Attached files

file filename
EX-32.3 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - ICON LEASING FUND ELEVEN, LLCex32-3.htm
EX-32.1 - CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - ICON LEASING FUND ELEVEN, LLCex32-1.htm
EX-31.2 - CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - ICON LEASING FUND ELEVEN, LLCex31-2.htm
EX-31.1 - CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - ICON LEASING FUND ELEVEN, LLCex31-1.htm
EX-31.3 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - ICON LEASING FUND ELEVEN, LLCex31-3.htm
EX-32.2 - CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - ICON LEASING FUND ELEVEN, LLCex32-2.htm
 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
   
 
For the fiscal year ended December 31, 2010
   
 
OR
   
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
   
   For the transitional period from _____ to _____

Commission file number: 000-51916
 
ICON Leasing Fund Eleven, LLC
 (Exact name of registrant as specified in its charter)
 
Delaware
 
20-1979428
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
100 Fifth Avenue, 4th Floor
New York, New York
 
 
10011
(Address of principal executive offices)
 
(Zip Code)

(212) 418-4700
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:  None
 
Securities registered pursuant to Section 12(g) of the Act:  Shares of Limited Liability Company Interests
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes     No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes     No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ    No 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                                
  Yes    No 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    
þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer       Accelerated filer         Non-accelerated filer þ     Smaller reporting company 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
   Yes     No þ
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter:  Not applicable.  There is no established market for shares of limited liability company interests of the registrant.
 
Number of outstanding shares of limited liability company interests of the registrant on March 21, 2011 is 362,656.

DOCUMENTS INCORPORATED BY REFERENCE
None.


 
 

 

 
 
Page
1
1
4
18
18
18
18
   
19
19
21
22
44
45
85
85
85
   
86
86
88
88
88
89
   
90
90
102
 


Forward-Looking Statements

Certain statements within this Annual Report on Form 10-K may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”).  These statements are being made pursuant to the PSLRA, with the intention of obtaining the benefits of the “safe harbor” provisions of the PSLRA, and, other than as required by law, we assume no obligation to update or supplement such statements.  Forward-looking statements are those that do not relate solely to historical fact.  They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events.  You can identify these statements by the use of words such as “may,” “will,” “could,” “anticipate,” “believe,” “estimate,” “expect,” “continue,” “further,” “plan,” “seek,” “intend,” “predict” or “project” and variations of these words or comparable words or phrases of similar meaning.  These forward-looking statements reflect our current beliefs and expectations with respect to future events and are based on assumptions and are subject to risks and uncertainties and other factors outside our control that may cause actual results to differ materially from those projected.  We undertake no obligation to update publicly or review any forward-looking statement, whether as a result of new information, future developments or otherwise.


Our History

ICON Leasing Fund Eleven, LLC (the “LLC” or “Fund Eleven”) was formed on December 2, 2004 as a Delaware limited liability company.  The LLC will continue until December 31, 2024, unless terminated sooner.  When used in this Annual Report on Form 10-K, the terms “we,” “us,” “our” or similar terms refer to the LLC and its consolidated subsidiaries.

Our manager is ICON Capital Corp., a Delaware corporation (our “Manager”). Our Manager manages and controls our business affairs, including, but not limited to, our equipment leases and other financing transactions that we enter into pursuant to the terms of our amended and restated limited liability company agreement (our “LLC Agreement”).

We are currently in our operating period.  Our offering period began in April 2005 and ended in April 2007.  Our initial capitalization of $2,000 was contributed on December 17, 2004, which consisted of $1,000 from our Manager and $1,000 from an officer of our Manager.  We subsequently redeemed the $1,000 contributed by the officer of our Manager.  We initially offered shares of limited liability company interests (“Shares”) with the intention of raising up to $200,000,000 of capital.  On March 8, 2006, we commenced a consent solicitation of our members to amend and restate our limited liability company agreement in order to increase the maximum offering amount from up to $200,000,000 to up to $375,000,000.  The consent solicitation was completed on April 21, 2006 with the requisite consents received from our members.  We filed a new registration statement (the “New Registration Statement”) to register up to an additional $175,000,000 of Shares with the Securities and Exchange Commission (the “SEC”) on May 2, 2006.  The New Registration Statement was declared effective by the SEC on July 3, 2006, and we commenced the offering of the additional 175,000 Shares thereafter.

Our initial closing was on May 6, 2005, with the sale of 1,200 Shares representing $1,200,000 of capital contributions.  Through the end of our offering period on April 21, 2007, we sold 365,199 Shares, representing $365,198,690 of capital contributions. In addition, pursuant to the terms of our offering, we established a reserve in the amount of 0.5% of the gross offering proceeds, or $1,825,993.  Through December 31, 2010, we repurchased 2,543 Shares, bringing the total number of outstanding Shares to 362,656. From May 6, 2005 through April 21, 2007, we paid sales commissions to third parties and various fees to our Manager and ICON Securities Corp., a wholly-owned subsidiary of our Manager (“ICON Securities”). The sales commissions and fees paid to our Manager and its affiliate are recorded as a reduction of our equity.  Through December 31, 2007, we paid (i) $29,210,870 of sales commissions to third parties, (ii) $6,978,355 of organizational and offering expense allowance to our Manager, and (iii) $7,304,473 of underwriting fees to ICON Securities.

 


Our Business

We operate as an equipment leasing and finance program in which the capital our members invested was pooled together to make investments, pay fees and establish a small reserve. We primarily acquire equipment subject to lease, purchase equipment and lease it to third parties, provide equipment and other financing and, to a lesser degree, acquire ownership rights to items of leased equipment at lease expiration. Some of our equipment leases are acquired for cash and are expected to provide current cash flow, which we refer to as “income” leases. For our other equipment leases, we finance the majority of the purchase price through borrowings from third parties. We refer to these leases as “growth” leases. These growth leases generate little or no current cash flow because substantially all of the rental payments received from the lessee are used to service the indebtedness associated with acquiring or financing the lease. For these leases, we anticipate that the future value of the leased equipment will exceed the cash portion of the purchase price.
 
We divide the life of the program into three distinct phases:

 
(1) Offering Period: We invested most of the net proceeds from the sale of Shares in equipment leases and other financing transactions.

 
(2) Operating Period: After the close of the offering period, we reinvested and continue to reinvest the cash generated from our initial investments to the extent that cash is not used for our expenses, reserves and distributions to members. We anticipate that the operating period will end five years from the end of our offering period, or April 2012.  However, our Manager may, at its sole discretion, extend the operating period for up to an additional three years.

 
(3)  Liquidation Period: After the operating period, we will then sell our assets in the ordinary course of business. Our goal is to complete the liquidation period within three years from the end of the operating period, but it may take longer to do so.

At December 31, 2010 and 2009, we had total assets of $158,213,941 and $272,120,852, respectively. For the year ended December 31, 2010, two lessees accounted for approximately 80.1% of our total rental and finance income of $37,221,483. We had a net loss attributable to us for the year ended December 31, 2010 of $6,696,493. For the year ended December 31, 2009, three lessees accounted for approximately 63.0% of our total rental and finance income of $66,647,989.   We had a net loss attributable to us for the year ended December 31, 2009 of $45,095,916. For the year ended December 31, 2008, three lessees accounted for approximately 55.4% of our total rental and finance income of $94,660,802. We had a net loss attributable to us for the year ended December 31, 2008 of $5,797,721.

At December 31, 2010, our portfolio, which we hold either directly or through joint ventures, consisted primarily of the following investments:

Lumber Processing Equipment

·  
We own equipment, plant and machinery that is subject to a lease with The Teal Jones Group and Teal Jones Lumber Services, Inc. (collectively, “Teal Jones”). The lease expires in November 2013. We also hold a related mortgage note receivable that is due on December 1, 2013.

Marine Vessels

Container Vessels

·  
We owned two container vessels on bareboat charter to ZIM Integrated Shipping Services Ltd. (“ZIM”), the M/V ZIM Hong Kong and the M/V ZIM Israel. On September 23, 2010, our wholly-owned subsidiaries ICON European Container KS (“ICON European Container”) and ICON European Container II KS (“ICON European Container II”) entered into memoranda of agreement (the “ZIM MOAs”) to sell the container vessels, the M/V ZIM Andaman Sea, the M/V ZIM Hong Kong, the M/V ZIM Israel, and the M/V ZIM Japan Sea (collectively, the “ZIM Vessels”), to unaffiliated third parties for the purchase price of $11,250,000 per vessel. In connection with the ZIM MOAs, each purchaser paid a deposit in the amount of $1,125,000 for its respective vessel.  Effective September 30, 2010, the ZIM Vessels have been classified as assets held for sale. During November 2010, ICON European Container sold the M/V ZIM Japan Sea and the M/V ZIM Andaman Sea vessels.  During February 2011, ICON European Container II sold the M/V ZIM Hong Kong vessel and during March 2011, ICON European Container II sold the M/V ZIM Israel vessel.
 
 

 
Aframax Product Tankers

·  
We own two Aframax product tankers, the M/T Senang Spirit (the “Senang Spirit”) and the M/T Sebarok Spirit (the “Sebarok Spirit”) (collectively, the “Teekay Vessels”), which are subject to bareboat charters that expire in April 2012.

Telecommunications Equipment

·  
Our wholly-owned subsidiary ICON Global Crossing III, LLC (“ICON Global Crossing III”) owns telecommunications equipment that is subject to leases with the Global Crossing Telecommuncations, Inc. ("Global Crossing"). The leases expire on June 30, 2011 and September 30, 2011.

·  
We have a 55% ownership interest in ICON Global Crossing V, LLC (“ICON Global Crossing V”), which purchased telecommunications equipment that is subject to a lease with Global Crossing. On January 3, 2011, upon the conclusion of the lease, ICON Global Crossing V sold its telecommunications equipment to Global Crossing.

Manufacturing Equipment

·  
Our wholly-owned subsidiary ICON French Equipment I, LLC (“ICON Heuliez”) owns auto parts manufacturing equipment, which was purchased from and leased back to Heuliez SA (“HSA”) and Heuliez Investissements SNC (“Heuliez”). The leases expire on December 31, 2014.

·  
We owned machining and metal working equipment subject to lease with MW Scott, Inc. (“Scott”), MW General, Inc. (“General”) and AMI Manchester, LLC (“AMI Manchester”), all of which are wholly-owned subsidiaries of MW Universal, Inc. (“MWU”).  The leases expire on December 31, 2012. On September 1, 2010, we amended our schedule with AMI Manchester and Gallant Steel, Inc. (collectively, “AMI”) to restructure AMI’s payment obligations and extend the base term of the schedule through December 31, 2013.  On September 30, 2010, we, ICON Income Fund Ten, LLC (“Fund Ten”) and ICON Leasing Fund Twelve, LLC (“Fund Twelve”) (collectively, the “Participating Funds”) terminated the credit support agreement. Simultaneously with the termination, we and Fund Twelve formed ICON MW, LLC (“ICON MW”), with ownership interests of 6.33% and 93.67%, respectively, and, as contemplated by the credit support agreement, we contributed all of our interest in the assets related to the financing of the MWU subsidiaries (primarily in the form of machining and metal working equipment subject to lease with AMI, General, and Scott) to ICON MW to extinguish our obligations under the credit support agreement and receive an ownership interest in ICON MW. The methodology used to determine the ownership interests was at the discretion of our Manager.

