager and its
affiliates for expenses incurred on our behalf, and pay our Manager and its
affiliates substantial fees for acquiring, managing, and realizing our
investments for 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. Nevertheless, the
amount of these expense reimbursements and fees is likely to exceed the income
portion of distributions made to you in our early years.
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. This lag between the time when we must pay fees and
expenses at the time when we receive revenues may result in losses to us during
our early years, which our Manager believes is typical for start-up companies
such as us.
Furthermore,
we are likely to borrow a significant portion of the purchase price of our
investments. This use of indebtedness should permit us to make more investments
than if borrowings were not utilized. As a consequence, we will pay 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. Also, our Manager will determine the amount of cash
reserves that we will maintain for future expenses, contingencies or
investments. The reimbursement of expenses, payment of fees or creation of
reserves 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 Eleven,
LLC (“Fund Eleven”) 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:
|
·
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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
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as of March 19, 2010
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Manager
(as a member)
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1
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Additional
members
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8,356
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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 May 2014. We paid
distributions to additional members totaling $31,554,863, $16,072,151 and
$2,040,455 for the years ended December 31, 2009, 2008 and 2007,
respectively. Additionally, we paid our Manager distributions of
$318,725, $162,440 and $20,561 for the years ended December 31, 2009, 2008 and
2007, respectively. The terms of our loan agreement with CB&T, as amended,
could restrict us from paying cash distributions to our members if such payment
would cause us to not be in compliance with our financial covenants. See “Item
7. Manager’s Discussion and Analysis of Financial Condition and Results of
Operations – Liquidity and Capital Resources.”
In order
for Financial Industry Regulatory Authority, Inc. (“FINRA”) members and their
associated persons to have participated in the offering and sale of Shares
pursuant to the offering or to participate in any future offering of our Shares,
we are required pursuant to FINRA Rule 2310(b)(5) to disclose in each annual
report distributed to our members a per Share estimated value of our Shares, the
method by which we developed the estimated value, and the date used to develop
the estimated value. In addition, our Manager prepares statements of our
estimated Share values to assist fiduciaries of retirement plans subject to the
annual reporting requirements of ERISA in the preparation of their reports
relating to an investment in our Shares. For these purposes, the
estimated value of our Shares is deemed to be $768.11 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.
During
the offering of our Shares, the value of our Shares was estimated to be the
offering price of $1,000 per Share (without regard to purchase price discounts
for certain categories of purchasers), as adjusted for any special distribution
of net sales proceeds.
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 $768.11 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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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 the 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 $768.11 per
Share does not reflect the amount that a member would currently receive under
our repurchase plan. In addition, there can be no assurance that you
will be able to redeem your Shares under our repurchase plan.
The
selected financial data should be read in conjunction with the consolidated
financial statements and related notes included in “Item 8. Consolidated
Financial Statements and Supplementary Data” contained elsewhere in this Annual
Report on Form 10-K.
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Years Ended December 31,
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2009
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2008
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2007 (d)
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Total
revenue (a)
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$ | 78,491,218 | $ | 29,346,502 | $ | 4,830,315 | |||||||||||
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Net
income attributable to Fund Twelve (b)
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$ | 13,858,916 | $ | 5,942,580 | $ | 116,852 | |||||||||||
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Net
income attributable to Fund Twelve allocable to the additional
members
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$ | 13,720,327 | $ | 5,883,154 | $ | 115,683 | |||||||||||
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Net
income attributable to Fund Twelve allocable to the
Manager
|
$ | 138,589 | $ | 59,426 | $ | 1,169 | |||||||||||
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Weighted
average number of additional shares of
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|||||||||||||||||
|
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limited
liability company interests outstanding
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333,979 | 181,777 | 47,186 | |||||||||||||
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Net
income attributable to Fund Twelve per weighted average
|
|||||||||||||||||
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additional
share of limited liability company interests
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$ | 41.08 | $ | 32.36 | $ | 2.45 | |||||||||||
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Distributions
to additional members
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$ | 31,554,863 | $ | 16,072,151 | $ | 2,040,455 | |||||||||||
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Distributions
per weighted average additional share of
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|||||||||||||||||
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limited
liability company interests
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$ | 94.48 | $ | 88.42 | $ | 43.24 | |||||||||||
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Distributions
to the Manager
|
$ | 318,725 | $ | 162,440 | $ | 20,561 | |||||||||||
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December 31,
|
|||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | ||||||||||||||
|
Total
assets (a)
|
$ | 620,978,386 | $ | 438,585,542 | $ | 114,242,189 | $ | 2,000 | |||||||||
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Non-recourse
long-term debt and other liabilities (a)
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$ | 264,349,884 | $ | 162,575,068 | $ | 22,480,270 | $ | - | |||||||||
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Members'
equity (c)
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$ | 273,079,715 | $ | 223,487,730 | $ | 79,289,609 | $ | 2,000 | |||||||||
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(a)
|
Increases
in total revenue, total assets and non-recourse long-term debt and other
liabilities were primarily due to our investments in equipment leases and
other financing transactions during 2009 and 2008. Our non-recourse
long-term debt and other liabilities increased because of debt
agreements entered into in connection with our acquisitions. We are
currently in our operating period, during which we will 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.
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(b)
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In
2009, net income attributable to Fund Twelve increased $7,916,336 from
2008. In 2008, net income attributable to Fund Twelve increased
$5,825,728 from 2007. Both increases were a result of the increase in
rental and finance income resulting from our acquisitions of marine
vessels, telecommunications equipment, coal-mining equipment and
manufacturing equipment, which was primarily offset by the recognition of
depreciation and amortization expense associated with the assets
acquired.
|
||||||||||||||||
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(c)
|
Members'
equity has increased each year since the Commencement of Operations on May
25, 2007, primarily due to our equity raise, along with the increases in
our net income.
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(d)
|
The
Commencement of Operations was on May 25, 2007. As a result, no
operating activities are presented for the year ending December 31,
2006.
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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
Our
offering period ended on April 30, 2009 and our operating period commenced on
May 1, 2009. 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. With the proceeds from the sale of our Shares, we
invested and continue to invest in equipment subject to leases, other equipment
financing, and residual ownership rights in items of leased equipment and
establish a cash reserve. After the net offering proceeds were invested,
additional investments will be made with the cash generated from our initial
investments to the extent that cash is not used for expenses, reserves and
distributions to members. The investment in additional equipment in this manner
is called “reinvestment.” We anticipate investing in equipment from time to time
for five years. This time frame is called the “operating period” and may be
extended, at the sole discretion of our Manager, for up to an additional three
years. After the operating period, we will then sell our assets in
the ordinary course of business during a time frame called the “liquidation
period.”
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. Our initial closing was on May 25, 2007, when the minimum
offering of $1,200,000 was achieved. From the Commencement of Operations through
April 30, 2009, the end of the offering period, we raised total equity of
$347,686,947.
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:
|
·
|
lack
of liquidity to provide new financing and/or
refinancing;
|
|
·
|
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;
|
|
·
|
net
charge offs of and write-downs on outstanding financings;
and
|
|
·
|
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”).
|
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:
Telecommunications
Equipment
During
2007, we, through our wholly-owned subsidiary, ICON Global Crossing IV,
purchased telecommunications equipment for approximately $21,294,000 that is
subject to a lease with Global Crossing. The lease expires on November 30, 2011.
We incurred professional fees of approximately $149,000 and paid acquisition
fees to our Manager of approximately $639,000 relating to this transaction. On
March 11, 2008, ICON Global Crossing IV purchased additional telecommunications
equipment for approximately $5,939,000 that is also subject to a lease with
Global Crossing. The lease expires on March 31, 2011. We paid an acquisition fee
to our Manager of approximately $178,000 relating to this transaction. During
March 2009, ICON Global Crossing IV purchased additional telecommunications
equipment for approximately $3,859,000 that is subject to a lease with Global
Crossing. The lease expires on March 31, 2012. We paid acquisition
fees to our Manager of approximately $116,000 relating to this
transaction.
Marine Vessels and
Equipment
On June
26, 2007, we and Fund Ten formed ICON Mayon, with ownership interests of 51% and
49%, respectively. On July 24, 2007, ICON Mayon purchased a 98,507 deadweight
ton (“DWT”) Aframax product tanker, the Mayon Spirit, from an affiliate of
Teekay. The purchase price for the Mayon Spirit was approximately $40,250,000,
with approximately $15,312,000 funded in the form of a capital contribution to
ICON Mayon and approximately $24,938,000 of non-recourse debt borrowed from
Fortis Capital Corp. Simultaneously with the closing of the purchase of the
Mayon Spirit, the Mayon Spirit was bareboat chartered back to Teekay for a term
of 48 months. The charter commenced on July 24, 2007. The total capital
contributions made to ICON Mayon were approximately $16,020,000, of which our
share was approximately $8,472,000. We paid approximately $845,000 in
transaction-related costs, which included approximately $616,000 of acquisition
fees paid to our Manager.
On April
24, 2008, we, through our wholly-owned subsidiaries, ICON Arabian and ICON
Aegean, acquired two 1,500 TEU containership vessels from Vroon, the Aegean
Express and the Arabian Express (collectively, the “Vroon Vessels”), for an
aggregate purchase price of $51,000,000, of which $38,700,000 of non-recourse
debt was borrowed from Fortis Bank NV/SA (“Fortis”). Simultaneously with the
purchase, the Vroon Vessels were bareboat chartered back to subsidiaries of
Vroon for a period of 72 months. We paid approximately $2,082,000 in
transaction-related costs, including $1,530,000 in acquisition fees paid to our
Manager.
On
November 18, 2008, ICON Eagle Auriga Pte. Ltd. (“ICON Eagle Auriga”), a
wholly-owned subsidiary of ICON Eagle Holdings, purchased a 102,352 DWT Aframax
product tanker, the Eagle Auriga, from Aframax Tanker I AS for $42,000,000, of
which $28,000,000 of non-recourse debt was borrowed from Fortis and DVB Bank SE
(“DVB”). On November 21, 2008, ICON Eagle Centaurus Pte. Ltd. (“ICON Eagle
Centaurus”), also a wholly-owned subsidiary of ICON Eagle Holdings, purchased a
95,644 DWT Aframax product tanker, the Eagle Centaurus, for $40,500,000, of
which $27,000,000 of non-recourse debt was borrowed from Fortis and DVB. The
Eagle Auriga and the Eagle Centaurus are subject to 84-month bareboat charters
with AET that expire on November 14, 2013 and November 13, 2013,
respectively. We paid an acquisition fee to our Manager of $2,475,000
relating to this transaction.
On
December 3, 2008, ICON Eagle Carina, a Singapore corporation wholly-owned by
ICON Carina Holdings, a Marshall Islands limited liability company owned 64.3%
by us and 35.7% by Fund Ten, executed a Memorandum of Agreement to purchase a
95,639 DWT Aframax product tanker, the Eagle Carina, from Aframax Tanker II AS.
On December 18, 2008, the Eagle Carina was purchased for $39,010,000, of which
$27,000,000 was financed as non-recourse debt borrowed from Fortis and
DVB. The Eagle Carina is subject to an 84-month bareboat charter with
AET that expires on November 14, 2013. ICON Carina Holdings paid an acquisition
fee to our Manager of approximately $1,170,000 relating to this transaction, of
which our share was approximately $752,000.
On
December 3, 2008, ICON Eagle Corona, a Singapore corporation wholly-owned by
ICON Corona Holdings, a Marshall Islands limited liability company owned 64.3%
by us and 35.7% by Fund Ten, executed a Memorandum of Agreement to purchase a
95,634 DWT Aframax product tanker, the Eagle Corona, from Aframax Tanker II
AS. On December 31, 2008, the Eagle Corona was purchased for
$41,270,000, of which $28,000,000 was financed as non-recourse debt borrowed
from Fortis and DVB. The Eagle Corona is subject to an 84-month
bareboat charter with AET that expires on November 14, 2013. ICON Corona
Holdings paid an acquisition fee to our Manager of approximately $1,238,000
relating to this transaction, of which our share was approximately
$796,000.
On March
24, 2009, Victorious, a Marshall Islands limited liability company that is
controlled by us through our wholly-owned subsidiary, ICON Victorious, purchased
the Barge from Swiber for $42,500,000. Simultaneously with the purchase,
the Barge was chartered back to the Charterer for 96 months. The purchase
price of the Barge was funded by (i) a $19,125,000 equity investment from ICON
Victorious, (ii) an $18,375,000 contribution-in-kind by Swiber and (iii) a
subordinated, non-recourse and unsecured $5,000,000 payable. The payable
bears interest at 3.5% per year, accrues interest quarterly, is only required to
be repaid after we achieve our minimum targeted return and is recorded within
other non-current liabilities. At the end of the charter, the Charterer has the
option to purchase the Barge for $21,000,000 plus 50% of the difference between
the then fair market value less $21,000,000. ICON Victorious is the sole manager
of Victorious and holds a senior, controlling equity interest and all management
rights with respect to Victorious. Swiber holds a subordinate, noncontrolling
equity interest in Victorious and the obligations of the Swiber entities that
are parties to the transaction are guaranteed by Swiber’s parent company, Swiber
Holdings Limited (“Swiber Holdings”). We paid an acquisition fee to our Manager
of $1,275,000 in connection with this transaction.
On June
25, 2009, we, through our wholly-owned subsidiaries, purchased the Diving
Equipment from Swiber for $10,000,000. Simultaneously with the purchase of the
Diving Equipment, we entered into a 60-month lease with Swiber Offshore
Construction Pte. Ltd. (the “Lessee”), which commenced on July 1, 2009. The
purchase price of the Diving Equipment was comprised of $8,000,000 in cash and a
subordinated, interest-free $2,000,000 payable to Swiber, which is due upon sale
of the Diving Equipment at the conclusion of the lease term. The $2,000,000
payable is recorded on a discounted basis within other non-current liabilities
and is being accreted to its carrying value as interest expense over its term.
If an event of loss or an event of default occurs, our obligation to repay the
payable is terminated. We paid an acquisition fee to our Manager of $300,000
relating to this transaction.
At the
conclusion of the lease, the Lessee has the option to (x) purchase the Diving
Equipment for $4,250,000 (the “Purchase Option”) and pay an amount equal to 50%
of the difference between the fair market value of the Diving Equipment less
$4,250,000 or (y) return the Diving Equipment. In the event the Lessee does not
exercise the Purchase Option and the Diving Equipment is not sold to a third
party, but rather the lease is renewed or is re-leased to a third party, all
lease payments received by us will be paid as follows: (i) first, to
us until we receive in full our purchase price of $10,000,000 less the
$2,000,000 payable and achieve a return thereon at an agreed-upon rate and (ii)
then, to Swiber to repay in full the $2,000,000 payable without interest
thereon. In addition, Victorious, ICON Victorious and Swiber granted our
subsidiaries a first priority mortgage in the Barge as security for the Lessee’s
obligations under the lease. The obligations of the Lessee, Swiber, and Swiber
Holdings under the operative transactional documents are subordinate only to
ICON Victorious’ rights in the Barge. The obligations of the Lessee are
guaranteed by Swiber Holdings.
On June
26, 2009, we, through ICON Mynx, ICON Stealth and ICON Eclipse, executed
Memoranda of Agreement (“MOA”) to purchase the Leighton Vessels from Leighton
Contractors (Singapore) Pte. Ltd. (“Leighton”) for an aggregate purchase price
of $133,000,000. We paid aggregate acquisition fees to our Manager of $3,990,000
relating to these transactions. Simultaneously with the execution of the MOA,
each of ICON Mynx, ICON Stealth and ICON Eclipse entered into a bareboat charter
to charter the Leighton Vessel that it owns to Leighton for a term of 96 months.
During the term of the bareboat charters, Leighton will have the option to
purchase each of the Leighton Vessels for a specified purchase option price on
the dates defined in each respective bareboat charter. All of Leighton’s
obligations are guaranteed by its ultimate parent company, Leighton Holdings
Limited (“Leighton Holdings”), a publicly traded company that is listed on the
Australian Stock Exchange.
Two of
the three Leighton Vessels were acquired on June 26, 2009 for $58,000,000,
including the incurrence of $34,800,000 of senior debt (the “Senior Tranche”)
pursuant to a $79,800,000 senior facility agreement (the “Facility Agreement”)
with Standard Chartered Bank, Singapore Branch (“Standard Chartered”) and
$20,500,000 of subordinated seller’s credit (the “Subordinated Tranche”)
pursuant to a $47,000,000 seller’s credit agreement with Leighton (the “Seller’s
Credit Agreement”). The Seller’s Credit Agreement is subordinated only to the
Facility Agreement. The Senior Tranche will be repaid by us in 20 quarterly
principal and interest payments beginning on September 30, 2009. The Senior
Tranche bore an interest rate of 4.8475% during the period from June 26, 2009 to
September 30, 2009 (the “Stub Period”) and, thereafter, the interest rate was
fixed pursuant to a swap agreement at 7.05%. The interest-free Subordinated
Tranche will be repaid by us in eight annual principal payments beginning on
June 25, 2010. The Subordinated Tranche is recorded on a discounted basis within
other non-current liabilities and is being accreted to its carrying value as
interest expense over its term. The bareboat charter for each of these two
Leighton Vessels expires on June 25, 2017.
On
October 28, 2009, we, through ICON Eclipse, purchased the remaining third
Leighton Vessel from Leighton for $75,000,000. To purchase the Leighton Vessel,
ICON Eclipse borrowed $45,000,000 of senior debt (the “Eclipse Senior Tranche”)
pursuant to the Facility Agreement and $26,500,000 of subordinated seller’s
credit (the “Eclipse Subordinated Tranche”) pursuant to the Seller’s Credit
Agreement. The Eclipse Senior Tranche will be repaid by us in 20 quarterly
principal and interest payments beginning on December 31, 2009. The
interest-free Eclipse Subordinated Tranche will be repaid by us in eight annual
principal payments beginning on October 28, 2010. The Eclipse Subordinated
Tranche is recorded on a discounted basis within other non-current liabilities
and is being accreted to its carrying value as interest expense over its
term.
On
October 30, 2009, ICON Ionian purchased the Ocean Princess from Lily Shipping
Ltd. (“Lily Shipping”), a wholly-owned subsidiary of the Ionian Group
(“Ionian”), for the purchase price of $10,750,000. Simultaneously with the
purchase, the Ocean Princess was bareboat chartered back to Lily Shipping for 60
months. The purchase price consisted of (i) a non-recourse loan in the amount of
$5,500,000 from Nordea Bank Norge ASA (“Nordea”), (ii) $950,000 in cash and
(iii) a subordinated, interest-free $4,300,000 seller’s credit to Lily Shipping,
which is due upon the sale of the Ocean Princess in accordance with the terms of
the bareboat charter. If an event of default occurs, ICON Ionian’s obligation to
repay the seller’s credit to Lily Shipping is terminated. The
obligations of Lily Shipping are guaranteed by Delta Petroleum Ltd., a
wholly-owned subsidiary of Ionian. We paid an acquisition fee to our Manager of
approximately $323,000 in connection with this transaction.
Manufacturing
Equipment
On
September 28, 2007, we completed the acquisition of and simultaneously leased
back substantially all of the machining and metal working equipment of LC
Manufacturing, LLC, a wholly-owned subsidiary of MWU (“LC Manufacturing”), for a
purchase price of $14,890,000. The lease term commenced on January 1, 2008 and
continues for a period of 60 months. We paid an acquisition fee to our Manager
of approximately $447,000. On December 10, 2007, we completed the acquisition of
and simultaneously leased back substantially all of the machining and metal
working equipment of Crow, another wholly-owned subsidiary of MWU, for a
purchase price of $4,100,000. The lease term commenced on January 1,
2008 and continues for a period of 60 months. We paid an acquisition fee to our
Manager of $123,000.
Simultaneously
with the closing of the transactions with LC Manufacturing and Crow, Fund Ten
and Fund Eleven (together with us, the “Participating Funds”) completed similar
acquisitions with seven 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 LC Manufacturing and Crow) 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 September 5, 2008, the Participating Funds
and IEMC Corp., a subsidiary of our Manager (“IEMC”), entered into an amended
forbearance agreement with MWU, LC Manufacturing, Crow and seven other
subsidiaries of MWU (collectively, the “MWU entities”) to cure certain
non-payment related defaults by the MWU entities under their lease covenants
with us. 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. The obligations of the MWU entities are
guaranteed by their affiliate, American Metals Industries, Inc. As of
December 31, 2009, our proportionate share was 35.3% of the warrant issued for
the fully diluted common stock of MWU. At December 31, 2009, our Manager
determined that the fair value of the MWU warrant was $0.
