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, 2010
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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: 000-50217
ICON Income Fund Nine, LLC
(Exact name of registrant as specified in its charter)
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Delaware
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13-4183234
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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100 Fifth Avenue, 4th Floor
New York, New York
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10011
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(Address of principal executive offices)
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(Zip Code)
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(212) 418-4700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Shares of Limited Liability Company Interests
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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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 the registrant.
Number of outstanding shares of limited liability company interests of the registrant on March 21, 2011 is 97,955.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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Forward-Looking Statements
Certain statements within this Annual Report on Form 10-K may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). These statements are being made pursuant to the PSLRA, with the intention of obtaining the benefits of the “safe harbor” provisions of the PSLRA, and, other than as required by law, we assume no obligation to update or supplement such statements. Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. You can identify these statements by the use of words such as “may,” “will,” “could,” “anticipate,” “believe,” “estimate,” “expect,” “continue,” “further,” “plan,” “seek,” “intend,” “predict” or “project” and variations of these words or comparable words or phrases of similar meaning. These forward-looking statements reflect our current beliefs and expectations with respect to future events and are based on assumptions and are subject to risks and uncertainties and other factors outside our control that may cause actual results to differ materially from those projected. We undertake no obligation to update publicly or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
Item 1. Business
Our History
ICON Income Fund Nine, LLC (the “LLC” or “Fund Nine”) was formed on July 11, 2001 as a Delaware limited liability company. The LLC will continue until December 31, 2020, unless terminated sooner. When used in this Annual Report on Form 10-K, the terms “we,” “us,” “our” or similar terms refer to the LLC and its consolidated subsidiaries.
Our manager is ICON Capital Corp., a Delaware corporation (our “Manager”). Our Manager manages and controls our business affairs, including, but not limited to, our equipment leases and other financing transactions that we entered into pursuant to the terms of our amended and restated operating agreement (our “LLC Agreement”).
We are currently in our liquidation period. Our initial capitalization was $1,000, which was contributed by our Manager. We offered shares of limited liability company interests (“Shares”) with the intent to raise up to $100,000,000 of capital and we commenced business operations on our initial closing date, December 18, 2001, when we issued 1,250 Shares, representing $1,249,910 of capital contributions. Between December 19, 2001 and April 30, 2003, our final closing date, we sold an additional 98,416 Shares representing $98,403,564 of capital contributions, bringing the total sale of Shares and capital contributions to 99,666 and $99,653,474, respectively. Through December 31, 2010, we redeemed 1,711 Shares, bringing the total number of outstanding Shares to 97,955.
Our Business
We operate as an equipment leasing program in which the capital our members invested was pooled together to make investments, pay fees and establish a small reserve. We primarily acquired equipment subject to lease, purchased equipment and leased it to third-party end users or financed equipment for third parties, provided equipment and other financing and, to a lesser degree, acquired ownership rights to leased equipment at lease expiration. Some of our equipment leases were acquired for cash and provide current cash flow, which we refer to as “income” leases. For the other equipment leases, we financed the majority of the purchase price through borrowings from third parties. We refer to these leases as “growth” leases. These growth leases generate little or no current cash flow because substantially all of the rental payments received from the lessee are used to service the indebtedness associated with acquiring or financing the lease. For these leases, we anticipated that the future value of the leased equipment would exceed our cash portion of the purchase price.
We divide the life of the program into three distinct phases:
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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 continued to reinvest the cash generated from our initial investments to the extent that cash was not needed for our expenses, reserves and distributions to members. Our operating period ended on April 30, 2008.
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(3) Liquidation Period: We began our liquidation period on May 1, 2008. Since the beginning of the liquidation period, we have sold and will continue to sell our assets in the ordinary course of business. Our goal was to complete the liquidation period within three years from the end of the operating period, but it will take longer to do so.
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As we sell our assets during our liquidation period, both rental income and finance income will decrease over time as will expenses related to our assets, such as depreciation and amortization expense. Additionally, interest expense should decrease as we reach the expiration of leases that were financed and the debt is repaid to the lender. As leased equipment is sold, we will incur gains or losses on these sales.
At December 31, 2010 and 2009, we had total assets of $90,617,773 and $102,900,677, respectively. For the year ended December 31, 2010, three lessees accounted for approximately 98% of our total rental and finance income of $16,526,980. We had net income for the year ended December 31, 2010 of $6,757,659. For the year ended December 31, 2009, three lessees accounted for approximately 95% of our total rental and finance income of $18,162,892. We had net income for the year ended December 31, 2009 of $6,700,146. For the year ended December 31, 2008, three lessees accounted for approximately 83% of our total rental and finance income of $21,820,889. We had net income for the year ended December 31, 2008 of $1,047,818.
At December 31, 2010, our portfolio, which we hold either directly or through joint ventures, consisted primarily of the following investments:
Air Transportation Equipment
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We own one Airbus A340-313X aircraft (“Aircraft 128”) and have a 50% ownership interest through a joint venture with ICON Income Fund Eight B L.P. (“Fund Eight B”), an entity also managed by our Manager, in a second Airbus A340-313X aircraft (“Aircraft 126”). Both aircraft are on lease to Cathay Pacific Airways Limited (“Cathay”). The leases are scheduled to expire on December 1, 2011 and July 1, 2011, respectively.
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Marine Vessels
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We own three car and truck carrying vessels (“Wilhelmsen Vessels”) on bareboat charter to Wilhelmsen Lines Shipowning AS (“Wilhelmsen”) that are scheduled to expire on December 22, 2013.
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We own the Samar Spirit (“Samar Spirit”), an Aframax product tanker, which is subject to a bareboat charter with an affiliate of the Teekay Corporation (“Teekay”) that expires on July 23, 2011.
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Ground Transportation Equipment
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We own forty-seven Great Dane Trailers with Carrier Ultra Refrigeration Units, which are subject to lease with Conwell Corporation ("Conwell"), a wholly-owned subsidiary of Frozen Foods Express Industries, Inc. The lease expired in April 2010 and continues on a month-to-month basis.
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Energy Equipment
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We have a 5.62% interest in the rights to the profits, losses and cash flows from an entity that owns a 50% interest in a mobile offshore drilling rig subject to a lease with Rowan Companies, Inc.
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For a discussion of the significant transactions that we engaged in during the years ended December 31, 2010, 2009 and 2008, please refer to “Item 7. Manager’s Discussion and Analysis of Financial Condition and Results of Operations.”
Segment Information
We are engaged in one business segment, the business of purchasing equipment and leasing it to third-party end users, providing equipment and other financing, acquiring equipment subject to lease and, to a lesser degree, acquiring ownership rights to items of leased equipment at lease expiration.
Competition
The commercial leasing and financing industry is highly competitive and is characterized by competitive factors that vary based upon product and geographic region. When we made our investments, we competed, and as we seek to liquidate our portfolio, we compete with a variety of competitors, including other equipment leasing and finance funds, hedge funds, private equity funds, captive and independent finance companies, commercial and industrial banks, manufacturers and vendors. Competition from both traditional competitors and new market entrants has intensified in recent years due to growing marketplace liquidity and increasing recognition of the attractiveness of the commercial leasing and finance industry. Our competitors may have been and/or may be in a position to offer equipment to prospective customers on financial terms that were or are more favorable than those that we could offer or that we can offer in liquidating our portfolio, which may have affected our ability to make investments and may affect our ability to liquidate our portfolio, in each case, in a manner that would enable us to achieve our investment objectives. For additional information about our competition and other risks related to our operations, please see “Item 1A. Risk Factors.”
Employees
We have no direct employees. Our Manager has full and exclusive control over our management and operations.
Available Information
Our Annual Report on Form 10-K, our most recent Quarterly Reports on Form 10-Q and any amendments to those reports and our Current Reports on Form 8-K and any amendments to those reports are available free of charge on our Manager’s internet website at http://www.iconcapital.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”). The information contained on our Manager’s website is not deemed part of this Annual Report on Form 10-K. Our reports are also available on the SEC’s website at http://www.sec.gov.
Financial Information Regarding Geographic Areas
We have long-lived assets, which include finance leases and operating leases, and we generate revenues in geographic areas outside of the United States. For additional information, see Note 15 to our consolidated financial statements.
Item 1A. Risk Factors
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 have deemed 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 ensure that no public trading market develops for our Shares. In addition, our LLC Agreement imposes significant restrictions on your right to transfer your Shares. We have established these restrictions to comply with federal and State securities laws and so that we will not be considered to be a publicly traded partnership that is taxed as a corporation for federal income tax purposes. Your ability to sell or otherwise transfer your Shares is extremely limited and will depend on your ability to identify a buyer. Thus, you will probably not be able to sell or otherwise liquidate your Shares in the event of an emergency and if you were able to arrange a sale, the price you receive would likely be at a substantial discount to the price you paid for your Shares. As a result, you must view your investment in our Shares as a long-term, illiquid investment.
If you choose to request that we redeem your Shares, you may receive significantly less than you would receive if you were to hold your Shares for the life of the fund.
You may request that we redeem up to all of your Shares. We are under no obligation to do so, however, and will have only limited cash available for this purpose. If we redeem your Shares, the redemption price has been unilaterally set and, depending upon when you request redemption, the redemption price may be less than the unreturned amount of your investment. If your Shares are redeemed, the redemption price may provide you a significantly lower value than the value you would realize by retaining your Shares for the duration of the fund.
You should not rely on any income from your Shares because cash distributions are expected only from time to time as significant assets are sold.
You should not rely on the cash distributions from your Shares as a source of income. During the liquidation period, although we expect that lump sums will be distributed from time to time if and when financially significant assets are sold, regularly scheduled distributions will decrease because there will be fewer investments available to generate cash flow.
Our assets may be plan assets for ERISA purposes, which could subject our Manager to additional restrictions on its ability to operate our business.
The Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and the Internal Revenue Code of 1986, as amended (the “Code”) may apply what is known as the look-through rule to an investment in our Shares. Under that rule, the assets of an entity in which a qualified plan or IRA has made an equity investment may constitute assets of the qualified plan or IRA. If you are a fiduciary of a qualified plan or IRA, you should consult with your advisors and carefully consider the effect of that treatment if that were to occur. If the look-through rule were to apply, our Manager may be viewed as an additional fiduciary with respect to the qualified plan or IRA to the extent of any decisions relating to the undivided interest in our assets represented by the Shares held by such qualified plan or IRA. This could result in some restriction on our Manager’s willingness to engage in transactions that might otherwise be in the best interest of all Share holders due to the strict rules of ERISA regarding fiduciary actions.
The statements of value that we include in this Annual Report on Form 10-K and future Annual Reports on Form 10-K and that we will send to fiduciaries of plans subject to ERISA and to certain other parties is only an estimate and may not reflect the actual value of our Shares.
The statements of estimated value are based on the estimated value of each Share (i) as of the close of our fiscal year, for the annual statements included in this and future Annual Reports on Form 10-K and (ii) as of September 30 of each fiscal year, for annual statements sent to fiduciaries of plans subject to ERISA and certain other parties. Management, in part, will rely upon third-party sources and advice in arriving at this estimated value. No independent appraisals on the particular value of our Shares will be obtained and the value will be based upon an estimated fair market value as of the referenced date for such value. Because this is only an estimate, we may subsequently revise any valuation that is provided. We cannot ensure 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, 2010, our Manager is managing seven other public equipment leasing and finance funds. See “Item 13. Certain Relationships and Related Transactions, and Director Independence.” These conflicts may include, but are not limited to:
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our Manager may have received more fees for making investments in which we incurred indebtedness to fund these investments than if indebtedness was not incurred;
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our LLC Agreement does not prohibit our Manager or any of our affiliates from competing with us for investments and engaging in other types of business;
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our Manager may have had opportunities to earn fees for referring a prospective investment opportunity to others;
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the lack of separate legal representation for us and our Manager and lack of arm’s-length negotiations regarding compensation payable to our Manager;
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our Manager is our “tax matters partner” and is able to negotiate with the IRS to settle tax disputes that would bind us and our members that might not be in your best interest given your individual tax situation; and
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our Manager can make decisions as to when and whether to sell a jointly-owned asset when the co-owner is another business it manages.
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The Investment Committee of our Manager is not independent.
Any conflicts in determining and allocating investments between us and our Manager, or between us and another fund managed by our Manager, were resolved by our Manager’s investment committee, which also serves as the investment committee for other funds managed by our Manager. Since all of the members of our Manager’s investment committee are officers of our Manager and are not independent, matters determined by such investment committee, including conflicts of interest between us and our Manager and our affiliates involving investment opportunities, may not have been as favorable to you and our other investors as they would be if independent members were on the committee. Generally, if an investment was appropriate for more than one fund, our Manager’s investment committee allocated the investment to a fund (which includes us) after taking into consideration at least the following factors:
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whether the fund had the cash required for the investment;
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whether the amount of debt to be incurred with respect to the investment was acceptable for the fund;
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the effect the investment would have on the fund’s cash flow;
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whether the investment would further diversify, or unduly concentrate, the fund’s investments in a particular lessee/borrower, class or type of equipment, location, industry, etc.;
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whether the term of the investment was within the term of the fund; and
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which fund had been seeking investments for the longest period of time.
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Notwithstanding the foregoing, our Manager’s investment committee may have made exceptions to these general policies when, in our Manager’s judgment, other circumstances made application of these policies inequitable or economically undesirable. In addition, our LLC Agreement permits our Manager and our affiliates to engage in equipment acquisitions, financing secured loans, refinancing, leasing and releasing opportunities on their own behalf or on behalf of other funds even if they compete with us.
Our Manager’s officers and employees manage other businesses and did not and will not devote their time exclusively to managing us and our business.
We do not and will not employ our own full-time officers, managers or employees. Instead, our Manager will supervise and control our business affairs. Our Manager’s officers and employees will also be spending time supervising the affairs of other equipment leasing and finance funds it manages. Therefore, such officers and employees devoted and will devote the amount of time that they think is necessary to conduct our business, which may not be the same amount of time that would be devoted to us if we had separate officers and employees.
Our Manager may have difficulty managing its growth, which may divert its resources and limit its ability to expand its operations successfully.
The amount of assets that our Manager manages has grown substantially since our Manager was formed in 1985 and our Manager and its affiliates intend to continue to sponsor and manage, as applicable, funds similar to us that may be concurrent with us and they expect to experience further growth in their respective assets under management. Our Manager’s future success will depend on the ability of its and its affiliates’ officers and key employees to implement and improve their operational, financial and management controls, reporting systems and procedures, and manage a growing number of assets and investment funds. They, however, may not implement improvements to their management information and control systems in an efficient or timely manner and they may discover deficiencies in their existing systems and controls. Thus, our Manager’s anticipated growth may place a strain on its administrative and operations infrastructure, which could increase its costs and reduce its efficiency and could negatively impact our operations, business and financial condition.
Operational risks may disrupt our business and result in losses.
We may face operational risk from errors made in the execution, confirmation or settlement of transactions. We may also face operational risk from our transactions not being properly recorded, evaluated or accounted for. We rely heavily on our Manager’s financial, accounting, and other software systems. If any of these systems fail to operate properly or become disabled, we could suffer financial loss and a disruption of our business. In addition, we are highly dependent on our Manager’s information systems and technology. There can be no assurance that these information systems and technology will be able to accommodate our Manager’s growth or that the cost of maintaining such systems will not increase from its current level. Such a failure to accommodate growth, or an increase in costs related to such information systems, could also negatively affect our liquidity and cash flows, and could negatively affect our profitability. Furthermore, we depend on the headquarters of our Manager, which are located in New York City, for the operation of our business. A disaster or a disruption in the infrastructure that supports our businesses, including a disruption involving electronic communications or other services used by us or third parties with whom we conduct business, or directly affecting our headquarters, may have an adverse impact on our ability to continue to operate our business without interruption that could have a material adverse effect on us. Although we have disaster recovery programs in place, there can be no assurance that these will be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for any losses. Finally, we rely on third-party service providers for certain aspects of our business, including certain accounting and financial services. Any interruption or deterioration in the performance of these third parties could impair the quality of our operations and could adversely affect our business and result in losses.
Our internal controls over financial reporting may not be effective, 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 our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002, as amended, and the rules and regulations of the SEC thereunder, which we refer to as “Section 404.” During the course of testing, our Manager may identify deficiencies that it may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404. We cannot be certain as to the timing of completion of our evaluation, testing and any remediation actions or the impact of the same on our operations. If we are not able to complete our annual evaluations required by Section 404 in a timely manner or with adequate compliance, we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. As a result, we may be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could negatively affect our results of operations and the achievement of our investment objectives.
We are subject to certain reporting requirements and are required to file certain periodic reports with the SEC.
We are subject to reporting requirements under the Securities Exchange Act of 1934, including the filing of quarterly and annual reports. Prior public funds sponsored by our Manager have been and are subject to the same requirements. Some of these funds have been required to amend previously filed reports to, among other things, restate the audited or unaudited financial statements filed in such reports. As a result, the prior funds have been delinquent in filing subsequent quarterly and annual reports when they became due. If we experience delays in the filing of our reports, our members may not have access to timely information concerning us, our operations, and our financial results.
Your ability to institute a cause of action against our Manager and its affiliates is limited by our LLC Agreement.
Our LLC Agreement provides that neither our Manager nor any of its affiliates will have any liability to us for any loss we suffer arising out of any action or inaction of our Manager or an affiliate if the Manager or affiliate determined, in good faith, that the course of conduct was in our best interests and did not constitute negligence or misconduct. As a result of these provisions in our LLC Agreement, your right to institute a cause of action against our Manager may be more limited than it would be without these provisions.
Business Risks
Our business could be hurt by economic downturns.
Our business is affected by a number of economic factors, including the level of economic activity in the markets in which we operate. A decline in economic activity in the United States or internationally could materially affect our financial condition and results of operations. The equipment leasing and financing industry is influenced by factors such as interest rates, inflation, employment rates and other macroeconomic factors over which we have no control. Any decline in economic activity as a result of these factors typically results in a decrease in the number of transactions in which we participate and in our profitability.
Uncertainties associated with the equipment leasing and financing industry may have an adverse effect on our business and may adversely affect our ability to give you any economic return from our Shares or a complete return of your capital.
There are a number of uncertainties associated with the equipment leasing and financing industry that may have an adverse effect on our business and may adversely affect our ability to make cash distributions to you that will, in total, be equal to a return of all of your capital, or provide for any economic return from our Shares. These include:
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fluctuations in demand for equipment and fluctuations in interest rates and inflation rates;
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the continuing economic life and value of equipment at the time our investments mature;
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the technological and economic obsolescence of equipment;
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potential defaults by lessees, borrowers or other counterparties;
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supervision and regulation by governmental authorities; and
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increases in our expenses, including taxes and insurance expenses.
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The risks and uncertainties associated with the industries of our lessees, borrowers, and other counterparties may indirectly affect our business, operating results and financial condition.
We are indirectly subject to a number of uncertainties associated with the industries of our lessees, borrowers, and other counterparties. We invested in a pool of equipment by, among other things, acquiring equipment subject to lease, purchasing equipment and leasing equipment to third-party end users, financing equipment for third-party end users, acquiring ownership rights to items of leased equipment at lease expiration, and acquiring interests or options to purchase interests in the residual value of equipment. The lessees, borrowers, and other counterparties to these transactions operate in a variety of industries. As such, we are indirectly subject to the various risks and uncertainties that affect our lessees’, borrowers’, and other counterparties’ businesses and operations. If such risks or uncertainties were to affect our lessees, borrowers, or other counterparties, we may indirectly suffer a loss on our investment, lose future revenues or experience adverse consequences to our business, operating results and financial condition.
Because we borrowed money to make our investments, losses as a result of lessee, borrower or other counterparty defaults may be greater than if such borrowings were not incurred.
Although we acquired some of our investments for cash, we borrowed a substantial portion of the purchase price of certain of our investments. While we believe the use of leverage resulted in our ability to make more investments with less risk than if leverage was not utilized, there can be no assurance that the benefits of greater size and diversification of our portfolio will offset the heightened risk of loss in an individual investment using leverage. With respect to non-recourse borrowings, if we are unable to pay our debt service obligations because a lessee, borrower or other counterparty defaults, a lender could foreclose on the investment securing the non-recourse indebtedness. This could cause us to lose all or part of our investment or could force us to meet debt service payment obligations so as to protect our investment subject to such indebtedness and prevent it from being subject to repossession. Additionally, while the majority of our borrowings were non-recourse, we are jointly and severally liable for recourse indebtedness incurred under a senior secured revolving line of credit facility with California Bank & Trust (“CB&T”) that is secured by certain of our assets that are not otherwise pledged to other lenders. CB&T has a security interest in such assets and the right to sell those assets to pay off the indebtedness if we default on our payment obligations. This recourse indebtedness may increase our risk of loss because we must meet the debt service payment obligations regardless of the revenue we receive from the investment that is subject to such secured indebtedness.
Restrictions imposed by the terms of our indebtedness may limit our financial flexibility.
We, together with certain of our affiliates (entities managed by our Manager), Fund Eight B, ICON Income Fund Ten, LLC (“Fund Ten”), ICON Leasing Fund Eleven, LLC (“Fund Eleven”), ICON Leasing Fund Twelve, LLC (“Fund Twelve”) and ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P. (“Fund Fourteen”), are party to the revolving line of credit agreement with CB&T, as amended. The terms of that agreement could restrict us from paying distributions to our members if such payments would cause us not to be in compliance with our financial covenants in that agreement. For additional information on the terms of our credit agreement, see “Item 7. Manager’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
Guarantees made by the guarantors of some of our lessees, borrowers and other counterparties may be voided under certain circumstances and we may be required to return payments received from such guarantors.