·  
We have a 45% ownership interest in ICON EAR, LLC (“ICON EAR”), which purchased and simultaneously leased back semiconductor manufacturing equipment to Equipment Acquisition Resources, Inc. (“EAR”).  The lease was scheduled to expire on June 30, 2013; however, in October 2009, certain facts came to light that led our Manager to believe that EAR was perpetrating a fraud against EAR’s lenders, including ICON EAR.

·  
Our wholly-owned subsidiary ICON EAR II, LLC (“ICON EAR II”) owns semiconductor manufacturing equipment, which was purchased from and leased back to EAR.  The lease was scheduled to expire on June 30, 2013, but on October 23, 2009, EAR filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Effective December 31, 2009, these assets have been classified as assets held for sale.
 
·  
We have a 55% ownership interest in ICON Pliant, LLC (“ICON Pliant”), which owns manufacturing equipment. The equipment is subject to a 60-month lease that expires on September 30, 2013.
 
 
 
Notes Receivable Secured by Point-of-Sale Equipment

·  
We have a 35% ownership interest in ICON Northern Leasing, LLC ("ICON Northern Leasing"), which holds four promissory notes (the “Northern Notes”) issued by Northern Capital Associates XIV, L.P., as borrower, in favor of Merrill Lynch Commercial Finance Corp. The Northern Notes are secured by an underlying pool of leases for point-of-sale equipment.
 
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 parties, providing equipment and other financing, acquiring equipment subject to lease and, to a lesser degree, acquiring ownership rights to items of leased equipment at lease expiration.
 
Competition

The commercial leasing and financing industry is highly competitive and is characterized by competitive factors that vary based upon product and geographic region. When we made our current investments and as we seek to make new investments, we competed and compete with a variety of competitors, including other equipment leasing and finance funds, hedge funds, 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 currently offer, which may have affected our ability to make our current investments and may affect our ability to make future investments, in each case, in a manner that would enable us to achieve our investment objectives.  For additional information about our competition and other risks related to our operations, please see “Item 1A. Risk Factors.”

Employees

We have no direct employees. Our Manager has full and exclusive control over our management and operations.

Available Information

Our Annual Report on Form 10-K, our most recent Quarterly Reports on Form 10-Q and any amendments to those reports and our Current Reports on Form 8-K and any amendments to those reports are available free of charge on our Manager’s internet website at http://www.iconcapital.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC.  The information contained on our Manager’s website is not deemed part of this Annual Report on Form 10-K.  Our reports are also available on the SEC’s website at http://www.sec.gov.

Financial Information Regarding Geographic Areas
 
We have long-lived assets, which include finance leases and operating leases, and we generate revenues in geographic areas outside of the United States. For additional information, see Note 18 to our consolidated financial statements.


We are subject to a number of risks.  Careful consideration should be given to the following risk factors, in addition to the other information included in this Annual Report. The risks and uncertainties described below are not the only ones we may face.  Each of these risk factors could adversely affect our business operating results and/or financial condition, as well as adversely affect the value of an investment in our Shares. In addition to the following disclosures, please refer to the other information contained in this Annual Report including the consolidated financial statements and the related notes.
 
 

 
General Investment Risks

All or a substantial portion of your distributions may be a return of capital and not a return on capital, which will not necessarily be indicative of our performance.

The portion of total distributions that is a return of capital and the portion that is economic return will depend upon a number of factors that cannot be determined until all of our investments have been sold or otherwise matured. At that time, you will be able to compare the total amount of all cash distributions you receive to your total capital invested in order to determine your economic return.

The Internal Revenue Service (the “IRS”) may 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 repurchase your Shares, you may receive significantly less than you would receive if you were to hold your Shares for the life of the fund.

You may request that we repurchase up to all of your Shares. We are under no obligation to do so, however, and will have only limited cash available for this purpose. If we repurchase your Shares, the repurchase price has been unilaterally set and, depending upon when you request repurchase, the repurchase price may be less than the unreturned amount of your investment. If your Shares are repurchased, the repurchase price may provide you a significantly lower value than the value you would realize by retaining your Shares for the duration of the fund.

You may not receive cash distributions every month and, therefore, you should not rely on any income from your Shares.

You should not rely on the cash distributions from your Shares as a source of income. While we intend to make monthly cash distributions, our Manager has and may determine again in the future that it is in our best interest to periodically change the amount of the cash distributions you receive or not make any distributions in some months. Losses from our operations of the types described in these risk factors and unexpected liabilities could result in a reduced level of distributions to you. Additionally, during the liquidation period, although we expect that lump sums will be distributed from time to time if and when financially significant assets are sold, regularly scheduled distributions will decrease because there will be fewer investments available to generate cash flow.

Your Shares may be diluted.

Some investors, including our Manager and its officers, directors and other affiliates, may have purchased Shares at discounted prices and generally will share in our revenues and distributions based on the number of Shares that they purchased, rather than the discounted subscription price paid by them for their Shares. As a result, investors who paid discounted prices for their Shares will receive higher returns on their Shares as compared to investors who paid the entire $1,000 per Share.
 
 

 
Our assets may be plan assets for ERISA purposes, which could subject our Manager to additional restrictions on its ability to operate our business.

The Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and the Internal Revenue Code of 1986, as amended (the “Code”) may apply what is known as the look-through rule to an investment in our Shares. Under that rule, the assets of an entity in which a qualified plan or IRA has made an equity investment may constitute assets of the qualified plan or IRA. If you are a fiduciary of a qualified plan or IRA, you should consult with your advisors and carefully consider the effect of that treatment if that were to occur. If the look-through rule were to apply, our Manager may be viewed as an additional fiduciary with respect to the qualified plan or IRA to the extent of any decisions relating to the undivided interest in our assets represented by the Shares held by such qualified plan or IRA. This could result in some restriction on our Manager’s willingness to engage in transactions that might otherwise be in the best interest of all Share holders due to the strict rules of ERISA regarding fiduciary actions.

The statements of value that we include in this Annual Report on Form 10-K and future Annual Reports on Form 10-K and that we send to fiduciaries of plans subject to ERISA and to certain other parties is only an estimate and may not reflect the actual value of our Shares.

The statements of estimated value are based on the estimated value of each Share (i) as of the close of our fiscal year, for the annual statements included in this and future Annual Reports on Form 10-K and (ii) as of September 30 of each fiscal year, for annual statements sent to fiduciaries of plans subject to ERISA and certain other parties. Management, in part, will rely upon third-party sources and advice in arriving at this estimated value. No independent appraisals on the particular value of our Shares will be obtained and the value will be based upon an estimated fair market value as of the referenced date for such value. Because this is only an estimate, we may subsequently revise any valuation that is provided. We cannot ensure that:

·  
this estimate of value could actually be realized by us or by our members upon liquidation;
·  
members could realize this estimate of value if they were to attempt to sell their Shares;
·  
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
·  
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.

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:

·  
our Manager may receive more fees for making investments in which we incur indebtedness to fund these investments than if indebtedness is not incurred;
·  
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;
·  
our Manager may have opportunities to earn fees for referring a prospective investment opportunity to others;
·  
the lack of separate legal representation for us and our Manager and lack of arm’s-length negotiations regarding compensation payable to our Manager;
·  
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
·  
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.
 
 

 
The Investment Committee of our Manager is not independent.

Any conflicts in determining and allocating investments between us and our Manager, or between us and another fund managed by our Manager, are resolved by our Manager’s investment committee, which also serves as the investment committee for other funds managed by our Manager. Since all of the members of our Manager’s investment committee are officers of our Manager and are not independent, matters determined by such investment committee, including conflicts of interest between us and our Manager and our affiliates involving investment opportunities, may not be as favorable to you and our other investors as they would be if independent members were on the committee. Generally, if an investment is appropriate for more than one fund, our Manager’s investment committee will allocate the investment to a fund (which includes us) after taking into consideration at least the following factors:

·  
whether the fund has the cash required for the investment;
·  
whether the amount of debt to be incurred with respect to the investment is acceptable for the fund;
·  
the effect the investment would have on the fund’s cash flow;
·  
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.;
·  
whether the term of the investment is within the term of the fund; and
·  
which fund has been seeking investments for the longest period of time.
 
Notwithstanding the foregoing, our Manager’s investment committee may make exceptions to these general policies when, in our Manager’s judgment, other circumstances make application of these policies inequitable or economically undesirable. In addition, our LLC Agreement permits our Manager and our affiliates to engage in equipment acquisitions, financing secured loans, refinancing, leasing and releasing opportunities on their own behalf or on behalf of other funds even if they compete with us.

Our Manager’s officers and employees manage other businesses and will not devote their time exclusively to managing us and our business.

We do not and will not employ our own full-time officers, managers or employees. Instead, our Manager will supervise and control our business affairs. Our Manager’s officers and employees will also be spending time supervising the affairs of other equipment leasing and finance funds it manages. Therefore, such officers and employees devoted and will devote the amount of time that they think is necessary to conduct our business, which may not be the same amount of time that would be devoted to us if we had separate officers and employees.

Our Manager and its affiliates will receive expense reimbursements and substantial fees from us.

The expense reimbursements and fees of our Manager and its affiliates were established by our Manager in compliance with the NASAA Guidelines (the North American Securities Administrators Association guidelines for publicly offered, finite-life equipment leasing and finance funds) in effect on the date of our prospectus, are not based on arm’s-length negotiations, but are subject to the limitations set forth in our LLC Agreement.  In general, expense reimbursements and fees are paid without regard to the amount of our cash distributions to our additional members, and regardless of the success or profitability of our operations. Some of those fees and expense reimbursements will be required to be paid as we acquire our portfolio and we may pay other expenses, such as accounting and interest expenses, costs for supplies, etc., even though we may not yet have begun to receive revenues from all of our investments.
 
 

 
Furthermore, we borrowed a significant portion of the purchase price of certain of our investments.  As a consequence, we paid greater fees to our Manager than if no indebtedness were incurred because management and acquisition fees are based upon the gross payments earned or receivable from, or the purchase price (including any indebtedness incurred) of, our investments.  The reimbursement of expenses and payment of fees could adversely affect our ability to make distributions to our additional members.

Our Manager may have difficulty managing its growth, which may divert its resources and limit its ability to expand its operations successfully.

The amount of assets that our Manager manages has grown substantially since our Manager was formed in 1985 and our Manager and its affiliates intend to continue to sponsor and manage, as applicable, funds similar to us that may be concurrent with us and they expect to experience further growth in their respective assets under management. Our Manager’s future success will depend on the ability of its and its affiliates’ officers and key employees to implement and improve their operational, financial and management controls, reporting systems and procedures, and manage a growing number of assets and investment funds. They, however, may not implement improvements to their management information and control systems in an efficient or timely manner and they may discover deficiencies in their existing systems and controls. Thus, our Manager’s anticipated growth may place a strain on its administrative and operations infrastructure, which could increase its costs and reduce its efficiency and could negatively impact our operations, business and financial condition.