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 LC Manufacturing’s lease payment
schedule, we received, among other things, a warrant, exercisable until March
31, 2015, to purchase 10% of the fully diluted membership interests of LC
Manufacturing at the time of exercise at an aggregate exercise price of $1,000.
At December 31, 2009, our Manager determined that the fair value of the LC
Manufacturing warrant was $0.
On June
1, 2009, we amended and restructured the master lease agreement with LC
Manufacturing dated September 28, 2007 to reduce the assets under lease from
$14,890,000 to approximately $12,420,000. Contemporaneously, we entered into a
new lease with Metavation for the assets previously under lease with LC
Manufacturing with a cost of approximately $2,470,000. The equipment is subject
to a 43-month lease with Metavation that expires on December 31, 2012. The
obligations of Metavation under the lease are guaranteed by its parent company,
Cerion, LLC. In consideration for restructuring LC Manufacturing’s lease payment
schedule, we received a warrant, exercisable until March 31, 2015, to purchase
65% of the fully diluted membership interests of LC Manufacturing at the time of
exercise at an aggregate exercise price of $1,000. At December 31, 2009, our
Manager determined that the fair value of the LC Manufacturing warrant was
$0.
On
December 11, 2007, we and Fund Eleven formed ICON EAR, with ownership interests
of 55% and 45%, 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
$3,814,000. During June 2008, we and Fund Eleven 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 $4,837,000. We and Fund Eleven retained ownership interests of
55% and 45%, respectively, subsequent to this transaction. The lease term
commenced on July 1, 2008 and expires on June 30, 2013. As additional security
for the purchase and lease, ICON EAR received mortgages on certain parcels of
real property located in Jackson Hole, Wyoming. We paid acquisition fees to our
Manager of approximately $259,000 relating to these transactions.
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. 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. Accordingly, such
assets have been classified as held for sale, net of estimated selling costs, on
the accompanying consolidated balance sheet 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 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. 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 petition for reorganization under Chapter 11 of the
U.S. Bankruptcy Code. Based on our Manager’s review, the net book value of the
semiconductor manufacturing equipment exceeded the undiscounted cash flows and,
as a result, we recognized a non-cash impairment charge of approximately
$3,429,000 relating to the write down in value of the semiconductor
manufacturing equipment. 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. 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 our accounting policies and the above mentioned
factors.
On March
3, 2008, we, through our wholly-owned subsidiary, ICON French Equipment II,
purchased auto parts manufacturing equipment and simultaneously leased back the
equipment to Sealynx. The purchase price was approximately $11,626,000
(€7,638,400). The lease term commenced on March 3, 2008 and continues for a
period of 60 months. We paid an acquisition fee to our Manager of approximately
$350,000 (€229,152) relating to this transaction. As additional security for
Sealynx’s obligations under the lease, we were granted a lien on property owned
by Sealynx in France, valued at €3,746,400 at the acquisition date, and a
guarantee from Sealynx’s parent company, Sealynx Automotive
Holding.
Subsequently,
due to the global downturn in the automotive industry, Sealynx requested a
restructuring of its lease payments during the third quarter of 2009 and we
agreed to reduce Sealynx’s lease payments. On January 4, 2010, we
restructured the payment obligations of Sealynx under the lease to provide it
with cash flow flexibility while at the same time attempting to preserve our
projected economic return on this investment. As additional security
for restructuring the payment obligations, we received an additional mortgage on
certain real property owned by Sealynx located in Charleval,
France.
On June
30, 2008, we and Fund Eleven 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 $5,452,000. On July 16, 2008, we and
Fund Eleven completed the acquisition of and simultaneously leased back
manufacturing equipment to Pliant. We and Fund Eleven have ownership interests
in ICON Pliant of 45% and 55%, 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 $163,000.
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.
Mining
Equipment
On May 5,
2008, we, through our wholly-owned subsidiary, ICON Magnum, purchased the
Dragline from Magnum Coal Company for a purchase price of approximately
$12,461,000. The Dragline was simultaneously leased back to Magnum Coal
Company and its subsidiaries. The lease term commenced on June 1, 2008 and
continues for a period of 60 months. We paid an acquisition fee to our Manager
of approximately $374,000 relating to this transaction.
On
February 18, 2009, we, through our wholly-owned subsidiary, ICON Murray,
purchased mining equipment for approximately $3,348,000 that is subject to a
lease with American Energy Corp. and Ohio American Energy, Incorporated. The
lease expires on March 31, 2011. The payment and performance
obligations of American Energy Corp. are secured by a guarantee of its parent
company, Murray Energy Corporation. We paid an acquisition fee to our Manager of
approximately $100,000 relating to this transaction.
On May
26, 2009, we, through our wholly-owned subsidiary, ICON Murray II, purchased
mining equipment subject to a lease between Varilease Finance, Inc.
(“Varilease”), as lessor, and American Energy Corp. and The Ohio
Valley Coal Company, as lessees. The equipment was purchased from Varilease
for approximately $3,196,000 and is subject to a 30-month lease that expires on
December 31, 2011. We paid an acquisition fee to our Manager of approximately
$96,000 relating to this transaction.
Motor
Coaches
On April
1, 2009, we, through our wholly-owned subsidiary, ICON Coach, acquired title to
certain motor coaches from CUSA, an affiliate of Coach America, for
approximately $5,314,000. The motor coaches are subject to a 60-month lease with
CUSA that expires on March 31, 2014. The payment and performance obligations of
CUSA are guaranteed by Coach America. We paid an acquisition fee to our Manager
of approximately $159,000 relating to this transaction.
On
December 11, 2009, ICON Coach borrowed approximately $3,207,000 from Wells Fargo
Equipment Finance, Inc. (“Wells Fargo”). The terms of the loan require
ICON Coach to make 38 monthly payments of approximately $95,000 each from
January 1, 2010 through February 1, 2013. Interest is computed at a rate
of 7.5% per year throughout the term of the loan. In consideration for
making the loan, Wells Fargo received a first priority security interest in (i)
the fourteen 2009 MCI Model D4505 passenger motor coaches owned by ICON Coach,
(ii) the master lease agreement between ICON Coach and CUSA, and (iii) the
guaranty of Coach America. ICON Coach has the option to prepay the loan
(a) beginning January 1, 2011 through December 31, 2011 in consideration for a
fee of 3% of the amount being prepaid or (b) beginning January 1, 2012 through
the end of the term in consideration for a fee of 2% of the amount being
prepaid.
Gas
Compressors
On June
26, 2009, we and Fund Fourteen entered into a joint venture, ICON Atlas, for the
purpose of investing in eight new Gas Compressors from AG. On June 26, 2009,
ICON Atlas purchased four of the Gas Compressors from AG for approximately
$4,270,000. Simultaneously with the purchase, ICON Atlas entered into a lease
with APMC, an affiliate of Atlas Pipeline Partners, L.P. (“APP”).
On August
17, 2009, ICON Atlas purchased the other four Gas Compressors from AG for
approximately $7,028,000. Simultaneously with that purchase, ICON Atlas entered
into a second schedule to the lease with APMC. Each schedule is for a
period of 48 months and expires on August 31, 2013. The obligations
of APMC are guaranteed by its parent company, APP. As of December 31,
2009, our and Fund Fourteen’s ownership interests in ICON Atlas were 55% and
45%, respectively. We paid an acquisition fee to our Manager in the amount of
approximately $186,000 in connection with this transaction.
Note
Receivable Secured by Solar Panel Production Equipment
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.
Note
Receivable Secured by a Machine Paper Coating Manufacturing Line
On
November 7, 2008, we, through our wholly-owned subsidiary, ICON Appleton, made a
secured term loan to Appleton in the amount of $22,000,000. The loan is secured
by a machine paper coating manufacturing line. Interest on the term note accrued
at 12.5% per year and was payable monthly in arrears in accordance with the
promissory note for a period of 60 months. We paid an acquisition fee to our
Manager of $660,000 relating to this transaction.
On March
26, 2009, the loan and security agreement and the secured term loan note issued
by Appleton were amended due to a default on one of its covenants. As a
result of the default provisions of the loan and security agreement, the
interest on the term note was adjusted to accrue interest at 14.25% per year and
is payable monthly in arrears. On February 26, 2010, we amended
certain financial covenants in the loan agreement with Appleton. In
consideration for amending the loan, we received an amendment fee in the amount
of approximately $117,000 from Appleton.
Notes
Receivable Secured by Credit Card Machines
On
November 25, 2008, ICON Northern Leasing, a joint venture among us, Fund Ten and
Fund Eleven, purchased the Notes and received an assignment of the underlying
master loan and security agreement (the “MLSA”), dated July 28, 2006. We, Fund
Ten and Fund Eleven have ownership interests of 52.75%, 12.25% and 35%,
respectively, in ICON Northern Leasing. The aggregate purchase price for the
Notes was approximately $31,573,000, net of a discount of approximately
$5,165,000. The 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 Notes, provided a limited guarantee of the MLSA
for payment deficiencies up to approximately $6,355,000. The 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 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 Notes was approximately $16,655,000 and we paid an
acquisition fee to our Manager of approximately $500,000 relating to this
transaction.
On March
31, 2009, we, through our wholly-owned subsidiary, ICON Northern Leasing II,
provided a senior secured loan in the amount of approximately $7,870,000 (the
“Northern Leasing II Loan”) to NCA XV and NCA XIV, pursuant to the MLSA dated
March 31, 2009. The Northern Leasing II Loan accrues interest at a rate of 18%
per year and is secured by a first priority security interest in an underlying
pool of leases for credit card machines of NCA XV and a second priority security
interest in an underlying pool of leases for credit card machines of NCA XIV
(subject only to the first priority security interest of ICON Northern Leasing).
Northern Leasing Systems, the originator and servicer of the Northern Leasing II
Loan, provided a limited guarantee for payment deficiencies of up to 10% of the
Northern Leasing II Loan, or approximately $787,000. We paid an acquisition fee
to our Manager of approximately $314,000 relating to this
transaction.
Notes
Receivable Secured by Analog Seismic System Equipment
On June
29, 2009, we and Fund Fourteen entered into a joint venture, ICON ION, for the
purpose of making the ION Loans in the aggregate amount of $20,000,000 to the
ARAM Borrowers. On that date, ICON ION funded the first tranche of
the ION Loans in the amounts of $8,825,000 and $3,675,000 to ARC and ASR,
respectively. On July 20, 2009, ICON ION funded the second tranche of
the ION Loans to ARC in the amount of $7,500,000.
The ARAM
Borrowers are wholly-owned subsidiaries of ION Geophysical Corporation, a
Delaware corporation (“ION”). The ION Loans are secured by (i) a
first priority security interest in all of the ARAM analog seismic system
equipment owned by the ARAM Borrowers and (ii) a pledge of all of the equity
interests in the ARAM Borrowers. In addition, ION guaranteed all
obligations of the ARAM Borrowers under the ION Loans. Interest
accrues at the rate of 15% per year and the ION Loans are payable monthly in
arrears for a period of 60 months beginning on August 1, 2009. As of
December 31, 2009, our and Fund Fourteen’s ownership interests in ICON ION were
55% and 45%, respectively. We paid an acquisition fee to our Manager
in the amount of $330,000 in connection with this transaction.
Note
Receivable Secured by Rail Support Construction Equipment
On
December 23, 2009, ICON Quattro, a joint venture owned 55% by us and 45% by Fund
Fourteen, participated in a £24,800,000 facility by making a second priority
secured term loan to Quattro Plant in the amount of £5,800,000. Quattro
Plant is a wholly-owned subsidiary of Quattro Group Limited (“Quattro
Group”). The loan is secured by (i) all of Quattro Plant’s Construction
Equipment and any other existing or future asset owned by Quattro Plant, (ii)
all of Quattro Plant’s accounts receivable, and (iii) a mortgage over certain
real estate in London, England owned by the majority shareholder of Quattro
Plant. In addition, ICON Quattro will receive a key man insurance
policy insuring the life of the majority shareholder of ICON Quattro in an
amount not less than £5,500,000 and not more than £5,800,000. All of
Quattro Plant’s obligations under the loan are guaranteed by Quattro Group and
its subsidiaries, Quattro Hire Limited and Quattro Occupational Academy Limited
(collectively, the “Quattro Companies”).
Interest
on the secured term loan accrues at a rate of 20% per year and the loan will be
amortized to a balloon payment of 15% at the end of the term. The loan is
payable monthly in arrears for a period of 33 months, which began on January 1,
2010. Quattro Plant has the option to prepay the entire outstanding amount
of the loan beginning January 1, 2012 in consideration for a fee of 5% of the
amount being prepaid.
Simultaneously
with ICON Quattro’s loan, KBC Bank N.V. (“KBC”) participated in the
£24,800,000 loan financing by making a loan of £19,000,000 to Quattro Plant (the
“KBC Loan”). The KBC Loan is secured by (i) a first priority security
interest in all of Quattro Plant’s Construction Equipment and any other existing
or future asset owned by Quattro Plant and (ii) a first priority security
interest in all of Quattro Plant’s accounts receivable.
Simultaneously
with the consummation of ICON Quattro’s loan and the KBC Loan, ICON Quattro,
KBC, Quattro Plant, Quattro Group and the Quattro Companies entered into an
intercreditor deed governing the relationship between ICON Quattro and
KBC. In the event either ICON Quattro or KBC seeks to enforce its security
interest under its respective loan, the proceeds from the enforcement of any
security interest shall be applied (i) first, to pay all costs and expenses
incurred by or on behalf of ICON Quattro or KBC, (ii) second, to KBC in an
amount that would allow KBC to receive its return on its investment, and (iii)
third, to ICON Quattro in an amount that would allow ICON Quattro to receive its
return on its investment. ICON Quattro paid an acquisition fee to our
Manager of approximately $807,000 relating to this transaction, of which our
share was approximately $480,000.
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 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:
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·
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Lease
classification and revenue
recognition;
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|
·
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Asset
impairments;
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|
·
|
Depreciation;
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|
·
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Notes
receivable;
|
|
·
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Initial
direct costs;
|
|
·
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Acquisition
fees;
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·
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Foreign
currency translation;
|
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·
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Warrants;
and
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·
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Derivative
financial instruments.
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Lease
Classification and Revenue Recognition
Each
equipment lease we enter into is classified as either a finance lease or an
operating lease, which is determined based upon the terms of each lease.
For a finance lease, initial direct costs are capitalized and amortized over the
lease term. For an operating lease, the initial direct costs are included
as a component of the cost of the equipment and depreciated over the lease
term.
For
finance leases, 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 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
in accordance with our policy on doubtful accounts.
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 is utilized normally
in an open, unrestricted and stable market. Short-term fluctuations in the
marketplace are disregarded and it is assumed that there is no necessity either
to dispose of a significant number of the assets, if held in quantity,
simultaneously or to dispose of the asset quickly. The residual value
is calculated using information from various external sources, such as trade
publications, auction data, equipment dealers, wholesalers and industry experts,
as well as inspection of the physical asset and other economic
indicators.
Asset
Impairments
The
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 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. 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”)
Our
offering period ended on April 30, 2009 and our operating period commenced on
May 1, 2009. We invested most of the net proceeds from our offering in equipment
leases and other financing transactions. During our operating period, we have
made and 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 used 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.
Revenue
for 2009 and 2008 is summarized as follows:
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Years Ended December 31,
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|
2009
|
2008
|
Change
|
||||||||||
|
Rental
income
|
$ | 59,604,472 | $ | 22,940,645 | $ | 36,663,827 | ||||||
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Finance
income
|
7,246,926 | 3,695,178 | 3,551,748 | |||||||||
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Income
from investment in joint venture
|
573,040 | 325,235 | 247,805 | |||||||||
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Interest
and other income
|
11,066,780 | 2,385,444 | 8,681,336 | |||||||||
|
Total
revenue
|
$ | 78,491,218 | $ | 29,346,502 | $ | 49,144,716 | ||||||
Total
revenue for 2009 increased $49,144,716 as compared to 2008. The increase in
total revenue was primarily due to increases in rental income of approximately
$36,664,000 due to the acquisitions of (i) the Gas Compressors by ICON Atlas in
June 2009 and August 2009, (ii) the Diving Equipment by ICON Diving Marshall
Islands in June 2009, (iii) mining equipment by ICON Murray in February 2009 and
ICON Murray II in May 2009, (iv) motor coaches by ICON Coach in April 2009, and
(v) the Barge by Victorious in March 2009. In addition, we recorded a full year
of rental income during 2009 related to the acquisitions of (i) marine vessels
by ICON Carina Holdings and ICON Corona Holdings in December 2008, (ii) marine
vessels by ICON Eagle Holdings in November 2008, (iii) additional manufacturing
equipment by ICON EAR in June 2008, (iv) the Dragline by ICON Magnum in May
2008, (v) marine vessels by ICON Aegean and ICON Arabian in April 2008 and (vi)
the additional telecommunications equipment by ICON Global Crossing IV in March
2008. The increase in interest and other income was primarily due to the
interest received from the notes receivable invested in by ICON ION in June 2009
and July 2009 and ICON Northern Leasing II in March 2009 and the interest earned
in our money market accounts. In addition, we recorded a full year of interest
income for the notes receivable invested in by ICON Appleton and ICON Northern
Leasing in November 2008. The increase in interest and other income was
primarily offset by a decrease in interest income from Solyndra, as this note
was paid in full in July 2008. The increase in finance income was primarily due
to the acquisitions of (i) the Leighton Vessel by ICON Eclipse and the Ocean
Princess by ICON Ionian in October 2009, (ii) the other two Leighton Vessels by
ICON Mynx and ICON Stealth in June 2009, and (iii) the additional
telecommunications equipment by ICON Global Crossing IV in March 2009. In
addition, we recorded a full year of finance income during 2009 related to the
acquisition of auto parts manufacturing equipment by ICON French Equipment II in
March 2008.
Expenses
for 2009 and 2008 are summarized as follows:
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
Change
|
||||||||||
|
|
||||||||||||
|
Management
fees - Manager
|
$ | 3,390,239 | $ | 1,474,993 | $ | 1,915,246 | ||||||
|
Administrative
expense reimbursements - Manager
|
3,594,400 | 2,705,118 | 889,282 | |||||||||
|
General
and administrative
|
2,276,211 | 1,350,134 | 926,077 | |||||||||
|
Interest
|
11,616,105 | 3,086,275 | 8,529,830 | |||||||||
|
Depreciation
and amortization
|
34,507,641 | 12,875,095 | 21,632,546 | |||||||||
|
Bad
debt expense
|
572,721 | - | 572,721 | |||||||||
|
Impairment
loss
|
3,429,316 | - | 3,429,316 | |||||||||
|
Loss
on financial instruments
|
25,642 | 55,495 | (29,853 | ) | ||||||||
|
Total
expenses
|
$ | 59,412,275 | $ | 21,547,110 | $ | 37,865,165 | ||||||
Total
expenses for 2009 increased $37,865,165 as compared to 2008. The increase in
total expenses was primarily due to increases in depreciation and amortization
expense of approximately $21,633,000 due to the acquisitions of (i) the Gas
Compressors by ICON Atlas in June 2009 and August 2009, (ii) the Diving
Equipment by ICON Diving Marshall Islands in June 2009, (iii) mining equipment
by ICON Murray in February 2009 and ICON Murray II in May 2009, (iv) motor
coaches by ICON Coach in April 2009, and (v) the Barge by Victorious in March
2009. The increase in depreciation and amortization expense was also
due to the amortization expense for capitalized fees on direct finance leases
for (i) the Leighton Vessel acquired by ICON Eclipse and the Ocean Princess
acquired by ICON Ionian in October 2009, (ii) the other two Leighton Vessels
acquired by ICON Mynx and ICON Stealth in June 2009, and (iii) the additional
telecommunications equipment acquired by ICON Global Crossing IV in March 2009,
as well as the amortization expense for capitalized fees on the notes receivable
invested in by ICON ION in June 2009 and July 2009 and ICON Northern Leasing II
in March 2009. In addition, we recorded a full year of depreciation and
amortization expense during 2009 related to the acquisitions of (i) marine
vessels by ICON Carina Holdings and ICON Corona Holdings in December 2008, (ii)
marine vessels by ICON Eagle Holdings in November 2008, (iii) the notes
receivable invested in by ICON Appleton and ICON Northern Leasing in November
2008, (iv) the Dragline by ICON Magnum in May 2008, (v) marine vessels by ICON
Aegean and ICON Arabian in April 2008 and (vi) auto parts manufacturing
equipment by ICON French Equipment II in March 2008. The increase in interest
expense was primarily due to the interest incurred on the non-recourse debt owed
by ICON Eclipse, ICON Ionian, ICON Mynx, ICON Stealth, ICON Eagle Holdings, ICON
Corona Holdings, ICON Carina Holdings, ICON Mayon, ICON Aegean and ICON Arabian.