Under federal bankruptcy law and comparable provisions of State fraudulent transfer laws, a guarantee could be voided, or claims in respect of a guarantee could be subordinated to all other debts of that guarantor if, among other things, the guarantor, at the time it incurred the indebtedness evidenced by its guarantee:
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received less than reasonably equivalent value or fair consideration for the incurrence of such guarantee; and
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was insolvent or rendered insolvent by reason of such incurrence; or
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was engaged in a business or transaction for which the guarantor’s remaining assets constituted unreasonably small capital; or
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intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature.
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In addition, any payment by that guarantor pursuant to its guarantee could be voided and required to be returned to the guarantor, or to a fund for the benefit of the creditors of the guarantor.
The measures of insolvency for purposes of these fraudulent transfer laws will vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, a guarantor would be considered insolvent if:
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the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all of its assets;
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the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or
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it could not pay its debts as they become due.
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We cannot assure you as to what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard. We also cannot make any assurances as to the standards that courts in foreign jurisdictions may use or that courts in foreign jurisdictions will take a position similar to that taken in the United States.
If the value of our investments declines more rapidly than we anticipate, our financial performance may be adversely affected.
A significant part of the value of a significant portion of the equipment that we invested in is expected to be the potential value of the equipment once the lease term expires (with respect to leased equipment). Generally, equipment is expected to decline in value over its useful life. In making these types of investments, we assumed a residual value for the equipment at the end of the lease or other investment that, at maturity, was expected to be enough to return the cost of our investment in the equipment and provide a rate of return despite the expected decline in the value of the equipment over the term of the investment. However, the actual residual value of the equipment at maturity and whether that value meets our expectations will depend to a significant extent upon the following factors, many of which are beyond our control:
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our ability to acquire or enter into agreements that preserved or enhanced the relative value of the equipment;
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our ability to maximize the value of the equipment at maturity of our investment;
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market conditions prevailing at maturity;
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the cost of new equipment at the time we are remarketing used equipment;
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the extent to which technological or regulatory developments reduce the market for such used equipment;
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the strength of the economy; and
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the condition of the equipment at maturity.
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We cannot assure you that our assumptions with respect to value will be accurate or that the equipment will not lose value more rapidly than we anticipate.
If equipment is not properly maintained, its residual value may be less than expected.
If a lessee or other counterparty fails to maintain equipment in accordance with the terms of our agreements, we may have to make unanticipated expenditures to repair the equipment in order to protect our investment. In addition, some of the equipment we invested in was used equipment. While we planned to inspect most used equipment prior to making an investment, there is no assurance that an inspection of used equipment prior to purchasing it revealed any or all defects and problems with the equipment that may occur after it was acquired by us.
We typically obtained representations from the sellers and lessees of used equipment that:
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the equipment has been maintained in compliance with the terms of applicable agreements;
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that neither the seller nor the lessee was in violation of any material terms of such agreements; and
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the equipment was in good operating condition and repair and that, with respect to leases, the lessee had no defenses to the payment of rent for the equipment as a result of the condition of such equipment.
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We have rights against the seller of equipment for any losses arising from a breach of representations made to us and against the lessee for a default under the lease. However, we cannot assure you that these rights will make us whole with respect to our entire investment in the equipment or our expected returns on the equipment, including legal costs, costs of repair and lost revenue from the delay in being able to sell or re-lease the equipment due to undetected problems or issues. These costs and lost revenue could negatively affect our liquidity and cash flows, and could negatively affect our profitability if we are unable to recoup such costs from the lessee or other third parties.
If a lessee, borrower or other counterparty defaults on its obligations to us, we could incur losses.
We entered into transactions with parties that had senior debt rated below investment grade. We did not require such parties to have a minimum credit rating. Lessees, borrowers, and other counterparties with lower credit ratings may default on payments to us more frequently than lessees, borrowers or other counterparties with higher credit ratings. For example, if a lessee does not make lease payments to us or to a lender on our behalf or a borrower does not make loan payments to us when due, or violates the terms of its contract in another important way, we may be forced to terminate our agreements with such parties and attempt to recover the equipment. We may do this at a time when we may not be able to arrange for a new lease or to sell our investment right away, if at all. We would then lose the expected revenues and might not be able to recover the entire amount or any of our original investment. The costs of recovering equipment upon a lessee’s or borrower’s default, enforcing the obligations under the contract, and transporting, storing, repairing, and finding a new lessee or purchaser for the equipment may be high and may negatively affect the value of our investment in the equipment. These costs could also negatively affect our liquidity and cash flows, and could negatively affect our profitability.
If a lessee, borrower or other counterparty files for bankruptcy, we may have difficulty enforcing the terms of the contract and may incur losses.
If a lessee, borrower or other counterparty files for protection under the bankruptcy laws, the remaining term of the lease, loan or other financing contract could be shortened or the contract could be rejected by the bankruptcy court, which could result in, among other things, any unpaid pre-bankruptcy lease, loan or other contractual payments being cancelled as part of the bankruptcy proceeding. We may also experience difficulties and delays in recovering equipment from a bankrupt lessee or borrower that is involved in a bankruptcy proceeding or has been declared bankrupt by a bankruptcy court. If a contract is rejected in a bankruptcy, we would bear the cost of retrieving and storing the equipment and then have to remarket such equipment. In addition, the bankruptcy court would treat us as an unsecured creditor for any amounts due under the lease, loan or other contract. These costs and lost revenues could also negatively affect our liquidity and cash flows and could negatively affect our profitability.
Investing in equipment in foreign countries may be riskier than domestic investments and may result in losses.
We made investments in equipment for use by domestic or foreign parties outside of the United States. We may have difficulty enforcing our rights under foreign transaction documents. In addition, we may have difficulty repossessing equipment if a foreign party defaults and enforcement of our rights outside the United States could be more expensive. Moreover, foreign jurisdictions may confiscate our equipment. Use of equipment in a foreign country will be subject to that country’s tax laws, which may impose unanticipated taxes. While we sought to require lessees, borrowers, and other counterparties to reimburse us for all taxes imposed on the use of the equipment and require them to maintain insurance covering the risks of confiscation of the equipment, we cannot assure you that we will be successful in doing so or that insurance reimbursements will be adequate to allow for recovery of and a return on foreign investments.
In addition, we invested in equipment that may travel to or between locations outside of the United States. Regulations in foreign countries may adversely affect our interest in equipment in those countries. Foreign courts may not recognize judgments obtained in U.S. courts and different accounting or financial reporting practices may make it difficult to judge the financial viability of a lessee, borrower or other counterparty, heightening the risk of default and the loss of our investment in such equipment, which could have a material adverse effect on our results of operations and financial condition.
In addition to business uncertainties, our investments may be affected by political, social, and economic uncertainty affecting a country or region. Many financial markets are not as developed or as efficient as those in the U.S. and, as a result, liquidity may be reduced and price volatility may be higher. The legal and regulatory environment may also be different, particularly with respect to bankruptcy and reorganization. Financial accounting standards and practices may also differ and there may be less publicly available information with respect to such companies. While our Manager considered these factors when making investment decisions, no assurance can be given that we will be able to fully avoid these risks or generate sufficient risk-adjusted returns.
Sellers of leased equipment could use their knowledge of the lease terms for gain at our expense.
We may have acquired equipment subject to lease from leasing companies that have an ongoing relationship with the lessees. A seller could use its knowledge of the terms of the lease, particularly the end of lease options and date the lease ends, to compete with us. In particular, a seller may approach a lessee with an offer to substitute similar equipment at lease end for lower rental amounts. This may adversely affect our opportunity to maximize the residual value of the equipment and potentially negatively affect our profitability.
Investment in joint ventures may subject us to risks relating to our co-investors that could adversely impact the financial results of such joint ventures.
We invested in joint ventures with other businesses our Manager manages, as well as with unrelated third parties. Investing in joint ventures involves additional risks not present when acquiring leased equipment that will be wholly owned by us. These risks include the possibility that our co-investors might become bankrupt or otherwise fail to meet financial commitments, thereby obligating us to pay all of the debt associated with the joint venture, as each party to a joint venture may be required to guarantee all of the joint venture’s obligations. Alternatively, the co-investors may have economic or business interests or goals that are inconsistent with our investment objectives and want to manage the joint venture in ways that do not maximize our return. Among other things, actions by a co-investor might subject leases that are owned by the joint venture to liabilities greater than those contemplated by the joint venture agreement. Also, when none of the joint owners control a joint venture, there might be a stalemate on decisions, including when to sell the equipment or the prices or terms of a lease. Finally, while we typically have the right to buy out the other joint owner’s interest in the equipment in the event of the sale, we may not have the resources available to do so. These risks could negatively affect our profitability and could result in legal and other costs, which would negatively affect our liquidity and cash flows.
We may not be able to obtain insurance for certain risks and would have to bear the cost of losses from non-insurable risks.
Equipment may be damaged or lost. Fire, weather, accidents, theft or other events can cause damage or loss of equipment. While our transaction documents generally require lessees and borrowers to have comprehensive insurance and assume the risk of loss, some losses, such as from acts of war, terrorism or earthquakes, may be either uninsurable or not economically feasible to insure. Furthermore, not all possible liability claims or contingencies affecting equipment can be anticipated or insured against, and, if insured, the insurance proceeds may not be sufficient to cover a loss. If such a disaster occurs to the equipment, we could suffer a total loss of any investment in the affected equipment. In investing in some types of equipment, we may have been exposed to environmental tort liability. Although we used our best efforts to minimize the possibility and exposure of such liability including by means of attempting to obtain insurance, we cannot assure you that our assets will be protected against any such claims. These risks could negatively affect our profitability and could result in legal and other costs, which would negatively affect our liquidity and cash flows.
We could suffer losses from failure to maintain our equipment registration and from unexpected regulatory compliance costs.
Many types of transportation assets are subject to registration requirements by U.S. governmental agencies, as well as foreign governments if such equipment is to be used outside of the United States. Failing to register the equipment, or losing such registration, could result in substantial penalties, forced liquidation of the equipment and/or the inability to operate and lease the equipment. Governmental agencies may also require changes or improvements to equipment and we may have to spend our own funds to comply if the lessee, borrower or other counterparty is not required to do so under the transaction documents. These changes could force the equipment to be removed from service for a period of time. The terms of the transaction documents may provide for payment reductions if the equipment must remain out of service for an extended period of time or is removed from service. We may then have reduced income from our investment for this equipment. If we do not have the funds to make a required change, we might be required to sell the affected equipment. If so, we could suffer a loss on our investment, lose future revenues and experience adverse tax consequences.
If any of our investments become subject to usury laws, we could have reduced revenues or possibly a loss on such investments.
In addition to credit risks, we may be subject to other risks in equipment financing transactions in which we are deemed to be a lender. For example, equipment leases have sometimes been held by U.S. courts to be loan transactions subject to State usury laws, which limit the interest rate that can be charged. Uncertainties in the application of some laws may result in inadvertent violations that could result in reduced investment returns or, possibly, loss on our investment in the affected equipment. Although part of our business strategy was to enter into or acquire leases that we believe were structured so that they avoid being deemed loans, and would therefore not be subject to usury laws, we cannot assure you that we were successful in doing so. If an equipment lease is held to be a loan with a usurious rate of interest, the amount of the lease payment could be reduced and adversely affect our revenue.
State laws determine what rates of interest are deemed usurious, when the applicable rate of interest is determined, and how it is calculated. In addition, some U.S. courts have also held that certain lease features, such as equity interests, constitute additional interest. Although we generally sought assurances and/or opinions to the effect that our transactions do not violate applicable usury laws, a finding that our transactions violate usury laws could result in the interest obligation to us being declared void and we could be liable for damages and penalties under applicable law. We cannot assure you as to what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard. We also cannot make any assurances as to the standards that courts in foreign jurisdictions may use or that courts in foreign jurisdictions will take a position similar to that taken in the United States.
We competed with a variety of financing sources for our investments, which may affect our ability to achieve our investment objectives.
The commercial leasing and financing industry is highly competitive and is characterized by competitive factors that vary based upon product and geographic region. Our competitors are varied and include other equipment leasing and finance funds, hedge funds, private equity funds, captive and independent finance companies, commercial and industrial banks, manufacturers and vendors. Competition from both traditional competitors and new market entrants has intensified in recent years due to growing marketplace liquidity and increasing recognition of the attractiveness of the commercial leasing and finance industry.
When we made our investments, we competed primarily on the basis of pricing, terms and structure. To the extent that our ability to make favorable investments was adversely affected by any combination of those factors, we could fail to achieve our investment objectives. In addition, our competitors may have been and/or may be in a position to offer equipment to prospective customers on financial terms that were or are more favorable than those that we could offer or that we can offer in liquidating our portfolio, which may have affected our ability to make favorable investments and may affect our ability to liquidate our portfolio, in each case, in a manner that would enable us to achieve our investment objectives.
General Tax Risks
If the IRS classifies us as a corporation rather than a partnership, your distributions would be reduced under current tax law.
We did not and will not apply for an IRS ruling that we will be classified as a partnership for federal income tax purposes. Although counsel rendered an opinion to us at the time of our offering that we will be taxed as a partnership and not as a corporation, that opinion is not binding on the IRS and the IRS has not ruled on any federal income tax issue relating to us. If the IRS successfully contends that we should be treated as a corporation for federal income tax purposes rather than as a partnership, then:
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our realized losses would not be passed through to you;
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our income would be taxed at tax rates applicable to corporations, thereby reducing our cash available to distribute to you; and
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your distributions would be taxed as dividend income to the extent of current and accumulated earnings and profits.
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In addition, we could be taxed as a corporation if we are treated as a publicly traded partnership by the IRS. To minimize this possibility, our LLC Agreement places significant restrictions on your ability to transfer our Shares.
We could lose cost recovery or depreciation deductions if the IRS treats our leases as sales or financings.
We expect that, for federal income tax purposes, we will be treated as the owner and lessor of the equipment that we leased. However, the IRS may challenge the leases and instead assert that they are sales or financings. If the IRS determines that we are not the owner of our leased equipment, we would not be entitled to cost recovery, depreciation or amortization deductions, and our leasing income might be deemed to be portfolio income instead of passive activity income. The denial of such cost recovery or amortization deductions could cause your tax liabilities to increase.
You may incur tax liability in excess of the cash distributions you receive in a particular year.
In any particular year, your tax liability from owning our Shares may exceed the cash distributions you receive from this investment. While we expect that your net taxable income from owning our Shares for most years will be less than your cash distributions in those years, to the extent any of our debt is repaid with income or proceeds from equipment sales, taxable income could exceed the amount of cash distributions you receive in those years. Additionally, a sale of our investments may result in taxes in any year that are greater than the amount of cash from the sale, resulting in a tax liability in excess of cash distributions. Further, due to the operation of the various loss disallowance rules, in a given tax year you may have taxable income when, on a net basis, we have a loss, or you may recognize a greater amount of taxable income than our net income because, due to a loss disallowance, income from some of our activities cannot be offset by losses from some of our other activities.
You may be subject to greater income tax obligations than originally anticipated due to special depreciation rules.
We may have acquired equipment subject to lease that the Code requires us to depreciate over a longer period than the standard depreciation period. Similarly, some of the equipment that we purchased was not eligible for accelerated depreciation under the Modified Accelerated Costs Recovery System, which was established by the Tax Reform Act of 1986 to set forth the guidelines for accelerated depreciation under the Code. Further, if we acquired equipment that the Code deems to be tax-exempt use property and the leases did not satisfy certain requirements, losses attributable to such equipment are suspended and may be deducted only against income we receive from such equipment or when we dispose of such equipment. Depending on the equipment that we acquired and its eligibility for accelerated depreciation under the Code, we may have less depreciation deductions to offset gross lease revenue, thereby increasing our taxable income.
There are limitations on your ability to deduct our losses.
Your ability to deduct your share of our losses is limited to the amounts that you have at risk from owning our Shares. This is generally the amount of your investment, plus any profit allocations and minus any loss allocation and distributions. This determination is further limited by a tax rule that applies the at-risk rules on an activity by activity basis, further limiting losses from a specific activity to the amount at risk in that activity. Additionally, your ability to deduct losses attributable to passive activities is restricted. Some of our operations will constitute passive activities and you can only use our losses from such activities to offset passive activity income in calculating tax liability. Furthermore, passive activity losses may not be used to offset portfolio income.
The IRS may allocate more taxable income to you than our LLC Agreement provides.
The IRS might successfully challenge our allocations of taxable income or losses. If so, the IRS would require reallocation of our taxable income and loss, resulting in an allocation of more taxable income or less loss to you than our LLC Agreement allocates.
If you are a tax-exempt organization, you will have unrelated business taxable income from this investment.
Tax-exempt organizations are subject to income tax on unrelated business taxable income (“UBTI”). Such organizations are required to file federal income tax returns if they have UBTI from all sources in excess of $1,000 per year. Our leasing income will constitute UBTI. Furthermore, tax-exempt organizations in the form of charitable remainder trusts will be subject to an excise tax equal to 100% of their UBTI.
This investment may cause you to pay additional taxes.
You may be required to pay alternative minimum tax in connection with owning our Shares, since you will be allocated a proportionate share of our tax preference items. Our Manager’s operation of our business affairs may lead to other adjustments that could also increase your alternative minimum tax. Alternative minimum tax is treated in the same manner as the regular income tax for purposes of making estimated tax payments.
You may incur State tax and foreign tax liabilities and have an obligation to file State or foreign tax returns.
You may be required to file tax returns and pay foreign, State or local taxes, such as income, franchise or personal property taxes, as a result of an investment in our Shares, depending upon the laws of the jurisdictions in which the equipment that we own is located.
Any adjustment to our tax return as a result of an audit by the IRS may result in adjustment to your tax return.
If we adjust our tax return as a result of an IRS audit, such adjustment may result in an examination of other items in your returns unrelated to us, or an examination of your tax returns for prior years. You could incur substantial legal and accounting costs in contesting any challenge by the IRS, regardless of the outcome. Further, because you will be treated for federal income tax purposes as a partner in a partnership by investing in our Shares, an audit of our tax return could potentially lead to an audit of your individual tax return. Finally, under certain circumstances, the IRS may automatically adjust your personal return without the opportunity for a hearing if it adjusts our tax return.
Some of the distributions on our Shares will be a return of capital, in whole or in part, which will complicate your tax reporting and could cause unexpected tax consequences at liquidation.
As we depreciated our investments in leased equipment over the term of our existence, a portion of each distribution to you was likely considered a return of capital, rather than income. Therefore, the dollar amount of each distribution should not be considered as necessarily being all income to you. As your capital in our Shares is reduced for tax purposes over the life of your investment, you will not receive a lump sum distribution upon liquidation that equals the purchase price you paid for our Shares, such as you might expect if you had purchased a bond. Also, payments made upon our liquidation will be taxable to the extent that such payments are not a return of capital.
As you receive distributions throughout the life of your investment, you will not know at the time of the distribution what portion of the distribution represents a return of capital and what portion represents income. The Schedule K-1 statement you received and continue to receive from us each year will specify the amounts of capital and income you received throughout the prior year.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We neither own nor lease office space or any other real property in our business at the present time.
Item 3. Legal Proceedings
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.
Item 4. (Removed and Reserved)
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Item 5. Market for the Registrant's Securities, Related Security Holder Matters and Issuer Purchases of Equity Securities
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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 21, 2011
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Manager (as a member)
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1
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Additional members
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3,277
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We, at our Manager’s discretion, paid monthly distributions to each of our members beginning the first month after each such member was admitted to the LLC through the end of our operating period, which was on April 30, 2008. We paid distributions to additional members totaling $3,424,344, $2,899,453 and $7,678,004 for the years ended December 31, 2010, 2009 and 2008, respectively. Additionally, our Manager was paid distributions of $34,589, $29,285 and $77,556 for the years ended December 31, 2010, 2009 and 2008, 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 $457.71 per Share as of December 31, 2010. 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.
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 the difference 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 $457.71 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 redemption price we offer in our redemption plan utilizes a different methodology than that which we use to determine the current value of our Shares for the ERISA and FINRA purposes described above and, therefore, the $457.71 per Share does not reflect the amount that a member would currently receive under our redemption plan. In addition, there can be no assurance that you will be able to redeem your Shares under our redemption plan.
Item 6. Selected Financial Data
The selected financial data should be read in conjunction with the consolidated financial statements and related notes included in “Item 8. Consolidated Financial Statements and Supplementary Data” contained elsewhere in this Annual Report on Form 10-K.