Operational risks may disrupt our business and result in losses.

We may face operational risk from errors made in the execution, confirmation or settlement of transactions. We may also face operational risk from our transactions not being properly recorded, evaluated or accounted for. We rely heavily on our Manager’s financial, accounting, and other software systems. If any of these systems fail to operate properly or become disabled, we could suffer financial loss and a disruption of our business.  In addition, we are highly dependent on our Manager’s information systems and technology. There can be no assurance that these information systems and technology will be able to accommodate our Manager’s growth or that the cost of maintaining such systems will not increase from its current level. Such a failure to accommodate growth, or an increase in costs related to such information systems, could also negatively affect our liquidity and cash flows, and could negatively affect our profitability.  Furthermore, we depend on the headquarters of our Manager, which are located in New York City, for the operation of our business. A disaster or a disruption in the infrastructure that supports our businesses, including a disruption involving electronic communications or other services used by us or third parties with whom we conduct business, or directly affecting our headquarters, may have an adverse impact on our ability to continue to operate our business without interruption that could have a material adverse effect on us. Although we have disaster recovery programs in place, there can be no assurance that these will be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for any losses.  Finally, we rely on third-party service providers for certain aspects of our business, including certain accounting and financial services. Any interruption or deterioration in the performance of these third parties could impair the quality of our operations and could adversely affect our business and result in losses.

Our internal controls over financial reporting may not be effective, 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, as amended, including the filing of quarterly and annual reports. Prior public funds sponsored by our Manager have been and are subject to the same requirements. Some of these funds have been required to amend previously filed reports to, among other things, restate the audited or unaudited financial statements filed in such reports. As a result, the prior funds have been delinquent in filing subsequent quarterly and annual reports when they became due. If we experience delays in the filing of our reports, our members may not have access to timely information concerning us, our operations, and our financial results.

Your ability to institute a cause of action against our Manager and its affiliates is limited by our LLC Agreement.

Our LLC Agreement provides that neither our Manager nor any of its affiliates will have any liability to us for any loss we suffer arising out of any action or inaction of our Manager or an affiliate if our Manager or affiliate determined, in good faith, that the course of conduct was in our best interests and did not constitute negligence or misconduct. As a result of these provisions in our LLC Agreement, your right to institute a cause of action against our Manager may be more limited than it would be without these provisions.

Business Risks

Our business could be hurt by economic downturns.

Our business is affected by a number of economic factors, including the level of economic activity in the markets in which we operate. A decline in economic activity in the United States or internationally has and could materially affect our financial condition and results of operations in the future. 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:

·  
fluctuations in demand for equipment and fluctuations in interest rates and inflation rates;
·  
fluctuations in the availability and cost of credit for us to borrow to make and/or realize on some of our investments;
·  
the continuing economic life and value of equipment at the time our investments mature;
·  
the technological and economic obsolescence of equipment;
·  
potential defaults by lessees, borrowers or other counterparties;
·  
supervision and regulation by governmental authorities; and
·  
increases in our expenses, including taxes and insurance expenses.

The risks and uncertainties associated with the industries of our lessees, borrowers, and other counterparties may indirectly affect our business, operating results and financial condition.

We are indirectly subject to a number of uncertainties associated with the industries of our lessees, borrowers, and other counterparties. We invest in a pool of equipment by, among other things, acquiring equipment subject to lease, purchasing equipment and leasing equipment to third-party end users, financing equipment for third-party end users, acquiring ownership rights to items of leased equipment at lease expiration, and acquiring interests or options to purchase interests in the residual value of equipment. The lessees, borrowers, and other counterparties to these transactions operate in a variety of industries. As such, we are indirectly subject to the various risks and uncertainties that affect our lessees’, borrowers’, and other counterparties’ businesses and operations. If such risks or uncertainties were to affect our lessees, borrowers, or other counterparties, we may indirectly suffer a loss on our investment, lose future revenues or experience adverse consequences to our business, operating results and financial condition.
 
 

 
Instability in the credit markets could have a material adverse effect on our results of operations, financial condition and ability to meet our investment objectives.

If debt financing is not available on terms and conditions we find acceptable, we may not be able to obtain financing for some of our investments. Recently, domestic and international financial markets have experienced unusual volatility and uncertainty. If this volatility and uncertainty persists, our ability to borrow to finance the acquisition of some of our investments could be significantly impacted. If we are unable to borrow on terms and conditions that we find acceptable, we may have to reduce the number of and possibly limit the type of investments we will make, and the return on some of the investments we do make could be lower. All of these events could have a material adverse effect on our results of operations, financial condition and ability to meet our investment objectives.

Because we borrowed and may in the future borrow money to make our investments, losses as a result of lessee, borrower or other counterparty defaults may be greater than if such borrowings were not incurred.

Although we acquired some of our investments for cash, we borrowed and may in the future borrow a substantial portion of the purchase price of certain of our investments. While we believe the use of leverage will result in our ability to make more investments with less risk than if leverage is not utilized, there can be no assurance that the benefits of greater size and diversification of our portfolio will offset the heightened risk of loss in an individual investment using leverage.  With respect to non-recourse borrowings, if we are unable to pay our debt service obligations because a lessee, borrower or other counterparty defaults, a lender could foreclose on the investment securing the non-recourse indebtedness. This could cause us to lose all or part of our investment or could force us to meet debt service payment obligations so as to protect our investment subject to such indebtedness and prevent it from being subject to repossession.  Additionally, while the majority of our borrowings are non-recourse, we are jointly and severally liable for recourse indebtedness incurred under a 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), ICON Income Fund Eight B L.P. (“Fund Eight B”), ICON Income Fund Nine, LLC (“Fund Nine”), Fund Ten, 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:

·  
received less than reasonably equivalent value or fair consideration for the incurrence of such guarantee; and
·  
was insolvent or rendered insolvent by reason of such incurrence; or
·  
was engaged in a business or transaction for which the guarantor’s remaining assets constituted unreasonably small capital; or
·  
intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature.

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:

·  
the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all of its assets;
·  
if the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or
·  
it could not pay its debts as they become due.

We cannot assure you as to what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard. We also cannot make any assurances as to the standards that courts in foreign jurisdictions may use or that courts in foreign jurisdictions will take a position similar to that taken in the United States.

If the value of our investments declines more rapidly than we anticipate, our financial performance may be adversely affected.

A significant part of the value of a significant portion of the equipment that we invest in is expected to be the potential value of the equipment once the lease term expires (with respect to leased equipment). Generally, equipment is expected to decline in value over its useful life. In making these types of investments, we assume a residual value for the equipment at the end of the lease or other investment that, at maturity, is expected to be enough to return the cost of our investment in the equipment and provide a rate of return despite the expected decline in the value of the equipment over the term of the investment. However, the actual residual value of the equipment at maturity and whether that value meets our expectations will depend to a significant extent upon the following factors, many of which are beyond our control:

·  
our ability to acquire or enter into agreements that preserve or enhance the relative value of the equipment;
·  
our ability to maximize the value of the equipment at maturity of our investment;
·  
market conditions prevailing at maturity;
·  
the cost of new equipment at the time we are remarketing used equipment;
·  
the extent to which technological or regulatory developments reduce the market for such used equipment;
·  
the strength of the economy; and
·  
the condition of the equipment at maturity.

We cannot assure you that our assumptions with respect to value will be accurate or that the equipment will not lose value more rapidly than we anticipate.

If equipment is not properly maintained, its residual value may be less than expected.

If a lessee or other counterparty fails to maintain equipment in accordance with the terms of our agreements, we may have to make unanticipated expenditures to repair the equipment in order to protect our investment. In addition, some of the equipment we invest in is used equipment. While we plan to inspect most used equipment prior to making an investment, there is no assurance that an inspection of used equipment prior to purchasing it will reveal any or all defects and problems with the equipment that may occur after it is acquired by us.
 
 

 
We typically obtain representations from the sellers and lessees of used equipment that:

·  
the equipment has been maintained in compliance with the terms of applicable agreements;
·  
that neither the seller nor the lessee is in violation of any material terms of such agreements; and
·  
the equipment is in good operating condition and repair and that, with respect to leases, the lessee has no defenses to the payment of rent for the equipment as a result of the condition of such equipment.

We would have rights against the seller of equipment for any losses arising from a breach of representations made to us and against the lessee for a default under the lease. However, we cannot assure you that these rights will make us whole with respect to our entire investment in the equipment or our expected returns on the equipment, including legal costs, costs of repair and lost revenue from the delay in being able to sell or re-lease the equipment due to undetected problems or issues. These costs and lost revenue could negatively affect our liquidity and cash flows, and could negatively affect our profitability if we are unable to recoup such costs from the lessee or other third parties.

If a lessee, borrower or other counterparty defaults on its obligations to us, we could incur losses.

We enter into transactions with parties that have senior debt rated below investment grade or no credit rating. We do not require such parties to have a minimum credit rating. Lessees, borrowers, and other counterparties with lower or no credit ratings may default on payments to us more frequently than lessees, borrowers or other counterparties with higher credit ratings. For example, if a lessee does not make lease payments to us or to a lender on our behalf or a borrower does not make loan payments to us when due, or violates the terms of its contract in another important way, we may be forced to terminate our agreements with such parties and attempt to recover the equipment. We may do this at a time when we may not be able to arrange for a new lease or to sell our investment right away, if at all. We would then lose the expected revenues and might not be able to recover the entire amount or any of our original investment. The costs of recovering equipment upon a lessee’s or borrower’s default, enforcing the obligations under the contract, and transporting, storing, repairing, and finding a new lessee or purchaser for the equipment may be high and may negatively affect the value of our investment in the equipment. These costs could also negatively affect our liquidity and cash flows, and could negatively affect our profitability.

If a lessee, borrower or other counterparty files for bankruptcy, we may have difficulty enforcing the terms of the contract and may incur losses.

If a lessee, borrower or other counterparty files for protection under the bankruptcy laws, the remaining term of the lease, loan or other financing contract could be shortened or the contract could be rejected by the bankruptcy court, which could result in, among other things, any unpaid pre-bankruptcy lease, loan or other contractual payments being cancelled as part of the bankruptcy proceeding. We may also experience difficulties and delays in recovering equipment from a bankrupt lessee or borrower that is involved in a bankruptcy proceeding or has been declared bankrupt by a bankruptcy court. If a contract is rejected in a bankruptcy, we would bear the cost of retrieving and storing the equipment and then have to remarket such equipment. In addition, the bankruptcy court would treat us as an unsecured creditor for any amounts due under the lease, loan or other contract. These costs and lost revenues could also negatively affect our liquidity and cash flows and could negatively affect our profitability.

We may invest in options to purchase equipment that could become worthless if the option grantor files for bankruptcy.