The increase in impairment loss was due to the impairment charge recognized on
the semiconductor manufacturing equipment owned by ICON EAR in 2009. The
increase in Management fees – Manager and Administrative expense reimbursements
– Manager resulted from our increased investment in equipment subject to lease
and other financing transactions during 2009. The increase in general and
administrative expense was primarily due to the accounts receivable balance for
ICON EAR that was charged to bad debt expense and the increase in professional
fees during 2009.
Noncontrolling
Interests
Net
income attributable to noncontrolling interests for 2009 increased $3,363,215 as
compared to 2008. The increase in income attributable to noncontrolling
interests was primarily due to our investment in controlling interests in (i)
ICON Quattro, ICON Atlas and ICON ION during 2009, in each of which Fund
Fourteen has a noncontrolling interest, (ii) Victorious in March 2009, in which
Swiber has a noncontrolling interest and (iii) ICON Carina Holdings, ICON Corona
Holdings and ICON Northern Leasing in 2008, in each of which Fund Ten has a
noncontrolling interest. In addition, Fund Eleven acquired a noncontrolling
interest in ICON Northern Leasing in 2008, which contributed to the increase in
income attributable to noncontrolling interests. The increase in income
attributable to noncontrolling interests was offset by the impairment loss
recorded by ICON EAR, in which Fund Eleven has a noncontrolling
interest.
Net
Income Attributable to Fund Twelve
As a
result of the foregoing changes from 2008 to 2009, net income attributable to us
for 2009 and 2008 was $13,858,916 and $5,942,580, respectively. Net income
attributable to us per weighted average additional Share for 2009 and 2008 was
$41.08 and $32.36, 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
|
$ | 22,940,645 | $ | 3,745,463 | $ | 19,195,182 | ||||||
|
Finance
income
|
3,695,178 | 762,779 | 2,932,399 | |||||||||
|
Income
from investment in joint venture
|
325,235 | - | 325,235 | |||||||||
|
Interest
and other income
|
2,385,444 | 322,073 | 2,063,371 | |||||||||
|
Total
revenue
|
$ | 29,346,502 | $ | 4,830,315 | $ | 24,516,187 | ||||||
Total revenue for 2008 increased
$24,516,187 as compared to 2007. The increase in total revenue was primarily
attributable to increases in rental income due to the acquisitions of
approximately $10,585,000 of (i) additional telecommunications equipment by ICON
Global Crossing IV in March 2008, (ii) the Vroon Vessels owned by ICON Aegean
and ICON Arabian in April 2008, (iii) the Dragline owned by ICON Magnum in May
2008, (iv) additional manufacturing equipment by ICON EAR prior to June 30,
2008, (v) the marine vessels owned by ICON Eagle Holdings in November 2008 and
(vi) the marine vessels owned by ICON Carina Holdings and ICON Corona Holdings
in December 2008. In addition, we recognized a full year of rental income for
2007 acquisitions of (i) the marine vessel owned by ICON Mayon in July 2007,
(ii) the machining and metal working equipment acquired from LC Manufacturing in
September 2007, (iii) the telecommunications equipment owned by ICON Global
Crossing IV after the second quarter of 2007 and (iv) the equipment owned by
ICON EAR and the machining and metal working equipment acquired from Crow in
December 2007, which resulted in an increase of approximately
$8,611,000. The increase in finance income was from ICON French
Equipment II’s investment in a finance lease with Sealynx in March 2008 and ICON
Global Crossing IV’s investment in a finance lease with Global Crossing after
the second quarter of 2007, which resulted in increases of approximately
$1,510,000 and $1,422,000, respectively. The increase in interest
income was due to the interest received on our money market account as well as
the notes receivable with Solyndra, Appleton and NCA XIV and NCA
XV.
Expenses
for 2008 and 2007 are summarized as follows:
|
Years Ended December 31,
|
||||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
|
|
|||||||||||
|
Management
fees - Manager
|
$ | 1,474,993 | $ | 178,289 | $ | 1,296,704 | ||||||
|
Administrative
expense reimbursements - Manager
|
2,705,118 | 1,346,866 | 1,358,252 | |||||||||
|
General
and administrative
|
1,350,134 | 161,497 | 1,188,637 | |||||||||
|
Interest
|
3,086,275 | 704,418 | 2,381,857 | |||||||||
|
Depreciation
and amortization
|
12,875,095 | 1,860,863 | 11,014,232 | |||||||||
|
Loss
on financial instruments
|
55,495 | 25,024 | 30,471 | |||||||||
|
Total
expenses
|
$ | 21,547,110 | $ | 4,276,957 | $ | 17,270,153 | ||||||
Total
expenses for 2008 increased $17,270,153 as compared to 2007. The increase in
total expenses was primarily attributable to increases in depreciation and
amortization expense due to acquisitions of approximately $6,089,000 of (i)
additional telecommunications equipment by ICON Global Crossing IV in March
2008, (ii) the auto parts manufacturing equipment owned by ICON French Equipment
II in March 2008, (iii) the Vroon Vessels owned by ICON Aegean and ICON Arabian
in April 2008, (iv) the Dragline owned by ICON Magnum in May 2008, (v) the
additional manufacturing equipment acquired by ICON EAR prior to June 30, 2008,
(vi) the marine vessels owned by ICON Eagle Holdings and the notes receivable
invested in by ICON Appleton and ICON Northern Leasing in November 2008 and
(vii) the marine vessels owned by ICON Carina Holdings and ICON Corona Holdings
in December 2008. In addition, we recognized a full year of depreciation for
2007 acquisitions of (i) the marine vessel owned by ICON Mayon in July 2007,
(ii) the machining and metal working equipment acquired from LC Manufacturing in
September 2007, (iii) the telecommunications equipment owned by ICON Global
Crossing IV after the second quarter of 2007 and (iv) the manufacturing
equipment owned by ICON EAR and the machining and metal working equipment
acquired from Crow in December 2007, which resulted in an increase of
approximately $4,925,000. The increase in interest expense was primarily due to
the interest incurred on the non-recourse debt owed by ICON Aegean, ICON Arabian
and ICON Mayon. The increase in Management fees – Manager resulted from our
increased investment in leased assets in 2008. Administrative expense
reimbursements - Manager are costs incurred by our Manager that are necessary to
our operations. These costs include our Manager’s legal, accounting,
investor relations and operations personnel, as well as professional fees and
other costs, that are charged to us based upon the percentage of time such
personnel dedicate to our operations. Both Management fees – Manager and
Administrative expense reimbursements – Manager are expected to increase as we
make more investments. The increase in general and administrative expenses was
primarily due to the increase in professional fees during 2008.
Noncontrolling
Interests
Net
income attributable to noncontrolling interests for 2008 increased $1,420,306 as
compared to 2007. The increase in income attributable to noncontrolling
interests was primarily due to our investments in ICON Carina Holdings, ICON
Corona Holdings and ICON Northern Leasing in 2008. Fund Ten has a noncontrolling
interest in ICON Carina Holdings, ICON Corona Holdings and ICON Northern
Leasing, which resulted in the increase in income attributable to noncontrolling
interests. Also contributing to the increase was the full year impact of Fund
Ten’s noncontrolling interest in ICON Mayon, which acquired the Mayon Spirit in
July 2007. The increase in income attributable to noncontrolling interests was
also due to the noncontrolling interest that Fund Eleven has in ICON Northern
Leasing, which was acquired in 2008 and the full year impact of Fund Eleven’s
noncontrolling interest in ICON EAR, which was acquired in December
2007.
Net
Income Attributable to Fund Twelve
As a
result of the foregoing changes from 2007 to 2008, net income attributable to us
for 2008 and 2007 was $5,942,580 and $116,852, respectively. Net income
attributable to us per weighted average additional Share for 2008 and 2007 was
$32.36 and $2.45, respectively.
Financial
Condition
This
section discusses the major balance sheet variances from 2009 compared to
2008.
Total Assets
Total
assets increased $182,392,844, from $438,585,542 at December 31, 2008 to
$620,978,386 at December 31, 2009. The increase was primarily due to cash
proceeds received from our equity raise, which provided us with funds to make
additional investments during 2009. We acquired the Gas Compressors owned by
ICON Atlas, the Diving Equipment, the Barge, the motor coaches owned by ICON
Coach, and the mining equipment owned by ICON Murray and ICON Murray II during
2009, which accounted for the increase in our leased equipment at cost. The
increase in our leased equipment at cost was offset by the recognition of
depreciation expense on all of our assets and impairment charges recognized on
the semiconductor manufacturing equipment owned by ICON EAR. The increase in
notes receivable was due to our investments in notes receivable through ICON
Quattro, ICON ION and ICON Northern Leasing II during 2009. The increase in net
investment in finance leases resulted from our investments in the Leighton
Vessels, the Ocean Princess, and additional telecommunications equipment during
2009. In addition, we capitalized the deferred financing costs and initial
direct costs associated with acquisitions entered into during 2009.
Current Assets
Current
assets increased $10,524,732, from $71,097,660 at December 31, 2008 to
$81,622,392 at December 31, 2009, primarily due to the cash proceeds used to
invest in additional equipment subject to lease and other financing transactions
entered into during 2009. In addition, we classified the assets owned by ICON
EAR as assets held for sale, net of selling costs, as we intend to sell the
assets during 2010. We also classified as other current assets a portion of the
deferred financing costs and initial direct costs associated with acquisitions
entered into during 2009.
Total
Liabilities
Total
liabilities increased $104,350,091, from $174,993,070 at December 31, 2008 to
$279,343,161 at December 31, 2009. The increase was primarily due to
the non-recourse debt obligations incurred by ICON Eclipse, ICON Ionian, ICON
Mynx, ICON Stealth and ICON Victorious during 2009.
Current
Liabilities
Current
liabilities increased $16,807,316, from $41,491,899 at December 31, 2008 to
$58,299,215 at December 31, 2009. The increase was primarily due to
the non-recourse debt obligations incurred by ICON Eclipse, ICON Ionian, ICON
Mynx and ICON Stealth during 2009.
Equity
Equity
increased $78,042,753, from $263,592,472 at December 31, 2008 to $341,635,225 at
December 31, 2009. The majority of this balance was primarily due to our equity
raise, which was partially offset by the distributions paid to our members and
noncontrolling interests, the organizational and offering expense allowance paid
to our Manager, the sales commissions paid to third party broker-dealers and
underwriting fees paid to ICON Securities. Equity also increased as a result of
our net income for 2009 and the contributions made by Swiber and Fund Fourteen
in connection with our joint ventures.
Liquidity
and Capital Resources
Summary
At
December 31, 2009 and 2008, we had cash and cash equivalents of $27,075,059 and
$45,408,378, respectively. During our offering period, our main source of cash
was from financing activities and our main use of cash was in investing
activities. During our operating period, our main source of cash is from
operating activities and our main use of cash is in investing and financing
activities.
Our
liquidity will vary in the future, increasing to the extent cash flows from
investments and proceeds from sale of our investments exceed expenses and
decreasing as we enter into new investments, pay distributions to our members
and to the extent expenses exceed cash flows from operations and proceeds from
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:
|
For
the Period from
|
||||||||||||
|
May
25, 2007
|
||||||||||||
|
(Commencement
of
|
||||||||||||
|
Years Ended December 31,
|
Operations)
through
|
|||||||||||
|
2009
|
2008
|
December 31, 2007
|
||||||||||
|
Net
cash provided by (used in):
|
||||||||||||
|
Operating
activities
|
$ | 28,769,289 | $ | 13,684,207 | $ | 983,164 | ||||||
|
Investing
activities
|
(88,951,923 | ) | (159,142,765 | ) | (58,350,968 | ) | ||||||
|
Financing
activities
|
41,819,222 | 168,713,518 | 79,520,707 | |||||||||
|
Effects
of exchange rates on cash and cash equivalents
|
30,093 | (1,485 | ) | - | ||||||||
|
Net
(decrease) increase in cash and cash equivalents
|
$ | (18,333,319 | ) | $ | 23,253,475 | $ | 22,152,903 | |||||
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 increased $15,085,082, from $13,684,207 in 2008
to $28,769,289 in 2009. The increase was primarily related to the increase in
collection of approximately $6,544,000 in receivables from our finance
leases, primarily from our investments in ICON Eclipse and ICON Ionian in
October 2009, ICON Mynx and ICON Stealth in June 2009 and the
additional leases entered into by ICON Global Crossing IV in March 2009. In
addition, we collected a full year of receivables from our finance lease for
ICON French Equipment II, which lease commenced in March 2008.
Investing
Activities
Cash used
in investing activities decreased $70,190,842, from $159,142,765 in 2008 to
$88,951,923 in 2009. The decrease in the use of cash for investing
activities was primarily related to our increased use of borrowings for the
investments we made in 2009 as compared to 2008, which resulted in less cash
being expended for our investing activities.
Financing
Activities
Cash
provided by financing activities decreased $126,894,296, from $168,713,518 in
2008 to $41,819,222 in 2009. Our offering period ended on April 30,
2009, which primarily accounts for the decrease in cash provided by financing
activities. We raised additional net capital of approximately $92,911,000 during
2008 as compared to 2009, as we raised equity for a full year in 2008 as
compared to four months in 2009. The cash distributions paid to our members and
noncontrolling interests were higher in 2009 as we had additional members
receiving distributions in 2009 and collected payments from additional lease and
other financing transactions. In addition, we received $27,000,000 from our
borrowings of non-recourse long-term debt in 2008, as compared to approximately
$3,205,000 in 2009.
Financings
and Borrowings
Non-Recourse
Long-Term Debt
We had
non-recourse long-term debt obligations at December 31, 2009 of
$220,267,838. Most of our non-recourse long-term debt obligations
consist of notes payable in which the lender has a security interest in the
equipment and an assignment of the rental payments under the lease, in which
case the lender is being paid directly by the lessee. In other cases, we receive
the rental payments and pay the lender. If the lessee were to default on the
non-recourse long-term debt, the equipment would be returned to the lender in
extinguishment of the non-recourse long-term debt.
Revolving
Line of Credit, Recourse
We and
certain entities managed by our Manager, Fund Eight B, Fund Nine, Fund Ten, Fund
Eleven and Fund Fourteen (collectively, the “ICON 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 ICON Borrowers not subject to a first priority
lien, as defined in the Loan Agreement. Each of the ICON 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 ICON Borrowers have a beneficial interest.
The
Facility expires on June 30, 2011 and the ICON 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 ICON
Borrowers are obligated to pay a quarterly commitment fee of 0.50% on unused
commitments under the Facility.
Aggregate
borrowings by all ICON Borrowers under the Facility amounted to $2,360,000 at
December 31, 2009. We had no borrowings outstanding under the
Facility as of such date. The balances of $100,000 and $2,260,000
were borrowed by Fund Ten and Fund Eleven, respectively. As of March
24, 2010, Fund
Ten and Fund Eleven had outstanding borrowings under the Facility of
$700,000 and $0, respectively.
Pursuant
to the Loan Agreement, the ICON Borrowers are required to comply with certain
covenants. At December 31, 2009, the ICON Borrowers were in
compliance with all covenants. For additional information, see Note 8 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
$31,554,863, $16,072,151 and $2,040,455, respectively, for the years ended
December 31, 2009, 2008 and 2007. We paid distributions to our
Manager of $318,725, $162,440 and $20,561, respectively, for the years ended
December 31, 2009, 2008 and 2007. We paid distributions to our noncontrolling
interests of $13,458,787, $1,943,705 and $0, 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 relating to each non-recourse
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
was $220,267,838. We are a party to the Facility, as discussed in
“Financings and Borrowings” above. We had no borrowings under the Facility at
December 31, 2009.
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 | 4 -5 | ||||||||||||||
|
Total
|
Year
|
Years
|
Years
|
|||||||||||||
|
Non-recourse
debt
|
$ | 220,267,838 | $ | 43,305,938 | $ | 83,977,704 | $ | 92,984,196 | ||||||||
|
Non-recourse
interest
|
34,752,683 | 12,329,760 | 16,168,094 | 6,254,829 | ||||||||||||
| $ | 255,020,521 | $ | 55,635,698 | $ | 100,145,798 | $ | 99,239,025 | |||||||||
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 were accrued at
December 31, 2009 and our Manager cannot reasonably estimate at this time the
maximum potential amounts, if any, that may become payable under the credit
support agreement.
In
connection with the acquisitions of the Eagle Auriga, the Eagle Centaurus, the
Eagle Carina and the Eagle Corona, we, through ICON Eagle Holdings, ICON Carina
Holdings and ICON Corona Holdings, maintain four restricted cash accounts with
Fortis. These restricted cash accounts consist of the free cash balances that
result from the difference between the bareboat charter payments from AET and
the repayments on the non-recourse long-term debt to Fortis and DVB. The account
of ICON Eagle Holdings is cross-collateralized and the free cash remains in the
restricted cash account until an aggregate amount of $500,000 is funded into the
account. Thereafter, all cash in excess of $500,000 can be distributed. The free
cash for ICON Carina Holdings and ICON Corona Holdings remain in their
restricted cash accounts until $500,000 is funded into each account. Thereafter,
all free cash in excess of $500,000 can be distributed from the respective
accounts.
In
connection with the acquistions of the Leighton Vessels, we, through ICON Mynx,
ICON Stealth and ICON Eclipse, are required to maintain a minimum aggregate cash
balance of $450,000 among the respective bank accounts of ICON Mynx, ICON
Stealth and ICON Eclipse.
In
connection with the acquisition of the Ocean Princess, we, through ICON Ionian,
are required to maintain a minimum cash balance of $300,000 with Nordea at all
times.
The
aforementioned cash amounts are presented within other non-current assets in our
consolidated balance sheets as of December 31, 2009 and 2008.
We have
entered into certain residual sharing and remarketing agreements with various
third parties. In connection with these agreements, residual proceeds
received in excess of specific amounts will be shared with these third parties
based on specific formulas. The obligation related to these agreements is
recorded at fair value.
Off-Balance
Sheet Transactions
None.
Subsequent
Event
On
December 18, 2009, we, through our wholly-owned subsidiary, ICON Faulkner, LLC
(“ICON Faulkner”), a Marshall Islands limited liability company, entered into a
Memorandum of Agreement (the “Faulkner MOA”) to purchase the pipelay barge, the
Leighton Faulkner, from Leighton Contractors (Asia) Limited (“Leighton
Contractors”) for $20,000,000. Simultaneously with the execution of
the Faulkner MOA, ICON Faulkner entered into a bareboat charter with Leighton
Contractors for a period of 96 months commencing on the closing
date. The acquisition closed on January 5, 2010. The
purchase price for the Leighton Faulkner consisted of $1,000,000 in cash and
$19,000,000 in a non-recourse loan, which included $12,000,000 of senior debt
pursuant to a senior facility agreement with Standard Chartered and $7,000,000
of subordinated seller’s credit. The loan has a term of five years,
with an option to extend for another three years. The interest rate has been
fixed pursuant to a swap agreement. All of Leighton Contractors’
obligations are guaranteed by its ultimate parent company, Leighton Holdings, a
publicly traded company on the Australian Stock Exchange. We paid an
acquisition fee to our Manager of approximately $600,000 relating to this
transaction.
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 twelve outstanding notes payable, which are our non-recourse debt
obligations. With respect to the non-recourse 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. With respect to our revolving line of credit, which is
subject to a variable interest rate, we have no outstanding amounts due as of
December 31, 2009. 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 engage
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 and pounds
sterling, 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 counterparty. 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 July
24, 2007, we entered into an interest rate swap contract with Fortis in order to
fix the variable interest rate on our non-recourse debt obligation related to
the Mayon Spirit and to minimize our risk for interest rate fluctuations. After
giving effect to the swap agreement, we have a fixed interest rate of 6.35% per
year.
On April
24, 2008, we entered into interest rate swap contracts with Fortis in order to
fix the variable interest rate on our non-recourse debt obligations related to
the Vroon Vessels and to minimize our risk for interest rate fluctuations. After
giving effect to the swap agreements, we have a fixed interest rate of 3.93% per
year.