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Years Ended December 31,
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2010
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2009
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2008
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2007
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2006
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Total revenue (a)
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$ | 17,053,113 | $ | 18,837,809 | $ | 20,158,872 | $ | 23,460,086 | $ | 24,885,153 | ||||||||||
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Net income (loss) attributable to Fund Nine (b)
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$ | 6,757,659 | $ | 6,700,146 | $ | 1,047,818 | $ | 7,940,018 | $ | (667,903 | ) | |||||||||
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Net income (loss) attributable to Fund Nine
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allocable to additional members
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$ | 6,690,082 | $ | 6,633,145 | $ | 1,037,340 | $ | 7,860,618 | $ | (661,224 | ) | |||||||||
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Net income (loss) attributable to Fund Nine
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allocable to the Manager
|
$ | 67,577 | $ | 67,001 | $ | 10,478 | $ | 79,400 | $ | (6,679 | ) | |||||||||
|
Weighted average number of additional shares
|
||||||||||||||||||||
|
of limited liability company interests outstanding
|
97,955 | 97,955 | 97,955 | 98,052 | 98,123 | |||||||||||||||
|
Net income (loss) attributable to Fund Nine per weighted average
|
||||||||||||||||||||
|
additional share of limited liability company interests
|
$ | 68.30 | $ | 67.72 | $ | 10.59 | $ | 80.17 | $ | (6.74 | ) | |||||||||
|
Distributions to additional members
|
$ | 3,424,344 | $ | 2,899,453 | $ | 7,678,004 | $ | 8,825,274 | $ | 8,831,229 | ||||||||||
|
Distributions per weighted average additional share
|
||||||||||||||||||||
|
of limited liability company interests
|
$ | 34.96 | $ | 29.60 | $ | 78.38 | $ | 90.01 | $ | 90.00 | ||||||||||
|
Distributions to the Manager
|
$ | 34,589 | $ | 29,285 | $ | 77,556 | $ | 89,144 | $ | 89,204 | ||||||||||
|
December 31,
|
||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
|
Total assets (a)
|
$ | 90,617,773 | $ | 102,900,677 | $ | 114,231,144 | $ | 139,570,167 | $ | 137,187,658 | ||||||||||
|
Notes payable
|
$ | 47,174,188 | $ | 62,437,098 | $ | 77,448,699 | $ | 96,122,281 | $ | 92,480,648 | ||||||||||
|
Members' equity
|
$ | 41,027,167 | $ | 36,962,094 | $ | 31,783,252 | $ | 39,909,465 | $ | 42,333,349 | ||||||||||
|
(a) The decline in revenue and total assets is due to the winding down of our operations commencing with the beginning of our liquidation period on May 1, 2008. During our liquidation period, we are selling and will continue to sell our assets in the ordinary course of business. As we sell our assets, both rental income and finance income will continue to decrease over time.
|
||||||||||||||||||||
|
(b) In 2008, we recorded impairment losses of approximately $3,900,000 on our investment in Aircraft 128 and approximately $1,950,000 related to our 50% investment in Aircraft 126. During 2006, we recorded impairment losses of approximately $3,005,000.
|
||||||||||||||||||||
Item 7. Manager's Discussion and Analysis of Financial Condition and Results of Operations
Our Manager’s Discussion and Analysis of Financial Condition and Results of Operations relates to our consolidated financial statements and should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. Statements made in this section may be considered forward-looking. These statements are not guarantees of future performance and are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of these risks and assumptions, including, among other things, factors discussed in “Part I. Forward-Looking Statements” and “Item 1A. Risk Factors” located elsewhere in this Annual Report on Form 10-K.
Overview
We operate as an equipment leasing program in which the capital our members invested was pooled together to make investments, pay fees and establish a small reserve. We primarily acquired equipment subject to lease, purchased equipment and leased it to third-party end users or financed equipment for third parties, provided equipment and other financing and, to a lesser degree, acquired ownership rights to items of leased equipment at lease expiration. Some of our equipment leases were acquired for cash and provide current cash flow, which we refer to as “income” leases. For the other equipment leases, we financed the majority of the purchase price through borrowings from third parties. We refer to these leases as “growth” leases. These growth leases generate little or no current cash flow because substantially all of the rental payments received from the lessee are used to service the indebtedness associated with acquiring or financing the lease. For these leases, we anticipated that the future value of the leased equipment would exceed our cash portion of the purchase price.
Our Manager manages and controls our business affairs, including, but not limited to, our equipment leases and other financing transactions, under the terms of our LLC Agreement. We completed our operating period on April 30, 2008 and entered our liquidation period effective May 1, 2008. During our liquidation period, we are selling and will continue to sell our assets in the ordinary course of business. As we sell our assets, both rental income and finance income will decrease over time, as will expenses related to our assets, such as depreciation and amortization expense. Additionally, interest expense should decrease as we reach the expiration of leases that were financed and the debt is repaid to lenders. As leased equipment is sold, we will incur gains or losses on these sales. We will continue to liquidate our assets during this period and we expect to see a reduction in revenue and expenses accordingly.
Current Business Environment and Outlook
Recent trends indicate that domestic and global equipment leasing and financing volume is correlated to overall business investments in equipment. According to information provided by Global Insight, Inc., a global forecasting company, and the Equipment Leasing and Finance Foundation, a non-profit foundation dedicated to providing research regarding the equipment leasing and finance industry (“ELFF”), total domestic business investment in equipment and software increased annually from approximately $922 billion in 2002 to approximately $1,205 billion in 2006 and 2007. Similarly, during the same period, total domestic equipment leasing and financing volume increased from approximately $515 billion in 2002 to approximately $684 billion in 2007.
According to the World Leasing Yearbook 2011, which was published by Euromoney Institutional Investor PLC, global equipment leasing volume increased annually from approximately $462 billion in 2002 to approximately $780 billion in 2007. The most significant source of that increase was due to increased volume in Europe, Asia and Latin 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 Latin America increased from approximately $3 billion in 2002 to approximately $41 billion in 2007. It is believed that global business investment in equipment and global equipment financing volume increased as well during the same period.
The volume of equipment financing typically reflects general economic conditions. As the economy slows or builds momentum, the demand for productive equipment generally slows or builds and equipment financing volume generally decreases or increases. The economy in the United States experienced a downturn from 2001 through 2003, resulting in a decrease in equipment leasing and financing volume during that period. From 2004 through most of 2007, however, the economy in the United States and the global economy in general experienced significant growth, including growth in business investment in equipment and equipment leasing and financing volume.
In general, the U.S. and global credit markets deteriorated significantly after the U.S. economy entered into a recession in December 2007, and global credit markets continue to experience some dislocation and tightening. Many financial institutions and other financing providers have failed or significantly reduced financing operations, creating both uncertainty and opportunity in the finance industry.
According to information provided by the Equipment Leasing and Finance Association, an equipment finance trade association and affiliate of ELFF (“ELFA”), total domestic business investment in equipment and software decreased to $1,187 billion in 2008. Similarly, during the same period, total domestic equipment financing volume decreased to $671 billion in 2008. Global business investment in equipment, and global equipment financing volume, decreased as well during the same period. According to the World Leasing Yearbook 2011, global equipment leasing volume decreased to approximately $733 billion in 2008 and approximately $557 billion in 2009, with the largest decrease occurring in Europe. For 2009, domestic business investment in equipment and software is forecasted to drop to an estimated $1,011 billion with a corresponding decrease in equipment financing volume to an estimated $518 billion. Nevertheless, ELFA projects that domestic investment in equipment and software and equipment financing volume will begin to recover in 2010, with domestic business investment in equipment and software projected to increase to an estimated $1,108 billion in 2010 and $1,255 billion in 2011 and corresponding increases in equipment financing volume to an estimated $583 billion in 2010 and $668 billion in 2011. As we are currently liquidating our portfolio, however, the recent performance of the equipment leasing and financing market is not expected to be correlated to our performance and our Manager does not expect that there will be any long-term material adverse impact on the demand for equipment that we own.
Lease and Other Significant Transactions
We engaged in the following significant transactions during the years ended December 31, 2010, 2009 and 2008:
Aircraft
In light of unprecedented high fuel prices during 2008 and the related impact on the airline industry, our Manager reviewed our investments in ICON Aircraft 126 LLC (“ICON 126”) and ICON Aircraft 128 LLC (“ICON 128”) as of June 30, 2008 and determined that Aircraft 126 and Aircraft 128 were impaired.
The following factors, among others, indicated that the full carrying values of Aircraft 126 and Aircraft 128 might not be recoverable: (i) indications that lenders were willing to finance less of the acquisition cost of four-engine aircraft, which increased with each dollar rise of the price of fuel, thereby undermining the carrying value expectations of such aircraft; (ii) the rising cost of fuel was increasing the operating costs of four-engine aircraft and similar capacity twin-engine aircraft, thereby making such aircraft less attractive investments at the time and thereby depressing the market for Aircraft 126 and Aircraft 128; and (iii) the likelihood of aircraft operators switching to more efficient aircraft, thereby depressing the market for Aircraft 126 and Aircraft 128.
Based on our Manager’s review, the carrying values of Aircraft 126 and Aircraft 128 exceeded the expected undiscounted future cash flows of Aircraft 126 and Aircraft 128 and, as a result, we recorded an impairment charge representing the difference between the carrying value and the expected discounted future cash flows of Aircraft 126 and Aircraft 128. The expected discounted future cash flows of Aircraft 126 and Aircraft 128 were determined using a market approach, a recent appraisal for Aircraft 126 and Aircraft 128 and recent sales of similar aircraft, as well as other factors, including those discussed above. As a result, we recorded an impairment loss on Aircraft 128 of approximately $3,900,000 as of June 30, 2008. In addition, as of June 30, 2008, ICON 126 recorded an impairment loss on Aircraft 126 of approximately $3,900,000, of which our share was approximately $1,950,000.
Railcars
On January 28, 2008, ICON Railcar I, LLC (“ICON Rail”), our wholly-owned subsidiary, sold its entire interest in 110 railcars (the “Railcars”) to an unrelated third party that was leasing and operating the Railcars. We recognized a gain on the sale of approximately $313,000.
Manufacturing and Other Investments
On April 30, 2003, we acquired a Double Kraft Paper Forming Tubing Unit on lease to Wildwood Industries, Inc. (“Wildwood”) for approximately $1,350,000. Effective March 1, 2008, this lease was extended for an additional twelve months and was reclassified as an operating lease. On August 31, 2008 and September 30, 2008, two other finance leases with Wildwood expired, were renewed for twelve-month periods commencing September 1, 2008 and October 1, 2008, respectively, and expired on August 31, 2009 and September 30, 2009, respectively. Subject to the terms of the lease renewal, there is a residual interest sharing agreement with a third-party broker, payable upon attainment of a minimum return on investment, whereby all sales proceeds received above $150,000 will be shared equally with the third party. For the years ended December 31, 2010, 2009 and 2008, approximately $0, $0, and $130,000, respectively, was distributed to the third party in accordance with the residual interest sharing agreement.
At December 31, 2008, our Manager determined that all three assets on lease to Wildwood were fully impaired based on the estimate that lease proceeds would be insufficient to cover the residual position and we recorded an aggregate impairment loss of approximately $283,000 and bad debt expense for uncollectable receivables of approximately $201,000.
On January 21, 2009, we filed a lawsuit in the U.S. District Court for the Southern District of New York against Wildwood and its owners who guaranteed Wildwood’s obligations to us. Our claims were for breaches of the leases and guarantees for Wildwood’s failure to pay rents. On March 5, 2009, an involuntary petition under Chapter 11 of the United States Bankruptcy Code was filed against Wildwood by three of Wildwood’s creditors in United States Bankruptcy Court. On September 18, 2009, the involuntary petition under Chapter 11 of the United States Bankruptcy Code was converted to a Chapter 7 case by the United States Bankruptcy Trustee. We do not expect to receive any further proceeds from Wildwood.
On June 20, 2003, we acquired a manufacturing device previously on lease to Spansion (the “AMD Lease”) for approximately $6,391,000. On August 1, 2003, we acquired semi-conductor memory testing equipment subject to two leases with Spansion (the “FASL Leases”) for approximately $4,561,000.
On March 1, 2009, Spansion filed a petition for reorganization under Chapter 11 in United States Bankruptcy Court. On March 12, 2009, Spansion rejected the FASL Leases and affirmed the AMD Lease. On June 3, 2009, Spansion returned the equipment subject to the FASL Leases, which has been classified on the consolidated balance sheet as of December 31, 2009 as assets held for sale and has been recorded at the lower of its carrying value or fair market value less estimated costs to sell. Based on our Manager’s assessment of the equipment and knowledge of the market for such equipment, we recorded an impairment charge of approximately $164,000 on the consolidated financial statements for the year ended December 31, 2009.
In July 2009, the equipment subject to the AMD Lease was sold for approximately $585,000 and we recognized a gain on sale of the equipment and lease termination of approximately $432,000.
In March 2010, the equipment subject to the FASL Leases was sold for approximately $140,000 and we recognized a loss on sale of the equipment of approximately $1,000.
Each Spansion lease had a related residual interest sharing agreement with a third-party that was triggered when a minimum return on investment has been attained by us. Subject to the original terms, 35% of all proceeds received in excess of approximately $633,000 were to be distributed to the third party. For the years ended December 31, 2010, 2009 and 2008, approximately $49,000, $350,000 and $739,000, respectively, was distributed to the third party in accordance with the residual interest sharing agreements.
On February 22, 2010, the U.S. Bankruptcy Court approved a stipulation between us and Spansion allowing our administrative expense claim in the amount of approximately $90,000 and unsecured claim in the amount of approximately $269,000. On March 22, 2010, we sold our unsecured claim to a third party for approximately $161,000 and on May 24, 2010, we received a payment of approximately $90,000 related to the administrative expense claim. Both amounts were recorded as other income.
On December 18, 2009, the lease with Short Hills Surgery Center (“Short Hills”) expired and Short Hills purchased the medical equipment for approximately $40,000.
We, along with Fund Ten and Fund Eleven, own ICON Global Crossing II, LLC (“Global Crossing II”), with ownership interests of approximately 14.40%, 72.34% and 13.26%, respectively. The total capital contributions made to Global Crossing II were approximately $13,885,000, of which our share was approximately $2,000,000. All contributed capital was used to purchase telecommunications equipment subject to a 48-month lease with Global Crossing Telecommunications, Inc. (“Global Crossing”) and Global Crossing North American Networks, Inc. (together with Global Crossing, “Global Crossing Group”) that commenced on November 1, 2006.
On October 29, 2010, Global Crossing II sold all equipment under lease to Global Crossing for a total purchase price of $3,297,609 and our share of the gain is included in income from investments in joint ventures for approximately $93,000.
Recently Adopted Accounting Pronouncements
In 2010, we adopted the accounting pronouncement relating to variable interest entities, which requires assessments at each reporting period of which party within the variable interest entity is considered the primary beneficiary and requires a number of new disclosures related to variable interest entities. See Note 2 to our consolidated financial statements.
In 2010, we adopted the accounting pronouncement that amends the requirements for disclosures about the fair value of financial instruments, including the fair value of financial instruments for annual, as well as interim, reporting periods. This standard requires additional disclosures related to recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements, and information on purchases, sales, issuances, and settlements in a rollforward reconciliation of Level 3 fair-value measurements. Except for the Level 3 reconciliation disclosures, which will be effective for fiscal years beginning after December 15, 2010, the guidance became effective for us beginning January 1, 2010. See Note 2 to our consolidated financial statements.
Critical Accounting Policies
An understanding of our critical accounting policies is necessary to understand our financial results. The preparation of financial statements in conformity with US GAAP requires our Manager to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates primarily include the determination of allowance for doubtful accounts, depreciation and amortization, impairment losses, estimated useful lives and residual values. Actual results could differ from those estimates. We applied our critical accounting policies and estimation methods consistently in all periods presented. We consider the following accounting policies to be critical to our business:
|
·
|
Lease classification and revenue recognition;
|
|
·
|
Asset impairments;
|
|
·
|
Depreciation;
|
|
·
|
Initial direct costs;
|
|
·
|
Acquisition fees; and
|
|
·
|
Derivative financial instruments.
|
Lease Classification and Revenue Recognition
Each equipment lease we entered into is classified as either a finance lease or an operating lease, which is determined based upon the terms of each lease. For a finance lease, the initial direct costs were capitalized and amortized over the lease term. For an operating lease, the initial direct costs were included as a component of the cost of the equipment and depreciated over the lease term.
For finance leases, we recorded, at lease inception, the total minimum lease payments receivable from the lessee, the estimated unguaranteed residual value of the equipment at lease termination, the initial direct costs related to the lease and the related unearned income. Unearned income represents the difference between the sum of the minimum lease payments receivable, plus the estimated unguaranteed residual value, minus the cost of the leased equipment. Unearned income is recognized as finance income over the term of the lease using the effective interest rate method.
For operating leases, rental income is recognized on a straight-line basis over the lease term. Billed operating lease receivables are included in accounts receivable until collected. Accounts receivable are stated at their estimated net realizable value. Deferred revenue is the difference between the timing of the receivables billed and the income recognized on a straight-line basis.
Our Manager has an investment committee that approved each new equipment lease and other financing transaction. As part of its process, the investment committee determined the residual value, if any, to be used once the investment was approved. The factors considered in determining the residual value included, but were not limited to, the creditworthiness of the potential lessee, the type of equipment considered, how the equipment was integrated into the potential lessee’s business, the length of the lease and the industry in which the potential lessee operated. Residual values are reviewed for impairment in accordance with our impairment review policy.
The residual value assumed, among other things, that the asset would be utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the market place were disregarded and it was assumed that there was no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. The residual value was calculated using information from various external sources, such as trade publications, auction data, equipment dealers, wholesalers and industry experts, as well as inspection of the physical asset and other economic indicators.
Asset Impairments
The significant assets in our portfolio are periodically reviewed, no less frequently than annually, to determine whether events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss will be recognized only if the carrying value of a long-lived asset is not recoverable and exceeds its fair market value. If there is an indication of impairment, we will estimate the future cash flows (undiscounted and without interest charges) expected from the use of the asset and its eventual disposition. Future cash flows are the future cash inflows expected to be generated by an asset less the future outflows expected to be necessary to obtain those inflows. If an impairment is determined to exist, the impairment loss will be measured as the amount by which the carrying value of a long-lived asset exceeds its fair value and recorded in the consolidated statement of operations in the period the determination is made.
The events or changes in circumstances that generally indicate that an asset may be impaired are (i) the estimated fair value of the underlying equipment is less than its carrying value or (ii) the lessee is experiencing financial difficulties and it does not appear likely that the estimated proceeds from the disposition of the asset will be sufficient to satisfy the residual position in the asset and, if applicable, the remaining obligation to the non-recourse lender. Generally in the latter situation, the residual position relates to equipment subject to third-party non-recourse debt where the lessee remits its rental payments directly to the lender and we do not recover our residual position until the non-recourse debt is repaid in full. The preparation of the undiscounted cash flows requires the use of assumptions and estimates, including the level of future rents, the residual value expected to be realized upon disposition of the asset, estimated downtime between re-leasing events and the amount of re-leasing costs. Our Manager’s review for impairment includes a consideration of the existence of impairment indicators including third-party appraisals, published values for similar assets, recent transactions for similar assets, adverse changes in market conditions for specific asset types and the occurrence of significant adverse changes in general industry and market conditions that could affect the fair value of the asset.
Depreciation
We record depreciation expense on equipment when the lease is classified as an operating lease. In order to calculate depreciation, we first determined the depreciable equipment cost, which is the cost less the estimated residual value. The estimated residual value is our estimate of the value of the equipment at lease termination. Depreciation expense is recorded by applying the straight-line method of depreciation to the depreciable equipment cost over the term that includes known as well as expected lease terms.
Initial Direct Costs
We capitalize initial direct costs associated with the origination and funding of leased assets and other financing transactions. These costs are amortized on a lease by lease basis based on the actual lease term using a straight-line method for operating leases and the effective interest rate method for finance leases. Costs related to leases or other financing transactions that are not consummated are expensed as an acquisition expense.
Acquisition Fees
Pursuant to our LLC Agreement, we paid acquisition fees to our Manager equal to 3% of the purchase price for our investments. These fees were capitalized and included in the cost of the investment.
Derivative Financial Instruments
We may enter into derivative transactions for purposes of hedging specific financial exposures, including changes in interest rates of our non-recourse long-term debt. We enter into these instruments only for hedging underlying exposures. We do not hold or issue derivative financial instruments for purposes other than hedging, except for warrants, which are not hedges. Certain derivatives may not meet the established criteria to be designated as qualifying accounting hedges, even though we believe that these are effective economic hedges.
All derivatives are recognized as either assets or liabilities on the consolidated balance sheets and are measured at fair value. We recognize changes in the fair value of such instruments immediately in earnings unless certain accounting criteria are met. These criteria demonstrate that the derivative is expected to be highly effective at offsetting changes in the fair value or expected cash flows of the underlying exposure at both the inception of the hedging relationship and on an ongoing basis and include an evaluation of the counterparty risk and the impact, if any, on the effectiveness of the derivative. If these criteria are met, which we must document and assess at inception and on an ongoing basis, we recognize the changes in fair value of such instruments in accumulated other comprehensive income (loss) (“AOCI”), a component of members’ equity on the consolidated balance sheets. Changes in the fair value of the ineffective portion of all derivatives are recognized immediately in earnings.
Results of Operations for the Years Ended December 31, 2010 (“2010”) and 2009 (“2009”)
We completed our operating period on April 30, 2008 and entered our liquidation period on May 1, 2008. During our liquidation period, we are selling and will continue to sell our assets in the ordinary course of business. As we sell our assets, both rental income and finance income will decrease over time, as will expenses related to our assets, such as depreciation and amortization expense. Additionally, interest expense should decrease as we reach the expiration of leases that were financed and as the debt is repaid to the lenders. As leased equipment is sold, we will incur gains or losses on these sales.