We may acquire options to purchase equipment, usually for a fixed price at a future date. In the event of a bankruptcy by the party granting the option, we might be unable to enforce the option or recover the option price paid, which could negatively affect our profitability.

Investing in equipment in foreign countries may be riskier than domestic investments and may result in losses.

We made and may in the future make investments in equipment for use by domestic or foreign parties outside of the United States. We may have difficulty enforcing our rights under foreign transaction documents. In addition, we may have difficulty repossessing equipment if a foreign party defaults and enforcement of our rights outside the United States could be more expensive. Moreover, foreign jurisdictions may confiscate our equipment. Use of equipment in a foreign country will be subject to that country’s tax laws, which may impose unanticipated taxes. While we seek to require lessees, borrowers, and other counterparties to reimburse us for all taxes imposed on the use of the equipment and require them to maintain insurance covering the risks of confiscation of the equipment, we cannot assure you that we will be successful in doing so or that insurance reimbursements will be adequate to allow for recovery of and a return on foreign investments.
 
 

 
In addition, we invest in equipment that may travel to or between locations outside of the United States. Regulations in foreign countries may adversely affect our interest in equipment in those countries. Foreign courts may not recognize judgments obtained in U.S. courts and different accounting or financial reporting practices may make it difficult to judge the financial viability of a lessee, borrower or other counterparty, heightening the risk of default and the loss of our investment in such equipment, which could have a material adverse effect on our results of operations and financial condition.

In addition to business uncertainties, our investments may be affected by political, social, and economic uncertainty affecting a country or region. Many financial markets are not as developed or as efficient as those in the U.S. and, as a result, liquidity may be reduced and price volatility may be higher. The legal and regulatory environment may also be different, particularly with respect to bankruptcy and reorganization. Financial accounting standards and practices may also differ and there may be less publicly available information with respect to such companies. While our Manager considers these factors when making investment decisions, no assurance can be given that we will be able to fully avoid these risks or generate sufficient risk-adjusted returns.

We could incur losses as a result of foreign currency fluctuations.

We have the ability to invest in equipment where payments to us are not made in U.S. dollars. In these cases, we may then enter into a contract to protect these payments from fluctuations in the currency exchange rate. These contracts, known as hedge contracts, would allow us to receive a fixed number of U.S. dollars for any fixed, periodic payments due under the transactional documents even if the exchange rate between the U.S. dollar and the currency of the transaction changes over time. If the payments to us were disrupted due to default by the lessee, borrower or other counterparty, we would try to continue to meet our obligations under the hedge contract by acquiring the foreign currency equivalent of the missed payments, which may be available at unfavorable exchange rates. If a transaction is denominated in a major foreign currency such as the pound sterling, which historically has had a stable relationship with the U.S. dollar, we may consider hedging to be unnecessary to protect the value of the payments to us, but our assumptions concerning currency stability may turn out to be incorrect. Our investment returns could be reduced in the event of unfavorable currency fluctuation when payments to us are not made in U.S. dollars.

Furthermore, when we acquire a residual interest in foreign equipment, we may not be able to hedge our foreign currency exposure with respect to the value of such residual interests because the terms and conditions of such hedge contracts might not be in the best interests of our members. Even with transactions requiring payments in U.S. dollars, the equipment may be sold at maturity for an amount that cannot be pre-determined to a buyer paying in a foreign currency. This could positively or negatively affect our income from such a transaction when the proceeds are converted into U.S. dollars.

Sellers of leased equipment could use their knowledge of the lease terms for gain at our expense.

We may acquire equipment subject to lease from leasing companies that have an ongoing relationship with the lessees. A seller could use its knowledge of the terms of the lease, particularly the end of lease options and date the lease ends, to compete with us. In particular, a seller may approach a lessee with an offer to substitute similar equipment at lease end for lower rental amounts. This may adversely affect our opportunity to maximize the residual value of the equipment and potentially negatively affect our profitability.

Investment in joint ventures may subject us to risks relating to our co-investors that could adversely impact the financial results of such joint ventures.

We have the ability to invest in joint ventures with other businesses our Manager manages, as well as with unrelated third parties. Investing in joint ventures involves additional risks not present when acquiring leased equipment that will be wholly owned by us. These risks include the possibility that our co-investors might become bankrupt or otherwise fail to meet financial commitments, thereby obligating us to pay all of the debt associated with the joint venture, as each party to a joint venture may be required to guarantee all of the joint venture’s obligations. Alternatively, the co-investors may have economic or business interests or goals that are inconsistent with our investment objectives and want to manage the joint venture in ways that do not maximize our return. Among other things, actions by a co-investor might subject leases that are owned by the joint venture to liabilities greater than those contemplated by the joint venture agreement. Also, when none of the joint owners control a joint venture, there might be a stalemate on decisions, including when to sell the equipment or the prices or terms of a lease. Finally, while we typically have the right to buy out the other joint owner’s interest in the equipment in the event of the sale, we may not have the resources available to do so. These risks could negatively affect our profitability and could result in legal and other costs, which would negatively affect our liquidity and cash flows.
 
 

 
We may not be able to obtain insurance for certain risks and would have to bear the cost of losses from non-insurable risks.

Equipment may be damaged or lost. Fire, weather, accidents, theft or other events can cause damage or loss of equipment. While our transaction documents generally require lessees and borrowers to have comprehensive insurance and assume the risk of loss, some losses, such as from acts of war, terrorism or earthquakes, may be either uninsurable or not economically feasible to insure. Furthermore, not all possible liability claims or contingencies affecting equipment can be anticipated or insured against, and, if insured, the insurance proceeds may not be sufficient to cover a loss. If such a disaster occurs to the equipment, we could suffer a total loss of any investment in the affected equipment. In investing in some types of equipment, we may have been exposed to environmental tort liability. Although we use our best efforts to minimize the possibility and exposure of such liability including by means of attempting to obtain insurance, we cannot assure you that our assets will be protected against any such claims. These risks could negatively affect our profitability and could result in legal and other costs, which would negatively affect our liquidity and cash flows.

We could suffer losses from failure to maintain our equipment registration and from unexpected regulatory compliance costs.

Many types of transportation assets are subject to registration requirements by U.S. governmental agencies, as well as foreign governments if such equipment is to be used outside of the United States. Failing to register the equipment, or losing such registration, could result in substantial penalties, forced liquidation of the equipment and/or the inability to operate and lease the equipment. Governmental agencies may also require changes or improvements to equipment and we may have to spend our own funds to comply if the lessee, borrower or other counterparty is not required to do so under the transaction documents. These changes could force the equipment to be removed from service for a period of time. The terms of the transaction documents may provide for payment reductions if the equipment must remain out of service for an extended period of time or is removed from service. We may then have reduced income from our investment for this equipment. If we do not have the funds to make a required change, we might be required to sell the affected equipment. If so, we could suffer a loss on our investment, lose future revenues and experience adverse tax consequences.

If any of our investments become subject to usury laws, we could have reduced revenues or possibly a loss on such investments.

In addition to credit risks, we may be subject to other risks in equipment financing transactions in which we are deemed to be a lender. For example, equipment leases have sometimes been held by U.S. courts to be loan transactions subject to State usury laws, which limit the interest rate that can be charged. Uncertainties in the application of some laws may result in inadvertent violations that could result in reduced investment returns or, possibly, loss on our investment in the affected equipment. Although part of our business strategy is to enter into or acquire leases that we believe are structured so that they avoid being deemed loans, and would therefore not be subject to usury laws, we cannot assure you that we will be successful in doing so. If an equipment lease is held to be a loan with a usurious rate of interest, the amount of the lease payment could be reduced and adversely affect our revenue.

State laws determine what rates of interest are deemed usurious, when the applicable rate of interest is determined, and how it is calculated. In addition, some U.S. courts have also held that certain lease features, such as equity interests, constitute additional interest. Although we generally seek assurances and/or opinions to the effect that our transactions do not violate applicable usury laws, a finding that our transactions violate usury laws could result in the interest obligation to us being declared void and we could be liable for damages and penalties under applicable law. We cannot assure you as to what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard. We also cannot make any assurances as to the standards that courts in foreign jurisdictions may use or that courts in foreign jurisdictions will take a position similar to that taken in the United States.

 


We compete with a variety of financing sources for our investments, which may affect our ability to achieve our investment objectives.

The commercial leasing and financing industry is highly competitive and is characterized by competitive factors that vary based upon product and geographic region. Our competitors are varied and include other equipment leasing and finance funds, hedge funds, 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.  We compete primarily on the basis of pricing, terms and structure.  To the extent that our competitors compete aggressively on any combination of those factors, we could fail to achieve our investment objectives.

Some of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than either we or our Manager and its affiliates have.  For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us.  A lower cost of funds could enable a competitor to offer financing at rates that are less than ours, potentially forcing us to lower our rates or lose potential lessees, borrowers or other counterparties.  In addition, our competitors may have been and/or may be in a position to offer equipment to prospective customers on other terms that are more favorable than those that we can offer or that we will be able to offer when liquidating our portfolio, which may affect our ability to make investments and may affect our ability to liquidate our portfolio, in each case, in a manner that would enable us to achieve our investment objectives.

General Tax Risks

If the IRS classifies us as a corporation rather than a partnership, your distributions would be reduced under current tax law.

We did not and will not apply for an IRS ruling that we will be classified as a partnership for federal income tax purposes. Although counsel rendered an opinion to us at the time of our offering that we will be taxed as a partnership and not as a corporation, that opinion is not binding on the IRS and the IRS has not ruled on any federal income tax issue relating to us. If the IRS successfully contends that we should be treated as a corporation for federal income tax purposes rather than as a partnership, then:

·  
our realized losses would not be passed through to you;
·  
our income would be taxed at tax rates applicable to corporations, thereby reducing our cash available to distribute to you; and
·  
your distributions would be taxed as dividend income to the extent of current and accumulated earnings and profits.
 
In addition, we could be taxed as a corporation if we are treated as a publicly traded partnership by the IRS. To minimize this possibility, our LLC Agreement places significant restrictions on your ability to transfer our Shares.

We could lose cost recovery or depreciation deductions if the IRS treats our leases as sales or financings.

We expect that, for federal income tax purposes, we will be treated as the owner and lessor of the equipment that we lease. However, the IRS may challenge the leases and instead assert that they are sales or financings. If the IRS determines that we are not the owner of our leased equipment, we would not be entitled to cost recovery, depreciation or amortization deductions, and our leasing income might be deemed to be portfolio income instead of passive activity income. The denial of such cost recovery or amortization deductions could cause your tax liabilities to increase.

Our investments in secured loans will not give rise to depreciation or cost recovery deductions and may not be offset against our passive activity losses.

We expect that, for federal income tax purposes, we will not be treated as the owner and lessor of the equipment that we invest in through our lending activities. Based on our expected level of activity with respect to these types of financings, we expect that the IRS will treat us as being in the trade or business of lending. Generally, trade or business income can be considered passive activity income. However, because we expect that the source of funds we lend to others will be the capital contributed by our members and the funds generated from our operations (rather than money we borrow from others), you may not be able to offset your share of our passive activity losses from our leasing activities with your share of our interest income from our lending activities. Instead, your share of our interest income from our lending activities would be taxed as portfolio income.
 