We
entered into interest rate swap contracts with Fortis and DVB in order to fix
the variable interest rates on our non-recourse debt obligations related to the
Eagle Auriga on November 18, 2008, the Eagle Centaurus on November 12, 2008, the
Eagle Carina on December 4, 2008 and the Eagle Corona on January 5, 2009 and to
minimize our risk for interest rate fluctuations. After giving effect to the
swap agreements, we have fixed interest rates of 4.94%, 4.63%, 3.85% and 4.015%
with respect to the non-recourse debt obligations of the Eagle Auriga, the Eagle
Centaurus, the Eagle Carina and for the Eagle Corona, respectively.
On June
26, 2009, we entered into interest rate swap contracts with Fortis in order to
fix the variable interest rate on our non-recourse debt obligations related to
ICON Mynx and ICON Stealth and to minimize our risk for interest rate
fluctuations. After giving effect to the swap agreements, we have a fixed
interest rate of 7.05% per year for the Senior Tranche.
On June
30, 2009, we entered into an interest rate swap contract with Standard Chartered
in order to fix the variable interest rate on our non-recourse debt obligation
related to ICON Eclipse and to minimize our risk for interest rate fluctuations.
After giving effect to the swap agreement, we have a fixed interest rate of
7.25% per year for the Eclipse Senior Tranche.
On
October 30, 2009, we entered into an interest rate swap contract with Nordea
Bank Finland Plc. in order to fix the variable interest rate on our non-recourse
debt obligation related to the Ocean Princess and to minimize our risk for
interest rate fluctuations. After giving effect to the swap agreement, we have a
fixed interest rate of 5.54% per year. We account for this swap contract as a
non-designated derivative instrument and will recognize any change in the fair
value directly in earnings.
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
|
|
|
|
54
|
|
|
55
|
|
|
56
|
|
|
57
|
|
|
58
|
|
|
60
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Members
ICON
Leasing Fund Twelve, LLC
We have
audited the accompanying consolidated balance sheets of ICON Leasing Fund
Twelve, 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. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company’s internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of ICON Leasing Fund
Twelve, LLC at December 31, 2009 and 2008, and the 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.
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 30,
2010
New York,
New York
|
(A
Delaware Limited Liability Company)
|
||||||||
|
Consolidated
Balance Sheets
|
||||||||
|
Assets
|
||||||||
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 27,075,059 | $ | 45,408,378 | ||||
|
Current
portion of net investment in finance leases
|
18,783,013 | 6,175,219 | ||||||
|
Current
portion of notes receivable
|
22,786,334 | 17,058,414 | ||||||
|
Other
current assets
|
3,995,632 | 2,455,649 | ||||||
|
Assets
held for sale, net
|
8,982,354 | - | ||||||
|
Total
current assets
|
81,622,392 | 71,097,660 | ||||||
|
Non-current
assets:
|
||||||||
|
Net
investment in finance leases, less current portion
|
137,797,207 | 20,723,514 | ||||||
|
Leased
equipment at cost (less accumulated depreciation of
|
||||||||
|
$43,506,562
and $14,178,194, respectively)
|
335,480,153 | 302,253,674 | ||||||
|
Notes
receivable, less current portion
|
51,122,271 | 35,641,940 | ||||||
|
Investment
in joint venture
|
4,609,644 | 5,374,899 | ||||||
|
Derivative
instrument
|
- | 92,388 | ||||||
|
Due
from Manager and affiliates
|
- | 641,568 | ||||||
|
Other
non-current assets, net
|
10,346,719 | 2,759,899 | ||||||
|
Total
non-current assets
|
539,355,994 | 367,487,882 | ||||||
|
Total
Assets
|
$ | 620,978,386 | $ | 438,585,542 | ||||
|
Liabilities
and Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Current
portion of non-recourse long-term debt
|
$ | 43,305,938 | $ | 29,073,897 | ||||
|
Derivative
instruments
|
4,779,552 | 5,431,968 | ||||||
|
Deferred
revenue
|
6,576,971 | 4,608,711 | ||||||
|
Due
to Manager and affiliates
|
482,301 | 330,980 | ||||||
|
Accrued
expenses and other current liabilities
|
3,154,453 | 2,046,343 | ||||||
|
Total
current liabilities
|
58,299,215 | 41,491,899 | ||||||
|
Non-current
liabilities:
|
||||||||
|
Non-recourse
long-term debt, less current portion
|
176,961,900 | 133,501,171 | ||||||
|
Other
non-current liabilities
|
44,082,046 | - | ||||||
|
Total
non-current liabilities
|
221,043,946 | 133,501,171 | ||||||
|
Total
Liabilities
|
279,343,161 | 174,993,070 | ||||||
|
Commitments
and contingencies (Note 16)
|
||||||||
|
Equity:
|
||||||||
|
Members'
Equity:
|
||||||||
|
Additional
Members
|
278,405,366 | 229,360,768 | ||||||
|
Manager
|
(301,542 | ) | (121,406 | ) | ||||
|
Accumulated
other comprehensive loss
|
(5,024,109 | ) | (5,751,632 | ) | ||||
|
Total
Members' Equity
|
273,079,715 | 223,487,730 | ||||||
|
Noncontrolling
Interests
|
68,555,510 | 40,104,742 | ||||||
|
Total
Equity
|
341,635,225 | 263,592,472 | ||||||
|
Total
Liabilities and Equity
|
$ | 620,978,386 | $ | 438,585,542 | ||||
See
accompanying notes to consolidated financial statements.
|
(A
Delaware Limited Liability Company)
|
||||||||||||
|
Consolidated
Statements of Operations
|
||||||||||||
|
For
the Period from
|
||||||||||||
|
May
25, 2007
|
||||||||||||
|
(Commencement
of
|
||||||||||||
|
Years Ended December 31,
|
Operations)
through
|
|||||||||||
|
2009
|
2008
|
December 31, 2007
|
||||||||||
|
Revenue:
|
||||||||||||
|
Rental
income
|
$ | 59,604,472 | $ | 22,940,645 | $ | 3,745,463 | ||||||
|
Finance
income
|
7,246,926 | 3,695,178 | 762,779 | |||||||||
|
Income
from investment in joint venture
|
573,040 | 325,235 | - | |||||||||
|
Interest
and other income
|
11,066,780 | 2,385,444 | 322,073 | |||||||||
|
Total
revenue
|
78,491,218 | 29,346,502 | 4,830,315 | |||||||||
|
Expenses:
|
||||||||||||
|
Management
fees - Manager
|
3,390,239 | 1,474,993 | 178,289 | |||||||||
|
Administrative
expense reimbursements - Manager
|
3,594,400 | 2,705,118 | 1,346,866 | |||||||||
|
General
and administrative
|
2,276,211 | 1,350,134 | 161,497 | |||||||||
|
Interest
|
11,616,105 | 3,086,275 | 704,418 | |||||||||
|
Depreciation
and amortization
|
34,507,641 | 12,875,095 | 1,860,863 | |||||||||
|
Bad
debt expense
|
572,721 | - | - | |||||||||
|
Impairment
loss
|
3,429,316 | - | - | |||||||||
|
Loss
on financial instruments
|
25,642 | 55,495 | 25,024 | |||||||||
|
Total
expenses
|
59,412,275 | 21,547,110 | 4,276,957 | |||||||||
|
Net
income
|
19,078,943 | 7,799,392 | 553,358 | |||||||||
|
Less:
Net income attributable to noncontrolling interests
|
(5,220,027 | ) | (1,856,812 | ) | (436,506 | ) | ||||||
|
Net
income attributable to Fund Twelve
|
$ | 13,858,916 | $ | 5,942,580 | $ | 116,852 | ||||||
|
Net
income attributable to Fund Twelve allocable to:
|
||||||||||||
|
Additional
Members
|
$ | 13,720,327 | $ | 5,883,154 | $ | 115,683 | ||||||
|
Manager
|
138,589 | 59,426 | 1,169 | |||||||||
| $ | 13,858,916 | $ | 5,942,580 | $ | 116,852 | |||||||
|
Weighted
average number of additional shares of
|
||||||||||||
|
limited
liability company interests outstanding
|
333,979 | 181,777 | 47,186 | |||||||||
|
Net
income attributable to Fund Twelve per weighted
|
||||||||||||
|
average
additional share of limited liability company
|
||||||||||||
|
interests
|
$ | 41.08 | $ | 32.36 | $ | 2.45 | ||||||
See accompanying notes to consolidated financial statements.
|
(A
Delaware Limited Liability Company)
|
||||||||||||||||||||||||||||
|
Consolidated
Statements of Changes in Equity
|
||||||||||||||||||||||||||||
|
Members'
Equity
|
||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||||
|
Additional
Shares
of Limited
Liability |
Additional Members |
Manager
|
Accumulated Other |
Total Members'
Equity |
Noncontrolling Interests |
Total Equity |
||||||||||||||||||||||
|
Balance,
December 31, 2006
|
1 | $ | 1,000 | $ | 1,000 | $ | - | $ | 2,000 | $ | - | $ | 2,000 | |||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||
|
Net
income
|
- | 115,683 | 1,169 | - | 116,852 | 436,506 | 553,358 | |||||||||||||||||||||
|
Change
in valuation of
|
||||||||||||||||||||||||||||
|
interest
rate swap contracts
|
- | - | - | (349,950 | ) | (349,950 | ) | (336,226 | ) | (686,176 | ) | |||||||||||||||||
|
Total
comprehensive loss
|
(233,098 | ) | 100,280 | (132,818 | ) | |||||||||||||||||||||||
|
Proceeds
from issuance of additional shares
|
||||||||||||||||||||||||||||
|
of
limited liability company interests
|
93,805 | 93,670,295 | - | - | 93,670,295 | - | 93,670,295 | |||||||||||||||||||||
|
Shares
of limited liability company interests repurchased
|
(1 | ) | (1,000 | ) | (1,000 | ) | - | (1,000 | ) | |||||||||||||||||||
|
Sales
and offering expenses
|
- | (12,087,572 | ) | - | - | (12,087,572 | ) | - | (12,087,572 | ) | ||||||||||||||||||
|
Cash
distributions
|
- | (2,040,455 | ) | (20,561 | ) | - | (2,061,016 | ) | - | (2,061,016 | ) | |||||||||||||||||
|
Investment
in joint venture by noncontrolling interest
|
- | - | - | - | - | 10,762,478 | 10,762,478 | |||||||||||||||||||||
|
Balance,
December 31, 2007
|
93,805 | $ | 79,657,951 | $ | (18,392 | ) | $ | (349,950 | ) | $ | 79,289,609 | $ | 10,862,758 | $ | 90,152,367 | |||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||
|
Net
income
|
- | 5,883,154 | 59,426 | - | 5,942,580 | 1,856,812 | 7,799,392 | |||||||||||||||||||||
|
Change
in valuation of
|
||||||||||||||||||||||||||||
|
derivative
instruments
|
- | (4,455,706 | ) | (4,455,706 | ) | (279,661 | ) | (4,735,367 | ) | |||||||||||||||||||
|
Currency
translation adjustment
|
- | (945,976 | ) | (945,976 | ) | - | (945,976 | ) | ||||||||||||||||||||
|
Total
comprehensive income
|
540,898 | 1,577,151 | 2,118,049 | |||||||||||||||||||||||||
|
Proceeds
from issuance of additional shares
|
||||||||||||||||||||||||||||
|
of
limited liability company interests
|
180,184 | 179,455,836 | - | - | 179,455,836 | - | 179,455,836 | |||||||||||||||||||||
|
Sales
and offering expenses
|
- | (19,564,022 | ) | - | - | (19,564,022 | ) | - | (19,564,022 | ) | ||||||||||||||||||
|
Cash
distributions
|
- | (16,072,151 | ) | (162,440 | ) | - | (16,234,591 | ) | (1,943,705 | ) | (18,178,296 | ) | ||||||||||||||||
|
Investments
in joint ventures by noncontrolling interests
|
- | - | - | - | - | 29,608,538 | 29,608,538 | |||||||||||||||||||||
|
Balance,
December 31, 2008
|
273,989 | $ | 229,360,768 | $ | (121,406 | ) | $ | (5,751,632 | ) | $ | 223,487,730 | $ | 40,104,742 | $ | 263,592,472 | |||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||
|
Net
income
|
- | 13,720,327 | 138,589 | - | 13,858,916 | 5,220,027 | 19,078,943 | |||||||||||||||||||||
|
Change
in valuation of
|
||||||||||||||||||||||||||||
|
derivative
instruments
|
- | - | - | 555,127 | 555,127 | 231,872 | 786,999 | |||||||||||||||||||||
|
Currency
translation adjustment
|
- | - | - | 172,396 | 172,396 | - | 172,396 | |||||||||||||||||||||
|
Total
comprehensive income
|
14,586,439 | 5,451,899 | 20,038,338 | |||||||||||||||||||||||||
|
Proceeds
from issuance of additional shares
|
||||||||||||||||||||||||||||
|
of
limited liability company interests
|
74,837 | 74,561,816 | - | - | 74,561,816 | - | 74,561,816 | |||||||||||||||||||||
|
Sales
and offering expenses
|
- | (7,580,626 | ) | - | - | (7,580,626 | ) | - | (7,580,626 | ) | ||||||||||||||||||
|
Cash
distributions
|
- | (31,554,863 | ) | (318,725 | ) | - | (31,873,588 | ) | (13,458,787 | ) | (45,332,375 | ) | ||||||||||||||||
|
Shares
of limited liability company interests repurchased
|
(117 | ) | (102,056 | ) | - | - | (102,056 | ) | - | (102,056 | ) | |||||||||||||||||
|
Investments
in joint ventures by noncontrolling interests
|
- | - | - | - | - | 36,457,656 | 36,457,656 | |||||||||||||||||||||
|
Balance,
December 31, 2009
|
348,709 | $ | 278,405,366 | $ | (301,542 | ) | $ | (5,024,109 | ) | $ | 273,079,715 | $ | 68,555,510 | $ | 341,635,225 | |||||||||||||
See accompanying notes to consolidated financial
statements.
|
(A
Delaware Limited Liability Company)
|
||||||||||||
|
Consolidated
Statements of Cash Flows
|
||||||||||||
|
For
the Period from
|
||||||||||||
|
May
25, 2007
|
||||||||||||
|
(Commencement
of
|
||||||||||||
|
Years Ended December 31,
|
Operations)
through
|
|||||||||||
|
2009
|
2008
|
December 31, 2007
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$ | 19,078,943 | $ | 7,799,392 | $ | 553,358 | ||||||
|
Adjustments
to reconcile net income to net cash provided by
|
||||||||||||
|
operating
activities:
|
||||||||||||
|
Rental
income paid directly to lenders by lessees
|
(36,136,272 | ) | (11,314,201 | ) | (3,261,468 | ) | ||||||
|
Finance
income
|
(7,246,926 | ) | (3,695,178 | ) | (762,779 | ) | ||||||
|
Income
from investment in joint venture
|
(573,040 | ) | (325,235 | ) | - | |||||||
|
Depreciation
and amortization
|
34,507,641 | 12,875,095 | 1,860,863 | |||||||||
|
Interest
expense on non-recourse financing paid directly
|
||||||||||||
|
to
lenders by lessees
|
7,422,605 | 2,944,076 | 674,781 | |||||||||
|
Interest
expense from amortization of debt financing costs
|
959,712 | 142,199 | 18,436 | |||||||||
|
Accretion
of seller's credit and other
|
756,948 | - | - | |||||||||
|
Impairment
loss
|
3,429,316 | - | - | |||||||||
|
Bad
debt expense
|
572,721 | - | - | |||||||||
|
Loss
on financial instruments
|
25,642 | 55,495 | 25,024 | |||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Collection
of finance leases
|
15,788,477 | 9,244,453 | 1,142,760 | |||||||||
|
Other
assets, net
|
(11,727,785 | ) | (4,617,634 | ) | (189,187 | ) | ||||||
|
Accrued
expenses and other current liabilities
|
(692,743 | ) | 1,194,823 | 132,620 | ||||||||
|
Deferred
revenue
|
1,968,260 | (1,342,076 | ) | 541,830 | ||||||||
|
Due
to/from Manager and affiliates, net
|
62,750 | 397,763 | 246,926 | |||||||||
|
Distributions
from joint venture
|
573,040 | 325,235 | - | |||||||||
|
Net
cash provided by operating activities
|
28,769,289 | 13,684,207 | 983,164 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchase
of equipment
|
(69,304,587 | ) | (120,866,253 | ) | (54,022,668 | ) | ||||||
|
Investment
in joint venture
|
- | (5,615,735 | ) | - | ||||||||
|
Distributions
received from joint venture in excess of profits
|
765,255 | 240,836 | - | |||||||||
|
Restricted
cash
|
(1,071,816 | ) | - | - | ||||||||
|
Investment
in notes receivable
|
(38,359,443 | ) | (38,599,487 | ) | (4,328,300 | ) | ||||||
|
Repayment
of notes receivable
|
19,018,668 | 5,697,874 | - | |||||||||
|
Net
cash used in investing activities
|
(88,951,923 | ) | (159,142,765 | ) | (58,350,968 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from non-recourse long-term debt
|
3,205,167 | 27,000,000 | - | |||||||||
|
Repayments
of non-recourse long-term debt
|
(1,740,000 | ) | - | - | ||||||||
|
Issuance
of additional shares of limited liability company
interests,
|
||||||||||||
|
net
of sales and offering expenses
|
66,981,190 | 159,891,814 | 81,581,723 | |||||||||
|
Shares
of limited liability company interests repurchased
|
(102,056 | ) | - | - | ||||||||
|
Investment
in joint ventures by noncontrolling interest
|
18,807,296 | - | - | |||||||||
|
Distributions
to noncontrolling interests
|
(13,458,787 | ) | (1,943,705 | ) | - | |||||||
|
Cash
distributions to members
|
(31,873,588 | ) | (16,234,591 | ) | (2,061,016 | ) | ||||||
|
Net
cash provided by financing activities
|
41,819,222 | 168,713,518 | 79,520,707 | |||||||||
|
Effects
of exchange rates on cash and cash equivalents
|
30,093 | (1,485 | ) | - | ||||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(18,333,319 | ) | 23,253,475 | 22,152,903 | ||||||||
|
Cash
and cash equivalents, beginning of the year
|
45,408,378 | 22,154,903 | 2,000 | |||||||||
|
Cash
and cash equivalents, end of the year
|
$ | 27,075,059 | $ | 45,408,378 | $ | 22,154,903 | ||||||
[
See accompanying notes to consolidated financial statements.
|
ICON
Leasing Fund Twelve LLC
|
||||||||||||
|
(A
Delaware Limited Liability Company)
|
||||||||||||
|
Consolidated
Statements of Cash Flows
|
||||||||||||
|
For
the Period from
|
||||||||||||
|
May
25, 2007
|
||||||||||||
|
(Commencement
of
|
||||||||||||
|
Years Ended December 31,
|
Operations)
through
|
|||||||||||
|
2009
|
2008
|
December 31, 2007
|
||||||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||||
|
Cash
paid during the period for interest
|
$ | 1,723,285 | $ | - | $ | - | ||||||
|
Supplemental
disclosure of non-cash investing and financing activities:
|
||||||||||||
|
Principal
and interest on non-recourse long-term debt
|
||||||||||||
|
paid
directly to lenders by lessees
|
$ | 36,136,272 | $ | 11,314,201 | $ | 3,261,468 | ||||||
|
Equipment
purchased with non-recourse long-term debt paid directly by
lender
|
$ | 85,300,000 | $ | 121,699,640 | $ | 24,938,433 | ||||||
|
Equipment
purchased with subordinated financing provided by seller
|
$ | 58,300,000 | $ | - | $ | - | ||||||
|
Investment
in joint venture by noncontrolling interest
|
$ | 18,381,998 | $ | 28,548,220 | $ | 10,762,478 | ||||||
See accompanying notes to consolidated financial
statements.
59
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(1)
|
Organization
|
ICON
Leasing Fund Twelve, LLC (the “LLC”) was formed on October 3, 2006 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, 2026,
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 on May 1, 2009.
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 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 LLC
offered shares of limited liability company interests (the “Shares”) with the
intent to raise up to $410,800,000 of capital, consisting of 400,000 Shares at a
purchase price of $1,000 per share and an additional 12,000 Shares, which were
reserved for the LLC’s distribution reinvestment plan (the “Distribution
Reinvestment Plan”). The Distribution Reinvestment Plan allowed investors to
purchase additional Shares with distributions received from the LLC and/or
certain other funds managed by the Manager at a discounted share price of $900.
The LLC had its initial closing on May 25, 2007 (the “Commencement of
Operations”) with the admission of investors that purchased Shares.