Revenue for 2010 and 2009 is summarized as follows:
|
Years Ended December 31,
|
||||||||||||
|
2010
|
2009
|
Change
|
||||||||||
|
Rental income
|
$ | 12,857,909 | $ | 13,397,814 | $ | (539,905 | ) | |||||
|
Finance income
|
3,669,071 | 4,765,078 | (1,096,007 | ) | ||||||||
|
Income from investments in joint ventures
|
267,182 | 101,976 | 165,206 | |||||||||
|
Net gain on sales of equipment and unguaranteed residual values
|
12,231 | 540,795 | (528,564 | ) | ||||||||
|
Interest and other income
|
246,720 | 32,146 | 214,574 | |||||||||
|
Total revenue
|
$ | 17,053,113 | $ | 18,837,809 | $ | (1,784,696 | ) | |||||
Total revenue for 2010 decreased $1,784,696, or 9.5%, as compared to 2009. The decrease in finance income was primarily due to the normal lifecycle of our bareboat charters with Wilhelmsen, which experience scheduled, declining revenue over the course of the bareboat charters. The decrease in rental income was primarily due to the sale of the equipment subject to the AMD Lease in July 2009. The decrease in net gain on sales of equipment and unguaranteed residual values was primarily due to gains recorded on the sales of equipment on lease to Spansion and Hudson Crossing during 2009 of approximately $432,000 and $49,000, respectively, as compared to a gain on the sale of unguaranteed residual values during 2010 of approximately $12,000. The decrease in total revenue was partially offset by an increase in interest and other income attributable to the sale of our unsecured claim against Spansion to a third party for approximately $161,000 and the payment we received on our administrative expense claim of approximately $90,000 in 2010. Additionally, there was an increase in income from investments in joint ventures which was primarily due to the gain on sale of Global Crossing II in 2010, of which our share was approximately $93,000.
Expenses for 2010 and 2009 are summarized as follows:
|
Years Ended December 31,
|
||||||||||||
|
2010
|
2009
|
Change
|
||||||||||
|
General and administrative
|
$ | 636,272 | $ | 1,505,773 | $ | (869,501 | ) | |||||
|
Interest
|
4,024,902 | 5,056,856 | (1,031,954 | ) | ||||||||
|
Depreciation and amortization
|
5,321,247 | 5,411,040 | (89,793 | ) | ||||||||
|
Impairment loss
|
313,033 | 163,994 | 149,039 | |||||||||
|
Total expenses
|
$ | 10,295,454 | $ | 12,137,663 | $ | (1,842,209 | ) | |||||
Total expenses for 2010 decreased $1,842,209, or 15.2%, as compared to 2009. The decrease in interest expense was due to a reduction in the principal balance of debt outstanding related to our leases with Cathay and our bareboat charters with Teekay and Wilhelmsen. The decrease in general and administrative expense was primarily due to the residual interest sharing expense recognized in 2009 for which there was no corresponding expense recorded in 2010. The decrease in total expenses was partially offset by an impairment loss of approximately $313,000 related to the impairment of our investment in unguaranteed residual values in 2010 compared to an impairment loss of approximately $164,000 related to the impairment of the FASL Leases in 2009.
Net Income Attributable to Fund Nine
As a result of the foregoing changes from 2009 to 2010, net income attributable to us for 2010 and 2009 was $6,757,659 and $6,700,146, respectively. Net income attributable to us per weighted average additional Share for 2010 and 2009 was $68.30 and $67.72, respectively.
Results of Operations for the Years Ended December 31, 2009 (“2009”) and 2008 (“2008”)
Revenue for 2009 and 2008 is summarized as follows:
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
Change
|
||||||||||
|
Rental income
|
$ | 13,397,814 | $ | 16,053,175 | $ | (2,655,361 | ) | |||||
|
Finance income
|
4,765,078 | 5,767,714 | (1,002,636 | ) | ||||||||
|
Income (loss) from investments in joint ventures
|
101,976 | (1,996,825 | ) | 2,098,801 | ||||||||
|
Net gain on sales of equipment and unguaranteed residual values
|
540,795 | 519,729 | 21,066 | |||||||||
|
Interest and other income (loss)
|
32,146 | (184,921 | ) | 217,067 | ||||||||
|
Total revenue
|
$ | 18,837,809 | $ | 20,158,872 | $ | (1,321,063 | ) | |||||
Total revenue for 2009 decreased $1,321,063, or 6.6%, as compared to 2008. The decrease in rental income in 2009 was primarily due to the sale of digital mini-labs in September and October of 2008 previously on lease to Rite Aid, the sale of medical equipment in January 2009 previously on lease to Hudson Crossing and the sale of the equipment subject to the AMD Lease in July 2009. We reclassified the lease with Short Hills from an operating lease to a direct finance lease in 2008. As such, no rental income was recognized during 2009 for that lease. In addition, no rental income was recognized from the Wildwood lease and the FASL Leases following the impairment of those assets in December 2008 and March 2009, respectively, after which we ceased recognizing revenue. The decrease in finance income was primarily due to the normal lifecycle of our bareboat charters with Wilhelmsen, which experience scheduled, declining revenue over the remaining course of the bareboat charters. The decrease in revenue was offset by our income from investments in joint ventures of approximately $102,000 in 2009, as compared to a loss of approximately $1,997,000 in 2008. The loss in 2008 was primarily attributable to our 50% ownership interest in ICON 126, which recorded an impairment loss of $3,900,000 in 2008. ICON 126 did not record a similar impairment charge in 2009. The increase in interest and other income is attributable to the decline in loss position on cash accounts with balances denominated in foreign currencies of approximately $185,000 as compared to 2008.
Expenses for 2009 and 2008 are summarized as follows:
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
Change
|
||||||||||
|
Management fees - Manager
|
$ | - | $ | 526,469 | $ | (526,469 | ) | |||||
|
Administrative expense reimbursements - Manager
|
- | 149,844 | (149,844 | ) | ||||||||
|
General and administrative
|
1,505,773 | 1,946,654 | (440,881 | ) | ||||||||
|
Interest
|
5,056,856 | 6,576,691 | (1,519,835 | ) | ||||||||
|
Depreciation and amortization
|
5,411,040 | 5,762,239 | (351,199 | ) | ||||||||
|
Impairment loss
|
163,994 | 4,149,157 | (3,985,163 | ) | ||||||||
|
Total expenses
|
$ | 12,137,663 | $ | 19,111,054 | $ | (6,973,391 | ) | |||||
Total expenses for 2009 decreased $6,973,391, or 36.5%, as compared to 2008. The decrease in total expenses was primarily attributable to the impairment charge of approximately $3,900,000 recognized by ICON 128 and approximately $283,000 related to the impairment of the assets on lease to Wildwood, both in 2008. We did not record similar impairment charges in 2009. The decrease in interest expense was due to a reduction in the principal balance of debt outstanding related to our leases with Cathay and our bareboat charters with Teekay and Wilhelmsen. The decrease in both management fees-Manager and administrative expense reimbursements-Manager was due to our Manager’s decision to waive all future administrative expense reimbursements and management fees effective April 1, 2008 and May 1, 2008, respectively, in light of the commencement of our liquidation period. The decrease in general and administrative expense was primarily due to the decrease in residual interest sharing expense recognized in 2009 and the bad debt expense recorded in 2008 for the Wildwood lease. The decrease in depreciation and amortization expense was due to the sale of numerous assets during 2008 and 2009 as a result of being in our liquidation period.
Net Income Attributable to Fund Nine
As a result of the foregoing changes from 2008 to 2009, net income attributable to us for 2009 and 2008 was $6,700,146 and $1,047,818, respectively. Net income attributable to us per weighted average additional Share for 2009 and 2008 was $67.72 and $10.59, respectively.
Financial Condition
This section discusses the major balance sheet variances from 2010 compared to 2009.
Total Assets
Total assets decreased $12,282,904, from $102,900,677 at December 31, 2009 to $90,617,773 at December 31, 2010. The decrease was primarily due to the depreciation of our leased equipment at cost and impairment losses recorded with respect to our investment in unguaranteed residual values.
Total Liabilities
Total liabilities decreased $16,347,977, from $65,938,583 at December 31, 2009 to $49,590,606 at December 31, 2010. The decrease was primarily due to the scheduled repayments of our non-recourse debt in the ordinary course of business and a decrease in the obligations associated with our interest rate swap contracts related to the debt associated with the Samar Spirit and the Wilhelmsen Vessels.
Current Liabilities
Current liabilities increased $20,026,213, from $18,764,393 at December 31, 2009 to $38,790,606 at December 31, 2010. The increase was primarily due to the scheduled maturity of certain non-recourse debt obligations in 2011 and balloon payments associated with those debt maturities.
Members’ Equity
Members’ equity increased $4,065,073, from $36,962,094 at December 31, 2009 to $41,027,167 at December 31, 2010. The increase was due to net income, the change in valuation of our interest rate swap contracts and distributions paid to our members.
Liquidity and Capital Resources
Sources and Uses of Cash
At December 31, 2010 and December 31, 2009, we had cash and cash equivalents of $929,220 and $1,033,840, respectively. During our operating period, which ended on April 30, 2008, our main sources of cash were proceeds from sales of equipment as well as from collections of rentals on non-leveraged operating and direct finance leases. These have continued to be our main sources of cash during our liquidation period. During our operating period our main use of cash was principally for distributions to our members, which we anticipate will continue during our liquidation period.
Operating Activities
Sources of Cash
Sources of cash from operating activities increased $361,750, from $1,968,590 in 2009 to $2,330,340 in 2010. The increase was primarily due an increase in the distributions received from our investments in joint ventures.
Investing Activities
Sources of Cash
Sources of cash from investing activities decreased $190,471, from $1,214,444 in 2009 to $1,023,973 in 2010. The decrease was primarily due to a reduction in proceeds from sales of equipment, offset by proceeds of approximately $475,000 received from the sale of one of our joint ventures, Global Crossing II. In 2010, we consummated two sales transactions, which resulted in total proceeds of approximately $294,000, as compared to four transactions during 2009, which resulted in total proceeds of approximately $822,000.
Financing Activities
Uses of Cash
Uses of cash in financing activities increased $530,195, from $2,928,738 in 2009 to $3,458,933 in 2010. The increase was due to a greater amount of cash distributions paid to our members during 2010 compared to 2009. Cash distributions of $3,458,933 were paid to our members during 2010 as compared to $2,928,738 paid to our members during 2009.
Financings and Borrowings
Non-Recourse Long-Term Debt
We had non-recourse long-term debt obligations at December 31, 2010 of $47,174,188. 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 other entities managed by our Manager, Fund Eight B, Fund Ten, Fund Eleven, Fund Twelve and Fund Fourteen (collectively, the “Borrowers”), are parties to a Commercial Loan Agreement, as amended (the “Loan Agreement”), with CB&T. The Loan Agreement provides for a revolving line of credit of up to $30,000,000 pursuant to a senior secured revolving loan facility (the “Facility”), which is secured by all assets of the Borrowers not subject to a first priority lien, as defined in the Loan Agreement. Each of the Borrowers is jointly and severally liable for all amounts borrowed under the Facility. At December 31, 2010, no amounts were accrued related to our joint and several obligations under the Facility. Amounts available under the Facility are subject to a borrowing base that is determined, subject to certain limitations, on the present value of the future receivables under certain lease agreements and loans in which the Borrowers have a beneficial interest.
The Facility expires on June 30, 2011 and the Borrowers may request a one year extension to the revolving line of credit within 390 days of the then-current expiration date, but CB&T has no obligation to extend. The interest rate for general advances under the Facility is CB&T’s prime rate and the interest rate on up to five separate non-prime rate advances that are permitted to be made under the Facility is the rate at which U.S. dollar deposits can be acquired by CB&T in the London Interbank Eurocurrency Market plus 2.5% per year, provided that neither interest rate is permitted to be less than 4.0% per year. The interest rate at December 31, 2010 was 4.0%. In addition, the Borrowers are obligated to pay a quarterly commitment fee of 0.50% on unused commitments under the Facility.
Aggregate borrowings by all Borrowers under the Facility amounted to $1,450,000 at December 31, 2010, all of which was borrowed by Fund Eleven. Subsequent to December 31, 2010, Fund Eleven repaid $1,450,000, which reduced its outstanding loan balance to $0.
Pursuant to the Loan Agreement, the Borrowers are required to comply with certain covenants. At December 31, 2010, the Borrowers were in compliance with all covenants. For additional information, see Note 8 to our consolidated financial statements.
At December 31, 2010, we had $6,512,207 of current assets and $38,790,606 of current liabilities, which results in a $32,278,399 working capital deficit. Of the $38,790,606 of current liabilities, $7,891,000 consisted of direct payments to a lender to be made by our lessee and $24,762,500 of payments due on our non-recourse debt. These direct payments are for a debt that had no corresponding current assets due to the classification of these transactions as operating leases. Therefore, when considering our overall working capital, direct payments should be excluded. The exclusion of these payments yields a working capital deficit of $24,387,399 at December 31, 2010. The primary reason for this deficit is a balloon payment of approximately $22,750,000 due in 2011 related to the non-recourse financing of Aircraft 128. Our options related to this payment include, but are not limited to, entering into a new lease arrangement, which would include a refinancing of the debt. Currently, we are actively remarketing the aircraft. Our Manager believes that with the cash we currently have available, the cash being generated from our remaining leases, and the proceeds from equipment and asset sales, we have sufficient cash to continue our operations into the foreseeable future. However, our ability to generate cash in the future is subject to general economic, financial, competitive, regulatory and other factors that affect us and our lessees’ businesses that are beyond our control. See “Item 1A. Risk Factors.”
Distributions
We, at our Manager’s discretion, paid monthly distributions to each of our additional members beginning the first month after each such member was admitted through the end of our operating period, which was on April 30, 2008. During the liquidation period, we plan to make distributions in accordance with the terms of our LLC Agreement. We expect that distributions made during the liquidation period will vary, depending on the timing of the sale of our assets, and our receipt of rental and other income from our investments. We paid distributions to additional members for the years ended December 31, 2010, 2009 and 2008 in the amounts of $3,424,344, $2,899,453 and $7,678,004, respectively. We paid distributions to our Manager for the years ended December 31, 2010, 2009 and 2008 of $34,589, $29,285 and $77,556, respectively.
Commitments and Contingencies and Off-Balance Sheet Transactions
Commitments and Contingencies
At December 31, 2010, we had non-recourse debt obligations in which the lender has a security interest in our equipment and an assignment of the rental payments under the lease. In such cases, the lender is being paid directly by the lessee. If the lessee defaults on the lease, the equipment would be returned to the lender in extinguishment of the non-recourse debt. At December 31, 2010, our outstanding non-recourse debt obligations were $47,174,188.
We are a party to the Facility, as discussed in “Financings and Borrowings” above. We had no borrowings under the Facility at December 31, 2010.
We have a right to a portion of the profits, losses, and cash flows from a limited partnership interest (its “Interest”) in North Sea (Connecticut) Limited Partnership (“North Sea”), an entity that owns a 100% interest in a mobile offshore drilling rig that was subject to lease with Rowan Companies, Inc.(“the Charterer”). In 2005, the Charterer notified the owner trustee of the rig that an “Event of Loss” occurred with respect to the rig as a result of Hurricane Rita. The charter provides that the Charterer will pay to the lender (and upon satisfaction of all of the debt outstanding, to the owner trustee on behalf of North Sea) an amount equal to the “Stipulated Loss Value” of the rig as determined according to the terms of the charter. The calculation of “Stipulated Loss Value”, among other things, is the subject of a dispute between the Charterer and North Sea.
Principal and interest maturities of our debt and related interest consisted of the following at December 31, 2010:
|
Payments Due by Period
|
||||||||||||
|
Less Than 1
|
1 - 3 | |||||||||||
|
Total
|
Year
|
Years
|
||||||||||
|
Non-recourse debt
|
$ | 47,174,188 | $ | 36,374,188 | $ | 10,800,000 | ||||||
|
Non-recourse interest
|
3,474,122 | 2,677,265 | 796,857 | |||||||||
| $ | 50,648,310 | $ | 39,051,453 | $ | 11,596,857 | |||||||
We entered into residual sharing agreements with various third parties. In connection with these agreements, residual proceeds received in excess of specific amounts will be shared with these third parties based on specific formulas.
Off-Balance Sheet Transactions
None.
Inflation and Interest Rates
The potential effects of inflation on us are difficult to predict. If the general economy experiences significant rates of inflation, however, it could affect us in a number of ways. We do not currently have rent escalation clauses tied to inflation in our leases. The anticipated residual values to be realized upon the sale or re-lease of equipment upon lease terminations (and thus the overall cash flow from our leases) may increase with inflation as the cost of similar new and used equipment increases. We are currently in our liquidation period and therefore, we do not currently intend to obtain additional external financing or refinance our existing indebtedness.
If interest rates increase significantly, leases already in place would generally not be affected.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We, like most other companies, are exposed to certain market risks, which include changes in interest rates and the demand for equipment owned by us. We believe that our exposure to other market risks, including foreign currency exchange rate risk, commodity risk and equity price risk, are insignificant, at this time, to both our financial position and our results of operations.
We currently have five outstanding notes payable, which are our non-recourse debt obligations. Due to the fixed nature of the non-recourse debt, the conditions in the credit markets as of December 31, 2010 have not had any impact on us. With respect to our revolving line of credit, which is subject to a variable interest rate, we have no outstanding amounts as of December 31, 2010. Accordingly, the condition of the credit markets will not have any material impact on us. Furthermore, we are currently in our liquidation period and, therefore, as we have no current intentions of obtaining additional external financing or refinancing our existing indebtedness, we do not expect any adverse impact on our cash flows should credit conditions in general remain the same or deteriorate further.
In general, we managed our exposure to interest rate risk by obtaining fixed rate debt. The fixed rate debt was structured so as to match the cash flows required to service the debt to the payment streams under fixed rate lease receivables. The payments under each lease are assigned to the lender in satisfaction of the debt.
To hedge our variable interest rate risk, we entered into interest rate swap contracts that effectively convert the underlying floating interest rates to a fixed interest rate. In general, these swap agreements reduced our interest rate risk associated with variable interest rate borrowings. However, we are exposed to and manage credit risk associated with our counterparties to our swap agreements by dealing only with institutions our Manager considered financially sound.
At December 31, 2010, we had four floating-to-fixed interest rate swaps relating to the three Wilhelmsen Vessels on bareboat charter to Wilhelmsen and the Samar Spirit on bareboat charter to Teekay that were designated as cash flow hedges with an aggregate notional amount of $21,028,871. These interest rate swaps have maturity dates ranging from July 25, 2011 to September 23, 2013.
Effective May 18, 2006, we refinanced the non-recourse debt obligations related to the Wilhelmsen Vessels that are subject to bareboat charters with Wilhelmsen. The non-recourse debt accrues interest at the London Interbank Offered Rate (“LIBOR”) plus 1.50% per year. Simultaneously with the refinancing, we entered into three identical interest rate swap contracts, each having a notional amount of $17,000,000, with Fortis Bank SA/NV, New York Branch (n/k/a BNP Paribas, as successor in interest to Fortis Bank SA/NV, New York Branch). We entered into these agreements in order to effectively fix the variable interest rate on the non-recourse debt at 7.02% per year. On May 22, 2006, we terminated the original three interest rate swap contracts that applied to the original financing of the Wilhelmsen Vessels.
On July 24, 2007, we, through ICON Samar, borrowed approximately $23,382,000 in connection with a bareboat charter with Teekay. The long-term debt matures on July 25, 2011 and accrues interest at LIBOR plus 1.00% per year. Simultaneously with the borrowing, we entered into an interest rate swap contract with Fortis Bank NV/SA, New York Branch in order to fix the debt interest rate at 6.35% per year.
We manage our exposure to equipment and residual risk by monitoring the markets our leased equipment is in and maximizing remarketing proceeds through the re-lease or sale of equipment.