 

 
You may incur tax liability in excess of the cash distributions you receive in a particular year.

In any particular year, your tax liability from owning our Shares may exceed the cash distributions you receive from this investment. While we expect that your net taxable income from owning our Shares for most years will be less than your cash distributions in those years, to the extent any of our debt is repaid with income or proceeds from equipment sales, taxable income could exceed the amount of cash distributions you receive in those years. Additionally, a sale of our investments may result in taxes in any year that are greater than the amount of cash from the sale, resulting in a tax liability in excess of cash distributions. Further, due to the operation of the various loss disallowance rules, in a given tax year you may have taxable income when, on a net basis, we have a loss, or you may recognize a greater amount of taxable income than our net income because, due to a loss disallowance, income from some of our activities cannot be offset by losses from some of our other activities.

You may be subject to greater income tax obligations than originally anticipated due to special depreciation rules.

We may acquire equipment subject to lease that the Code requires us to depreciate over a longer period than the standard depreciation period. Similarly, some of the equipment that we purchase may not be eligible for accelerated depreciation under the Modified Accelerated Costs Recovery System, which was established by the Tax Reform Act of 1986 to set forth the guidelines for accelerated depreciation under the Code. Further, if we acquire equipment that the Code deems to be tax-exempt use property and the leases do not satisfy certain requirements, losses attributable to such equipment are suspended and may be deducted only against income we receive from such equipment or when we dispose of such equipment. Depending on the equipment that we acquire and its eligibility for accelerated depreciation under the Code, we may have less depreciation deductions to offset gross lease revenue, thereby increasing our taxable income.

There are limitations on your ability to deduct our losses.

Your ability to deduct your share of our losses is limited to the amounts that you have at risk from owning our Shares. This is generally the amount of your investment, plus any profit allocations and minus any loss allocation and distributions. This determination is further limited by a tax rule that applies the at-risk rules on an activity by activity basis, further limiting losses from a specific activity to the amount at risk in that activity. Based on the tax rules, we expect that we will have multiple activities for purposes of the at-risk rules. Specifically, our lending activities must be analyzed separately from our leasing activities, and our leasing activities must be further divided into separate year-by-year groups according to the tax year the equipment is placed in service. As such, you cannot aggregate income and loss from our separate activities for purposes of determining your ability to deduct your share of our losses under the at-risk rules.

Additionally, your ability to deduct losses attributable to passive activities is restricted. Some of our operations will constitute passive activities and you can only use our losses from such activities to offset passive activity income in calculating tax liability. Furthermore, passive activity losses may not be used to offset portfolio income. As stated above, we expect our lending activities to generate portfolio income from the interest we receive, even though we expect the income to be attributable to a lending trade or business. However, we expect any gains or losses we recognize from those lending activities to be associated with a trade or business and generally allowable as either passive activity income or loss, as applicable.

The IRS may allocate more taxable income to you than our LLC Agreement provides.

The IRS might successfully challenge our allocations of taxable income or losses. If so, the IRS would require reallocation of our taxable income and loss, resulting in an allocation of more taxable income or less loss to you than our LLC Agreement allocates.
 



If you are a tax-exempt organization, you will have unrelated business taxable income from this investment.

Tax-exempt organizations are subject to income tax on unrelated business taxable income (“UBTI”). Such organizations are required to file federal income tax returns if they have UBTI from all sources in excess of $1,000 per year. Our leasing income will constitute UBTI. Furthermore, tax-exempt organizations in the form of charitable remainder trusts will be subject to an excise tax equal to 100% of their UBTI.

To the extent that we borrow money in order to finance our lending activities, a portion of our income from such activities will be treated as attributable to debt-financed property and, to the extent so attributable, will constitute UBTI. We presently do not expect to finance our lending activities with borrowed funds. Nevertheless, the debt-financed UBTI rules are broad and there is much uncertainty in determining when, and the extent to which, property should be considered debt-financed. Thus, the IRS might assert that a portion of the assets we acquire as part of our lending activities are debt-financed property generating UBTI, especially with regard to any indebtedness we incur to fund working capital at a time when we hold loans we have acquired or made to others. If the IRS were to successfully assert that debt we believed should have been attributed to our leasing activities should instead be attributed to our lending activities, the amount of our income that constitutes UBTI would be increased.

This investment may cause you to pay additional taxes.

You may be required to pay alternative minimum tax in connection with owning our Shares, since you will be allocated a proportionate share of our tax preference items. Our Manager’s operation of our business affairs may lead to other adjustments that could also increase your alternative minimum tax. In addition, the IRS could take the position that all or a portion of our lending activities are not a trade or business, but rather an investment activity. If all or a portion of our lending activities are not considered to be a trade or business, then a portion of our management fees could be considered investment expenses rather than trade or business expenses. To the extent that a portion of our fees are considered investment expenses, they are not deductible for alternative minimum tax purposes and are subject to a limitation for regular tax purposes. Alternative minimum tax is treated in the same manner as the regular income tax for purposes of making estimated tax payments.

You may incur State tax and foreign tax liabilities and have an obligation to file State or foreign tax returns.

You may be required to file tax returns and pay foreign, State or local taxes, such as income, franchise or personal property taxes, as a result of an investment in our Shares, depending upon the laws of the jurisdictions in which the equipment that we own is located.

Any adjustment to our tax return as a result of an audit by the IRS may result in adjustment to your tax return.

If we adjust our tax return as a result of an IRS audit, such adjustment may result in an examination of other items in your returns unrelated to us, or an examination of your tax returns for prior years. You could incur substantial legal and accounting costs in contesting any challenge by the IRS, regardless of the outcome. Further, because you will be treated for federal income tax purposes as a partner in a partnership by investing in our Shares, an audit of our tax return could potentially lead to an audit of your individual tax return. Finally, under certain circumstances, the IRS may automatically adjust your personal return without the opportunity for a hearing if it adjusts our tax return.

Some of the distributions on our Shares will be a return of capital, in whole or in part, which will complicate your tax reporting and could cause unexpected tax consequences at liquidation.

As we depreciate our investments in leased equipment over the term of our existence and/or borrowers repay the loans we make to them, it is very likely that a portion of each distribution to you will be considered a return of capital, rather than income. Therefore, the dollar amount of each distribution should not be considered as necessarily being all income to you. As your capital in our Shares is reduced for tax purposes over the life of your investment, you will not receive a lump sum distribution upon liquidation that equals the purchase price you paid for our Shares, such as you might expect if you had purchased a bond. Also, payments made upon our liquidation will be taxable to the extent that such payments are not a return of capital.
 
 

 
As you receive distributions throughout the life of your investment, you will not know at the time of the distribution what portion of the distribution represents a return of capital and what portion represents income. The Schedule K-1 statement you have received and will continue to receive from us each year will specify the amounts of capital and income you received throughout the prior year.


None.


We neither own nor lease office space or any other real property in our business at the present time.


In the ordinary course of conducting our business, we may be subject to certain claims, suits, and complaints filed against us.  In our Manager’s opinion, the outcome of such matters, if any, will not have a material impact on our consolidated financial position or results of operations.  We are not aware of any material legal proceedings that are currently pending against us or against any of our assets.




 

Our Shares are not publicly traded and there is no established public trading market for our Shares. It is unlikely that any such market will develop.

 
Number of Members
Title of Class
as of March 21, 2011
Manager (as a member)
1
Additional members
8,736
 
We, at our Manager’s discretion, pay monthly distributions to each of our members beginning the first month after each such member is admitted through the end of our operating period, which we currently anticipate will be in April 2012.  We paid distributions to additional members totaling $33,005,773, $33,047,095 and $33,072,923 for the years ended December 31, 2010, 2009 and 2008, respectively.  Additionally, we paid our Manager distributions of $333,391, $333,811 and $334,071 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 our Shares pursuant to the offering or to participate in any future offering of our Shares, we are required pursuant to FINRA Rule 2310(b)(5) to disclose in each annual report distributed to our members a per Share estimated value of our Shares, the method by which we developed the estimated value, and the date used to develop the estimated value. In addition, our Manager prepares statements of our estimated Share values to assist fiduciaries of retirement plans subject to the annual reporting requirements of ERISA in the preparation of their reports relating to an investment in our Shares.  For these purposes, the estimated value of our Shares is deemed to be $241.84 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.

During the offering of our Shares and consistent with NASD Rule 2340(c), the value of our Shares was estimated to be the offering price of $1,000 per Share (without regard to purchase price discounts for certain categories of purchasers), as adjusted for any special distribution of net sales proceeds.

The estimated value of our Shares is based on the estimated amount that a holder of a Share would receive if all of our assets were sold in an orderly liquidation as of the close of our fiscal year and all proceeds from such sales, without reduction for transaction costs and expenses, together with any cash held by us, were distributed to the members upon liquidation.  To estimate the amount that our members would receive upon such liquidation, we calculated the sum of:  (i) the unpaid finance lease and note receivable payments on our existing finance leases and notes receivable, discounted at the implicit yield for each such transaction, (ii) the fair market value of our operating leases, equipment held for sale or lease, and other assets, as determined by the most recent third-party appraisals we have obtained for certain assets or our Manager’s  estimated values of certain other assets, as applicable, and (iii) our cash on hand.  From this amount, we then subtracted our total debt outstanding and then divided that sum by the total number of Shares outstanding.

The foregoing valuation is an estimate only.  The appraisals that we obtained and the methodology utilized by our management in estimating our per Share value were subject to various limitations and were based on a number of assumptions and estimates that may or may not be accurate or complete. No liquidity discounts or discounts relating to the fact that we are currently externally managed were applied to our estimated per Share valuation, and no attempt was made to value us as an enterprise.
 
 

 
As noted above, the foregoing valuation was performed solely for the ERISA and FINRA purposes described above and was based solely on our Manager’s perception of market conditions and the types and amounts of our assets as of the reference date for such valuation and should not be viewed as an accurate reflection of the value of our Shares or our assets. Except for independent third-party appraisals of certain assets, no independent valuation was sought. In addition, as stated above, as there is no significant public trading market for our Shares at this time and none is expected to develop, there can be no assurance that members could receive $241.84 per Share if such a market did exist and they sold their Shares or that they will be able to receive such amount for their Shares in the future. Furthermore, there can be no assurance:

·  
as to the amount members may actually receive if and when we seek to liquidate our assets or the amount of lease and note receivable payments and asset disposition proceeds we will actually receive over our remaining term; the total amount of distributions our members may receive may be less than $1,000 per Share primarily due to the fact that the funds initially available for investment were reduced from the gross offering proceeds in order to pay selling commissions, underwriting fees, organizational and offering expenses, and acquisition or formation fees;
·  
that the foregoing valuation, or the method used to establish value, will satisfy the technical requirements imposed on plan fiduciaries under ERISA; or
·  
that the foregoing valuation, or the method used to establish value, will not be subject to challenge by the IRS if used for any tax (income, estate, gift or otherwise) valuation purposes as an indicator of the current value of our Shares.