The LLC’s
offering period ended on April 30, 2009, and its operating period commenced on
May 1, 2009. Through April 30, 2009, the LLC sold approximately 348,826 Shares,
including approximately 11,393 Shares issued in connection with the LLC’s
Distribution Reinvestment Plan, representing $347,686,947 of capital
contributions. Through December 31, 2009, 117 Shares have been repurchased by
the LLC pursuant to its repurchase plan. Beginning with the Commencement of
Operations through December 31, 2009, the LLC paid $26,995,024 of sales
commissions to third parties, $5,488,440 of organizational and offering expense
allowance to the Manager and $6,748,756 of underwriting fees to ICON Securities
Corp., a wholly-owned subsidiary of the Manager (“ICON Securities”), the
dealer-manager of the LLC’s offering.
60
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(1)
|
Organization
- continued
|
Members’
capital accounts are increased for their initial capital contribution plus their
proportionate share of earnings and decreased by their proportionate share of
losses and distributions. Profits, losses, cash distributions and liquidation
proceeds are allocated 99% to the additional members and 1% to the Manager until
each additional member has (a) received cash distributions and liquidation
proceeds sufficient to reduce its adjusted capital account to zero and (b)
received, in addition, other distributions and allocations that would provide an
8% per year cumulative return, compounded daily, on its outstanding adjusted
capital account. After such time, distributions will be allocated 90% to the
additional members and 10% to the Manager.
|
(2)
|
Summary
of Significant Accounting Policies
|
Basis of
Presentation and Consolidation
The
accompanying consolidated financial statements of the LLC have been prepared in
accordance with U.S. generally accepted accounting principles (“US GAAP”). In
the opinion of the Manager, all adjustments considered necessary for a fair
presentation have been included.
The
consolidated financial statements include the accounts of the LLC and its
majority-owned subsidiaries and other controlled entities. All intercompany
accounts and transactions have been eliminated in consolidation. In joint
ventures where the LLC has majority ownership, the financial condition and
results of operations of the joint venture are
consolidated. Noncontrolling interest represents the minority owner’s
proportionate share of its equity in the joint venture. The noncontrolling
interest is adjusted for the minority owner’s share of the earnings, losses,
investments and distributions of the joint venture.
The LLC
accounts for its noncontrolling interest in a joint venture where the LLC has
influence over financial and operational matters, generally 50% or less
ownership interest, under the equity method of accounting. In such case, the
LLC’s original investment is recorded at cost and adjusted for its share of
earnings, losses and distributions. The LLC accounts for its
investment in a joint venture where the LLC has virtually no influence over
financial and operational matters using the cost method of
accounting. In such case, the LLC’s original investment is recorded
at cost and any distributions received are recorded as revenue. All
of the LLC’s investments in joint ventures are subject to its impairment review
policy.
Effective
January 1, 2009, the LLC adopted and, for presentation and disclosure purposes,
retrospectively applied the accounting pronouncement relating to noncontrolling
interests in consolidated financial statements. As a result,
noncontrolling interests are reported as a separate component of consolidated
equity and net income attributable to the noncontrolling interest is included in
consolidated net income. The attribution of income between controlling and
noncontrolling interests is disclosed on the accompanying consolidated
statements of operations. Accordingly, the prior year consolidated financial
statements have been revised to conform to the current year
presentation.
Cash and
Cash Equivalents
Cash and
cash equivalents include cash in banks and highly liquid investments with
original maturity dates of three months or less.
61
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(2)
|
Summary
of Significant Accounting Policies -
continued
|
The LLC’s
cash and cash equivalents are held principally at two financial institutions and
at times may exceed insured limits. The LLC has placed these funds in
high quality institutions in order to minimize risk relating to exceeding
insured limits.
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 13 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.
The
residual value assumes, among other things, that the asset is utilized normally
in an open, unrestricted and stable market. Short-term fluctuations in the
marketplace are disregarded and it is assumed that there is no necessity either
to dispose of a significant number of the assets, if held in quantity,
simultaneously or to dispose of the asset quickly. The residual value
is calculated using information from various external sources, such as trade
publications, auction data, equipment dealers, wholesalers and industry experts,
as well as inspection of the physical asset and other economic
indicators.
62
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(2)
|
Summary
of Significant Accounting Policies -
continued
|
Asset
Impairments
The
significant assets in the LLC’s portfolio are periodically reviewed, no less
frequently than annually 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.
Revenue
Recognition
The LLC
leases equipment to third parties and each such lease is classified as either a
finance lease or an operating lease, which is determined based upon the terms of
each lease. For a finance lease, initial direct costs are capitalized
and amortized over the term of the related lease. For an operating
lease, the initial direct costs are included as a component of the cost of the
equipment and depreciated over the lease term.
For
finance leases, the LLC 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.
63
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(2)
|
Summary
of Significant Accounting Policies -
continued
|
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.
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. Accounts receivable are
generally placed in a non-accrual status (i.e., no revenue is recognized) when
payments are more than 90 days past due. Additionally, the LLC
periodically reviews the creditworthiness of companies with payments outstanding
less than 90 days. Based upon the Manager’s judgment, accounts may be
placed in a non-accrual status. Accounts on a non-accrual status are
only returned to an accrual status when the account has been brought current and
the LLC believes recovery of the remaining unpaid receivable is probable.
Revenue on non-accrual accounts is recognized only when cash has been received.
No allowance was deemed necessary at December 31, 2009 and 2008.
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. Interest receivable related to the unpaid principal is recorded
separately from the outstanding balance. Notes receivable are generally placed
in a non-accrual status when payments are more than 90 days past due.
Additionally, the LLC periodically reviews the creditworthiness of companies
with payments outstanding less than 90 days. Based upon the Manager’s
judgment, accounts may be placed in a non-accrual status. Accounts on
a non-accrual status are only returned to an accrual status when the account has
been brought current and the LLC believes recovery of the remaining unpaid
receivable is probable. Revenue on non-accrual accounts is recognized only when
cash has been received.
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.
64
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(2)
|
Summary
of Significant Accounting Policies -
continued
|
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 the LLC’s consolidated balance sheets.
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.
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 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.
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.
65
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(2)
|
Summary
of Significant Accounting Policies -
continued
|
Per Share
Data
Net
income attributable to the LLC per weighted average additional Share is based
upon the weighted average number of additional Shares outstanding during the
year.
Share
Repurchase
The LLC
may, at its discretion, repurchase Shares from a limited number of its
additional members, as provided for in its 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.
Reclassifications
Certain
reclassifications have been made to the accompanying consolidated financial
statements in prior years to conform to the current presentation.
Comprehensive
Income (Loss)
Comprehensive
income (loss) is reported in the accompanying consolidated statements of changes
in equity and consists of net income and other gains and losses affecting equity
that are excluded from net income.
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.
Recently
Adopted Accounting Pronouncements
In 2009,
the LLC adopted the accounting pronouncement relating to accounting for fair
value measurements, which establishes a framework for measuring fair value and
enhances fair value measurement disclosure for non-financial assets and
liabilities. The adoption of this accounting pronouncement for non-financial
assets and liabilities did not have a significant impact on the LLC’s
consolidated financial statements.
In 2009,
the LLC adopted the accounting pronouncement that amended the current accounting
and disclosure requirements for derivative instruments. The requirements were
amended to enhance how: (a) an entity uses derivative instruments; (b)
derivative instruments and related hedged items are accounted for; and (c)
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. The LLC was required to provide
such disclosures beginning with the quarter ended March 31, 2009.
66
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(2)
|
Summary
of Significant Accounting Policies -
continued
|
In 2009,
the LLC adopted the accounting pronouncement that provides additional guidance
for estimating fair value in accordance with the accounting standard for fair
value measurements when the volume and level of activity for the asset or
liability have significantly decreased. This pronouncement also provides
guidance for identifying transactions that are not orderly. This pronouncement
was effective prospectively for all interim and annual reporting periods ending
after June 15, 2009. The adoption of this accounting pronouncement did not have
a significant impact on the LLC’s consolidated financial
statements.
In 2009,
the LLC adopted the accounting pronouncement that amends the requirements for
disclosures about fair value of financial instruments, regarding the fair value
of financial instruments for annual, as well as interim, reporting periods. This
pronouncement was effective prospectively for all interim and annual reporting
periods ending after June 15, 2009. The adoption of this accounting
pronouncement did not have a significant impact on the LLC’s consolidated
financial statements.
In 2009,
the LLC adopted the accounting pronouncement regarding the general standards of
accounting for, and disclosure of, events that occur after the balance sheet
date, but before the financial statements are issued. This pronouncement was
effective prospectively for interim and annual reporting periods ending after
June 15, 2009. The adoption of this accounting pronouncement did not have a
significant impact on the LLC’s consolidated financial statements.
In 2009,
the LLC adopted Accounting Standards Codification 105, “Generally Accepted
Accounting Principles,” which establishes the Financial Accounting Standards
Board Accounting Standards Codification (the “Codification”), which supersedes
all existing accounting standard documents and is the single source of
authoritative non-governmental US GAAP. All other accounting
literature not included in the Codification is considered
non-authoritative. This accounting standard is effective for interim
and annual periods ending after September 15, 2009. The Codification
did not change or alter existing US GAAP and it did not result in a change in
accounting practices for the LLC upon adoption. The LLC has conformed its
consolidated financial statements and related notes to the new Codification for
the year ended December 31, 2009.
|
(3)
|
Net
Investment in Finance Leases
|
Net
investment in finance leases consisted of the following at December 31, 2009 and
2008:
|
2009
|
2008
|
|||||||
|
Minimum
rents receivable
|
$ | 203,775,000 | $ | 29,642,020 | ||||
|
Estimated
residual values
|
16,545,104 | 4,283,003 | ||||||
|
Initial
direct costs, net
|
5,663,856 | 682,275 | ||||||
|
Unearned
income
|
(69,403,740 | ) | (7,708,565 | ) | ||||
|
Net
investment in finance leases
|
156,580,220 | 26,898,733 | ||||||
|
Less: Current
portion of net
|
||||||||
|
investment
in finance leases
|
18,783,013 | 6,175,219 | ||||||
|
Net
investment in finance leases,
|
||||||||
|
less
current portion
|
$ | 137,797,207 | $ | 20,723,514 | ||||
67
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(3)
|
Net
Investment in Finance Leases -
continued
|
Telecommunications
Equipment
During
2007, the LLC, through its wholly-owned subsidiary, ICON Global Crossing IV, LLC
(“ICON Global Crossing IV”), purchased telecommunications equipment for
approximately $21,294,000 that is subject to a lease with Global Crossing
Telecommunications, Inc. (“Global Crossing”). The lease expires on November 30,
2011. The LLC incurred professional fees of approximately $149,000 and paid
acquisition fees to the Manager of approximately $639,000 relating to this
transaction.
During
March 2009, ICON Global Crossing IV purchased additional telecommunications
equipment for approximately $3,859,000 that is subject to a lease with Global
Crossing. The lease expires on March 31, 2012. The LLC paid
acquisition fees to the Manager of approximately $116,000 relating to this
transaction.
Manufacturing
Equipment
On March
3, 2008, the LLC, through its wholly-owned subsidiary, ICON French Equipment II,
LLC (“ICON French Equipment II”), purchased auto parts manufacturing equipment
and simultaneously leased back the equipment to Sealynx Automotive Transieres
SAS (“Sealynx”). The purchase price was approximately $11,626,000
(€7,638,400). The lease term commenced on March 3, 2008 and continues for a
period of 60 months. The LLC paid an acquisition fee to the Manager of
approximately $350,000 (€229,152) relating to this transaction. As additional
security for Sealynx’s obligations under the lease, the LLC was granted a lien
on property owned by Sealynx in France, valued at €3,746,400 at the acquisition
date, and a guarantee from Sealynx’s parent company, Sealynx Automotive
Holding.
Subsequently,
due to the global downturn in the automotive industry, Sealynx requested a
restructuring of its lease payments during the third quarter of 2009 and the LLC
agreed to reduce Sealynx’s lease payments. On January 4, 2010, the LLC
restructured the payment obligations of Sealynx under the lease to provide it
with cash flow flexibility while at the same time attempting to preserve the
LLC’s projected economic return on this investment. As additional
security for restructuring the payment obligations, ICON French Equipment II
received an additional mortgage on certain real property owned by Sealynx
located in Charleval, France.
Marine
Vessels
On June
26, 2009, the LLC, through its wholly-owned subsidiaries ICON Mynx Pte. Ltd.
(“ICON Mynx”), ICON Stealth Pte. Ltd. (“ICON Stealth”) and ICON Eclipse Pte.
Ltd. (“ICON Eclipse”), each a Singapore corporation, executed Memoranda of
Agreement (“MOA”) to purchase three barges (each a “Leighton Vessel” and,
collectively, the “Leighton Vessels”) from Leighton Contractors (Singapore) Pte.
Ltd. (“Leighton”) for an aggregate purchase price of $133,000,000. The LLC paid
aggregate acquisition fees to the Manager of $3,990,000 relating to these
transactions. Simultaneously with the execution of the MOA, each of ICON Mynx,
ICON Stealth and ICON Eclipse entered into a bareboat charter to charter the
Leighton Vessel that it owns to Leighton for a term of 96 months. During the
term of the bareboat charters, Leighton will have the option to purchase each of
the Leighton Vessels for a specified purchase option price on the dates defined
in each respective bareboat charter. All of Leighton’s obligations
are guaranteed by its ultimate parent company, Leighton Holdings Limited
(“Leighton Holdings”), a publicly traded company that is listed on the
Australian Stock Exchange.
68
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(3)
|
Net
Investment in Finance Leases -
continued
|
Two of
the three Leighton Vessels were acquired on June 26, 2009 for $58,000,000,
including the incurrence of $34,800,000 of senior debt (the “Senior Tranche”)
pursuant to a $79,800,000 senior facility agreement (the “Facility Agreement”)
with Standard Chartered Bank, Singapore Branch (“Standard Chartered”) and
$20,500,000 of subordinated seller’s credit (the “Subordinated Tranche”)
pursuant to a $47,000,000 seller’s credit agreement with Leighton (the “Seller’s
Credit Agreement”). The Seller’s Credit Agreement is subordinated only to the
Facility Agreement. The Senior Tranche will be repaid by the LLC in 20 quarterly
principal and interest payments beginning on September 30, 2009. The Senior
Tranche bore an annual interest rate of 4.8475% during the period from June 26,
2009 to September 30, 2009 (the “Stub Period”) and, thereafter, the interest
rate was fixed pursuant to a swap agreement at 7.05%. The interest-free
Subordinated Tranche will be repaid by the LLC in eight annual principal
payments beginning on June 25, 2010. The Subordinated Tranche is recorded on a
discounted basis within other non-current liabilities and is being accreted to
its carrying value as interest expense over its term. The bareboat charter for
each of these two Leighton Vessels expires on June 25, 2017.
On
October 28, 2009, the LLC, through ICON Eclipse, purchased the remaining third
Leighton Vessel from Leighton for $75,000,000. To purchase the Leighton Vessel,
ICON Eclipse borrowed $45,000,000 of senior debt (the “Eclipse Senior Tranche”)
pursuant to the Facility Agreement and $26,500,000 of subordinated seller’s
credit (the “Eclipse Subordinated Tranche”) pursuant to the Seller’s Credit
Agreement. The Eclipse Senior Tranche will be repaid by the LLC in 20 quarterly
principal and interest payments beginning on December 31, 2009. The
interest-free Eclipse Subordinated Tranche will be repaid by the LLC in eight
annual principal payments beginning on October 28, 2010. The Eclipse
Subordinated Tranche is recorded on a discounted basis within other non-current
liabilities and is being accreted to its carrying value as interest expense over
its term.
On
October 30, 2009, ICON Ionian, LLC (“ICON Ionian”), a Marshall Islands limited
liability company that is wholly-owned by the LLC, purchased a product tanker
vessel, the Ocean Princess (the “Ocean Princess”), from Lily Shipping Ltd.
(“Lily Shipping”), a wholly-owned subsidiary of the Ionian Group (“Ionian”), for
the purchase price of $10,750,000. Simultaneously with the purchase, the Ocean
Princess was bareboat chartered back to Lily Shipping for 60 months. The
purchase price consisted of (i) a non-recourse loan in the amount of $5,500,000
from Nordea Bank Norge ASA (“Nordea”), (ii) $950,000 in cash and (iii) a
subordinated, interest-free $4,300,000 payable to Lily Shipping, which is due
upon the sale of the Ocean Princess in accordance with the terms of the bareboat
charter. If an event of default occurs, ICON Ionian’s obligation to repay the
seller's credit to Lily Shipping is terminated. The obligations of
Lily Shipping are guaranteed by Delta Petroleum Ltd., a wholly-owned subsidiary
of Ionian. The LLC paid an acquisition fee to the Manager of approximately
$323,000 in connection with this transaction.
Non-cancelable
minimum annual amounts due on investment in finance leases over the next five
years were as follows at December 31, 2009:
|
Years Ending
December 31,
|
||||
|
2010
|
$ | 31,399,942 | ||
|
2011
|
29,063,409 | |||
|
2012
|
22,213,771 | |||
|
2013
|
18,814,655 | |||
|
2014
|
22,831,155 | |||
|
Thereafter
|
79,452,068 | |||
| $ | 203,775,000 | |||
69
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(4)
|
Leased
Equipment at
Cost
|
Leased
equipment at cost consisted of the following at December 31, 2009 and
2008:
|
2009
|
2008
|
|||||||
|
Marine
vessels and equipment
|
$ | 316,103,074 | $ | 261,719,265 | ||||
|
Manufacturing
equipment
|
19,559,700 | 35,761,085 | ||||||
|
Mining
equipment
|
20,122,452 | 12,834,631 | ||||||
|
Telecommunications
equipment
|
6,116,887 | 6,116,887 | ||||||
|
Motor
coaches
|
5,473,082 | - | ||||||
|
Gas
compressors
|
11,611,520 | - | ||||||
| 378,986,715 | 316,431,868 | |||||||
|
Less:
Accumulated depreciation
|
(43,506,562 | ) | (14,178,194 | ) | ||||
| $ | 335,480,153 | $ | 302,253,674 | |||||
Depreciation
expense was $32,869,210, $12,354,313 and $1,823,881 for the years ended December
31, 2009, 2008 and 2007, respectively.
Marine
Vessels and Equipment
On June
26, 2007, the LLC and ICON Income Fund Ten, LLC (“Fund Ten”), an entity also
managed by the Manager, formed ICON Mayon, LLC (“ICON Mayon”), with ownership
interests of 51% and 49%, respectively. On July 24, 2007, ICON Mayon purchased a
98,507 deadweight ton (“DWT”) Aframax product tanker, the Mayon Spirit, from an
affiliate of Teekay Corporation (“Teekay”). The purchase price for the Mayon
Spirit was approximately $40,250,000, with approximately $15,312,000 funded in
the form of a capital contribution to ICON Mayon and approximately $24,938,000
of non-recourse debt borrowed from Fortis Capital Corp. Simultaneously with the
closing of the purchase of the Mayon Spirit, the Mayon Spirit was bareboat
chartered back to Teekay for a term of 48 months. The charter commenced on
July 24, 2007. The total capital contributions made to ICON Mayon were
approximately $16,020,000. The LLC paid approximately $845,000 in
transaction-related costs, which included approximately $616,000 of acquisition
fees paid to the Manager.
On April
24, 2008, the LLC, through its wholly-owned subsidiaries, ICON Arabian Express,
LLC (“ICON Arabian”) and ICON Aegean Express, LLC (“ICON Aegean”), acquired two
1,500 twenty-foot equivalent unit (“TEU”) containership vessels from Vroon Group
B.V. (“Vroon”), the Aegean Express and the Arabian Express (collectively, the
“Vroon Vessels”), for an aggregate purchase price of $51,000,000, of which
$38,700,000 of non-recourse debt was borrowed from Fortis Bank NV/SA (“Fortis”).
Simultaneously with the purchase, the Vroon Vessels were bareboat chartered back
to the subsidiaries of Vroon for a period of 72 months. The LLC paid
approximately $2,082,000 in transaction-related costs, including $1,530,000 in
acquisition fees paid to the Manager.