Item 8. Consolidated Financial Statements and Supplementary Data
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40
|
|
61
|
The Members
ICON Income Fund Nine, LLC
We have audited the accompanying consolidated balance sheets of ICON Income Fund Nine, LLC (the “Company”) as of December 31, 2010 and 2009, 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, 2010. Our audits also included the financial statement schedule listed in the index at Item 15(a)(2). 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 Income Fund Nine, LLC at December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young, LLP
March 25, 2011
New York, New York
|
ICON Income Fund Nine, LLC
|
||||||||
|
(A Delaware Limited Liability Company)
|
||||||||
|
Assets
|
||||||||
|
|
||||||||
|
December 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 929,220 | $ | 1,033,840 | ||||
|
Current portion of net investment in finance leases
|
5,582,987 | 5,367,587 | ||||||
|
Assets held for sale
|
- | 140,000 | ||||||
|
Total current assets
|
6,512,207 | 6,541,427 | ||||||
|
Non-current assets:
|
||||||||
|
Net investment in finance leases, less current portion
|
12,379,833 | 17,987,288 | ||||||
|
Leased equipment at cost (less accumulated depreciation of
|
||||||||
|
$21,751,790 and $16,513,937, respectively)
|
68,871,626 | 74,148,333 | ||||||
|
Investments in joint ventures
|
1,259,152 | 1,926,926 | ||||||
|
Investment in unguaranteed residual values
|
257,813 | 752,113 | ||||||
|
Other non-current assets, net
|
1,337,142 | 1,544,590 | ||||||
|
Total non-current assets
|
84,105,566 | 96,359,250 | ||||||
|
Total Assets
|
$ | 90,617,773 | $ | 102,900,677 | ||||
|
Liabilities and Members' Equity
|
||||||||
|
Current liabilities:
|
||||||||
|
Current portion of non-recourse long-term debt
|
$ | 36,374,188 | $ | 15,262,908 | ||||
|
Interest rate swap contracts
|
1,279,541 | 2,054,841 | ||||||
|
Deferred revenue
|
904,608 | 1,124,734 | ||||||
|
Accrued expenses and other current liabilities
|
232,269 | 321,910 | ||||||
|
Total current liabilities
|
38,790,606 | 18,764,393 | ||||||
|
Non-current liabilities:
|
||||||||
|
Non-recourse long-term debt, less current portion
|
10,800,000 | 47,174,190 | ||||||
|
Total Liabilities
|
49,590,606 | 65,938,583 | ||||||
|
Commitments and contingencies (Note 13)
|
||||||||
|
Members' Equity:
|
||||||||
|
Additional Members
|
42,720,633 | 39,454,895 | ||||||
|
Manager
|
(438,082 | ) | (471,070 | ) | ||||
|
Accumulated other comprehensive loss
|
(1,255,384 | ) | (2,021,731 | ) | ||||
|
Total Members' Equity
|
41,027,167 | 36,962,094 | ||||||
|
Total Liabilities and Members' Equity
|
$ | 90,617,773 | $ | 102,900,677 | ||||
See accompanying notes to consolidated financial statements.
|
ICON Income Fund Nine, LLC
|
||||||||||||
|
(A Delaware Limited Liability Company)
|
||||||||||||
|
|
||||||||||||
|
Years Ended December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Revenue:
|
||||||||||||
|
Rental income
|
$ | 12,857,909 | $ | 13,397,814 | $ | 16,053,175 | ||||||
|
Finance income
|
3,669,071 | 4,765,078 | 5,767,714 | |||||||||
|
Income (loss) from investments in joint ventures
|
267,182 | 101,976 | (1,996,825 | ) | ||||||||
|
Net gain on sales of equipment and unguaranteed residual values
|
12,231 | 540,795 | 519,729 | |||||||||
|
Interest and other income (loss)
|
246,720 | 32,146 | (184,921 | ) | ||||||||
|
Total revenue
|
17,053,113 | 18,837,809 | 20,158,872 | |||||||||
|
Expenses:
|
||||||||||||
|
Management fees - Manager
|
- | - | 526,469 | |||||||||
|
Administrative expense reimbursements - Manager
|
- | - | 149,844 | |||||||||
|
General and administrative
|
636,272 | 1,505,773 | 1,946,654 | |||||||||
|
Interest
|
4,024,902 | 5,056,856 | 6,576,691 | |||||||||
|
Depreciation and amortization
|
5,321,247 | 5,411,040 | 5,762,239 | |||||||||
|
Impairment loss
|
313,033 | 163,994 | 4,149,157 | |||||||||
|
Total expenses
|
10,295,454 | 12,137,663 | 19,111,054 | |||||||||
|
Net income
|
$ | 6,757,659 | $ | 6,700,146 | $ | 1,047,818 | ||||||
|
Net income allocable to:
|
||||||||||||
|
Additional Members
|
$ | 6,690,082 | $ | 6,633,145 | $ | 1,037,340 | ||||||
|
Manager
|
67,577 | 67,001 | 10,478 | |||||||||
| $ | 6,757,659 | $ | 6,700,146 | $ | 1,047,818 | |||||||
|
Weighted average number of additional shares
|
||||||||||||
|
of limited liability company interests outstanding
|
97,955 | 97,955 | 97,955 | |||||||||
|
Net income per weighted average additional share
|
||||||||||||
|
of limited liability company interests
|
$ | 68.30 | $ | 67.72 | $ | 10.59 | ||||||
See accompanying notes to consolidated financial statements.
|
ICON Income Fund Nine, LLC
|
||||||||||||||||||||
|
(A Delaware Limited Liability Company)
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Members' Equity
|
||||||||||||||||||||
|
Additional Member
|
Additional
|
Accumulated Other
Comprehensive |
Total
Members' |
|||||||||||||||||
|
Shares
|
Members
|
Manager
|
Loss
|
Equity
|
||||||||||||||||
|
Balance, December 31, 2007
|
97,955 | $ | 42,361,867 | $ | (441,708 | ) | $ | (2,010,694 | ) | $ | 39,909,465 | |||||||||
|
Net income
|
- | 1,037,340 | 10,478 | - | 1,047,818 | |||||||||||||||
|
Change in valuation of interest rate swap contracts
|
- | - | - | (1,418,471 | ) | (1,418,471 | ) | |||||||||||||
|
Comprehensive loss
|
(370,653 | ) | ||||||||||||||||||
|
Cash distributions
|
- | (7,678,004 | ) | (77,556 | ) | - | (7,755,560 | ) | ||||||||||||
|
Balance, December 31, 2008
|
97,955 | 35,721,203 | (508,786 | ) | (3,429,165 | ) | 31,783,252 | |||||||||||||
|
Net income
|
- | 6,633,145 | 67,001 | - | 6,700,146 | |||||||||||||||
|
Change in valuation of interest rate swap contracts
|
- | - | - | 1,407,434 | 1,407,434 | |||||||||||||||
|
Comprehensive income
|
8,107,580 | |||||||||||||||||||
|
Cash distributions
|
- | (2,899,453 | ) | (29,285 | ) | - | (2,928,738 | ) | ||||||||||||
|
Balance, December 31, 2009
|
97,955 | 39,454,895 | (471,070 | ) | (2,021,731 | ) | 36,962,094 | |||||||||||||
|
Net income
|
- | 6,690,082 | 67,577 | - | 6,757,659 | |||||||||||||||
|
Change in valuation of interest rate swap contracts
|
- | - | - | 766,347 | 766,347 | |||||||||||||||
|
Comprehensive income
|
7,524,006 | |||||||||||||||||||
|
Cash distributions
|
- | (3,424,344 | ) | (34,589 | ) | - | (3,458,933 | ) | ||||||||||||
|
Balance, December 31, 2010
|
97,955 | $ | 42,720,633 | $ | (438,082 | ) | $ | (1,255,384 | ) | $ | 41,027,167 | |||||||||
See accompanying notes to consolidated financial statements.
|
ICON Income Fund Nine, LLC
|
||||||||||||
|
(A Delaware Limited Liability Company)
|
||||||||||||
|
Years Ended December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net income
|
$ | 6,757,659 | $ | 6,700,146 | $ | 1,047,818 | ||||||
|
Adjustments to reconcile net income to net cash
|
||||||||||||
|
provided by operating activities:
|
||||||||||||
|
Rental income paid directly to lenders by lessees
|
(12,353,607 | ) | (12,745,000 | ) | (12,762,000 | ) | ||||||
|
Finance income
|
(3,669,071 | ) | (4,765,078 | ) | (5,767,714 | ) | ||||||
|
(Income) loss from investments in joint ventures
|
(267,182 | ) | (101,976 | ) | 1,996,825 | |||||||
|
Net gain on sale of equipment and unguaranteed residual values
|
(12,231 | ) | (540,795 | ) | (519,729 | ) | ||||||
|
Depreciation and amortization
|
5,321,247 | 5,411,040 | 5,762,239 | |||||||||
|
Uncollectible receivables
|
- | - | 200,547 | |||||||||
|
Interest expense on non-recourse financing paid directly
|
||||||||||||
|
to lenders by lessees
|
3,869,134 | 4,849,914 | 6,118,572 | |||||||||
|
Interest expense from amortization of debt financing costs
|
155,435 | 198,980 | 450,205 | |||||||||
|
Impairment loss
|
313,033 | 163,994 | 4,149,157 | |||||||||
|
Changes in operating assets and liabilities:
|
||||||||||||
|
Collection of finance leases
|
2,268,270 | 2,380,536 | 867,898 | |||||||||
|
Other assets, net
|
(4,856 | ) | 40,742 | (111,882 | ) | |||||||
|
Deferred revenue
|
(220,126 | ) | 136,100 | (9,762 | ) | |||||||
|
Due to (from) Manager and affiliates
|
- | - | (87,476 | ) | ||||||||
|
Accrued expenses and other current liabilities
|
(36,380 | ) | 71,578 | 82,093 | ||||||||
|
Distributions from joint ventures
|
209,015 | 168,409 | 170,725 | |||||||||
|
Net cash provided by operating activities
|
2,330,340 | 1,968,590 | 1,587,516 | |||||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Proceeds from sales of equipment
|
293,607 | 821,710 | 941,011 | |||||||||
|
Distributions received from joint ventures
|
730,366 | 392,734 | 435,096 | |||||||||
|
Net cash provided by investing activities
|
1,023,973 | 1,214,444 | 1,376,107 | |||||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Cash distributions to members
|
(3,458,933 | ) | (2,928,738 | ) | (7,755,560 | ) | ||||||
|
Net cash used in financing activities
|
(3,458,933 | ) | (2,928,738 | ) | (7,755,560 | ) | ||||||
|
Net (decrease) increase in cash and cash equivalents
|
(104,620 | ) | 254,296 | (4,791,937 | ) | |||||||
|
Cash and cash equivalents, beginning of the year
|
1,033,840 | 779,544 | 5,571,481 | |||||||||
|
Cash and cash equivalents, end of the year
|
$ | 929,220 | $ | 1,033,840 | $ | 779,544 | ||||||
See accompanying notes to consolidated financial statements.
|
ICON Income Fund Nine, LLC
|
||||||||||||
|
(A Delaware Limited Liability Company)
|
||||||||||||
|
Consolidated Statements of Cash Flows
|
||||||||||||
|
|
Years Ended December 31,
|
|||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Supplemental disclosure of non-cash investing and financing activities:
|
||||||||||||
|
Principal and interest on non-recourse long-term debt paid
|
|
|||||||||||
|
directly to lenders by lessees
|
$ | 19,137,855 | $ | 19,922,463 | $ | 24,762,786 | ||||||
|
Reclassification of net assets from investments in leased equipment
|
||||||||||||
|
to investment in finance leases
|
$ | - | $ | - | $ | 240,000 | ||||||
See accompanying notes to consolidated financial statements.
ICON Income Fund Nine, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(1)
|
ICON Income Fund Nine, LLC (the “LLC”) was formed on July 11, 2001 as a Delaware limited liability company. The LLC is engaged in one business segment, the business of purchasing equipment and leasing it to third-party end users, providing equipment and other financing, acquiring equipment subject to lease and, to a lesser degree, acquiring ownership rights to items of leased equipment at lease expiration. The LLC will continue until December 31, 2020, unless terminated sooner.
The LLC’s operating period ended on April 30, 2008 and the LLC commenced its liquidation period on May 1, 2008. During the liquidation period, the LLC is distributing substantially all of its distributable cash from operations and equipment sales to the members and will continue the orderly termination of its operations and affairs. The LLC will not invest in any additional finance or lease transactions during the liquidation period.
The manager of the LLC is ICON Capital Corp., a Delaware corporation (the “Manager”). The Manager manages and controls the business affairs of the LLC, including, but not limited to, the equipment leases and other financing transactions that the LLC entered into pursuant to the terms of the LLC’s amended and restated operating agreement (the “LLC Agreement”). Additionally, the Manager has a 1% interest in the profits, losses, cash distributions and liquidation proceeds of the LLC.
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.
ICON Income Fund Nine, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(2)
|
Summary of Significant Accounting Policies - continued
|
The LLC accounts for its noncontrolling interests in joint ventures where the LLC has influence over financial and operational matters, generally 50% or less ownership interest, under the equity method of accounting. In such cases, the LLC's original investments are recorded at cost and adjusted for its share of earnings, losses and distributions. The LLC accounts for investments in joint ventures where the LLC has virtually no influence over financial and operational matters using the cost method of accounting. In such cases, the LLC's original investments are recorded at cost and any distributions received are recorded as revenue. All of the LLC's investments in joint ventures are subject to its impairment review policy.
Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and highly liquid investments with original maturity dates of three months or less.
The LLC's cash and cash equivalents are held principally at two financial institutions and at times may exceed insured limits. The LLC has placed these funds in high quality institutions in order to minimize risk relating to exceeding insured limits.
Risks and Uncertainties
In the normal course of business, the LLC is exposed to two significant types of economic risk: credit and market. Credit risk is the risk of a lessee, borrower or other counterparty’s inability or unwillingness to make contractually required payments. See Note 12 for a discussion of concentrations of risk.
Market risk reflects the change in the value of debt instruments, derivatives and credit facilities due to changes in interest rate spreads or other market factors. The LLC believes that the carrying value of its investments and derivative obligations is reasonable, taking into consideration these risks, along with estimated collateral values, payment history and other relevant information.
Allowance for Doubtful Accounts
When evaluating the adequacy of the allowance for doubtful accounts, the LLC estimates the uncollectibility of receivables by analyzing lessee, borrower and other counterparty concentrations, creditworthiness and current economic trends. The LLC records an allowance for doubtful accounts when the analysis indicates that the probability of full collection is unlikely. At December 31, 2010 and 2009, the LLC had no allowance recorded.
Debt Financing Costs
Expenses associated with the incurrence of debt are capitalized and amortized over the term of the debt instrument using the effective interest rate method. These costs are included in other current and other non-current assets.
Leased Equipment at Cost
Investments in leased equipment are stated at cost less accumulated depreciation. Leased equipment is depreciated on a straight-line basis over the lease term, which typically ranges from 4 to 5 years, to the asset’s residual value.
ICON Income Fund Nine, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(2)
|
Summary of Significant Accounting Policies - continued
|
The Manager has an investment committee that approved each new equipment lease and other financing transaction. As part of its process, the investment committee determined the residual value, if any, to be used once the investment was approved. The factors considered in determining the residual value included, but were not limited to, the creditworthiness of the potential lessee, the type of equipment considered, how the equipment was integrated into the potential lessee’s business, the length of the lease and the industry in which the potential lessee operated. Residual values are reviewed for impairment in accordance with the LLC’s impairment review policy.
The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the market place are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. The residual value is calculated using information from various external sources, such as trade publications, auction data, equipment dealers, wholesalers and industry experts, as well as inspection of the physical asset and other economic indicators.
Asset Impairments
The significant assets in the LLC’s portfolio are periodically reviewed, no less frequently than annually, to determine whether events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss will be recognized only if the carrying value of a long-lived asset is not recoverable and exceeds its fair market value. If there is an indication of impairment, the LLC will estimate the future cash flows (undiscounted and without interest charges) expected from the use of the asset and its eventual disposition. Future cash flows are the future cash inflows expected to be generated by an asset less the future outflows expected to be necessary to obtain those inflows. If an impairment is determined to exist, the impairment loss will be measured as the amount by which the carrying value of a long-lived asset exceeds its fair value and recorded in the consolidated statement of operations in the period the determination is made.
The events or changes in circumstances that generally indicate that an asset may be impaired are (i) the estimated fair value of the underlying equipment is less than its carrying value or (ii) the lessee is experiencing financial difficulties and it does not appear likely that the estimated proceeds from the disposition of the asset will be sufficient to satisfy the residual position in the asset and, if applicable, the remaining obligation to the non-recourse lender. Generally in the latter situation, the residual position relates to equipment subject to third-party non-recourse debt where the lessee remits its rental payments directly to the lender and the LLC does not recover its residual position until the non-recourse debt is repaid in full. The preparation of the undiscounted cash flows requires the use of assumptions and estimates, including the level of future rents, the residual value expected to be realized upon disposition of the asset, estimated downtime between re-leasing events and the amount of re-leasing costs. The Manager’s review for impairment includes a consideration of the existence of impairment indicators including third-party appraisals, published values for similar assets, recent transactions for similar assets, adverse changes in market conditions for specific asset types and the occurrence of significant adverse changes in general industry and market conditions that could affect the fair value of the asset.
Equipment Held for Sale
Equipment held for sale is recorded at the lower of cost or estimated fair value, less anticipated costs to sell, and consists of equipment previously leased to end users which has been returned to the LLC following lease expiration.
Equipment held for sale is not depreciated and related deferred costs are not amortized. Subsequent changes to the asset’s fair value, either increases or decreases, are recorded as adjustments to the carrying value of the equipment; however, any such adjustment would not exceed the original carrying value of the equipment held for sale.
Unguaranteed Residual Values
The LLC carries its investments in estimated unguaranteed residual values at cost. The net book value is equal to or less than fair value at each reporting period and is subject to the LLC's impairment review policy.
42
ICON Income Fund Nine, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(2)
|
Summary of Significant Accounting Policies – continued
|
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 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.
For finance leases, the LLC recorded, at lease inception, the total minimum lease payments receivable from the lessee, the estimated unguaranteed residual value of the equipment upon lease termination, the initial direct costs related to the lease and the related unearned income. Unearned income represents the difference between the sum of the minimum lease payments receivable, plus the estimated unguaranteed residual value, minus the cost of the leased equipment. Unearned income is recognized as finance income over the term of the lease using the effective interest rate method.
For operating leases, rental income is recognized on a straight-line basis over the lease term. Billed operating lease receivables are included in accounts receivable until collected. Accounts receivable are stated at their estimated net realizable value. Deferred revenue is the difference between the timing of the receivables billed and the income recognized on a straight-line basis.
Initial Direct Costs
The LLC capitalizes initial direct costs associated with the origination and funding of leased assets and other financing transactions. These costs are amortized on a lease by lease basis based on actual lease term using a straight-line method for operating leases and the effective interest rate method for finance leases and notes receivable. Costs related to leases or other financing transactions that are not consummated are expensed as an acquisition expense.
Acquisition Fees
Pursuant to the LLC Agreement, the LLC paid acquisition fees to the Manager equal to 3% of the purchase price of the LLC’s investments. These fees were capitalized and included in the cost of the investment.
Income Taxes
The LLC is taxed as a partnership for federal and State income tax purposes. No provision for income taxes has been recorded since the liability for such taxes is that of each of the individual members rather than the LLC. The LLC's income tax returns are subject to examination by the federal and State taxing authorities, and changes, if any, could adjust the individual income tax of the members.
Per Share Data
Net income attributable to the LLC per weighted average additional Share is based upon the weighted average number of additional Shares outstanding during the year.
ICON Income Fund Nine, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(2)
|
Summary of Significant Accounting Policies – continued
|
Share Redemption
The LLC may, at its discretion, redeem Shares from a limited number of its additional members, as provided for in its LLC Agreement. The redemption price for any Shares approved for redemption is based upon a formula, as provided in the LLC Agreement. Additional members are required to hold their Shares for at least one year before redemptions will be permitted.
Derivative Financial Instruments
The LLC may enter into derivative transactions for purposes of hedging specific financial exposures, including changes in interest rates of its non-recourse long-term debt. The LLC enters into these instruments only for hedging underlying exposures. The LLC does not hold or issue derivative financial instruments for purposes other than hedging, except for warrants, which are not hedges. Certain derivatives may not meet the established criteria to be designated as qualifying accounting hedges, even though the LLC believes that these are effective economic hedges.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires the Manager to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates primarily include the determination of allowance for doubtful accounts, depreciation and amortization, impairment losses, estimated useful lives and residual values. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the accompanying consolidated financial statements in prior years to conform to the current presentation.
Recently Adopted Accounting Pronouncements
In 2010, the LLC adopted the accounting pronouncement relating to variable interest entities, which requires assessments at each reporting period of which party within the variable interest entity is considered the primary beneficiary and requires a number of new disclosures related to variable interest entities. The adoption of this guidance did not have a material effect on the LLC’s consolidated financial statements as of December 31, 2010.
In 2010, the LLC adopted the accounting pronouncement that amends the requirements for disclosures about the fair value of financial instruments, including the fair value of financial instruments for annual, as well as interim, reporting periods. This standard requires additional disclosures related to recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements, and information on purchases, sales, issuances, and settlements in a rollforward reconciliation of Level 3 fair-value measurements. Except for the Level 3 reconciliation disclosures, which will be effective for fiscal years beginning after December 15, 2010, the guidance became effective for the LLC beginning January 1, 2010. The adoption of this accounting pronouncement did not have a material effect on the LLC’s consolidated financial statements as of December 31, 2010.
ICON Income Fund Nine, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(3)
|
Net Investment in Finance Leases
|
Net investment in finance leases consisted of the following at December 31, 2010 and 2009:
|
December 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
|
||||||||
|
Minimum rents receivable
|
$ | 22,885,499 | $ | 31,946,625 | ||||
|
Unearned income
|
(4,922,679 | ) | (8,591,750 | ) | ||||
|
Net investment in finance leases
|
17,962,820 | 23,354,875 | ||||||
|
Less: Current portion of net investment in finance leases
|
5,582,987 | 5,367,587 | ||||||
|
|
||||||||
|
Net investment in finance leases, less current portion
|
$ | 12,379,833 | $ | 17,987,288 | ||||
During August and September of 2003, the LLC acquired various manufacturing equipment on lease to Wildwood Industries, Inc. (“Wildwood”) for approximately $986,000 and $1,200,000, respectively. At lease expiration, each lease was typically extended for an additional twelve month period, most recently on September 1, 2008 and October 1, 2008, respectively.
At December 31, 2008, the Manager determined that both assets were impaired based upon the estimate that lease proceeds would be insufficient to cover the residual value and recorded an aggregate impairment loss of approximately $205,000 and bad debt expense for uncollectable receivables of approximately $136,000.
On January 21, 2009, the LLC filed a lawsuit in the U.S. District Court for the Southern District of New York against Wildwood and its owners who guaranteed Wildwood’s obligations to the LLC. The LLC’s claims are for breaches of the leases and guarantees for Wildwood’s failure to pay rents. On March 5, 2009, an involuntary petition under Chapter 11 of the United States Bankruptcy Code was filed against Wildwood by three of Wildwood’s creditors in United States Bankruptcy Court. On September 18, 2009, the involuntary petition under Chapter 11 of the United States Bankruptcy Code was converted to a Chapter 7 case by the United States Bankruptcy Trustee. The LLC does not expect to receive any further proceeds from Wildwood.
Non-cancelable minimum annual amounts due on investments in finance leases consisted of the following at December 31, 2010:
|
Years Ending
|
||||
|
December 31,
|
||||
|
2011
|
$ | 8,322,000 | ||
|
2012
|
8,322,000 | |||
|
2013
|
6,241,499 | |||
| $ | 22,885,499 | |||
ICON Income Fund Nine, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(4)
|
Leased Equipment at Cost
|
Leased equipment at cost consisted of the following at December 31, 2010 and 2009:
|
December 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Aircraft
|
$ | 48,453,180 | $ | 48,453,180 | ||||
|
Marine vessel
|
40,285,787 | 40,285,787 | ||||||
|
Manufacturing, telecommunications and computer equipment
|
1,884,449 | 1,923,303 | ||||||
| 90,623,416 | 90,662,270 | |||||||
|
Less: Accumulated depreciation
|
21,751,790 | 16,513,937 | ||||||
| $ | 68,871,626 | $ | 74,148,333 | |||||
Depreciation expense was $5,237,853, $5,385,000 and $5,701,646 for the years ended December 31, 2010, 2009 and 2008, respectively.