     The repurchase price we offer in our repurchase plan utilizes a different methodology than that which we use to determine the current value of our Shares for the ERISA and FINRA purposes described above and, therefore, the $241.84 per Share does not reflect the amount that a member would currently receive under our repurchase plan.  However, there can be no assurance that you will be able to redeem your Shares under our repurchase plan.




The selected financial data should be read in conjunction with the consolidated financial statements and related notes included in “Item 8. Consolidated Financial Statements and Supplementary Data” contained elsewhere in this Annual Report on Form 10-K.

   
Years Ended December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
 Total revenue (a)
  $ 65,363,792     $ 103,194,237     $ 86,766,901     $ 117,617,106     $ 71,897,046  
 Net loss attributable to Fund Eleven (b)
  $ (6,696,493 )   $ (45,095,916 )   $ (5,797,721 )   $ (2,478,993 )   $ (4,696,606 )
 Net loss attributable to Fund Eleven allocable to additional members
  $ (6,629,528 )   $ (44,644,957 )   $ (5,739,744 )   $ (2,454,203 )   $ (4,649,640 )
 Net loss attributable to Fund Eleven allocable to the Manager
  $ (66,965 )   $ (450,959 )   $ (57,977 )   $ (24,790 )   $ (46,966 )
                                         
 Weighted average number of additional shares
                                       
 of limited liability company interests outstanding
  $ 362,674       363,139       363,414       352,197       197,957  
 Net loss attributable to Fund Eleven per weighted average
                                       
 additional share of limited liability company interests outstanding
  $ (18.28 )   $ (122.94 )   $ (15.79 )   $ (6.97 )   $ (23.49 )
                                         
 Distributions to additional members
  $ 33,005,773     $ 33,047,095     $ 33,072,923     $ 37,151,073     $ 16,600,276  
 Distributions per weighted average additional
                                       
 share of limited liability company interests
  $ 91.01     $ 91.00     $ 91.01     $ 105.48     $ 83.86  
 Distributions to the Manager
  $ 333,391     $ 333,811     $ 334,071     $ 375,190     $ 167,738  
                                         
   
December 31,
 
     2010      2009      2008      2007      2006  
 Total assets (c)
  $ 158,213,941     $ 272,120,852     $ 408,178,159     $ 595,752,005     $ 530,841,551  
 Recourse and non-recourse debt (d)
  $ 53,984,957     $ 117,199,058     $ 168,449,633     $ 285,494,408     $ 260,926,942  
 Members' equity
  $ 95,755,387     $ 136,378,244     $ 210,185,781     $ 261,223,876     $ 232,896,485  

(a)  
During 2010, we had a decrease in total revenue of approximately $37,830,000 as compared to 2009. This decrease was primarily the result of (i) a decrease in rental income, and (ii) no significant net gains or losses on lease termination during 2010. This decrease was offset by (i) a net gain on sales of equipment relating to the sale of ICON European Container, ICON Doubtless, LLC (“ICON Doubtless”), ICON Spotless, LLC (“ICON Spotless”) and ICON Vanguard, LLC (“ICON Vanguard”) during 2010, and (ii) an increase in time charter revenue during 2010. In 2009, we had an increase in total revenue of approximately $16,427,000 as compared to 2008.  This increase was primarily the result of (i) the impact of the termination of the bareboat charters with subsidiaries of Top Ships, Inc. (“Top Ships”) in June 2009 (the “Bareboat Charter Termination”), (ii) the impact of the sale of the remaining net assets in the leasing portfolio in May 2008, and  (iii) the net gain recorded on the sales of leased equipment during 2009. In 2008, we had a decrease in total revenue of approximately $30,850,000. This decrease was primarily attributable to the sale of the remaining net assets in the leasing portfolio in May 2008.

(b)  
During 2010, we had a net loss attributable to us of $6,696,493 as compared to a net loss attributable to us of $45,095,916 in 2009. The decrease in the net loss attributable to us in 2010 as compared to 2009 was primarily due to (i) a change in year over year activity, because we recognized less impairment charges during 2010 (related to a parcel of real property recorded under assets held for sale for ICON EAR II and our equipment on lease to AMI, ICON Heuliez and the M/T Doubtless, the M/T Faithful, the M/T Spotless, and the M/T Vanguard (collectively, the “Top Ships Vessels”)) as compared to 2009 (related to our ZIM Vessels and our equipment on lease to EAR), and (ii) a decrease in depreciation and amortization expense. The decrease in net loss also resulted from a net gain on sale of equipment relating to the sale of the M/V ZIM Japan Sea, the M/V ZIM Andaman Sea, the M/T Faithful vessels, and ICON Doubtless, ICON Spotless, and ICON Vanguard during 2010. In 2009, we had a net loss attributable to us of $45,095,916 as compared to a net loss attributable to us of $5,797,721 in 2008. The increase in the net loss attributable to us in 2009 as compared to 2008 was primarily due to (i) an impairment loss recorded during 2009 in connection with the equipment on lease to ZIM and EAR and the M/T Faithful, (ii) the impact of the Bareboat Charter Termination, (iii) the impact of the sale of the remaining net assets in the leasing portfolio in May 2008, and (iv) the sales of leased equipment during 2009. In 2008, we had a net loss attributable to us of $5,797,721 as compared to a net loss attributable to us in 2007 of $2,478,993. This was primarily attributable to the impact of the sale of the remaining net assets in the leasing portfolio in May 2008. In 2007, we had a net loss attributable to us of $2,478,993 as compared to a net loss in 2006 of $4,696,606. This was primarily attributable to the increase in rental, finance, interest and other income, partly offset by an increase in (i) depreciation and amortization expense, (ii) interest expense, (iii) management fees paid to the Manager, and (iv) the amount of loss on hedging instruments.
 
(c)  
During 2010, total assets decreased $113,906,911 as compared to 2009. The decrease was primarily attributable to cash distributions, the sale of equipment relating to the sale of ICON European Container, ICON Doubtless, ICON Spotless, and ICON Vanguard during 2010. In addition, the decrease was driven by depreciation of our leased equipment and an impairment loss recorded during 2010. During 2009, total assets decreased $136,057,307 as compared to 2008. The decrease was primarily due to (i) the impairment loss recorded during 2009 discussed in footnote (b) and (ii) the impact of the Bareboat Charter Termination.  During 2008, total assets decreased $187,575,846 as compared to 2007. The decrease was primarily attributable to the sale of the net assets in the Leasing Portfolio and depreciation of our leased equipment. During 2007, total assets increased $64,910,454 as compared to 2006. The increase primarily relates to the 2007 purchases of the Teekay Vessels, the auto parts manufacturing equipment, the manufacturing equipment on lease to various subsidiaries of MWU, the telecommunications equipment on lease to Global Crossing and is offset by the sales of equipment on lease by the Leasing Portfolio and a decrease in current assets.

(d)  
 During 2010, the outstanding balance of our recourse and non-recourse debt decreased $63,214,101 as compared to 2009.  The decrease was primarily attributable to the reduction of the non-recourse debt outstanding in connection with the sale of ICON Doubtless, ICON Spotless, and ICON Vanguard and the sale of the M/V ZIM Japan Sea, the M/V ZIM Andaman Sea and the M/T Faithful vessels during 2010 and the scheduled repayment of our recourse and non-recourse debt.

 
 


Our Manager’s Discussion and Analysis of Financial Condition and Results of Operations relates to our consolidated financial statements and should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K.  Statements made in this section may be considered forward-looking.  These statements are not guarantees of future performance and are based on current expectations and assumptions that are subject to risks and uncertainties.  Actual results could differ materially because of these risks and assumptions, including, among other things, factors discussed in “Part I. Forward-Looking Statements” and “Item 1A. Risk Factors” located elsewhere in this Annual Report on Form 10-K.

Overview

We operate as an equipment leasing and finance program in which the capital our members invested was pooled together to make investments, pay fees and establish a small reserve. We primarily acquire equipment subject to lease, purchase equipment and lease it to third parties, provide equipment and other financing and, to a lesser degree, acquire ownership rights to items of leased equipment at lease expiration. Some of our equipment leases are acquired for cash and are expected to provide current cash flow, which we refer to as “income” leases. For our other equipment leases, we finance the majority of the purchase price through borrowings from third parties. We refer to these leases as “growth” leases. These growth leases generate little or no current cash flow because substantially all of the rental payments received from the lessee are used to service the indebtedness associated with acquiring or financing the lease. For these leases, we anticipate that the future value of the leased equipment will exceed our cash portion of the purchase price.

Our Manager manages and controls our business affairs, including, but not limited to, our equipment leases and other financing transactions, under the terms of our LLC Agreement.
 
 We are currently in our operating period. During our operating period, additional investments will continue to be made with the cash generated from our initial investments and our additional investments to the extent that the cash is not used for expenses, reserves and distributions to members. The investment in additional equipment leases and other financing transactions in this manner is called “reinvestment.”  We anticipate investing in equipment leases, other financing transactions, and residual ownership rights in leased equipment from time to time until April 2012, unless that date is extended, at our Manager’s sole discretion, for up to an additional three years.

Current Business Environment and Outlook

Recent trends indicate that domestic and global equipment financing volume is correlated to overall business investments in equipment, which are typically impacted by general economic conditions. As the economy slows or builds momentum, the demand for productive equipment generally slows or builds and equipment financing volume generally decreases or increases, depending on a number of factors.  These factors include the availability of liquidity to provide equipment financing and/or provide it on terms satisfactory to borrowers, lessees, and other counterparties, as well as the desire to upgrade equipment and/or expand operations during times of growth, but also in times of recession in order to, among other things, seize the opportunity to obtain competitive advantage over distressed competitors and/or increase business as the economy recovers.

Industry Trends Prior to the Recent Recession

The U.S. economy experienced a downturn from 2001 through 2003, resulting in a decrease in equipment financing volume during that period. From 2004 through most of 2007, however, the economy in the United States and the global economy in general experienced significant growth, including growth in business investment in equipment and equipment financing volume.  According to information provided by the Equipment Leasing and Finance Foundation, a non-profit foundation dedicated to providing research regarding the equipment leasing and finance industry (“ELFF”), based on information from the United States Department of Commerce Bureau of Economic Analysis and Global Insight, Inc., a global forecasting company, total domestic business investment in equipment and software increased annually from approximately $922 billion in 2002 to approximately $1,205 billion in 2006 and 2007.  Similarly, during the same period, total domestic equipment financing volume increased from approximately $515 billion in 2002 to approximately $684 billion in 2007.
 
 

 
According to the World Leasing Yearbook 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, including equipment loans and other types of equipment financing, increased as well during the same period.

Current Industry Trends

In general, the U.S. and global credit markets 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.      