70
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(4)
|
Leased
Equipment at Cost -
continued
|
On
November 18, 2008, ICON Eagle Auriga Pte. Ltd. (“ICON Eagle Auriga”), a
wholly-owned subsidiary of ICON Eagle Holdings, LLC (“ICON Eagle Holdings”),
purchased a 102,352 DWT Aframax product tanker, the M/V Eagle Auriga (the “Eagle
Auriga”), from Aframax Tanker I AS for $42,000,000, of which $28,000,000 of
non-recourse debt was borrowed from Fortis and DVB Bank SE (“DVB”). On November
21, 2008, ICON Eagle Centaurus Pte. Ltd. (“ICON Eagle Centaurus”), also a
wholly-owned subsidiary of ICON Eagle Holdings, purchased a 95,644 DWT Aframax
product tanker, the M/V Eagle Centaurus (the “Eagle Centaurus”), for
$40,500,000, of which $27,000,000 of non-recourse debt was borrowed from Fortis
and DVB. The Eagle Auriga and the Eagle Centaurus are subject to
84-month bareboat charters with AET, Inc. Limited (“AET”) that expire on
November 14, 2013 and November 13, 2013, respectively. The LLC paid an
acquisition fee to the Manager of $2,475,000 relating to these
transactions.
On
December 3, 2008, ICON Eagle Carina Pte. Ltd., a Singapore corporation
wholly-owned by ICON Eagle Carina Holdings, LLC (“ICON Carina Holdings”), a
Marshall Islands limited liability company owned 64.3% by the LLC and 35.7% by
Fund Ten, executed a Memorandum of Agreement to purchase a 95,639 DWT Aframax
product tanker, the M/V Eagle Carina (the “Eagle Carina”), from Aframax Tanker
II AS. On December 18, 2008, the Eagle Carina was purchased for $39,010,000, of
which $27,000,000 was financed as non-recourse debt borrowed from Fortis and
DVB. The Eagle Carina is subject to an 84-month bareboat charter with
AET that expires on November 14, 2013. ICON Carina Holdings paid an
acquisition fee to the Manager of approximately $1,170,000 relating to this
transaction.
On
December 3, 2008, ICON Eagle Corona Pte. Ltd., a Singapore corporation
wholly-owned by ICON Eagle Corona Holdings, LLC (“ICON Corona Holdings”), a
Marshall Islands limited liability company owned 64.3% by the LLC and 35.7% by
Fund Ten, executed a Memorandum of Agreement to purchase a 95,634 DWT Aframax
product tanker, the M/V Eagle Corona (the “Eagle Corona”), from Aframax Tanker
II AS. On December 31, 2008, the Eagle Corona was purchased for
$41,270,000, of which $28,000,000 was financed as non-recourse debt borrowed
from Fortis and DVB. The Eagle Corona is subject to an 84-month bareboat charter
with AET that expires on November 14, 2013. ICON Corona Holdings paid
an acquisition fee to the Manager of approximately $1,238,000 relating to this
transaction.
On March
24, 2009, Victorious, LLC (“Victorious”), a Marshall Islands limited liability
company that is controlled by the LLC through its wholly-owned subsidiary, ICON
Victorious, LLC (“ICON Victorious”), purchased a new, 300-man accommodation and
work barge (the “Barge”) from Swiber Engineering Ltd. (“Swiber”) for
$42,500,000. Simultaneously with the purchase, the Barge was chartered
back to Swiber Offshore Marine Pte. Ltd. (the “Charterer”) for 96 months.
The purchase price of the Barge was funded by (i) a $19,125,000 equity
investment from ICON Victorious, (ii) an $18,375,000
contribution-in-kind by Swiber and (iii) a subordinated, non-recourse and
unsecured $5,000,000 payable. The payable bears interest at 3.5% per year,
accrues interest quarterly, is only required to be repaid after the LLC achieves
its minimum targeted return and is recorded within other non-current
liabilities. At the end of the charter, the Charterer has the option to purchase
the Barge for $21,000,000 plus 50% of the difference between the then fair
market value less $21,000,000. ICON Victorious is the sole manager of Victorious
and holds a senior, controlling equity interest and all management rights with
respect to Victorious. Swiber holds a subordinate, noncontrolling equity
interest in Victorious and the obligations of the Swiber entities that are
parties to the transaction are guaranteed by Swiber’s parent company, Swiber
Holdings Limited (“Swiber Holdings”). The LLC paid an acquisition fee to the
Manager of $1,275,000 in connection with this transaction.
71
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(4)
|
Leased
Equipment at Cost -
continued
|
On June
25, 2009, the LLC, through its wholly-owned subsidiaries, purchased certain
marine diving equipment (the “Diving Equipment”) from Swiber for $10,000,000.
Simultaneously with the purchase of the Diving Equipment, the LLC entered into a
60-month lease with Swiber Offshore Construction Pte. Ltd. (the “Lessee”), which
commenced on July 1, 2009. The purchase price of the Diving Equipment was
comprised of $8,000,000 in cash and a subordinated, interest-free $2,000,000
payable to Swiber, which is due upon sale of the Diving Equipment at the
conclusion of the lease term. The $2,000,000 payable is recorded on a discounted
basis within other non-current liabilities and is being accreted to its carrying
value as interest expense over its term. If an event of loss or an event of
default occurs, the LLC’s obligation to repay the payable is terminated. The LLC
paid an acquisition fee to the Manager of $300,000 relating to this
transaction.
At the
conclusion of the lease, the Lessee has the option to (x) purchase the Diving
Equipment for $4,250,000 (the “Purchase Option”) and pay an amount equal to 50%
of the difference between the fair market value of the Diving Equipment less
$4,250,000 or (y) return the Diving Equipment. In the event the Lessee does not
exercise the Purchase Option and the Diving Equipment is not sold to a third
party, but rather the lease is renewed or is re-leased to a third party, all
lease payments received by the LLC will be paid as follows: (i) first, to the
LLC until it receives in full its purchase price of $10,000,000 less the
$2,000,000 payable and achieves a return thereon at an agreed-upon rate and (ii)
then, to Swiber to repay in full the $2,000,000 payable without interest
thereon. In addition, Victorious, ICON Victorious and Swiber granted the LLC’s
subsidiaries a first priority mortgage in the Barge as security for the Lessee’s
obligations under the lease. The obligations of the Lessee, Swiber, and Swiber
Holdings under the operative transactional documents are subordinate only to
ICON Victorious’ rights in the Barge. The obligations of the Lessee are
guaranteed by Swiber Holdings.
Manufacturing
Equipment
On
September 28, 2007, the LLC completed the acquisition of and simultaneously
leased back substantially all of the machining and metal working equipment of LC
Manufacturing, LLC (“LC Manufacturing”), a wholly-owned subsidiary of MW
Universal, Inc. (“MWU”), for a purchase price of $14,890,000. The
lease term commenced on January 1, 2008 and continues for a period of 60 months.
The LLC paid an acquisition fee to the Manager of approximately $447,000. 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
Crow, Inc. (“Crow”), another wholly-owned subsidiary of MWU, for a purchase
price of $4,100,000. The lease term commenced on January 1, 2008 and
continues for a period of 60 months. The LLC paid an acquisition fee
to the Manager of $123,000.
72
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(4)
|
Leased
Equipment at Cost -
continued
|
Simultaneously
with the closing of the transactions with LC Manufacturing and Crow, Fund Ten
and ICON Leasing Fund Eleven, LLC (“Fund Eleven”), entities also managed by the
Manager (together with the LLC, the “Participating Funds”), completed similar
acquisitions with seven 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 LC Manufacturing and Crow) 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 September 5, 2008, the
Participating Funds and IEMC Corp., a subsidiary of the Manager (“IEMC”),
entered into an amended forbearance agreement with MWU, LC Manufacturing, Crow
and seven other subsidiaries of MWU (collectively, 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. The obligations of the
MWU entities are guaranteed by their affiliate, American Metals Industries,
Inc. As of December 31, 2009, the LLC’s proportionate share was 35.3% of
the warrant issued for the fully diluted common stock of MWU. At December 31,
2009, the Manager determined that the fair value of the warrant was
$0.
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 LC Manufacturing’s lease payment
schedule, the LLC received, among other things, a warrant, exercisable until
March 31, 2015, to purchase 10% of the fully diluted membership interests of LC
Manufacturing at the time of exercise at an aggregate exercise price of $1,000.
At December 31, 2009, the Manager determined that the fair value of the LC
Manufacturing warrant was $0.
On June
1, 2009, the LLC amended and restructured the master lease agreement with LC
Manufacturing dated September 28, 2007 to reduce the assets under lease from
$14,890,000 to approximately $12,420,000. Contemporaneously, the LLC entered
into a new lease with Metavation, LLC, an affiliate of LC Manufacturing
(“Metavation”), for the assets previously under lease with LC Manufacturing with
a cost of approximately $2,470,000. The equipment is subject to a 43-month lease
with Metavation that expires on December 31, 2012. The obligations of Metavation
under the lease are guaranteed by its parent company, Cerion, LLC (“Cerion”). In
consideration for restructuring LC Manufacturing’s lease payment schedule, the
LLC received a warrant, exercisable until March 31, 2015, to purchase 65% of the
fully diluted membership interests of LC Manufacturing at the time of exercise
at an aggregate exercise price of $1,000. At December 31, 2009, the Manager
determined that the fair value of the LC Manufacturing warrant was
$0.
On
December 11, 2007, the LLC and Fund Eleven formed ICON EAR, LLC (“ICON EAR”),
with ownership interests of 55% and 45%, respectively. On December
28, 2007, ICON EAR purchased and simultaneously leased back semiconductor
manufacturing equipment to Equipment Acquisition Resources, Inc. (“EAR”) for a
purchase price of $6,935,000. During June 2008, the LLC and Fund Eleven made
additional contributions to ICON EAR, which were used to complete a purchase and
simultaneous leaseback of additional semiconductor manufacturing equipment to
EAR for a total purchase price of approximately $8,795,000. The LLC and Fund
Eleven retained ownership interests of 55% and 45%, 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 $259,000
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.
73
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(4)
|
Leased
Equipment at Cost -
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 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. Accordingly, such assets have been classified as held for
sale, net of estimated selling costs, on the accompanying consolidated balance
sheet at December 31, 2009.
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. 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 petition for reorganization under Chapter 11 of the
U.S. Bankruptcy Code. 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 and, as a result, the LLC recognized a non-cash
impairment charge of approximately $3,429,000 relating to the write down in
value of the semiconductor manufacturing equipment. No amount of this
impairment charge will result in any future cash expenditures. 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 the LLC’s accounting policies and the above mentioned
factors.
Mining
Equipment
On May 5,
2008, the LLC, through its wholly-owned subsidiary, ICON Magnum, LLC (“ICON
Magnum”), purchased the Bucyrus Erie model 1570 Dragline (the “Dragline”) from
Magnum Coal Company for a purchase price of approximately $12,461,000. The
Dragline was simultaneously leased back to Magnum Coal Company and its
subsidiaries. The lease term commenced on June 1, 2008 and continues for a
period of 60 months. The LLC paid an acquisition fee to the Manager of
approximately $374,000 relating to this transaction.
On
February 18, 2009, the LLC, through its wholly-owned subsidiary, ICON Murray,
LLC (“ICON Murray”), purchased mining equipment for approximately $3,348,000
that is subject to a lease with American Energy Corp. and Ohio American Energy,
Incorporated. The lease expires on March 31, 2011. The payment and
performance obligations of American Energy Corp. are secured by a guarantee of
its parent company, Murray Energy Corporation. The LLC paid an acquisition fee
to the Manager of approximately $100,000 relating to this
transaction.
On May
26, 2009, the LLC, through its wholly-owned subsidiary, ICON Murray II, LLC
(“ICON Murray II”), purchased mining equipment subject to a lease between
Varilease Finance, Inc. (“Varilease”), as lessor, and American Energy
Corp. and The Ohio Valley Coal Company, as lessees. The equipment
was purchased from Varilease for approximately $3,196,000 and is subject to a
30-month lease that expires on December 31, 2011. The LLC paid an acquisition
fee to the Manager of approximately $96,000 relating to this
transaction.
74
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(4)
|
Leased
Equipment at Cost -
continued
|
Telecommunications
Equipment
On March
11, 2008, ICON Global Crossing IV purchased additional telecommunications
equipment for approximately $5,939,000 that is also subject to a lease with
Global Crossing. The lease expires on March 31, 2011. The LLC paid an
acquisition fee to the Manager of approximately $178,000 relating to this
transaction.
Motor
Coaches
On April
1, 2009, the LLC, through its wholly-owned subsidiary, ICON Coach, LLC (“ICON
Coach”), acquired title to certain motor coaches from CUSA PRTS, LLC (“CUSA”),
an affiliate of Coach America Holdings, Inc. (“Coach America”), for
approximately $5,314,000. The motor coaches are subject to a 60-month lease with
CUSA that expires on March 31, 2014. The payment and performance obligations of
CUSA are guaranteed by Coach America. The LLC paid an acquisition fee to the
Manager of approximately $159,000 relating to this transaction.
On
December 11, 2009, ICON Coach borrowed approximately $3,207,000 from Wells Fargo
Equipment Finance, Inc. (“Wells Fargo”). The terms of the loan require
ICON Coach to make 38 monthly payments of approximately $95,000 each from
January 1, 2010 through February 1, 2013. Interest is computed at a rate
of 7.5% per annum throughout the term of the loan. In consideration for
making the loan, Wells Fargo received a first priority security interest in (i)
the fourteen 2009 MCI Model D4505 passenger motor coaches owned by ICON Coach,
(ii) the master lease agreement between ICON Coach and CUSA, and (iii) the
guaranty of Coach America. ICON Coach has the option to prepay the loan
(a) beginning January 1, 2011 through December 31, 2011 in consideration for a
fee of 3% of the amount being prepaid or (b) beginning January 1, 2012 through
the end of the term in consideration for a fee of 2% of the amount being
prepaid.
Gas
Compressors
On June
26, 2009, the LLC and ICON Equipment and Corporate Infrastructure Fund Fourteen,
L.P., an entity managed by an affiliate of the Manager (“Fund Fourteen”),
entered into a joint venture, ICON Atlas, LLC (“ICON Atlas”), for the purpose of
investing in eight new Ariel natural gas compressors (the “Gas Compressors”)
from AG Equipment Co. (“AG”). On June 26, 2009, ICON Atlas purchased four of the
Gas Compressors from AG for approximately $4,270,000. Simultaneously with the
purchase, ICON Atlas entered into a lease with Atlas Pipeline Mid-Continent, LLC
(“APMC”), an affiliate of Atlas Pipeline Partners, L.P. (“APP”).
On August
17, 2009, ICON Atlas purchased the other four Gas Compressors from AG for
approximately $7,028,000. Simultaneously with that purchase, ICON Atlas entered
into a second schedule to the lease with APMC. Each schedule is for a
period of 48 months and expires on August 31, 2013. The obligations
of APMC are guaranteed by its parent company, APP. As of December 31,
2009, the LLC’s and Fund Fourteen’s ownership interests in ICON Atlas were 55%
and 45%, respectively. The LLC paid an acquisition fee to the Manager in the
amount of approximately $186,000 in connection with this
transaction.
75
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(4)
|
Leased
Equipment at Cost -
continued
|
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
|
$ | 63,644,314 | ||
|
2011
|
$ | 58,244,482 | ||
|
2012
|
$ | 52,822,912 | ||
|
2013
|
$ | 37,269,673 | ||
|
2014
|
$ | 12,404,850 | ||
|
Thereafter
|
$ | 21,260,000 | ||
|
(5)
|
Notes
Receivable
|
Notes
Receivable Secured by Solar Panel Production Equipment
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.
Note
Receivable Secured by a Machine Paper Coating Manufacturing Line
On
November 7, 2008, the LLC, through its wholly-owned subsidiary, ICON Appleton,
LLC (“ICON Appleton”), made a secured term loan to Appleton Papers, Inc.
(“Appleton”) in the amount of $22,000,000. The loan is secured by a machine
paper coating manufacturing line. Interest on the term note accrued at 12.5% per
year and was payable monthly in arrears in accordance with the promissory note
for a period of 60 months. The LLC paid an acquisition fee to the Manager of
$660,000 relating to this transaction.
On March
26, 2009, the loan and security agreement and the secured term loan note issued
by Appleton were amended due to a default on one of its covenants. As a result
of the default provisions of the loan and security agreement, the interest on
the term note was adjusted to accrue interest at 14.25% per year and is payable
monthly in arrears. On February 26, 2010, the LLC amended certain financial
covenants in the loan agreement with Appleton. In consideration for the amended
loan, ICON Appleton received an amendment fee in the amount of approximately
$117,000 from Appleton.
76
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(5)
|
Notes
Receivable -
continued
|
Notes
Receivable Secured by Credit Card Machines
On
November 25, 2008, ICON Northern Leasing, LLC (“ICON Northern Leasing”), a joint
venture among the LLC, Fund Ten and Fund Eleven, purchased four promissory notes
(the “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 Eleven have ownership interests of 52.75%,
12.25% and 35%, respectively, in ICON Northern Leasing. The aggregate purchase
price for the Notes was approximately $31,573,000, net of a discount of
approximately $5,165,000. The 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 Notes, provided a limited
guarantee of the MLSA for payment deficiencies up to approximately $6,355,000.
The 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
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 Notes was approximately
$16,655,000 and the LLC paid an acquisition fee to the Manager of approximately
$500,000 relating to this transaction.
On March
31, 2009, ICON Northern Leasing II, LLC (“ICON Northern Leasing II”), a
wholly-owned subsidiary of the LLC, provided a senior secured loan in the amount
of approximately $7,870,000 (the “Northern Leasing II Loan”) to Northern Capital
Associates XV, L.P. (“NCA XV”) and Northern Capital Associates XIV, L.P. (“NCA
XIV”), pursuant to the MLSA dated March 31, 2009. The Northern Leasing II Loan
accrues interest at a rate of 18% per year and is secured by a first priority
security interest in an underlying pool of leases for credit card machines of
NCA XV and a second priority security interest in an underlying pool of leases
for credit card machines of NCA XIV (subject only to the first priority security
interest of ICON Northern Leasing). Northern Leasing Systems, the originator and
servicer of the Northern Leasing II Loan, provided a limited guarantee for
payment deficiencies of up to 10% of the Northern Leasing II Loan, or
approximately $787,000. The LLC paid an acquisition fee to the Manager of
approximately $314,000 relating to this transaction.
Notes
Receivable Secured by Analog Seismic System Equipment
On June
29, 2009, the LLC and Fund Fourteen entered into a joint venture, ICON ION, LLC
(“ICON ION”), for the purpose of making secured term loans (the “ION Loans”) in
the aggregate amount of $20,000,000 to ARAM Rentals Corporation, a Canadian
bankruptcy remote Nova Scotia unlimited liability company (“ARC”) and ARAM
Seismic Rentals Inc., a U.S. bankruptcy remote Texas corporation (“ASR,”
together with ARC, collectively referred to as the “ARAM
Borrowers”). On that date, ICON ION funded the first tranche of the
ION Loans in the amounts of $8,825,000 and $3,675,000 to ARC and ASR,
respectively. On July 20, 2009, ICON ION funded the second tranche of
the ION Loans to ARC in the amount of $7,500,000.
77
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(5)
|
Notes
Receivable -
continued
|
The ARAM
Borrowers are wholly-owned subsidiaries of ION Geophysical Corporation, a
Delaware corporation (“ION”). The ION Loans are secured by (i) a
first priority security interest in all of the ARAM analog seismic system
equipment owned by the ARAM Borrowers and (ii) a pledge of all of the equity
interests in the ARAM Borrowers. In addition, ION guaranteed all
obligations of the ARAM Borrowers under the ION Loans. Interest
accrues at the rate of 15% per year and the ION Loans are payable monthly in
arrears for a period of 60 months beginning on August 1, 2009. As of
December 31, 2009, the LLC’s and Fund Fourteen’s ownership interests in ICON ION
were 55% and 45%, respectively. The LLC paid an acquisition fee to
the Manager in the amount of $330,000 in connection with this
transaction
Note
Receivable Secured by Rail Support Construction Equipment
On
December 23, 2009, ICON Quattro, LLC (“ICON Quattro”), a joint venture owned 55%
by the LLC and 45% by Fund Fourteen, participated in a £24,800,000 loan facility
by making a second priority secured term loan to Quattro Plant Limited (“Quattro
Plant”) in the amount of £5,800,000. Quattro Plant is a wholly-owned
subsidiary of Quattro Group Limited (“Quattro Group”). The loan is secured
by (i) all of Quattro Plant’s rail support construction equipment, which
consists of railcars, attachments to railcars, bulldozers, excavators, tractors,
lowboy trailers, street sweepers, service trucks, forklifts (collectively, the
“Construction Equipment”) and any other existing or future asset owned by
Quattro Plant, (ii) all of Quattro Plant’s accounts receivable, and (iii) a
mortgage on certain real estate in London, England owned by the majority
shareholder of Quattro Plant. In addition, ICON Quattro will receive
a key man insurance policy insuring the life of the majority shareholder of ICON
Quattro in an amount not less than £5,500,000 and not more than
£5,800,000. All of Quattro Plant’s obligations under the loan are
guaranteed by Quattro Group and its subsidiaries, Quattro Hire Limited and
Quattro Occupational Academy Limited (collectively, the “Quattro
Companies”).