Aircraft
During July 2002, the LLC formed a wholly-owned subsidiary, ICON Aircraft 128 LLC (“ICON 128”), for the purpose of acquiring an Airbus A340-313X aircraft (“Aircraft 128”) on lease to Cathay Pacific Airways Limited (“Cathay”) for approximately $69,000,000, including the assumption of approximately $64,800,000 of non-recourse debt. The lease with Cathay was initially scheduled to expire in June 2006, but has been extended until December 1, 2011. Simultaneously with the lease extension of the aircraft, the LLC refinanced the non-recourse debt associated with the aircraft (see Note 7).
In light of unprecedented high fuel prices during 2008 and the related impact on the airline industry, the Manager reviewed the LLC’s investment in Aircraft 128 as of June 30, 2008 and determined that Aircraft 128 was impaired.
The following factors in 2008, among others, indicated that the full carrying value of Aircraft 128 might not be recoverable: (i) indications that lenders were willing to finance less of the acquisition cost of four-engine aircraft, which increased with each dollar rise of the price of fuel, thereby undermining the carrying value expectations of such aircraft; (ii) the rising cost of fuel was increasing the operating costs of four-engine aircraft and similar capacity twin-engine aircraft, thereby making such aircraft less attractive investments at the time and thereby depressing the market for Aircraft 128; and (iii) the likelihood of aircraft operators switching to more efficient aircraft, thereby depressing the market for Aircraft 128.
Based on the Manager’s review, the carrying value of Aircraft 128 exceeded its expected undiscounted future cash flows and, as a result, ICON 128 recorded an impairment charge representing the difference between the aircraft carrying value and the expected discounted future cash flows of Aircraft 128. The expected discounted future cash flows of Aircraft 128 were generally determined using a market approach, a recent appraisal for Aircraft 128 and recent sales of similar aircraft, as well as other factors, including those discussed above. As a result, ICON 128 recorded an impairment loss on Aircraft 128 of approximately $3,900,000 as of June 30, 2008.
ICON Income Fund Nine, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(4)
|
Leased Equipment at Cost - continued
|
Manufacturing, telecommunications and computer equipment
On January 28, 2008, ICON Railcar I, LLC (“ICON Rail”), the LLC’s wholly-owned subsidiary, sold its entire interest in 110 railcars (the “Railcars”) to an unrelated third party that was leasing and operating the Railcars. The LLC recognized a gain on the sale of approximately $313,000.
On June 20, 2003, the LLC acquired a manufacturing device previously on lease to Spansion LLC (“Spansion”) (the “AMD Lease”) for approximately $6,391,000. On August 1, 2003, the LLC acquired semi-conductor memory testing equipment subject to two leases with Spansion (the “FASL Leases”) for approximately $4,561,000. The FASL Leases were each renewed for a 15-month period commencing on April 1, 2008.
On March 1, 2009, Spansion filed a petition for reorganization under Chapter 11 in United States Bankruptcy Court. On March 12, 2009, Spansion rejected the FASL Leases and affirmed the AMD Lease. On June 3, 2009, Spansion returned the equipment subject to the FASL Leases, which was classified on the December 31, 2009 consolidated balance sheet as assets held for sale and was recorded at the lower of its carrying value or fair market value less estimated costs to sell. Based on the Manager’s assessment of the equipment and knowledge of the market for such equipment, the LLC recorded an impairment charge of approximately $164,000 for the year ended December 31, 2009.
In July 2009, the equipment subject to the AMD Lease was sold for approximately $585,000 and the LLC recognized a gain on sale of the equipment and lease termination of approximately $432,000.
In March 2010, the equipment subject to the FASL Leases was sold for approximately $140,000 and the LLC recognized a loss on sale of the equipment of approximately $1,000.
Each Spansion lease has a related residual interest sharing agreement with a third-party that is triggered when a minimum return on investment has been attained by the LLC. Subject to the original terms, 35% of all proceeds received in excess of approximately $633,000 will be distributed to the third party. For the years ended December 31, 2010, 2009 and 2008, approximately $49,000, $350,000 and $739,000, respectively, was distributed to the third party in accordance with the residual interest sharing agreements.
On February 22, 2010, the U.S. Bankruptcy Court approved a stipulation between the LLC and Spansion allowing the LLC’s administrative expense claim in the amount of approximately $90,000 and unsecured claim in the amount of approximately $269,000. On March 22, 2010, the LLC sold its unsecured claim to a third party for approximately $161,000 and on May 24, 2010, the LLC received a payment of approximately $90,000 related to its administrative expense claim. Both amounts were recorded as other income.
During December 2004, the LLC acquired from Varilease Technology Finance Group, Inc. a portfolio of medical equipment subject to a lease with Hudson Crossing Surgery Center (“Hudson Crossing”) and a lease with Short Hills Surgery Center (“Short Hills”) for an aggregate amount of approximately $2,046,000 in cash. The lease with Hudson Crossing expired on December 31, 2007 and was renewed for a six-month period commencing on January 1, 2008. Effective July 1, 2008, Hudson Crossing’s lease continued on a month-to-month basis. In January 2009, the medical equipment on lease to Hudson Crossing was sold for $152,000 and the LLC recognized a gain of approximately $49,000. On December 18, 2009, the lease with Short Hills expired and Short Hills purchased the medical equipment for approximately $40,000.
ICON Income Fund Nine, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(4)
|
Leased Equipment at Cost - continued
|
Aggregate annual minimum future rentals receivable from the LLC’s non-cancelable leases for the next year consist of $8,913,000 at December 31, 2010. There will be no additional rentals receivable after 2011.
|
(5)
|
Investments in Joint Ventures
|
The LLC and certain of its affiliates, entities also managed by the Manager, formed the joint ventures discussed below for the purpose of acquiring and managing various leased equipment. The LLC and these affiliates have substantially identical investment objectives and participate on identical terms and conditions. The LLC and the other joint venture members have a right of first refusal to purchase the equipment, on a pro-rata basis, if any of the other joint venture members desires to sell its interests in the equipment or joint venture.
ICON Global Crossing II, LLC
The LLC, along with ICON Income Fund Ten, LLC, an entity also managed by the Manager (“Fund Ten”), and ICON Leasing Fund Eleven, LLC, an entity also managed by the Manager (“Fund Eleven”), owns ICON Global Crossing II, LLC (“Global Crossing II”), with ownership interests of approximately 14.40%, 72.34% and 13.26%, respectively. The total capital contributions made to Global Crossing II were approximately $13,885,000, of which the LLC’s share was approximately $2,000,000. All contributed capital was used to purchase telecommunications equipment subject to a 48-month lease with Global Crossing Telecommunications, Inc. (“Global Crossing”) and Global Crossing North American Networks, Inc. (together with Global Crossing, “Global Crossing Group”) that commenced on November 1, 2006.
On October 29, 2010, Global Crossing II sold all equipment under lease to Global Crossing for a total purchase price of $3,297,609 and the LLC recorded its share of the gain in income from investments in joint ventures of approximately $93,000.
ICON Aircraft 126 LLC
During February 2002, the LLC and Fund Eight B formed ICON Aircraft 126 LLC (“ICON 126”) for the purpose of acquiring all of the outstanding shares of Delta Aircraft Leasing Limited, a Cayman Islands registered company that owns, through an owner trust, an Airbus A340-313X MSN 126 (“Aircraft 126”). Aircraft 126 was subject to a lease with Cathay at the time of purchase, which was consummated during March 2002. The lease was initially scheduled to expire in March 2006, but has been extended to July 1, 2011. The LLC and Fund Eight B each have a 50% ownership interest in ICON 126.
Effective March 27, 2006, in connection with the lease extension, approximately $52,850,000 of non-recourse debt associated with Aircraft 126 was refinanced. The refinanced non-recourse debt matures on July 1, 2011 and requires a balloon payment of approximately $33,000,000 at maturity. The interest rate of the debt is fixed at 6.104%.
Under the terms of a maintenance agreement between ICON Aircraft 123 LLC (“ICON 123”) and ICON 126, ICON 126 paid approximately $143,000 in maintenance costs on behalf of ICON 123. ICON 123 intends to reimburse ICON 126 if and when it receives proceeds from the sale of Aircraft 123.
ICON Income Fund Nine, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(5)
|
Investments in Joint Ventures - continued
|
Each of ICON 123 and ICON 126 are parties to a residual sharing agreement (the “Airtrade Residual Sharing Agreement”) with Airtrade Capital Corp. (“Airtrade”). Pursuant to the terms of the Airtrade Residual Sharing Agreement, all proceeds received in connection with the sale or lease renewal of Aircraft 123 or Aircraft 126, in excess of $8,500,000 of the applicable loan balance associated with each aircraft will be allocated 55% to ICON 123 or ICON 126, as applicable, and 45% to Airtrade
In light of unprecedented high fuel prices during 2008 and the related impact on the airline industry, the Manager reviewed the LLC’s investment in Aircraft 126 as of June 30, 2008 and determined that Aircraft 126 was impaired.
The following factors in 2008, among others, indicated that the full carrying value of Aircraft 126 might not be recoverable: (i) indications that lenders were willing to finance less of the acquisition cost of four-engine aircraft, which increased with each dollar rise of the price of fuel, thereby undermining the carrying value expectations of such aircraft; (ii) the rising cost of fuel was increasing the operating costs of four-engine aircraft and similar capacity twin-engine aircraft, thereby making such aircraft less attractive investments at the time and thereby depressing the market for Aircraft 126; and (iii) the likelihood of aircraft operators switching to more efficient aircraft, thereby depressing the market for Aircraft 126.
Based on the Manager’s review, the carrying value of Aircraft 126 exceeded the expected undiscounted future cash flows and, as a result, ICON 126 recorded an impairment charge representing the difference between the aircraft carrying value and the expected discounted future cash flows of Aircraft 126. The expected discounted future cash flows of the aircraft were generally determined using a market approach, a recent appraisal for Aircraft 126 and recent sales of similar aircraft, as well as other factors, including those discussed above. As a result, as of June 30, 2008, ICON 126 recorded an impairment loss on Aircraft 126 of approximately $3,900,000, of which the LLC’s share was approximately $1,950,000.
|
(6)
|
Investments in Unguaranteed Residual Values
|
On December 31, 2003, the LLC entered into an agreement with Summit Asset Management Limited to acquire a 90% interest in the unguaranteed residual values of manufacturing and technology equipment valued at approximately $37,713,000 and on lease to various lessees located in the United Kingdom for approximately $4,454,000. The LLC’s investment return is contingent upon the residual value of the equipment after repayment of the debt. The Manager was paid an acquisition fee of approximately $1,131,000 related to this transaction.
As of September 30, 2010, the Manager determined that the expected future proceeds would be insufficient to cover the residual position of the remaining investment. As a result, the LLC recognized an impairment loss on the investment in unguaranteed residual values of $250,000.
Subsequent to December 31, 2010, the Manager modified its exit strategy and determined that recoverability of the investment would require an additional impairment. As a result, the LLC recognized an additional impairment loss on the investment in unguaranteed residual values of approximately $63,000 as of December 31, 2010.
49
ICON Income Fund Nine, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(6)
|
Investments in Unguaranteed Residual Values - continued
|
During the year ended December 31, 2010, 2009 and 2008, the LLC received approximately $194,000, $45,000 and $686,000, respectively, in proceeds from the sale of various pieces of equipment and recognized a gain of approximately $12,000 for the year ended December 31, 2010, a loss of approximately $33,000 for the year ended December 31, 2009 and a gain of approximately $204,000 for the year ended December 31, 2008.
Additionally, for the years ended December 31, 2010, 2009 and 2008, the LLC received approximately $0, $1,000 and $20,000, respectively, in renewal income that is classified as rental income in the accompanying consolidated statements of operations.
|
(7)
|
Non-Recourse Long-Term Debt
|
The LLC acquired the Wilhelmsen Vessels on bareboat charter to Wilhelmsen for cash and non-recourse long-term debt (see Note 3). On May 18, 2006, in connection with the charter extension through December 22, 2013, the LLC refinanced the non-recourse long-term debt related to the Wilhelmsen Vessels and borrowed an additional $22,043,000. The principal amount of the refinanced debt is $51,000,000, which debt matures on December 22, 2013 and accrues interest at London Interbank Offered Rate (“LIBOR”) plus 1.50% per year. The refinanced non-recourse long-term debt requires quarterly payments ranging from $450,000 to $800,000. The lender has a security interest in the Wilhelmsen Vessels and an assignment of the rental payments under the charters. The LLC paid approximately $630,000 in costs associated with the non-recourse long-term debt refinancing, which were capitalized as debt financing costs and are being amortized as interest expense over the term of the non-recourse long-term debt. As of December 31, 2010, approximately $59,000 was recorded to interest expense related to the amortization of the non-recourse long-term debt financing costs.
Simultaneously with the execution of the refinancing of the non-recourse long-term debt of the Wilhelmsen Vessels, the LLC entered into three interest rate swap contracts with Fortis Bank NV/SA, New York Branch (“Fortis Bank”) in the aggregate notional amount of $51,000,000 in order to fix the variable interest rate on the non-recourse long-term debt and minimize the risk of interest rate fluctuation. The interest rate swap contracts fixed the refinanced debt interest rate at 7.02% per year.
On July 24, 2007, the LLC, through ICON Samar, borrowed approximately $23,382,000 in connection with a bareboat charter with Teekay. The non-recourse long-term debt matures on July 25, 2011 and accrues interest at LIBOR plus 1.00% per year. The non-recourse long-term debt requires monthly payments ranging from $480,000 to $530,000. The lender has a security interest in the vessel and an assignment of the rental payments under the bareboat charter. Simultaneously with the borrowing, the LLC entered into an interest rate swap contract with Fortis Bank in order to fix the debt interest rate at 6.35% per year. The LLC paid approximately $175,000 in costs associated with the debt, which was capitalized as debt financing costs. As of December 31, 2010, approximately $27,000 was recorded to interest expense related to the amortization of the non-recourse long-term debt financing costs.
The LLC designated its interest rate swaps as cash flow hedges and accounts for them in accordance with the accounting pronouncement for derivative instruments and hedging activities, by recording the interest rate swap contracts at their estimated fair market values, and recognizing the periodic change in their fair market values of effective hedges as other comprehensive income. At December 31, 2010 and 2009, the fair value of the interest rate swap contracts was a liability of $1,279,541 and $2,054,841, respectively.
ICON Income Fund Nine, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(7)
|
Non-Recourse Long-Term Debt - continued
|
The LLC acquired its interest in Aircraft 128 for cash and the assumption of non-recourse long-term debt (see Note 4). On August 1, 2006, the owner trustee refinanced the non-recourse long-term debt related to the aircraft. In connection with the refinancing, the LLC was able to borrow an additional amount of approximately $6,242,000. The principal balance of the refinancing was approximately $43,800,000, and matures on December 1, 2011, requires a balloon payment of approximately $22,750,000 and accrues interest at 6.85% per year. The refinancing requires monthly payments of approximately $545,000 through May 2010 and approximately $495,000 through December 2011. The LLC paid approximately $438,000 of costs in connection with the refinancing, which were capitalized as debt financing costs and will be amortized to operations over the term of the refinancing.
During the year ended December 31, 2010, approximately $70,000 was recorded to interest expense related to the amortization of the non-recourse long-term debt financing costs.
As of December 31, 2010 and 2009, the LLC had net debt financing costs of $135,418 and $290,852, respectively. For the years ended December 31, 2010, 2009 and 2008, the LLC recognized amortization expense of $155,434, $198,980 and $450,205, respectively.
The aggregate maturities of non-recourse long-term debt, including the effects of refinancing discussed above, consisted of the following at December 31, 2010:
|
For the year ending December 31, 2011
|
$ | 36,374,188 | ||
|
For the year ending December 31, 2012
|
5,400,000 | |||
|
For the year ending December 31, 2013
|
5,400,000 | |||
| $ | 47,174,188 |
|
(8)
|
Revolving Line of Credit, Recourse
|
The LLC and certain other entities managed by the Manager, Fund Eight B, Fund Ten, Fund Eleven, ICON Leasing Fund Twelve, LLC (“Fund Twelve”) and ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P. (“Fund Fourteen”) (collectively, the “Borrowers”), are parties to a Commercial Loan Agreement, as amended (the “Loan Agreement”), with California Bank & Trust (“CB&T”). The Loan Agreement provides for a revolving line of credit of up to $30,000,000 pursuant to a senior secured revolving loan facility (the “Facility”), which is secured by all assets of the Borrowers not subject to a first priority lien, as defined in the Loan Agreement. Each of the Borrowers is jointly and severally liable for all amounts borrowed under the Facility. At December 31, 2010, no amounts were accrued related to the LLC’s joint and several obligations under the Facility. Amounts available under the Facility are subject to a borrowing base that is determined, subject to certain limitations, on the present value of the future receivables under certain lease agreements and loans in which the Borrowers have a beneficial interest.
The Facility expires on June 30, 2011 and the Borrowers may request a one year extension to the revolving line of credit within 390 days of the then-current expiration date, but CB&T has no obligation to extend. The interest rate for general advances under the Facility is CB&T’s prime rate and the interest rate on up to five separate non-prime rate advances that are permitted to be made under the Facility is the rate at which U.S. dollar deposits can be acquired by CB&T in the London Interbank Eurocurrency Market plus 2.5% per year, provided that neither interest rate is permitted to be less than 4.0% per year. The interest rate at December 31, 2010 was 4.0%. In addition, the Borrowers are obligated to pay a quarterly commitment fee of 0.50% on unused commitments under the Facility.
ICON Income Fund Nine, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(8)
|
Revolving Line of Credit, Recourse - continued
|
The Borrowers are also parties to a Contribution Agreement (the “Contribution Agreement”) that provides that, in the event that a Borrower pays an amount in excess of its share of total obligations under the Facility, the other Borrowers will contribute to such Borrower so that the aggregate amount paid by each Borrower reflects its allocable share of the aggregate obligations under the Facility.
Aggregate borrowings by all Borrowers under the Facility amounted to $1,450,000 at December 31, 2010, all of which was borrowed by Fund Eleven. Subsequent to December 31, 2010, Fund Eleven repaid $1,450,000, which reduced its outstanding loan balance to $0.
The Borrowers were in compliance with all covenants under the Loan Agreement at December 31, 2010. As of such date, no amounts were due to or payable by the LLC under the Contribution Agreement.
|
(9)
|
Transactions with Related Parties
|
In accordance with the terms of the LLC Agreement, the LLC paid the Manager (i) management fees ranging from 1% to 5% based on a percentage of the rentals recognized either directly by the LLC or through its joint ventures, and (ii) acquisition fees, through the end of the operating period, of 3% of the purchase price of the LLC’s investments. In addition, the Manager was reimbursed for administrative expenses incurred in connection with the LLC’s operations. The Manager also has a 1% interest in the LLC’s profits, losses, cash distributions and liquidation proceeds.
The Manager performs certain services relating to the management of the LLC’s equipment leasing and financing activities. Such services include, but are not limited to, the collection of lease payments from the lessees of the equipment, re-leasing services in connection with equipment that is off-lease, inspections of the equipment, liaising with and general supervision of lessees to ensure that the equipment is being properly operated and maintained, monitoring performance by the lessees of their obligations under the leases and the payment of operating expenses.
Administrative expense reimbursements are costs incurred by the Manager or its affiliates that are necessary to the LLC’s operations. These costs include the Manager’s and its affiliates’ legal, accounting, investor relations and operations personnel, as well as professional fees and other costs that are charged to the LLC based upon the percentage of time such personnel dedicate to the LLC. Excluded are salaries and related costs, office rent, travel expenses and other administrative costs incurred by individuals with a controlling interest in the Manager.
The LLC paid distributions to the Manager of $34,589, $29,285 and $77,556 for the years ended December 31, 2010, 2009 and 2008, respectively. The Manager’s interest in the LLC’s net income was $67,577, $67,001 and $10,478 for the years ended December 31, 2010, 2009 and 2008, respectively.
Fees and other expenses paid or accrued by the LLC to the Manager or its affiliates for the years ended December 31, 2010, 2009 and 2008 were as follows:
|
Years Ended December 31,
|
||||||||||||||||
|
Entity
|
Capacity
|
Description
|
2010
|
2009
|
2008
|
|||||||||||
|
ICON Capital Corp.
|
Manager
|
Management fees (1)
|
$ | - | $ | - | $ | 526,469 | ||||||||
|
ICON Capital Corp.
|
Manager
|
Administrative expense reimbursements (1)
|
- | - | 149,844 | |||||||||||
| $ | - | $ | - | $ | 676,313 | |||||||||||
|
(1) Amount charged directly to operations.
|
||||||||||||||||
ICON Income Fund Nine, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(9)
|
Transactions with Related Parties - continued
|
Effective April 1, 2008 and May 1, 2008, the Manager waived its rights to all future administrative expense reimbursements and management fees, respectively. As of December 31, 2010, the Manager waived $322,706 of administrative expense reimbursements and $935,374 of management fees. For the year ended December 31, 2009, the Manager waived $344,958 of administrative expense reimbursements and $1,082,524 of management fees. For the year ended December 31, 2008, the Manager waived $364,877 of administrative expense reimbursements and $1,018,551 of management fees.
|
(10)
|
Derivative Financial Instruments
|
The LLC may enter into derivative transactions for purposes of hedging specific financial exposures, including changes in interest rates of its non-recourse long-term debt. The LLC enters into these instruments only for hedging underlying exposures. The LLC does not hold or issue derivative financial instruments for purposes other than hedging, except for warrants, which are not hedges. Certain derivatives may not meet the established criteria to be designated as qualifying accounting hedges, even though the LLC believes that these are effective economic hedges.