Commercial and Industrial Loan Trends. According to information provided by the U.S. Federal Deposit Insurance Corporation (“FDIC”), the change in the volume of outstanding commercial and industrial loans issued by FDIC-insured institutions started to decline dramatically beginning in the fourth quarter of 2007.  Thereafter, the change in volume turned negative for the first time since 2002 in the fourth quarter of 2008, with reductions of approximately $62 billion between the fourth quarter of 2008 and the first quarter of 2009, approximately $68 billion between the first and second quarters of 2009, and approximately $90 billion between the second and third quarters of 2009. 

The change in volume continued to be negative through the second quarter of 2010, but the reduction of volume appears to have stabilized.  Between the third and fourth quarters of 2009, volume decreased by approximately $55 billion.  The volume of outstanding loans issued by FDIC-insured institutions further decreased by approximately $37 billion between the fourth quarter of 2009 and the first quarter of 2010 and by approximately $12 billion between the first and second quarters of 2010.  Between the second and third quarters of 2010, volume increased by approximately $5 billion, the first increase in eight quarters.

While some of the reduction was due to voluntary and involuntary deleveraging by corporate borrowers, some of the other main factors cited for the decline in outstanding commercial lending and financing volume included the following: 

·  
lack of liquidity to provide new financing and/or refinancing;
·  
heightened credit standards and lending criteria (including ever-increasing spreads, fees, and other costs, as well as lower advance rates and shorter tenors, among other factors) that have hampered some demand for and issuance of new financing and/or refinancing;
·  
net charge offs of and write-downs on outstanding financings; and
·  
many lenders being sidetracked from providing new lending by industry consolidation, management of existing portfolios and relationships, and amendments (principally covenant relief and “amend and extend”). 
 
In addition, the volume of issuance of high yield bonds and investment grade bonds in the U.S. syndicated loan market rose significantly through the 2010 calendar year, a significant portion of the proceeds have been used to pay down and/or refinance existing commercial and industrial loans.  As a result of all of these factors affecting the commercial and industrial finance segment of the finance industry, financial institutions and other financing providers with liquidity to provide financing can do so selectively, at higher spreads and other more favorable terms than have been available in many years.  As noted below, this trend in the wider financing market is also prevalent in the specific market for equipment financing.

Equipment Financing Trends.  According to information provided by the Equipment Leasing and Finance Association, an equipment finance trade association and affiliate of ELFF (“ELFA”), total domestic business investment in equipment and software decreased to $1,187 billion in 2008.  Similarly, during the same period, total domestic equipment financing volume decreased to $671 billion in 2008. Global business investment in equipment, and global equipment financing volume, decreased as well during the same period.  According to the World Leasing Yearbook 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. 
 
 

 
Prior to the recent recession, a substantial portion of equipment financing was provided by the leasing and lending divisions of commercial and industrial banks, large independent leasing and finance companies, and captive and vendor leasing and finance companies. These institutions (i) generally provided financing to companies seeking to lease small ticket and micro ticket equipment, (ii) used credit scoring methodologies to underwrite a lessee’s creditworthiness, and (iii) relied heavily on the issuance of commercial paper and/or lines of credit from other financial institutions to finance new business. Many of these financial institutions and other financing providers have failed or significantly reduced their financing operations.  By contrast, we (i) focus on financing middle- to large-ticket, business-essential equipment and other capital assets, (ii) generally underwrite and structure such financing in a manner similar to providers of senior indebtedness (i.e., our underwriting includes both creditworthiness and asset due diligence and considerations and our structuring often includes guarantees, equity pledges, warrants, liens on related assets, etc.), and (iii) are not significantly reliant on receiving outside financing to meet our investment objectives. In short, in light of the tightening of the credit markets, our Manager in its role as the sponsor and manager of other equipment financing funds has, since the onset of the recent recession, reviewed and expects to continue to review more potential financing opportunities than it has in its history.

Lease and Other Significant Transactions

We engaged in the following significant transactions during the years ended December 31, 2010, 2009 and 2008:

Lumber Processing Equipment
 
On November 8, 2006, our wholly-owned subsidiaries ICON Teal Jones, LLC and ICON Teal Jones, ULC (collectively, “ICON Teal Jones”), entered into a lease financing arrangement with Teal Jones by acquiring from Teal Jones substantially all of the equipment, plant and machinery used by Teal Jones in its lumber processing operations in Canada and the United States and leasing it back to Teal Jones. The 84-month lease began on December 1, 2006 and grants Teal Jones the right to end the lease early if certain lump sum payments are made to ICON Teal Jones.  The total lease financing amount was approximately $22,224,000.  

In connection with the lease financing arrangement, Teal Cedar Products Ltd., an affiliate of The Teal Jones Group, delivered a secured promissory note to ICON Teal Jones, ULC (the “Teal Jones Note”). The Teal Jones Note is secured by a lien on certain land located in British Columbia, Canada, owned by Teal Jones, where substantially all of the equipment is operated.  The Teal Jones Note is in the amount of approximately $13,291,000, accrues interest at 20.629% per year and matures on December 1, 2013. The Teal Jones Note requires quarterly payments of $568,797 through September 1, 2013. On December 1, 2013, a balloon payment of approximately $18,519,000 is due and payable.  At December 31, 2010 and 2009, the principal balance of the Teal Jones Note was $12,722,006 and was reflected as a mortgage note receivable on our accompanying consolidated balance sheets.

On December 10, 2009, ICON Teal Jones restructured the lease payment obligations of Teal Jones to provide Teal Jones with cash flow flexibility while at the same time attempting to preserve our projected economic return on this investment.

Marine Vessels

Container Vessels

On June 21, 2006, our wholly-owned subsidiaries ICON European Container and ICON European Container II (the “ZIM Purchasers”), acquired four container vessels from Old Course Investments LLC (“Old Course”).  The M/V ZIM Andaman Sea (f/k/a ZIM America) and the M/V ZIM Japan Sea (both owned by ICON European Container) were subject to bareboat charters that expired in November 2010. The M/V ZIM Hong Kong and the M/V ZIM Israel (both owned by ICON European Container II) are subject to bareboat charters that expired in January 2011.  The ZIM Vessels were subject to bareboat charters with ZIM.
 
 

 
The purchase price for the ZIM Vessels was approximately $142,500,000, including (i) the assumption of approximately $93,325,000 of non-recourse indebtedness under a secured loan agreement (the “HSH Loan Agreement”) with HSH Nordbank AG (“HSH”) and (ii) the assumption of approximately $12,000,000 of non-recourse indebtedness, secured by a second priority mortgage over the ZIM Vessels in favor of ZIM, less the acquisition of related assets of approximately $3,273,000. The obligations under the HSH Loan Agreement are secured by a first priority mortgage over the ZIM Vessels.  

In light of developments in the market for containership vessels and the related impact on the shipping industry, our Manager reviewed our investments in the ZIM Vessels that are subject to bareboat charters with ZIM. Based on our Manager’s review, the net book value exceeded the fair value of the ZIM Vessels and, as a result, we recognized a non-cash impairment charge of approximately $35,147,000 relating to the write down in value of the ZIM Vessels during 2009. No amount of this impairment charge represents a cash expenditure and our Manager does not expect that any amount of this impairment charge will result in any future cash expenditures.

On October 30, 2009, the ZIM Purchasers amended the bareboat charters for the ZIM Vessels to restructure each respective charterer’s payment obligations so that we will continue to receive payments, subsequent to the end of each bareboat charter in November 2010 and January 2011, through September 30, 2014 in accordance with each amended charter (the “European Containers Charter Amendments”).

On September 23, 2010, the ZIM Purchasers entered into the ZIM MOAs to sell the ZIM Vessels to unaffiliated third parties for the purchase price of $11,250,000 per vessel. In connection with the ZIM MOAs, each purchaser paid a deposit in the amount of $1,125,000 for its respective vessel. As a result, effective September 30, 2010 the ZIM Vessels have been classified as assets held for sale.

On November 10, 2010 and on November 22, 2010, ICON European Container sold the M/V ZIM Japan Sea and the M/V ZIM Andaman Sea, respectively, pursuant to the terms of the applicable ZIM MOAs.  The proceeds of the sales were used to make a prepayment under the HSH Loan Agreement in the amount of approximately $10,950,000 and $11,160,000, respectively. As a result of the sales of M/V ZIM Japan Sea and M/V ZIM Andaman Sea, the related interest rate swap contract was settled. We recorded a gain on the sale of leased equipment of approximately $14,618,000 for the year ended December 31, 2010.

On February 28, 2011, ICON European Container II sold the M/V ZIM Hong Kong pursuant to the terms of the applicable ZIM MOA.  The proceeds of the sale were used to make a prepayment under the HSH Loan Agreement in the amount of approximately $10,869,000.

On March 16, 2011, ICON European Container II sold the M/V ZIM Israel pursuant to the terms of the applicable ZIM MOA.  The proceeds of the sale were used to make a prepayment under the HSH Loan Agreement in the amount of approximately $5,751,000.

Handymax Product Tankers

On June 16, 2006, our wholly-owned subsidiaries ICON Doubtless, ICON Faithful, LLC (“ICON Faithful”), ICON Spotless, and ICON Vanguard (collectively, the “Companies”), acquired the Top Ships Vessels from subsidiaries of Oceanbulk Maritime, S.A. The Companies acquired the Top Ships Vessels directly, except for ICON Vanguard, which acquired the M/T Vanguard through its wholly-owned Cypriot subsidiary, Isomar Marine Company Limited (“Isomar” and, together with the Companies, the “Top Ships Purchasers”).

The Top Ships Vessels were subject to bareboat charters with subsidiaries of Top Ships. The bareboat charters were to expire in February 2011.  The purchase price for the Top Ships Vessels was approximately $115,097,000, including (i) the assumption of approximately $80,000,000 of senior non-recourse debt obligations and (ii) the assumption of approximately $10,000,000 of junior non-recourse debt obligations, less approximately $1,222,000 of discounted interest on the junior non-recourse debt obligations.
 
 

 
On June 24, 2009, the Top Ships Purchasers terminated the bareboat charters with subsidiaries of Top Ships at the request of Top Ships. As consideration for the Bareboat Charter Termination, Top Ships (i) paid $8,500,000 as a termination fee, which was used to pay down a portion of the outstanding balance of the non-recourse long-term debt related to the Top Ships Vessels, (ii) paid $2,250,000 for costs associated with repairs, upgrades and surveys of the Top Ships Vessels, (iii) paid $1,000,000 for transaction costs, (iv) waived its rights to the second priority non-recourse debt obligations of $10,000,000 related to the Top Ships Vessels and (v) agreed to pay all rentals due under the current bareboat charters through June 15, 2009. Simultaneously, the Top Ships Purchasers were assigned the rights to the underlying time charter for each bareboat charter. The time charters expired at various dates from May 2010 to November 2010. As a result of the Bareboat Charter Termination, we recorded a net gain on lease termination of approximately $25,142,000 during the year ended December 31, 2009.

In light of developments in the market for product tankers and the related impact on the shipping industry, our Manager reviewed our investment in the M/T Faithful, which is subject to a time charter. Based on our Manager’s review, the net book value exceeded the undiscounted cash flows and exceeded the fair value and, as a result, we recognized a non-cash impairment charge of approximately $5,827,000 during 2009 relating to the write down in value of the M/T Faithful.