Interest
on the secured term loan accrues at a rate of 20% per year and the loan will be
amortized to a balloon payment of 15% of the principal at the end of term.
The loan is payable monthly in arrears for a period of 33 months, which began on
January 1, 2010. Quattro Plant has the option to prepay the entire
outstanding amount of the loan beginning January 1, 2012 in consideration for a
fee of 5% of the amount being prepaid.
Simultaneously
with ICON Quattro's loan, KBC Bank N.V. (“KBC”) participated in the £24,800,000
loan facility by making a loan of £19,000,000 to Quattro Plant (the “KBC
Loan”). The KBC Loan is secured by (i) a first priority security interest
in all of Quattro Plant’s Construction Equipment and any other existing or
future asset owned by Quattro Plant and (ii) a first priority security interest
in all of Quattro Plant’s accounts receivable.
Simultaneously
with the consummation of ICON Quattro’s loan and the KBC Loan, ICON Quattro,
KBC, Quattro Plant, Quattro Group and the Quattro Companies entered into an
intercreditor deed governing the relationship between ICON Quattro and
KBC. In the event either ICON Quattro or KBC seeks to enforce its security
interest under its respective loan, the proceeds from the enforcement of any
security interest shall be applied (i) first, to pay all costs and expenses
incurred by or on behalf of ICON Quattro or KBC, (ii) second, to KBC in an
amount that would allow KBC to receive its return on its investment, and (iii)
third, to ICON Quattro in an amount that would allow ICON Quattro to receive its
return on its investment. ICON Quattro paid an acquisition fee to the
Manager of approximately $807,000 relating to this transaction.
78
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(6)
|
Investment
in Joint
Venture
|
The LLC
and Fund Eleven formed the joint venture discussed below for the purpose of
acquiring and managing certain assets. The LLC and Fund Eleven have
substantially identical investment objectives and participate on the same terms
and conditions.
ICON
Pliant, LLC
On June
30, 2008, the LLC and Fund Eleven 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 $5,452,000. On July 16, 2008, the LLC and Fund Eleven
completed the acquisition of and simultaneously leased back manufacturing
equipment to Pliant. The LLC and Fund Eleven have ownership interests in ICON
Pliant of 45% and 55%, 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 $163,000.
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
payments.
|
(7)
|
Non-Recourse
Long-Term
Debt
|
The LLC
had the following non-recourse long-term debt at December 31, 2009 and
2008:
|
2009
|
2008
|
|||||||
|
ICON
Mayon, LLC
|
$ | 12,341,338 | $ | 17,566,770 | ||||
|
ICON
Aegean Express, LLC
|
15,039,415 | 17,504,149 | ||||||
|
ICON
Arabian Express, LLC
|
15,039,415 | 17,504,149 | ||||||
|
ICON
Eagle Holdings, LLC
|
45,743,677 | 55,000,000 | ||||||
|
ICON
Eagle Carina Holdings, LLC
|
22,229,602 | 27,000,000 | ||||||
|
ICON
Eagle Corona Holdings, LLC
|
23,107,724 | 28,000,000 | ||||||
|
ICON
Mynx, LLC
|
5,700,000 | - | ||||||
|
ICON
Stealth, LLC
|
27,360,000 | - | ||||||
|
ICON
Eclipse, LLC
|
45,000,000 | - | ||||||
|
ICON
Ionian, LLC
|
5,500,000 | - | ||||||
|
ICON
Coach, LLC
|
3,206,667 | - | ||||||
|
Total
non-recourse long-term debt
|
220,267,838 | 162,575,068 | ||||||
|
Less: Current
portion of non-recourse long-term debt
|
43,305,938 | 29,073,897 | ||||||
|
Total
non-recourse long-term debt, less current portion
|
$ | 176,961,900 | $ | 133,501,171 | ||||
On July
24, 2007, ICON Mayon borrowed approximately $24,938,000 in connection with the
acquisition of the Mayon Spirit. The non-recourse long-term debt matures on July
25, 2011 and accrues interest at the London Interbank Offered Rate (“LIBOR”)
plus 1.00% per year. The non-recourse long-term debt requires monthly
payments ranging from $476,000 to $527,000. The lender has a security interest
in the Mayon Spirit and an assignment of the charter hire. The LLC paid and
capitalized approximately $187,000 in debt financing costs.
79
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(7)
|
Non-Recourse
Long-Term Debt -
continued
|
Along
with the execution of the non-recourse long-term debt agreement mentioned above,
the LLC entered into an interest rate swap contract with Fortis in order to
hedge the variable interest rate on the non-recourse long-term debt and minimize
the LLC’s risk of interest rate fluctuation. The interest rate swap contract,
which was deemed effective as of June 19, 2008, fixed the interest rate at
6.35%. As of December 31, 2009 and 2008, ICON Mayon recorded in AOCI a
cumulative decrease in the fair value of the interest swap of approximately
$571,000 and approximately $1,128,000, of which the LLC’s share was
approximately $291,000 and $575,000, respectively.
On April
24, 2008, ICON Aegean and ICON Arabian borrowed approximately $38,700,000 in
connection with the acquisition of the Vroon Vessels. The non-recourse long-term
debt obligations mature on April 24, 2014 and accrue interest at LIBOR plus
1.50% per year. The lender has a security interest in the Vroon Vessels and an
assignment of the charter hire. The LLC paid and capitalized approximately
$387,000 in debt financing costs.
Along
with the execution of the non-recourse long-term debt agreements mentioned
above, the LLC entered into interest rate swap contracts with Fortis in order to
hedge the variable interest rates on the non-recourse long-term debt and
minimize the LLC’s risk of interest rate fluctuation. The interest rate swap
contracts, which were deemed effective as of June 19, 2008, fixed the interest
rates of the debt of ICON Aegean and ICON Arabian at 3.93% per year. As of
December 31, 2009 and 2008, ICON Aegean and ICON Arabian recorded in AOCI a
cumulative decrease in the fair value of the interest rate swaps of
approximately $1,544,000 and $2,488,000, respectively, in the
aggregate.
On
November 18, 2008, ICON Eagle Holdings borrowed $55,000,000 in connection with
the acquisition of the Eagle Auriga and Eagle Centaurus. The non-recourse
long-term debt obligations mature on November 13, 2013 and accrue interest at
LIBOR plus a 1.75% per year margin. The lender has a security interest in the
Eagle Auriga and the Eagle Centaurus and an assignment of the charter hire. The
LLC paid and capitalized approximately $940,000 in debt financing
costs.
Along
with the execution of the non-recourse long-term debt agreements mentioned
above, the LLC entered into interest rate swap contracts with Fortis and DVB for
Eagle Auriga and Eagle Centaurus on November 18, 2008 and November 12, 2008,
respectively, in order to hedge the variable interest rates on the non-recourse
long-term debt and minimize the LLC’s risk of interest rate fluctuation. The
interest rate swap contracts, which were deemed effective as of November 18,
2008, fixed the interest rates of the debt of ICON Eagle Holdings at 4.94% per
year for ICON Eagle Auriga and 4.63% per year for ICON Eagle Centaurus. As of
December 31, 2009 and 2008, ICON Eagle Holdings recorded in AOCI a cumulative
decrease in the fair value of the interest rate swaps of approximately
$1,116,000 and $1,705,000, respectively.
On
December 18, 2008, ICON Carina Holdings borrowed $27,000,000 in connection with
the acquisition of the Eagle Carina. The non-recourse long-term debt obligation
matures on November 14, 2013 and accrues interest at LIBOR plus a 1.75% per year
margin. The lender has a security interest in the Eagle Carina and an
assignment of the charter hire. The LLC paid and capitalized approximately
$405,000 in debt financing costs.
80
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(7)
|
Non-Recourse
Long-Term Debt -
continued
|
Along
with the execution of the non-recourse long-term debt agreement mentioned above,
the LLC entered into an interest rate swap contract with Fortis and DVB on
December 4, 2008 in order to hedge the variable interest rate on the
non-recourse long-term debt and minimize the LLC’s risk of interest rate
fluctuation. The interest rate swap contract, which was deemed effective as of
December 18, 2008, fixed the interest rates of the debt of ICON Carina Holdings
at 3.85% per year. As of December 31, 2009 and 2008, ICON Carina Holdings
recorded in AOCI a cumulative decrease in the fair value of the interest rate
swap of approximately $115,000 and $192,000, respectively.
On
December 31, 2008, ICON Corona Holdings borrowed $28,000,000 in connection with
the acquisition of the Eagle Corona. The non-recourse long-term debt obligation
matures on November 14, 2013 and accrues interest at LIBOR plus a 1.75% per year
margin. The lender has a security interest in the Eagle Corona and an
assignment of the charter hire. The LLC paid and capitalized approximately
$422,000 in debt financing costs.
Along
with the execution of the non-recourse long-term debt agreement mentioned above,
the LLC entered into an interest rate swap contract with Fortis and DVB on
January 5, 2009 in order to hedge the variable interest rate on the non-recourse
long-term debt and minimize the LLC’s risk of interest rate fluctuation. The
interest rate swap contract, which was deemed effective as of January 5, 2009,
fixed the interest rates of the debt of ICON Corona Holdings at 4.015% per year.
As of December 31, 2009, ICON Corona Holdings recorded in AOCI a cumulative
decrease in the fair value of the interest rate swap of approximately
$191,000.
On June
26, 2009, ICON Mynx, ICON Stealth, and ICON Eclipse entered into the Facility
Agreement with Standard Chartered in connection with the acquisition of the
Leighton Vessels. The non-recourse long-term debt obligations incurred in
connection with the Leighton Vessels acquired by ICON Mynx and ICON Stealth
mature on June 30, 2014 and accrued interest at 4.8475% during the Stub Period
and, thereafter, accrue interest at LIBOR plus 4.25% per year. The
LLC also entered into interest rate swap contracts effective June 26, 2009 to
fix the interest rate on this debt at 7.05% per year. ICON Mynx, ICON Stealth
and ICON Eclipse are jointly and severally liable for the obligations under the
Facility Agreement and the Leighton Vessels are cross-collateralized. As of
December 31, 2009, ICON Mynx and ICON Stealth recorded in AOCI a cumulative
decrease in the fair value of the interest rate swaps of approximately $68,000
and $328,000, respectively.
On June
30, 2009, ICON Eclipse entered into an interest rate swap agreement with
Standard Chartered with a start date of September 30, 2009 in order to fix the
variable interest rate on the non-recourse long-term debt related to the
remaining Leighton Vessel and to minimize the LLC’s risk of interest rate
fluctuations. After giving effect to the swap agreement, the interest rate was
fixed at 7.25% per year for the Eclipse Senior Tranche. As of December 31, 2009,
ICON Eclipse recorded in AOCI a cumulative decrease in the fair value of the
interest rate swap of approximately $706,000.
On
October 30, 2009, ICON Ionian borrowed $5,500,000 from Nordea in connection with
the acquisition of the Ocean Princess. The non-recourse long-term debt
obligation matures on October 30, 2014 and accrues interest at LIBOR plus a 3.5%
per year margin. The LLC paid and capitalized approximately $96,000 in debt
financing costs.
81
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(7)
|
Non-Recourse
Long-Term Debt -
continued
|
On
October 30, 2009, ICON Ionian entered into an interest rate swap agreement with
Nordea Bank Finland Plc. in order to fix the variable interest rate on the
non-recourse debt obligation related to the Ocean Princess and to minimize the
LLC’s risk for interest rate fluctuations. After giving effect to the swap
agreement, the interest rate was fixed at 5.54% per year. The LLC
accounts for this swap contract as a non-designated derivative instrument and
will recognize any change in the fair value directly in earnings.
As of
December 31, 2009 and 2008, the LLC had capitalized net debt financing
costs of $3,699,981 and $2,180,047, respectively. For the years ended
December 31, 2009, 2008 and 2007, the LLC recognized amortization expense of
$959,712, $142,199 and $18,436, 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 of
non-recourse long-term debt after 2014.
|
Years Ending
December 31,
|
||||
|
2010
|
$ | 43,305,938 | ||
|
2011
|
44,719,918 | |||
|
2012
|
39,257,786 | |||
|
2013
|
47,341,272 | |||
|
2014
|
45,642,924 | |||
| $ | 220,267,838 | |||
|
(8)
|
Revolving
Line of Credit, Recourse
|
The LLC
and certain entities managed by the Manager, ICON Income Fund Eight B L.P.
(“Fund Eight B”), ICON Income Fund Nine, LLC, Fund Ten, Fund Eleven and Fund
Fourteen (collectively, the “ICON 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 ICON Borrowers not subject to
a first priority lien, as defined in the Loan Agreement. Each of the ICON
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 ICON Borrowers have a beneficial
interest.
The
Facility expires on June 30, 2011 and the ICON 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 ICON Borrowers are obligated to pay a quarterly commitment fee of 0.50% on
unused commitments under the Facility.
82
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(8)
|
Revolving
Line of Credit, Recourse -
continued
|
The ICON
Borrowers are also parties to a Contribution Agreement (the “Contribution
Agreement”) that provides that, in the event that an ICON Borrower pays an
amount in excess of its share of total obligations under the Facility, the other
ICON Borrowers will contribute to such ICON Borrower so that the aggregate
amount paid by each ICON Borrower reflects its allocable share of the aggregate
obligations under the Facility.
Aggregate
borrowings by all ICON Borrowers under the Facility amounted to $2,360,000 at
December 31, 2009. The LLC had no borrowings outstanding under the
Facility as of such date. The balances of $100,000 and $2,260,000
were borrowed by Fund Ten and Fund Eleven, respectively. As of March 24,
2010, Fund Ten and Fund Eleven had outstanding borrowings under the
Facility of $700,000 and $0, respectively.
The ICON
Borrowers were in compliance with all covenants under the Loan Agreement at
December 31, 2009. As of such date, no amounts were due to or payable by the LLC
under the Contribution Agreement.
|
(9)
|
Transactions
with Related
Parties
|
The LLC
entered into certain agreements with its Manager and ICON Securities, whereby
the LLC paid certain fees and reimbursements to these parties. The
Manager was entitled to receive an organizational and offering expense allowance
of 3.5% of capital raised up to $50,000,000, 2.5% of capital raised between
$50,000,001 and $100,000,000, 1.5% of capital raised between $100,000,001 and
$200,000,000, 1.0% of capital raised between $200,000,001 and $250,000,000 and
0.5% of capital raised over $250,000,000. ICON Securities was
entitled to receive a 2% underwriting fee from the gross proceeds from sales of
Shares to additional members.
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.
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.
83
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(9)
|
Transactions
with Related Parties -
continued
|
The LLC
paid distributions to the Manager of $318,725, $162,440 and $20,561 for the
years ended December 31, 2009, 2008 and 2007, respectively. The
Manager’s interest in the LLC’s net income for the years ended December 31,
2009, 2008 and 2007 was $138,589, $59,426 and $1,169, 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:
|
For
the Period from
|
||||||||||||||||
|
May
25, 2007
|
||||||||||||||||
|
(Commencement
of
|
||||||||||||||||
|
Years
Ended December 31,
|
Operations)
through
|
|||||||||||||||
|
Entity
|
Capacity
|
Description
|
2009
|
2008
|
December
31, 2007
|
|||||||||||
| ICON Capital Corp. | Manager |
Organizational
and offering expenses (1)
|
$ | 372,809 | $ | 2,273,874 | $ | 2,841,757 | ||||||||
|
ICON
Securities Corp.
|
Managing
broker-dealer
|
Underwriting
fees (1)
|
1,441,563 | 3,458,030 | 1,849,163 | |||||||||||
|
ICON
Capital Corp.
|
Manager
|
Acquisition
fees (2)
|
8,021,745 | 7,905,969 | 2,090,934 | |||||||||||
| ICON Capital Corp. | Manager |
Administrative
expense reimbursements (3)
|
3,594,400 | 2,705,118 | 1,346,866 | |||||||||||
|
ICON
Capital Corp.
|
Manager
|
Management
fees (3)
|
3,390,239 | 1,474,993 | 178,289 | |||||||||||
|
Total
fees paid to related parties
|
$ | 16,820,756 | $ | 17,817,984 | $ | 8,307,009 | ||||||||||
|
(1)
Amount charged directly to members' equity.
|
||||||||||||||||
|
(2)
Amount capitalized and amortized to operations over the estimated service
period in accordance with the LLC's accounting policies.
|
||||||||||||||||
|
(3)
Amount charged directly to operations.
|
||||||||||||||||
At
December 31, 2009, the LLC had a payable of $482,301 primarily related to
administrative expense reimbursements due to the Manager. At December 31, 2008,
the LLC had a payable of $330,980 primarily related to administrative expense
reimbursements, organizational and offering fees due to the Manager and
underwriting fees due to ICON Securities. At December 31, 2008, the
LLC was also due $641,568 primarily from an affiliate for the investments in
ICON Carina Holdings and ICON Corona Holdings.
|
(10)
|
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 Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(10)
|
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 ten floating-to-fixed interest rate swaps, one
relating to each of ICON Mynx, ICON Stealth, ICON Eclipse, ICON Corona Holdings,
ICON Carina Holdings, ICON Aegean, ICON Arabian and ICON Mayon and two relating
to ICON Eagle Holdings, that are designated and qualifying as cash flow hedges
with an aggregate notional amount of $210,108,046. These interest rate swaps
have maturity dates ranging from July 25, 2011 to September 30,
2014.
As of
December 31, 2008, the LLC had six floating-to-fixed interest rate swaps, one
relating to each of ICON Carina Holdings, ICON Aegean, ICON Arabian and ICON
Mayon and two relating to ICON Eagle Holdings, that are designated and
qualifying as cash flow hedges with an aggregate notional amount of
approximately $134,575,000.
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, 2009, the LLC recorded
approximately $74,000 of hedge ineffectiveness in earnings. During the years
ended December 31, 2008 and 2007, the LLC recorded an insignificant amount of
hedge ineffectiveness in earnings. At December 31, 2009 and 2008, the total
unrealized loss recorded to AOCI related to the change in fair value of these
interest rate swaps was approximately $3,947,000 and $4,542,000,
respectively.
During
the twelve months ending December 31, 2010, the LLC estimates that approximately
$4,277,000 will be transferred from AOCI to interest expense.
85
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(10)
|
Derivative
Financial Instruments -
continued
|
Foreign
Exchange Risk
The LLC
is exposed to fluctuations in Euros and pounds sterling. The LLC, at times, uses
foreign currency derivatives, including currency forward agreements, to manage
its exposure to fluctuations in the USD-Euro and USD-pounds sterling exchange
rate. Currency forward agreements involved fixing the foreign exchange rate for
delivery of a specified amount of foreign currency on a specified date. The
currency forward agreements were typically cash settled in U.S. dollars for
their fair value at or close to their settlement date.
On June
19, 2008, the LLC entered into four foreign exchange Euro-to-USD forward
contracts to hedge its exposure to currency translation risk with respect to the
Sealynx transaction. Each contract had a notional value of €275,000 with a Euro
to USD conversion rate ranging from 1.5184 to 1.5368. During 2008, two of the
forward contracts matured and the LLC recognized a gain of approximately
$17,000.
The
effective portion of changes in the fair value of derivatives designated and
qualifying as cash flow hedges of foreign exchange risk was recorded in AOCI and
subsequently reclassified into earnings in the period that the hedged forecasted
transaction affects earnings. The ineffective portion of the change in fair
value of the derivative, as well as amounts excluded from the assessment of
hedge effectiveness, was recognized directly in earnings. As of June 30, 2009,
the remaining outstanding foreign exchange Euro-to-USD forward contract
matured.
Non-designated
Derivatives
The LLC
holds an interest rate swap with a notional balance of approximately $5,500,000
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 swaps 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 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. As of December
31, 2009, the only outstanding derivatives that were not designated as hedges in
qualifying hedging relationships were 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
$11,600. The net loss recorded for the year ended December 31, 2008
was comprised of an unrealized loss of $15,833 relating to Euro-to-USD forward
contracts and an unrealized loss of $28,062 relating to warrants.