Interest Rate Risk
The LLC’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements on its variable non-recourse debt. The LLC’s hedging strategy to accomplish this objective is to match the projected future business cash flows with the underlying debt service. Interest rate swaps designated as cash flow hedges involve the receipt of floating-rate interest payments from a counterparty in exchange for the LLC making fixed interest rate payments over the life of the agreements without exchange of the underlying notional amount.
At December 31, 2010, the LLC had four floating-to-fixed interest rate swaps relating to the three Wilhelmsen Vessels on bareboat charter to Wilhelmsen and the Samar Spirit on bareboat charter to Teekay that were designated as cash flow hedges with an aggregate notional amount of $21,028,871. These interest rate swaps have maturity dates ranging from July 25, 2011 to September 23, 2013.
For these derivatives, the LLC reports the gain or loss from the effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges in AOCI and such gain or loss is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings and within the same line item on the statement of operations as the impact of the hedged transaction. During the year ended December 31, 2010 and 2009, the LLC recorded no hedge ineffectiveness in earnings. At December 31, 2010 and 2009, the total unrealized loss recorded to AOCI related to the change in fair value of these interest rate swaps was approximately $1,255,000 and $2,022,000, respectively.
During the twelve months ending December 31, 2011, the LLC estimates that approximately $821,672 will be reclassified from AOCI to interest expense.
ICON Income Fund Nine, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(10)
|
Derivative Financial Instruments - continued
|
The table below presents the fair value of the LLC’s derivative financial instruments and classification within the LLC’s consolidated balance sheet as of December 31, 2010:
|
Derivatives designated as hedging instruments:
|
Liability Derivative
|
||||
|
Balance Sheet Location
|
Fair Value
|
||||
|
Interest rate swaps
|
Interest rate swap contracts
|
$ | 1,279,541 | ||
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, 2010:
|
Year ended December 31, 2010
|
||||||||||||||
|
Derivatives
|
Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)
|
Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
|
Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
|
Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
|
Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
|
|||||||||
|
Interest rate swaps
|
$ | (616,870 | ) |
Interest expense
|
$ | (1,383,217 | ) |
Gain (loss) on financial instruments
|
$ | - | ||||
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:
|
Year ended December 31, 2009
|
||||||||||||||
|
Derivatives
|
Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)
|
Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
|
Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
|
Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
|
Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
|
|||||||||
|
Interest rate swaps
|
$ | (776,750 | ) |
Interest expense
|
$ | (2,184,184 | ) |
Gain (loss) on financial instruments
|
$ | - | ||||
Derivative Risks
The LLC manages exposure to possible defaults on derivative financial instruments by monitoring the concentration of risk that the LLC has with any individual bank and through the use of minimum credit quality standards for all counterparties. The LLC does not require collateral or other security in relation to derivative financial instruments. Since it is the LLC’s policy to enter into derivative contracts with banks of internationally acknowledged standing only, the LLC considers the counterparty risk to be remote.
As of December 31, 2010 and 2009, the fair value of the derivatives in a liability position was $1,279,541 and $2,054,841, respectively. In the event that the LLC would be required to settle its obligations under the agreements as of December 31, 2010, the termination value would be $1,320,072.
ICON Income Fund Nine, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(11)
|
Fair Value Measurements
|
The LLC accounts for the fair value of financial instruments in accordance with the accounting pronouncements, which require assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories:
|
·
|
Level 1: Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
|
|
·
|
Level 2: Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
|
|
·
|
Level 3: Pricing inputs that are generally unobservable and cannot be corroborated by market data.
|
Financial assets and liabilities 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.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
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, 2010:
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivative liabilities
|
$ | - | $ | 1,279,541 | $ | - | $ | 1,279,541 | ||||||||
The LLC’s derivative contracts, consisting of interest rate swaps, are valued using models based on readily observable market parameters for all substantial terms of the LLC’s derivative contracts and are classified within Level 2. As permitted by the accounting pronouncements, the LLC uses market prices and pricing models for fair value measurements of its derivative instruments. The fair value of the derivative liabilities was recorded in derivative instruments within the consolidated balance sheets.
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 carrying value of the LLC’s material non-financial assets and liabilities after valuation allowance using fair value measurement on a nonrecurring basis as of December 31, 2010:
|
December 31, 2010
|
Level 1
|
Level 2
|
Level 3
|
Total Impairment Loss
|
||||||||||||||||
|
Unguaranteed residual values
|
$ | 257,813 | $ | - | $ | - | $ | 257,813 | $ | 313,033 | ||||||||||
ICON Income Fund Nine, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(11)
|
Fair Value Measurements - continued
|
Fair value information with respect to the LLC’s leased assets and liabilities is not separately provided since (i) the current accounting pronouncements do not require fair value disclosures of lease arrangements and (ii) the carrying value of financial assets, other than lease-related investments, and the recorded value of recourse debt approximate fair value due to their short-term maturities and variable interest rates. The estimated fair value of the LLC’s non-recourse long-term debt was based on the discounted value of future cash flows related to the loan based on terms consistent with the range of the LLC’s internal pricing strategies for transactions of this type.
|
December 31, 2010
|
||||||||
|
Carrying Amount
|
Fair Value
|
|||||||
|
Fixed rate non-recourse long-term debt
|
$ | 26,145,317 | $ | 26,986,578 | ||||
|
(12)
|
Concentrations of Risk
|
Concentrations of credit risk with respect to lessees are dispersed across different industry segments within the United States of America and throughout the world. Accordingly, the LLC may be exposed to business and economic risk.
For the year ended December 31, 2010, the LLC had three lessees that accounted for approximately 98% of its rental and finance income. Wilhelmsen, Cathay and Teekay accounted for approximately 22%, 38% and 38%, respectively. For the year ended December 31, 2009, the LLC had three lessees that accounted for approximately 95% of its rental and finance income. Wilhelmsen, Cathay and Teekay accounted for approximately 26%, 35% and 34%, respectively. For the year ended December 31, 2008, the LLC had three lessees that accounted for approximately 83% of its rental and finance income. Wilhelmsen, Cathay and Teekay accounted for approximately 25%, 29% and 29%.
As of December 31, 2010, the LLC had one aircraft that accounted for approximately 53% of operating assets and one vessel that accounted for approximately 45%. As of December 31, 2009, the LLC had one aircraft that accounted for approximately 53% of operating assets and one vessel that accounted for approximately 46%. As of December 31, 2008, the LLC had one aircraft that accounted for approximately 52% of operating assets and one vessel that accounted for approximately 45%.
|
(13)
|
Commitments and Contingencies and Off-Balance Sheet Transactions
|
The LLC has entered into certain residual sharing and remarketing agreements with various third parties. In connection with these agreements, residual proceeds received in excess of specific amounts may be shared with these third parties based on specific formulas. The obligation related to these agreements is recorded at fair value.
ICON 128 is a party to a residual sharing agreement with Airfleet Credit Corporation (“Airfleet”) and HXO Leasing Limited. Pursuant to the terms of this residual sharing agreement, all proceeds received in connection with the sale or lease extension of Aircraft 128 in excess of $4,250,000 of the loan balance associated with the aircraft will be allocated 55% to ICON 128 and 45% to Airfleet. As of December 31, 2010, no liability has been accrued in connection with this agreement.
ICON Income Fund Nine, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(13)
|
Commitments and Contingencies and Off-Balance Sheet Transactions - continued
|
The LLC has a right to a portion of the profits, losses, and cash flows from a limited partnership interest (its “Interest”) in North Sea (Connecticut) Limited Partnership (“North Sea”), an entity that owns a 100% interest in a mobile offshore drilling rig that was subject to lease with Rowan Companies, Inc.(“the Charterer”). In 2005, the Charterer notified the owner trustee of the rig that an “Event of Loss” occurred with respect to the rig as a result of Hurricane Rita. The charter provides that the Charterer will pay to the lender (and upon satisfaction of all of the debt outstanding, to the owner trustee on behalf of North Sea) an amount equal to the “Stipulated Loss Value” of the rig as determined according to the terms of the charter. The calculation of “Stipulated Loss Value”, among other things, is the subject of a dispute between the Charterer and North Sea.
The LLC evaluates the recoverability of its investment as part of its impairment testing. As of December 31, 2010, the LLC’s carrying value related to its Interest in North Sea was $1,154,668. The LLC did not receive any cash distributions with respect to its Interest in the three years ended December 31, 2010.
At the time the LLC acquires or divests of its interest in an equipment lease or other financing transaction, the LLC may, under very limited circumstances, agree to indemnify the seller or buyer for specific contingent liabilities. The Manager believes that any liability that may arise as a result of any such indemnification obligations will not have a material adverse effect on the consolidated financial condition of the LLC taken as a whole.
57
ICON Income Fund Nine, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(14)
|
Geographic Information
|
Geographic information for revenue, based on the country of origin, and long-lived assets, which include operating leases (net of accumulated depreciation), finance leases, investments in joint ventures and investment in unguaranteed residual values, were as follows:
|
Year Ended December 31, 2010
|
||||||||||||||||||||
|
United
|
United
|
|
Marine
|
|||||||||||||||||
|
States
|
Kingdom
|
Asia
|
Vessels (a)
|
Total
|
||||||||||||||||
|
Revenue:
|
||||||||||||||||||||
|
Rental income
|
$ | 283,233 | $ | - | $ | 6,368,571 | $ | 6,206,105 | $ | 12,857,909 | ||||||||||
|
Finance income
|
$ | - | $ | - | $ | - | $ | 3,669,071 | $ | 3,669,071 | ||||||||||
|
Income (loss) from investments in joint ventures
|
$ | 209,015 | $ | - | $ | 58,167 | $ | - | $ | 267,182 | ||||||||||
|
At December 31, 2010
|
||||||||||||||||||||
|
United
|
United
|
|
Marine
|
|||||||||||||||||
|
States
|
Kingdom
|
Asia
|
Vessels (a)
|
Total
|
||||||||||||||||
|
Long-lived assets:
|
||||||||||||||||||||
|
Investment in finance leases
|
$ | - | $ | - | $ | - | $ | 17,962,820 | $ | 17,962,820 | ||||||||||
|
Leased equipment at cost, net
|
$ | 519,379 | $ | - | $ | 37,060,742 | $ | 31,291,505 | $ | 68,871,626 | ||||||||||
|
Investments in joint ventures
|
$ | - | $ | - | $ | 1,259,152 | $ | - | $ | 1,259,152 | ||||||||||
|
Investment in unguaranteed residual values
|
$ | - | $ | 257,813 | $ | - | $ | - | $ | 257,813 | ||||||||||
|
Year Ended December 31, 2009
|
||||||||||||||||||||
|
United
|
United
|
|
Marine
|
|||||||||||||||||
|
States
|
Kingdom
|
Asia
|
Vessels (a)
|
Total
|
||||||||||||||||
|
Revenue:
|
||||||||||||||||||||
|
Rental income
|
$ | 175,352 | $ | - | $ | 7,015,654 | $ | 6,206,808 | $ | 13,397,814 | ||||||||||
|
Finance income
|
$ | 91,030 | $ | - | $ | - | $ | 4,674,048 | $ | 4,765,078 | ||||||||||
|
Income (loss) from investments in joint ventures
|
$ | 168,382 | $ | - | $ | (66,406 | ) | $ | - | $ | 101,976 | |||||||||
|
At December 31, 2009
|
||||||||||||||||||||
|
United
|
United
|
|
Marine
|
|||||||||||||||||
|
States
|
Kingdom
|
Asia
|
Vessels (a)
|
Total
|
||||||||||||||||
|
Long-lived assets:
|
||||||||||||||||||||
|
Investment in finance leases
|
$ | - | $ | - | $ | - | $ | 23,354,875 | $ | 23,354,875 | ||||||||||
|
Leased equipment at cost, net
|
$ | 712,336 | $ | - | $ | 39,528,145 | $ | 33,907,852 | $ | 74,148,333 | ||||||||||
|
Investments in joint ventures
|
$ | 725,942 | $ | - | $ | 1,200,984 | $ | - | $ | 1,926,926 | ||||||||||
|
Investment in unguaranteed residual values
|
$ | - | $ | 752,113 | $ | - | $ | - | $ | 752,113 | ||||||||||
|
(a)
|
Three of the LLC’s vessels are chartered to Wilhelmsen, a Norway based company. The fourth vessel is chartered to Teekay, a Canada based company. When the LLC charters a vessel to a charterer, the charterer is free to trade the vessel worldwide.
|
ICON Income Fund Nine, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(15)
|
Selected Quarterly Financial Data (unaudited)
|
The following table is a summary of selected financial data by quarter:
|
Quarters Ended in 2010
|
Year Ended
|
|||||||||||||||||||
|
|
March 31,
|
June 30,
|
September 30,
|
December 31,
|
December 31, 2010
|
|||||||||||||||
|
Total revenue
|
$ | 4,405,245 | $ | 4,323,513 | $ | 4,152,860 | $ | 4,171,495 | $ | 17,053,113 | ||||||||||
|
Net income attributable to Fund Nine
|
||||||||||||||||||||
|
allocable to additional members
|
$ | 1,692,965 | $ | 2,006,420 | $ | 1,309,622 | $ | 1,681,075 | $ | 6,690,082 | ||||||||||
|
Weighted average number of additional shares
|
||||||||||||||||||||
|
of limited liability company interests outstanding
|
97,955 | 97,955 | 97,955 | 97,955 | 97,955 | |||||||||||||||
|
Net income attributable to Fund Nine per weighted
|
||||||||||||||||||||
|
average additional share of limited liability company interests
|
$ | 17.28 | $ | 20.48 | $ | 13.37 | $ | 17.16 | $ | 68.30 | ||||||||||
|
Quarters Ended in 2009
|
Year Ended
|
|||||||||||||||||||
|
|
March 31,
|
June 30,
|
September 30,
|
December 31,
|
December 31, 2009
|
|||||||||||||||
|
Total revenue
|
$ | 4,889,594 | $ | 4,549,146 | $ | 4,967,040 | $ | 4,432,029 | $ | 18,837,809 | ||||||||||
|
Net income attributable to Fund Nine
|
||||||||||||||||||||
|
allocable to additional members
|
$ | 1,832,610 | $ | 1,005,497 | $ | 2,213,104 | $ | 1,581,934 | $ | 6,633,145 | ||||||||||
|
Weighted average number of additional shares
|
||||||||||||||||||||
|
of limited liability company interests outstanding
|
97,955 | 97,955 | 97,955 | 97,955 | 97,955 | |||||||||||||||
|
Net income attributable to Fund Nine per weighted
|
||||||||||||||||||||
|
average additional share of limited liability company interests
|
$ | 18.71 | $ | 10.26 | $ | 22.59 | $ | 16.15 | $ | 67.72 | ||||||||||
|
(16)
|
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, 2010 and 2009, the members’ equity included in the consolidated financial statements totaled $41,027,167 and $36,962,094, respectively. The members’ capital for federal income tax purposes at December 31, 2010 and 2009 totaled $80,762,633 and $78,515,164, 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.
59
ICON Income Fund Nine, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(16)
|
Income Tax Reconciliation (unaudited) - continued
|
The following table reconciles net income attributable to Fund Nine for financial statement reporting purposes to the net income attributable to Fund Nine for federal income tax purposes for the years ended December 31, 2010, 2009 and 2008:
|
Years Ended December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Net income attributable to Fund Nine per consolidated financial statements
|
$ | 6,757,659 | $ | 6,700,146 | $ | 1,047,818 | ||||||
|
Finance leases
|
5,392,051 | 5,480,683 | 7,004,410 | |||||||||
|
Depreciation expense
|
(3,672,257 | ) | (4,179,146 | ) | (5,206,714 | ) | ||||||
|
Gain on sale of equipment
|
1,049,234 | - | 302,371 | |||||||||
|
Rent - consolidating joint venture
|
(3,914,571 | ) | 1,434,805 | - | ||||||||
|
Tax gain from joint venture
|
- | - | 4,571,741 | |||||||||
|
Fixed asset impairment
|
250,000 | 446,601 | . | |||||||||
|
Other
|
(145,690 | ) | (2,029,681 | ) | 917,781 | |||||||
|
Net income attributable to Fund Nine for federal income tax purposes
|
$ | 5,716,426 | $ | 7,853,408 | $ | 8,637,407 | ||||||
|
ICON Income Fund Nine, LLC
|
||||||||||||||||
|
(A Delaware Limited Liability Company)
|
||||||||||||||||
|
|
||||||||||||||||
|
Description
|
Balance at
Beginning of Year |
Additions Charged
to Cost, Expenses, |
Deductions
|
Balance at
End of Year |
||||||||||||
|
Year Ended
|
||||||||||||||||
|
December 31, 2010
|
|
|||||||||||||||
|
Allowance for
|
||||||||||||||||
|
Doubtful Accounts
|
- | - | - | - | ||||||||||||
|
Year Ended
|
||||||||||||||||
|
December 31, 2009
|
||||||||||||||||
|
Allowance for
|
||||||||||||||||
|
Doubtful Accounts
|
$ | 155,318 | - | $ | (155,318 | ) | - | |||||||||
|
Year Ended
|
||||||||||||||||
|
December 31, 2008
|
||||||||||||||||
|
Allowance for
|
||||||||||||||||
|
Doubtful Accounts
|
- | $ | 155,318 | - | $ | 155,318 | ||||||||||
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
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, 2010, 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, 2010. 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, 2010, its internal control over financial reporting is effective.
Changes in internal control over financial reporting
There were no changes in our Manager’s internal control over financial reporting during the quarter ended December 31, 2010 that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Item 9B. Other Information
Not applicable.
Item 10. Directors, Executive Officers of the Registrant's Manager and Corporate Governance
Our Manager, ICON Capital Corp., a Delaware corporation (“ICON”), was formed in 1985. Our Manager's principal office is located at 100 Fifth Avenue, 4th Floor, New York, New York 10011, and its telephone number is (212) 418-4700.
In addition to the primary services related to our making and disposing of investments, our Manager provides services relating to the day-to-day management of our equipment. These services include collecting payments due from lessees, borrowers and other counterparties; remarketing equipment that is off-lease; inspecting equipment; serving as a liaison with lessees, borrowers, and other counterparties; supervising equipment maintenance; and monitoring performance by lessees, borrowers and other counterparties of their obligations, including payment of contractual payments and all operating expenses.
|
Name
|
Age
|
Title
|
||
|
Michael A. Reisner
|
40
|
Co-Chairman, Co-Chief Executive Officer and Co-President
|
||
|
Mark Gatto
|
38
|
Co-Chairman, Co-Chief Executive Officer and Co-President
|
||
|
Joel S. Kress
|
38
|
Executive Vice President — Business and Legal Affairs
|
||
|
Anthony J. Branca
|
42
|
Senior Vice President and Chief Financial Officer
|
||
|
H. Daniel Kramer
|
59
|
Senior Vice President and Chief Marketing Officer
|
||
|
David J. Verlizzo
|
38
|
Senior Vice President — Business and Legal Affairs
|
||
|
Craig A. Jackson
|
52
|
Senior Vice President — Remarketing and Asset Management
|
||
|
Harry Giovani
|
36
|
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.
Item 11. Executive Compensation
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, 2010, 2009 and 2008:
|
Years Ended December 31,
|
||||||||||||||||
|
Entity
|
Capacity
|
Description
|
2010
|
2009
|
2008
|
|||||||||||
|
ICON Capital Corp.
|
Manager
|
Management fees (1)
|
$ | - | $ | - | $ | 526,469 | ||||||||
|
ICON Capital Corp.
|
Manager
|
Administrative expense reimbursements (1)
|
- | - | 149,844 | |||||||||||
| $ | - | $ | - | $ | 676,313 | |||||||||||
|
(1) Amount charged directly to operations.
|
||||||||||||||||
Our Manager also has a 1% interest in our profits, losses, cash distributions and liquidation proceeds. We paid distributions to our Manager of $34,589, $29,285 and $77,556, respectively, for the years ended December 31, 2010, 2009 and 2008. Additionally, our Manager’s interest in our net income was $67,577, $67,001 and $10,478 for the years ended December 31, 2010, 2009 and 2008, respectively.
Item 12. Security Ownership of Certain Beneficial Owners and the Manager and Related Security Holder Matters
|
|
(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 21, 2011, 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.
|
Item 13. Certain Relationships and Related Transactions, and Director Independence
See “Item 11. Executive Compensation” for a discussion of our related party transactions. See Notes 5, 9 and 13 to our consolidated financial statements for a discussion of our investments in joint ventures and transactions with related parties.
Because we are not listed on any national securities exchange or inter-dealer quotation system, we have elected to use the Nasdaq Stock Market’s definition of “independent director” in evaluating whether any of our Manager’s directors are independent. Under this definition, the board of directors of our Manager has determined that our Manager does not have any independent directors, nor are we required to have any.
Item 14. Principal Accounting Fees and Services
During the years ended December 31, 2010 and 2009, 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, 2010 and 2009:
|
2010
|
2009
|
|||||||
|
Audit fees
|
$ | 262,133 | $ | 319,000 | ||||
|
Tax fees
|
61,813 | 55,750 | ||||||
| $ | 323,946 | $ | 374,750 | |||||
Item 15. Exhibits, Financial Statement Schedules
|
(a)
|
1. Financial Statements
|
|
See index to financial statements included as Item 8 to this Annual Report on Form 10-K hereof.
|
|
|
2. Financial Statement Schedules
|
|
|
|
|
|
Financial Statement Schedule II – Valuation and Qualifying Accounts is filed with this Annual Report on Form 10-K. Schedules not listed above have been omitted because they are not applicable or the information required to be set forth therein is included in the financial statements or notes thereto.
|
|
|
3. Exhibits:
|
|
|
3.1 Certificate of Limited Liability Company of Registrant (Incorporated by reference to Exhibit 4.3 to Pre-Effective Amendment No. 1 to Registrant’s Registration Statement on Form S-1 filed with the SEC on October 12, 2001 (File No. 333-67638)).
|
|
|
4.1 Amended and Restated Operating Agreement of Registrant (Incorporated by reference to Exhibit 4.1 to Pre-Effective Amendment No. 2 to Registrant’s Registration Statement on Form S-1 filed with the SEC on November 20, 2001 (File No. 333-67638)).
|
|
|
4.2 Amendment to the Registrant’s Amended and Restated Operating Agreement (Incorporated by reference to Exhibit 4.1.1 to Post-Effective Amendment No. 1 to Registrant’s Registration Statement on Form S-1 filed with the SEC on August 19, 2002 (File No. 333-67638)).
|
|
|
10.1 Commercial Loan Agreement, by and between California Bank & Trust, ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON Income Fund Ten, LLC and ICON Leasing Fund Eleven, LLC, dated August 31, 2005 (Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated August 31, 2005).
|
|
|
10.2 Loan Modification Agreement, by and between California Bank & Trust and ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON Income Fund Ten, LLC and ICON Leasing Fund Eleven, LLC, dated December 26, 2006 (Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated December 26, 2006).
|
|
|
10.3 Loan Modification Agreement, by and between California Bank & Trust and ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON Income Fund Ten, LLC, ICON Leasing Fund Eleven, LLC, and ICON Leasing Fund Twelve, LLC, dated June 20, 2007 (Incorporated by reference to Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009, filed November 6, 2009).
|
|
|
10.4 Third Loan Modification Agreement, by and between California Bank & Trust, ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON Income Fund Ten, LLC, ICON Leasing Fund Eleven, LLC and ICON Leasing Fund Twelve, LLC, dated as of May 1, 2008 (Incorporated by reference to Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008, filed May 20, 2008).
|
|
|
10.5 Fourth Loan Modification Agreement, by and between California Bank & Trust and ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON Income Fund Ten, LLC, ICON Leasing Fund Eleven, LLC, ICON Leasing Fund Twelve, LLC and ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P., dated August 12, 2009 (Incorporated by reference to Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009, filed August 13, 2009).
|
|
|
31.1 Rule 13a-14(a)/15d-14(a) Certification of Co-Chief Executive Officer.
|
|
|
31.2 Rule 13a-14(a)/15d-14(a) Certification of Co-Chief Executive Officer.
|
|
|
31.3 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
|
|
|
32.1 Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.2 Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.3 Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
(b)
|
1. Consolidated Financial Statements of ICON Aircraft 126 LLC
|
68
ICON Aircraft 126 LLC
(A Delaware Limited Liability Company)
Table of Contents
The Members
ICON Aircraft 126 LLC
We have audited the accompanying consolidated balance sheets of ICON Aircraft 126 LLC (the “Company”) as of December 31, 2010, and the related consolidated statements of operations, changes in members’ equity, and cash flows for the year ended December 31, 2010 and for the year ended December 31, 2008. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ICON Aircraft 126 LLC at December 31, 2010, and the consolidated results of its operations and its cash flows for the year ended December 31, 2010 and for the year ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company has a working capital deficiency and does not have the ability to fulfill its obligations with respect to its non-recourse debt when it becomes due in July 2011. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The 2010 financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Ernst & Young, LLP
March 25, 2011
New York, New York
|
ICON Aircraft 126 LLC
|
||||||||
|
(A Delaware Limited Liability Company)
|
||||||||
|
Consolidated Balance Sheets
|
||||||||
|
December 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
(unaudited)
|
||||||||
|
Leased equipment at cost (less accumulated depreciation of
|
|
|||||||
|
$40,428,689, and $36,431,244)
|
$ | 37,094,895 | $ | 41,092,340 | ||||
|
Other non-current assets, net
|
251,757 | 278,073 | ||||||
|
Total Assets
|
$ | 37,346,652 | $ | 41,370,413 | ||||
|
|
||||||||
|
|
||||||||
|
Liabilities and Members’ Equity
|
||||||||
|
Current liabilities:
|
||||||||
|
Current portion of non-recourse long-term debt
|
$ | 34,421,461 | $ | 3,684,449 | ||||
|
Deferred rental income
|
214,286 | 642,857 | ||||||
|
Accrued interest
|
192,600 | 219,676 | ||||||
|
|
||||||||
|
Total current liabilities
|
34,828,347 | 4,546,982 | ||||||
|
Non-current liabilities:
|
||||||||
|
Non-recourse long-term debt, less current portion
|
- | 34,421,461 | ||||||
|
Total Liabilities
|
34,828,347 | 38,968,443 | ||||||
|
Commitments and contingencies
|
||||||||
|
|
||||||||
|
Members’ Equity
|
2,518,305 | 2,401,970 | ||||||
|
Total Liabilities and Members’ Equity
|
$ | 37,346,652 | $ | 41,370,413 | ||||
|
ICON Aircraft 126 LLC
|
||||||||||||
|
(A Delaware Limited Liability Company)
|
||||||||||||
|
Years ended December 31,
|
||||||||||||
|
|
2010
|
2009
|
2008
|
|||||||||
|
(unaudited)
|
||||||||||||
|
Revenue:
|
|
|||||||||||
|
Rental income
|
$ | 6,368,571 | $ | 6,368,571 | $ | 6,368,571 | ||||||
|
Interest and other income
|
- | - | 2,328 | |||||||||
|
Total revenue
|
6,368,571 | 6,368,571 | 6,370,899 | |||||||||
|
Expenses:
|
||||||||||||
|
General and administrative
|
- | - | 45,000 | |||||||||
|
Interest
|
2,254,791 | 2,509,861 | 2,772,778 | |||||||||
|
Depreciation and amortization
|
3,997,445 | 3,991,521 | 3,990,347 | |||||||||
|
Impairment loss
|
- | - | 3,900,000 | |||||||||
|
|
||||||||||||
|
Total expenses
|
6,252,236 | 6,501,382 | 10,708,125 | |||||||||
|
Net income (loss)
|
$ | 116,335 | $ | (132,811 | ) | $ | (4,337,226 | ) | ||||
|
ICON Aircraft 126 LLC
|
||||
|
(A Delaware Limited Liability Company)
|
||||
|
Members'
|
||||
|
Equity
|
||||
|
Balance, December 31, 2007
|
$ | 6,827,007 | ||
|
Net loss
|
(4,337,226 | ) | ||
|
Investment from members
|
45,000 | |||
|
Balance, December 31, 2008
|
2,534,781 | |||
|
Net loss (unaudited)
|
(132,811 | ) | ||
|
Balance, December 31, 2009 (unaudited)
|
2,401,970 | |||
|
Net income
|
116,335 | |||
|
Balance, December 31, 2010
|
$ | 2,518,305 | ||
|
ICON Aircraft 126 LLC
|
||||||||||||
|
(A Delaware Limited Liability Company)
|
||||||||||||
|
Years ended December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(unaudited)
|
||||||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net income (loss)
|
$ | 116,335 | $ | (132,811 | ) | $ | (4,337,226 | ) | ||||
|
Adjustments to reconcile net income (loss) to net cash
|
||||||||||||
|
used in operating activities:
|
||||||||||||
|
Rental income paid directly to lender by lessee
|
(5,940,000 | ) | (6,540,000 | ) | (6,540,000 | ) | ||||||
|
Interest and other income on maintenance reserve
|
- | - | (2,328 | ) | ||||||||
|
Depreciation and amortization
|
3,997,445 | 3,991,521 | 3,990,347 | |||||||||
|
Impairment loss
|
- | - | 3,900,000 | |||||||||
|
Interest expense from amortization of debt financing costs
|
26,316 | 22,978 | 47,892 | |||||||||
|
Interest expense on non-recourse financing paid directly to lender by lessee
|
2,255,551 | 2,495,904 | 2,729,973 | |||||||||
|
Change in operating assets and liabilities:
|
||||||||||||
|
Deferred rental income
|
(428,571 | ) | 171,429 | 171,429 | ||||||||
|
Accrued interest
|
(27,076 | ) | (9,021 | ) | (5,087 | ) | ||||||
|
Net cash used in operating activities
|
- | - | (45,000 | ) | ||||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Contributions received
|
- | - | 45,000 | |||||||||
|
|
||||||||||||
|
Net increase in cash
|
- | - | - | |||||||||
|
Cash, beginning of the year
|
- | - | - | |||||||||
|
|
||||||||||||
|
Cash, end of the year
|
$ | - | $ | - | $ | - | ||||||
|
|
||||||||||||
|
Supplemental disclosure of non-cash investing and financing activities:
|
||||||||||||
|
Principal and interest paid on non-recourse long-term debt
|
||||||||||||
|
directly to lender by lessee
|
$ | 5,940,000 | $ | 6,540,000 | $ | 6,540,000 | ||||||
74
ICON Aircraft 126 LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
(unaudited with regard to December 31, 2009)
|
(1)
|
ICON Aircraft 126 LLC (the “LLC”) was formed on February 15, 2002 as a Delaware limited liability company. The LLC is a joint venture between two affiliated entities, ICON Income Fund Eight B L.P. (“Fund Eight B”) and ICON Income Fund Nine, LLC (“Fund Nine”) (collectively, the “LLC’s Members”). Fund Eight B and Fund Nine each have a 50% ownership interest in the LLC’s profits, losses and cash distributions.
On March 4, 2002, the LLC acquired all of the outstanding shares of Delta Aircraft Leasing Limited (“D.A.L.”), a Cayman Islands registered company, for approximately $75,288,000, which was largely comprised of approximately $4,250,000 of cash and the assumption of approximately $70,280,000 of non-recourse debt. D.A.L. owns, through an owner trust, an Airbus A340-313X aircraft (“Aircraft 126”) that is on lease to Cathay Pacific Airways Limited (“Cathay”). The lender has a security interest in the aircraft and an assignment of the rental payments under the lease. The lease was initially scheduled to expire in March 2006, but was extended to July 1, 2011.
The Manager of the LLC’s Members is ICON Capital Corp., a Delaware corporation (the “Manager”). The Manager manages and controls the business affairs of the LLC, including, but not limited to, the equipment leases and other financing transactions that the LLC entered into pursuant to the terms of the respective limited partnership and limited liability company agreements with the LLC’s Members.
The accompanying consolidated financial statements have been prepared assuming that the LLC will continue as a going concern. At December 31, 2010, the LLC has a working capital deficit of $34,828,347 primarily relating to a balloon payment of $32,489,309 due on the non-recourse debt related to the financing of Aircraft 126, which matures on July 1, 2011. The LLC does not currently have the ability to satisfy the non-recourse debt relating to Aircraft 126. This condition raises substantial doubt about the LLC’s ability to continue as a going concern.
The 2010 financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
The LLC’s options related to this balloon payment include, but are not limited to, entering into a new lease arrangement, which would require a refinancing of the non-recourse debt. There can be no assurance that the Partnership will be able to re-lease Aircraft 126 and refinance the debt that is secured by the aircraft. As the debt is non-recourse, if the LLC does not refinance the debt, the lender could foreclose on Aircraft 126 to satisfy the loan.
|
(2)
|
Summary of Significant Accounting Policies
|
Basis of Presentation and Consolidation
The accompanying consolidated financial statements of the LLC have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”).
The consolidated financial statements include the accounts of the LLC and its wholly-owned subsidiary. All intercompany accounts and transactions have been eliminated in
consolidation.
ICON Aircraft 126 LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
(unaudited with regard to December 31, 2009)
|
(2)
|
Summary of Significant Accounting Policies - continued
|
Risks and Uncertainties
In the normal course of business, the LLC is exposed to two significant types of economic risk: credit and market. Credit risk is the risk of a lessee, borrower or other counterparty’s inability or unwillingness to make contractually required payments. See Note 8 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 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 to interest expense over the term of the debt instrument using the effective interest rate method. These costs are included in other non-current assets.
Leased Equipment at Cost
Investments in leased equipment are stated at cost less accumulated depreciation. Leased equipment is depreciated on a straight-line basis over the lease term, which typically ranges from 3 to 8 years, to the asset’s residual value.
The Manager has an investment committee that approved each new equipment lease and other financing transaction. As part of its process, the investment committee determined the residual value, if any, to be used once the investment was approved. The factors considered in determining the residual value included, but were not limited to, the creditworthiness of the potential lessee, the type of equipment considered, how the equipment was integrated into the potential lessee’s business, the length of the lease and the industry in which the potential lessee operated. Residual values are reviewed for impairment in accordance with each LLC’s Member’s impairment review policy.
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.
ICON Aircraft 126 LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
(unaudited with regard to December 31, 2009)
|
(2)
|
Summary of Significant Accounting Policies - continued
|
Asset Impairments
The asset in the LLC’s portfolio is periodically reviewed, no less frequently than annually, to determine whether events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss will be recognized only if the carrying value of a long-lived asset is not recoverable and exceeds its fair market value. If there is an indication of impairment, the LLC will estimate the future cash flows (undiscounted and without interest charges) expected from the use of the asset and its eventual disposition. Future cash flows are the future cash inflows expected to be generated by an asset less the future outflows expected to be necessary to obtain those inflows. If an impairment is determined to exist, the impairment loss will be measured as the amount by which the carrying value of a long-lived asset exceeds its fair value and recorded in the consolidated statement of operations in the period the determination is made.
The events or changes in circumstances that generally indicate that an asset may be impaired are (i) the estimated fair value of the underlying equipment is less than its carrying value or (ii) the lessee is experiencing financial difficulties and it does not appear likely that the estimated proceeds from the disposition of the asset will be sufficient to satisfy the residual position in the asset and, if applicable, the remaining obligation to the non-recourse lender. Generally in the latter situation, the residual position relates to equipment subject to third-party non-recourse debt where the lessee remits its rental payments directly to the lender and the LLC does not recover its residual position until the non-recourse debt is repaid in full. The preparation of the undiscounted cash flows requires the use of assumptions and estimates, including the level of future rents, the residual value expected to be realized upon disposition of the asset, estimated downtime between re-leasing events and the amount of re-leasing costs. The Manager’s review for impairment includes a consideration of the existence of impairment indicators including third-party appraisals, published values for similar assets, recent transactions for similar assets, adverse changes in market conditions for specific asset types and the occurrence of significant adverse changes in general industry and market conditions that could affect the fair value of the asset.
Revenue Recognition
Each equipment lease the LLC enters into is classified as either a finance lease or an operating lease, which is based upon the terms of each lease. For an operating lease, initial direct costs are included as a component of the cost of the equipment and depreciated over the lease term. The LLC has not entered into any finance leases.
For operating leases, rental income is recognized on a straight-line basis over the lease term. Billed operating lease receivables are included in accounts receivable until collected. Accounts receivable are stated at their estimated net realizable value. Deferred income is the difference between the timing of the cash payments and the income recognized on a straight-line basis.
ICON Aircraft 126 LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
(unaudited with regard to December 31, 2009)
|
(2)
|
Summary of Significant Accounting Policies - continued
|
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, 2010 and 2009.
Income Taxes
The LLC is taxed as a partnership for federal and State income tax purposes. No provision for income taxes has been recorded since the liability for such taxes is that of each of the members of the LLC’s Members rather than the LLC. The LLC’s income tax returns are subject to examination by the federal and State taxing authorities, and changes, if any, could adjust the individual income tax of the members of the LLC’s Members.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires the Manager to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates primarily include the determination of allowance for doubtful accounts, depreciation and amortization, impairment losses, estimated useful lives and residual values. Actual results could differ from those estimates.
Recently Adopted Accounting Pronouncements
In 2010, the LLC adopted the accounting pronouncement relating to variable interest entities, which requires assessments at each reporting period of which party within the variable interest entity is considered the primary beneficiary and requires a number of new disclosures related to variable interest entities. The adoption of this guidance did not have a material effect on the LLC’s consolidated financial statements as of December 31, 2010.
ICON Aircraft 126 LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
(unaudited with regard to December 31, 2009)
|
(3)
|
Leased Equipment at Cost
|
The LLC’s sole investment at December 31, 2010 and 2009 is Aircraft 126, which is on lease to Cathay. The lease was initially scheduled to expire in March 2006, but was extended to July 1, 2011.
In light of unprecedented high fuel prices during 2008 and the related impact on the airline industry, the Manager reviewed the LLC’s Members’ investments in Aircraft 126 as of June 30, 2008. Based on the Manager’s review, the carrying value of Aircraft 126 exceeded the expected undiscounted future cash flows of Aircraft 126 and, as a result, the LLC recorded an impairment charge representing the difference between the carrying value and the expected discounted future cash flows of Aircraft 126. Therefore, as of June 30, 2008, the LLC recorded an impairment loss on Aircraft 126 of approximately $3,900,000.
Depreciation expense was $3,997,445, $3,987,749 and $3,986,575 for the years ended December 31, 2010, 2009 and 2008, respectively.
Aggregate annual minimum future rentals receivable from the LLC’s non-cancelable lease for the next year consisted of $2,970,000 as of December 31, 2010. There will be no additional rentals receivable after 2011.
|
(4)
|
Non-recourse Long-Term Debt
|
Effective March 27, 2006, in connection with the lease extension, approximately $52,850,000 of non-recourse debt associated with Aircraft 126 was refinanced. The refinanced non-recourse debt matures on July 1, 2011 and requires a balloon payment of approximately $32,500,000 at maturity. The interest rate of the debt is fixed at 6.104%.
The aggregate maturities of non-recourse long-term debt consisted of $34,421,461 as of December 31, 2010. There are no amounts due after 2011.
|
(5)
|
Residual Sharing Agreement
|
The LLC is a party to a residual sharing agreement (the “Airtrade Residual Sharing Agreement”) with ICON Aircraft 123 LLC (“ICON 123”), a wholly-owned subsidiary of Fund Eight B, and Airtrade Capital Corp. (“Airtrade”). Pursuant to the terms of the Airtrade Residual Sharing Agreement, all proceeds received in connection with the sale or lease renewal of an Airbus A340-313X aircraft on lease to Cathay (“Aircraft 123”) or Aircraft 126 in excess of $8,500,000 of the applicable loan balance associated with each aircraft will be allocated 55% to the LLC or ICON 123, as applicable, and 45% to Airtrade.
ICON Aircraft 126 LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
(unaudited with regard to December 31, 2009)
|
(6)
|
Fair Value Measurements
|
The LLC is required, on a nonrecurring basis, to adjust the carrying value or provide valuation allowances for certain assets and liabilities using fair value measurements. Fair value information with respect to the LLC’s leased assets and liabilities is not separately provided since (i) the current accounting pronouncements do not require fair value disclosures of lease arrangements and (ii) the carrying value of financial assets, other than lease-related investments, and the recorded value of recourse debt approximate fair value due to their short-term maturities and variable interest rates. The estimated fair value of the LLC’s non-recourse debt was based on the discounted value of future cash flows related to the loan based on recent transactions of this type.
|
Carrying Amount
|
Fair Value
|
|||||||
|
Fixed rate non-recourse long-term debt
|
$ | 34,421,461 | $ | 35,064,497 | ||||
|
(7)
|
Transactions with Related Parties
|
The LLC does not maintain a separate bank account and, therefore, in the normal course of operations, the LLC’s Members will pay certain operating and general and administrative expenses on behalf of the LLC in proportion to their membership interests.
The financial condition and results of operations of the LLC, as reported, are not necessarily indicative of the results that would have been reported had the LLC operated completely independently.
Under the terms of a maintenance agreement between ICON 123 and the LLC, the LLC paid approximately $143,000 in maintenance costs on behalf of ICON 123. ICON 123 intends to reimburse the LLC if and when it receives proceeds from the sale of Aircraft 123.
|
(8)
|
Concentrations of Risk
|
For the years ended December 31, 2010, 2009 and 2008, the LLC had one lessee that accounted for 100% of total rental income and one lender that accounted for 99%, 98% and 98% of total liabilities, respectively.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ICON Income Fund Nine, LLC
(Registrant)
By: ICON Capital Corp.
(Manager of the Registrant)
March 25, 2011
|
By: /s/ Michael A. Reisner
|
|
Michael A. Reisner
|
|
Co-Chief Executive Officer and Co-President
(Co-Principal Executive Officer)
|
|
By: /s/ Mark Gatto
|
|
Mark Gatto
|
|
Co-Chief Executive Officer and Co-President
(Co-Principal Executive Officer)
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
ICON Income Fund Nine, LLC
(Registrant)
By: ICON Capital Corp.
(Manager of the Registrant)
March 25, 2011
|
By: /s/ Michael A. Reisner
|
|
Michael A. Reisner
|
|
Co-Chief Executive Officer, Co-President and Director
(Co-Principal Executive Officer)
|
|
By: /s/ Mark Gatto
|
|
Mark Gatto
|
|
Co-Chief Executive Officer, Co-President and Director
(Co-Principal Executive Officer)
|
|
By: /s/ Anthony J. Branca
|
|
Anthony J. Branca
|
|
Chief Financial Officer
|
|
(Principal Accounting and Financial Officer)
|
|
81
|