86
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(10)
|
Derivative
Financial Instruments -
continued
|
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
|
$ | 4,766,243 | |||||
|
Derivatives
not designated as hedging
|
||||||||||
|
instruments:
|
||||||||||
|
Interest
rate swaps
|
$ | - |
Derivative
instruments
|
$ | 13,309 | |||||
|
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:
|
|
|
|
Gain
(Loss) Recognized
|
|||||||||||
|
|
|
Gain
(Loss)
|
Location
of Gain (Loss)
|
in
Income on Derivative
|
||||||||||
|
Amount
of Gain (Loss) Recognized |
Location
of Gain (Loss) Reclassified |
Reclassified
from
AOCI into
|
Recognized
in Income on Derivative (Ineffective Portion |
(Ineffective
Portion and Amounts Excluded |
||||||||||
|
Derivatives
|
in
AOCI on Derivative (Effective Portion) |
from AOCI into Income(Effective
Portion)
|
Income
(Effective Portion)
|
and
Amounts Excluded from Effectiveness Testing) |
from Effectiveness Testing)
|
|||||||||
|
Foreign
exchange contracts
|
$ | (44,960 | ) |
Finance
income
|
$ | 41,414 |
(Loss)
gain on financial instruments
|
$ | - | |||||
|
Interest
rate swaps
|
(3,203,150 | ) |
Interest
expense
|
(3,844,651 | ) |
(Loss)
gain on financial instruments
|
(59,267 | ) | ||||||
|
Total
|
$ | (3,248,110 | ) | $ | (3,803,237 | ) | $ | (59,267 | ) | |||||
The
LLC’s derivative financial instruments not designated as hedging instruments
generated a net gain (loss) on the statements of operations for the years ended
December 31, 2009, 2008 and 2007 of $17,792, $(28,062) and $(25,024),
respectively. The gain (losses) were comprised of unrealized gain (losses)
relating to warrants, which were recorded as a component of loss on financial
instruments.
Derivative
Risks
The LLC
manages exposure to possible defaults on derivative financial instruments by
monitoring the concentration of risk that the LLC has with any individual bank
and through the use of minimum credit quality standards for all counterparties.
The LLC does not require collateral or other security in relation to derivative
financial instruments. Since it is the LLC’s policy to enter into derivative
contracts with banks of internationally acknowledged standing only, the LLC
considers the counterparty risk to be remote.
87
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(10)
|
Derivative
Financial Instruments -
continued
|
As of
December 31, 2009 and 2008, the fair value of the derivatives in a liability
position was $4,779,552 and $5,431,968, 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 $5,206,942.
|
(11)
|
Accumulated
Other Comprehensive Income
(Loss)
|
AOCI
includes accumulated unrealized gain (loss) on derivative financial instruments
of $555,127 and $(4,455,706) for the years ended December 31, 2009 and 2008,
respectively. AOCI includes accumulated unrealized gain (loss) from currency
translation adjustments of $172,396 and $(945,976) for the years ended December
31, 2009 and 2008, respectively.
|
(12)
|
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.
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
Instruments
|
$ | - | $ | 4,779,552 | $ | - | $ | 4,779,552 | ||||||||
|
(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.
|
||||||||||||||||
88
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(12)
|
Fair
Value Measurements –
continued
|
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
|
||||||||||||||||
|
Assets
held for sale, net
|
$ | 8,982,354 | $ | - | $ | 9,233,109 | $ | - | $ | 3,429,316 | ||||||||||
|
(1)
Represents the current value of the assets prior to measurement at fair
value.
|
||||||||||||||||||||
|
(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.
|
||||||||||||||||||||
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 other
non-current liabilities and notes receivable was based on the discounted value
of future cash flows expected to be received from the loans 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
|
|||||||
|
Fixed
rate notes receivable
|
$ | 73,908,605 | $ | 75,503,258 | ||||
|
Other
non-current liabilities
|
$ | 44,082,046 | $ | 43,765,995 | ||||
89
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(13)
|
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
years ended December 31, 2009, 2008 and 2007, the LLC had three, three and four
lessees that accounted for approximately 56.0%, 55.0% and 99.6% of rental and
finance income, respectively.
For the
years ended December 31, 2009, 2008 and 2007, the LLC had three, two and one
borrowers that accounted for approximately 98.4%, 51.7% and 40.0% of
interest and other income, respectively.
As of
December 31, 2009 and 2008, the LLC had two and five lessees that accounted for
approximately 43.9% and 46.4% of total assets, respectively.
As of
December 31, 2009 and 2008, the LLC had three and two lenders that accounted for
71.3% and 92.4% of total liabilities, respectively.
|
(14)
|
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)
and investment in joint venture, were as follows:
|
Year
Ended December 31, 2009
|
||||||||||||||||
|
United
|
Vessels and Equipment (a)
|
|||||||||||||||
|
States
|
Europe
|
Total
|
||||||||||||||
|
Revenue:
|
||||||||||||||||
|
Rental
income
|
$ | 22,160,133 | $ | - | $ | 37,444,339 | $ | 59,604,472 | ||||||||
|
Finance
income
|
$ | 2,154,751 | $ | 1,602,342 | $ | 3,489,833 | $ | 7,246,926 | ||||||||
|
Income
from investment in joint venture
|
$ | 573,040 | $ | - | $ | - | $ | 573,040 | ||||||||
|
Interest
and other income
|
$ | 10,985,470 | $ | 48,512 | $ | 32,798 | $ | 11,066,780 | ||||||||
|
As
of December 31, 2009
|
||||||||||||||||
|
United
|
Vessels and Equipment (a)
|
|||||||||||||||
|
States
|
Europe
|
Total
|
||||||||||||||
|
Long-lived
assets:
|
||||||||||||||||
|
Net
investment in finance leases
|
$ | 15,720,979 | $ | 10,229,027 | $ | 130,630,214 | $ | 156,580,220 | ||||||||
|
Leased
equipment at cost, net
|
$ | 50,681,620 | $ | - | $ | 284,798,533 | $ | 335,480,153 | ||||||||
|
Notes
receivable
|
$ | 64,615,265 | $ | 9,293,340 | $ | - | $ | 73,908,605 | ||||||||
|
Investment
in joint venture
|
$ | 4,609,644 | $ | - | $ | - | $ | 4,609,644 | ||||||||
|
(a)
The
LLC's vessels and equipment are chartered to six separate companies: one
vessel to Teekay, two vessels to Vroon, four vessels to AET, one vessel
and equipment to Swiber, three vessels to Leighton and one vessel to Lily
Shipping. When the LLC charters a vessel to a charterer, the
charterer is free to trade the vessel worldwide.
|
||||||||||||||||
90
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(14)
|
Geographic
Information –
continued
|
|
Year
Ended December 31, 2008
|
||||||||||||||||
|
United
|
||||||||||||||||
|
States
|
Europe
|
Vessels (a)
|
Total
|
|||||||||||||
|
Revenue:
|
||||||||||||||||
|
Rental
income
|
$ | 10,542,051 | $ | - | $ | 12,398,594 | $ | 22,940,645 | ||||||||
|
Finance
income
|
$ | 2,185,240 | $ | 1,509,938 | $ | - | $ | 3,695,178 | ||||||||
|
Income
from investment in joint venture
|
$ | 325,235 | $ | - | $ | - | $ | 325,235 | ||||||||
|
Interest
and other income
|
$ | 2,364,435 | $ | 21,009 | $ | - | $ | 2,385,444 | ||||||||
|
As
of December 31, 2008
|
||||||||||||||||
|
United
|
||||||||||||||||
|
States
|
Europe
|
Vessels (a)
|
Total
|
|||||||||||||
|
Long-lived
assets:
|
||||||||||||||||
|
Net
investment in finance leases
|
$ | 17,300,158 | $ | 9,598,575 | $ | - | $ | 26,898,733 | ||||||||
|
Leased
equipment at cost, net
|
$ | 47,855,363 | $ | - | $ | 254,398,311 | $ | 302,253,674 | ||||||||
|
Notes
receivable
|
$ | 52,700,354 | $ | - | $ | - | $ | 52,700,354 | ||||||||
|
Investment
in joint venture
|
$ | 5,374,899 | $ | - | $ | - | $ | 5,374,899 | ||||||||
|
(a)
The
LLC's vessels are chartered to three separate companies: one vessel to
Teekay, two vessels to Vroon and four vessels to AET. When the LLC
charters a vessel to a charterer, the charterer is free to trade the
vessel worldwide.
|
||||||||||||||||
|
(15)
|
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
|
$ | 16,289,020 | $ | 18,495,174 | $ | 20,783,152 | $ | 22,923,872 | (a) | $ | 78,491,218 | |||||||||
|
Net
income attributable to Fund Twelve
|
||||||||||||||||||||
|
allocable
to additional members
|
$ | 3,040,961 | $ | 3,675,766 | $ | 2,665,557 | $ | 4,338,043 | (a) | $ | 13,720,327 | |||||||||
|
Weighted
average number of additional shares of
|
||||||||||||||||||||
|
limited
liability company interests outstanding
|
295,095 | 342,374 | 348,749 | 348,716 | 333,979 | |||||||||||||||
|
Net
income attributable to Fund Twelve per
|
||||||||||||||||||||
|
weighted
average additional share of limited
|
||||||||||||||||||||
|
liability
company interests
|
$ | 10.31 | $ | 10.74 | $ | 7.64 | $ | 12.44 | $ | 41.08 | ||||||||||
| (a) | The LLC subsequently determined that a cumulative adjustment of $848,000 to increase revenue and a cumulative adjustment of $766,000 to decrease net income attributable to Fund Twelve was required to account for an operating lease previously accounted for as a finance lease during the quarter ended June 30, 2009. Management has determined that the impact on each of the fiscal quarters in 2009 is not material. |
91
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(15)
|
Selected
Quarterly Financial Data -
continued
|
|
(unaudited)
|
Year
ended
|
|||||||||||||||||||
|
Quarters
Ended in 2008
|
December
31,
|
|||||||||||||||||||
|
March
31,
|
June
30,
|
September
30,
|
December
31,
|
2008
|
||||||||||||||||
|
Total
revenue
|
$ | 4,247,630 | $ | 6,728,265 | $ | 7,934,321 | $ | 10,436,286 | $ | 29,346,502 | ||||||||||
|
Net
income attributable to Fund Twelve
|
||||||||||||||||||||
|
allocable
to additional members
|
$ | 721,535 | $ | 1,401,658 | $ | 2,005,987 | $ | 1,753,974 | $ | 5,883,154 | ||||||||||
|
Weighted
average number of additional shares of
|
||||||||||||||||||||
|
limited
liability company interests outstanding
|
114,701 | 157,613 | 203,998 | 251,778 | 181,777 | |||||||||||||||
|
Net
income attributable to Fund Twelve per
|
||||||||||||||||||||
|
weighted
average additional share of limited
|
||||||||||||||||||||
|
liability
company interests
|
$ | 6.29 | $ | 8.89 | $ | 9.83 | $ | 6.97 | $ | 32.36 | ||||||||||
|
(16)
|
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 were accrued at
December 31, 2009 and the Manager cannot reasonably estimate at this time the
maximum potential amounts, if any, that may become payable under the credit
support agreement.
The LLC
has entered into certain residual sharing and remarketing agreements with
various third parties. In connection with these agreements, residual
proceeds received in excess of specific amounts will be shared with these third
parties based on specific formulas. The obligation related to these agreements
is recorded at fair value.
In
connection with the acquisitions of the Eagle Auriga, the Eagle Centaurus, the
Eagle Carina and the Eagle Corona, the LLC, through ICON Eagle Holdings, ICON
Carina Holdings and ICON Corona Holdings, maintains four restricted cash
accounts with Fortis. These restricted cash accounts consist of the free cash
balances that result from the difference between the bareboat charter payments
from AET and the repayments on the non-recourse long-term debt to Fortis and
DVB. The account of ICON Eagle Holdings is cross-collateralized and the free
cash remains in the restricted cash account until an aggregate amount of
$500,000 is funded into the account. Thereafter, all cash in excess of
$500,000 can be distributed. The free cash for ICON Carina Holdings and ICON
Corona Holdings remain in their restricted cash accounts until $500,000 is
funded into each account. Thereafter, all free cash in excess of $500,000 can be
distributed from the respective accounts.
92
ICON
Leasing Fund Twelve, LLC
(A
Delaware Limited Liability Company)
Notes to
Consolidated Financial Statements
December
31, 2009
|
(16)
|
Commitments
and Contingencies and Off-Balance Sheet Transactions -
continued
|
In
connection with the acquistions of the Leighton Vessels, the LLC, through ICON
Mynx, ICON Stealth and ICON Eclipse, is required to maintain a minimum aggregate
cash balance of $450,000 among the respective bank accounts of ICON Mynx, ICON
Stealth and ICON Eclipse.
In
connection with the acquisition of the Ocean Princess, the LLC, through ICON
Ionian, is required to maintain a minimum cash balance of $300,000 with Nordea
at all times.
The
aforementioned cash amounts are presented within other non-current assets in the
LLC’s consolidated balance sheets as of December 31, 2009 and 2008.
|
(17)
|
Income
Tax Reconciliation
(unaudited)
|
No
provision for income taxes has been recorded by the LLC since the liability for
such taxes is the responsibility of each of the individual members rather than
the LLC. The LLC’s income tax returns are subject to examination by
federal and State taxing authorities, and changes, if any, could adjust the
individual income taxes of the members.
At
December 31, 2009 and 2008, the members’ capital accounts included in the
consolidated financial statements totaled $273,079,715 and $223,487,730,
respectively. The members’ capital for federal income tax purposes at December
31, 2009 and 2008 totaled $261,185,416 and $215,058,845,
respectively. The difference arises primarily from sales and offering
expenses reported as a reduction in the additional members’ capital accounts for
financial reporting purposes, but not for federal income tax reporting purposes,
and differences in depreciation and amortization between financial reporting
purposes and federal income tax purposes.
The
following table reconciles net income attributable to Fund Twelve for financial
statement reporting purposes to the net income (loss) attributable to Fund
Twelve for federal income tax purposes for the years ended December 31, 2009,
2008 and 2007:
|
2009
|
2008
|
2007
|
||||||||||
|
Net
income attributable to Fund Twelve per
|
$ | 13,858,916 | $ | 5,942,580 | $ | 116,852 | ||||||
|
consolidated
financial statements
|
||||||||||||
|
Rental
income
|
1,978,218 | 1,791,376 | 2,745,798 | |||||||||
|
Depreciation
and amortization
|
(7,413,456 | ) | (20,199,124 | ) | (6,286,562 | ) | ||||||
|
Tax
gain (loss) from consolidated joint venture
|
1,952,754 | (2,047,725 | ) | 529,288 | ||||||||
|
Other
|
(155,169 | ) | 1,691,381 | 669,836 | ||||||||
|
Net
income (loss) attributable to Fund Twelve for
|
||||||||||||
|
federal
income tax purposes
|
$ | 10,221,263 | $ | (12,821,512 | ) | $ | (2,224,788 | ) | ||||
|
(18)
|
Subsequent
Event
|
On
December 18, 2009, the LLC, through its wholly-owned subsidiary, ICON Faulkner,
LLC (“ICON Faulkner”), a Marshall Islands limited liability company, entered
into a Memorandum of Agreement (the “Faulkner MOA”) to purchase the pipelay
barge, the Leighton Faulkner, from Leighton Contractors (Asia) Limited
(“Leighton Contractors”) for $20,000,000. Simultaneously with the
execution of the Faulkner MOA, ICON Faulkner entered into a bareboat charter
with Leighton Contractors for a period of 96 months commencing on the closing
date. The acquisition closed on January 5, 2010. The
purchase price for the Leighton Faulkner consisted of $1,000,000 in cash and
$19,000,000 in a non-recourse loan, which included $12,000,000 of senior debt
pursuant to a senior facility agreement with Standard Chartered and $7,000,000
of subordinated seller’s credit. The loan has a term of five years,
with an option to extend for another three years. The interest rate has been
fixed pursuant to a swap agreement. All of Leighton Contractors’
obligations are guaranteed by its ultimate parent company, Leighton Holdings, a
publicly traded company on the Australian Stock Exchange. The LLC
paid an acquisition fee to the Manager of approximately $600,000 relating to
this transaction.
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 and 2008 and for the period from May 25, 2007
(Commencement of Operations) through December 31, 2007:
|
For
the Period from
|
||||||||||||||||
|
May
25, 2007
|
||||||||||||||||
|
(Commencement
of
|
||||||||||||||||
|
Years
Ended December 31,
|
Operations)
through
|
|||||||||||||||
|
Entity
|
Capacity
|
Description
|
2009
|
2008
|
December
31, 2007
|
|||||||||||
| ICON Capital Corp. | Manager |
Organizational
and offering expenses (1)
|
$ | 372,809 | $ | 2,273,874 | $ | 2,841,757 | ||||||||
|
ICON
Securities Corp.
|
Managing
broker-dealer
|
Underwriting
fees (1)
|
1,441,563 | 3,458,030 | 1,849,163 | |||||||||||
|
ICON
Capital Corp.
|
Manager
|
Acquisition
fees (2)
|
8,021,745 | 7,905,969 | 2,090,934 | |||||||||||
| ICON Capital Corp. | Manager |
Administrative
expense reimbursements (3)
|
3,594,400 | 2,705,118 | 1,346,866 | |||||||||||
|
ICON
Capital Corp.
|
Manager
|
Management
fees (3)
|
3,390,239 | 1,474,993 | 178,289 | |||||||||||
|
Total
fees paid to related parties
|
$ | 16,820,756 | $ | 17,817,984 | $ | 8,307,009 | ||||||||||
|
(1)
Amount charged directly to members' equity.
|
||||||||||||||||
|
(2)
Amount capitalized and amortized to operations over the estimated service
period in accordance with our accounting policies.
|
||||||||||||||||
|
(3)
Amount charged directly to operations.
|
||||||||||||||||
Our
Manager also has a 1% interest in our profits, losses, cash distributions and
liquidation proceeds. We paid and accrued distributions to our
Manager of $318,725 and $162,440 for the years ended December 31, 2009 and 2008,
respectively, and $20,561 for the period from May 25, 2007 (Commencement of
Operations) through December 31, 2007. Our Manager’s interest in our
net income was $138,589 and $59,426 for the years ended December 31, 2009 and
2008, respectively, and $1,169 for the period from May 25, 2007 (Commencement of
Operations) through December 31, 2007.
|
|
(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 6 and 9 to our consolidated financial statements
for a discussion of our investment in joint venture 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:
|
Principal
Audit Firm - Ernst & Young LLP
|
||||||||
|
2009
|
2008
|
|||||||
|
Audit
fees
|
$ | 470,000 | $ | 619,362 | ||||
|
Tax
fees
|
97,175 | 61,000 | ||||||
| $ | 567,175 | $ | 680,362 | |||||
|
(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
|
|
|
|
|
|
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
Registrant’s Registration Statement on Form S-1 filed with the SEC on
November 13, 2006 (File No.
333-138661)).
|
|
|
4.1
Limited
Liability Company Agreement of Registrant (Incorporated by reference
to Exhibit A to Registrant’s Prospectus filed with the SEC on May 8, 2007
(File No.
333-138661)).
|
|
|
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 June 20, 2007).
|
|
|
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 10.2 to Registrant’s
Current Report on Form 8-K dated June 20,
2007).
|
|
|
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 Current Report on Form 8-K dated June 20,
2007).
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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 10.4 to Registrant’s Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2008, filed May 15,
2008).
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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
10.5 to Registrant’s Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2009, filed August 14,
2009).
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31.1
Rule 13a-14(a)/15d-14(a) Certification of Co-Chief Executive
Officer.
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31.2
Rule 13a-14(a)/15d-14(a) Certification of Co-Chief Executive
Officer.
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31.3
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer.
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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.
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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.
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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.
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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 Twelve, LLC
(Registrant)
By: ICON
Capital Corp.
(Manager
of the Registrant)
March 30,
2010
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By:
/s/ Michael A.
Reisner
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Michael
A. Reisner
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Co-Chief
Executive Officer and Co-President
(Co-Principal
Executive Officer)
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By:
/s/
Mark Gatto
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Mark
Gatto
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Co-Chief
Executive Officer and Co-President
(Co-Principal
Executive Officer)
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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 Twelve, LLC
(Registrant)
By: ICON
Capital Corp.
(Manager
of the Registrant)
March 30,
2010
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By:
/s/ Michael A.
Reisner
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Michael
A. Reisner
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Co-Chief
Executive Officer, Co-President and Director
(Co-Principal
Executive Officer)
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By:
/s/ Mark Gatto
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Mark
Gatto
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Co-Chief
Executive Officer, Co-President and Director
(Co-Principal
Executive Officer)
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By:
/s/ Anthony J.
Branca
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Anthony
J. Branca
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Chief
Financial Officer
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(Principal
Accounting and Financial Officer)
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101
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