On September 23, 2009, the Top Ships Purchasers defaulted on the non-recourse secured loan (the “New Paribas Loan”) with BNP Paribas (“Paribas,” f/k/a Fortis Bank SA/NV), due to their failure to make required payments under the loan agreement. On April 1, 2010, the Top Ships Purchasers amended the terms of the New Paribas Loan. In connection with the amendment of the New Paribas Loan, Paribas agreed to waive all defaults under the loan and the Top Ships Purchasers paid $1,000,000 towards repayment of the outstanding balance of the non-recourse long-term debt related to the Top Ships Vessels and paid $3,000,000 towards funding the operation of the Top Ships Vessels.

On September 30, 2010, ICON Faithful entered into a memorandum of agreement to sell the M/T Faithful to Impressive Shores Corporation (“Impressive Shores”) for the purchase price of $5,741,000 (the “Faithful Purchase Price”). We recorded a non-cash impairment charge of approximately $402,000 related to the proposed sale and classified the M/T Faithful vessel as an asset held for sale as of September 30, 2010. On October 13, 2010, we terminated the M/T Faithful time charter and sold the M/T Faithful to Impressive Shores for the Faithful Purchase Price. We recorded a loss on sale of leased equipment of approximately $281,000 for the year ended December 31, 2010, in connection with the sale of the M/T Faithful vessel.

As a result of the loss on sale of the M/T Faithful in the third quarter of 2010, our Manager determined that an indicator of impairment existed. As a result, our Manager reviewed our remaining investments in the remaining Top Ships Vessels. Based on our Manager’s review, the net book value exceeded the remaining undiscounted cash flows and exceeded the fair value of the remaining Top Ships Vessels. As a result, in the third quarter of 2010, we recognized a non-cash impairment charge of approximately $7,753,000.

On December 24, 2010, we sold ICON Doubtless, ICON Spotless, and ICON Vanguard (the “Remaining Top Ships LLCs”) to an unaffiliated third party.  As a result, the Remaining Top Ships LLCs were released from their obligations as borrowers under the New Paribas Loan.  We recorded a gain of approximately $3,095,000 for the year ended December 31, 2010, in connection with the sale of the Remaining Top Ships LLCs.

Leasing Portfolio

On May 19, 2008, we sold substantially all of the remaining net assets of an acquired leasing portfolio (the “Remaining Net Assets”) to affiliates of U.S. Micro Corporation (“U.S. Micro”), an unaffiliated third party.  The gross cash purchase price was $19,000,000 and was subject to post-closing adjustments of approximately $11,684,000, bringing the net cash purchase price to approximately $7,316,000. As a result, we recorded a net loss of approximately $11,922,000 during the year ended December 31, 2008.



 
Aframax Product Tankers

        On April 11, 2007, our wholly-owned subsidiaries ICON Senang, LLC (“ICON Senang”) and ICON Sebarok, LLC (“ICON Sebarok”) (collectively the “Teekay Purchasers”) acquired the Teekay Vessels from an affiliate of Teekay Corporation (“Teekay”). The purchase price for the Teekay Vessels was approximately $88,000,000, including borrowings of approximately $66,660,000 of non-recourse debt under a secured loan agreement (the “Teekay Loan Agreement”) with Fortis Capital Corporation (“Fortis Capital”). Simultaneously with the closing of the purchase of the Teekay Vessels, the Teekay Purchasers entered into a bareboat charter for each of the Teekay Vessels with an affiliate of Teekay for a term of 60 months. The bareboat charters expire in April 2012.

Telecommunications Equipment

On November 17, 2005, we, along with Fund Ten and ICON Income Fund Eight A L.P. (“Fund Eight A”), an entity also managed by our Manager, formed ICON Global Crossing, LLC (“ICON Global Crossing”), with ownership interests of 44%, 44% and 12%, respectively, to purchase telecommunications equipment from various vendors. On March 31, 2006, we made an additional capital contribution of approximately $7,733,000, which changed our, Fund Eight A’s and Fund Ten’s ownership interests to 61.39%, 7.99% and 30.62%, respectively. The total capital contributions made to ICON Global Crossing were approximately $25,131,000, of which our share was approximately $15,428,000.  

ICON Global Crossing purchased approximately $22,100,000 of equipment during February and March 2006 and approximately $3,200,000 of additional equipment during April 2006, all of which is subject to a 48-month lease. On September 30, 2009, ICON Global Crossing sold certain telecommunications equipment on lease to Global Crossing back to Global Crossing for a purchase price of $5,493,000 and removed the equipment from the Global Crossing lease. We recorded a gain of approximately $111,000 for the year ended December 31, 2009 in connection with the sale of the telecommunications equipment.  In addition, we sold our 61.39% membership interest in ICON Global Crossing and we deconsolidated ICON Global Crossing in 2009.

On September 27, 2006, Fund Ten and Fund Nine formed ICON Global Crossing II, with original ownership interests of approximately 83% and 17%, respectively. The total capital contributions made to ICON Global Crossing II were approximately $12,000,000, of which Fund Ten’s share was approximately $10,000,000 and Fund Nine’s share was approximately $2,000,000.  On September 28, 2006, ICON Global Crossing II purchased approximately $12,000,000 of telecommunications equipment that is subject to a 48-month lease with the Global Crossing Group that expired on October 31, 2010.  On October 31, 2006, we made a capital contribution of approximately $1,800,000 to ICON Global Crossing II. The contribution changed the ownership interests of ICON Global Crossing II for Fund Nine, Fund Ten and us at October 31, 2006 to 14.40%, 72.34% and 13.26%, respectively. The additional contribution was used to purchase telecommunications equipment subject to a 48-month lease with the Global Crossing Group that expired on October 31, 2010.

On October 29, 2010, in accordance with the terms of the lease, ICON Global Crossing II sold telecommunications equipment to Global Crossing for approximately $3,298,000. Our share of the gain was approximately $69,000.
 
On December 29, 2006, our wholly-owned subsidiary ICON Global Crossing III purchased telecommunications equipment for approximately $9,779,000. This equipment was subject to a 48-month lease with the Global Crossing Group, which expired on December 31, 2010.  During February 2007, ICON Global Crossing III purchased approximately $6,893,000 of additional equipment that is subject to a lease with the Global Crossing Group, which expires on February 28, 2011.  On June 27, 2008 and September 23, 2008, ICON Global Crossing III acquired additional telecommunications equipment for aggregate purchase prices of approximately $5,417,000 and $3,991,000, respectively. The equipment is subject to 36-month leases with Global Crossing, which expire on June 30, 2011 and September 30, 2011, respectively.   

On December 1, 2009, ICON Global Crossing III and Global Crossing agreed to terminate certain schedules to our lease and, simultaneously with the termination, ICON Global Crossing III sold the equipment to Global Crossing for the aggregate purchase price of approximately $8,391,000 and removed the equipment from our lease. We recorded a gain of approximately $1,010,000 for the year ended December 31, 2009 in connection with the sale of the telecommunications equipment.
 


On December 20, 2007, we, along with Fund Ten, formed ICON Global Crossing V, with ownership interests of 55% and 45%, respectively, to purchase telecommunications equipment from various vendors for approximately $12,982,000. This equipment was subject to a 36-month lease with Global Crossing, which expired on December 31, 2010. The total capital contributions made to ICON Global Crossing V were approximately $12,982,000, of which our share was approximately $7,140,000.  

On January 3, 2011, upon the conclusion of the lease, ICON Global Crossing V sold the telecommunications equipment to Global Crossing for approximately $2,077,000 and accordingly, we expect to record a gain on the sale of approximately $779,000 during 2011.

Manufacturing Equipment

On June 30, 2008, we and Fund Twelve formed ICON Pliant, which entered into an agreement with Pliant to acquire manufacturing equipment for a purchase price of $12,115,000, of which we paid approximately $6,663,000. On July 16, 2008, we and Fund Twelve completed the acquisition of and simultaneously leased back the manufacturing equipment to Pliant. We and Fund Twelve have ownership interests in ICON Pliant of 55% and 45%, respectively. The lease expires on September 30, 2013.

On February 11, 2009, Pliant commenced a voluntary Chapter 11 proceeding in U.S. Bankruptcy Court to eliminate all of its high-yield debt. In connection with this action, Pliant submitted a financial restructuring plan to eliminate its debt as part of a pre-negotiated package with its high yield creditors. On September 22, 2009, Pliant assumed its lease with ICON Pliant and on December 3, 2009, Pliant emerged from bankruptcy. To date, Pliant has made all of its lease payments.

On December 11, 2007, we and Fund Twelve formed ICON EAR, with ownership interests of 45% and 55%, respectively. On December 28, 2007, ICON EAR purchased and simultaneously leased back semiconductor manufacturing equipment to EAR for a purchase price of $6,935,000, of which our share was approximately $3,121,000. During June 2008, we and Fund Twelve made additional contributions to ICON EAR, which were used to complete another purchase and simultaneous leaseback of additional semiconductor manufacturing equipment to EAR for a total purchase price of approximately $8,795,000, of which our share was approximately $3,958,000. We and Fund Twelve retained ownership interests of 45% and 55%, respectively, subsequent to this transaction. The lease term commenced on July 1, 2008 and was to expire on June 30, 2013. As additional security for the purchase and lease, ICON EAR received mortgages on certain parcels of real property located in Jackson Hole, Wyoming. ICON EAR and ICON EAR II jointly foreclosed on the property.

In light of the developments surrounding the semiconductor manufacturing equipment on lease to EAR, our Manager determined that the net book value of such equipment may not be recoverable.  Based on our Manager’s review, the net book value of the semiconductor manufacturing equipment exceeded the undiscounted cash flows and exceeded the fair value and, as a result, ICON EAR recognized a non-cash impairment charge of approximately $3,429,000 during the year ended December 31, 2009 relating to the write down in value of the semiconductor manufacturing equipment.  Our share of the impairment loss was approximately $1,543,000 and was included in the (loss) income from investments in joint ventures in the consolidated statements of operations for the year ended December 31, 2009. No amount of these impairment charges represent a cash expenditure and our Manager does not expect that any amount of these impairment charges will result in any future cash expenditures.
 
Based on our Manager’s periodic review of significant assets in our portfolio, the net book value of the semiconductor manufacturing equipment exceeded its fair value and, as a result, ICON EAR recognized a non-cash impairment charge of approximately $3,593,000 during the year ended December 31, 2010 relating to the write down in value of the semiconductor manufacturing equipment. In light of the sale of certain parcels of real property located in Jackson Hole, Wyoming on March 16, 2011, ICON EAR recognized an additional non-cash impairment charge of approximately $773,000 during the three months ended December 31, 2010. Our share of the aggregate impairment loss was approximately $1,965,000 and was included in the loss from investments in joint ventures in our consolidated statements of operations for the year ended December 31, 2010. No amount of these impairment charges represent a cash expenditure and our Manager does not expect that any amount of these impairment charges will result in any future cash expenditures. The joint venture has classified the assets as held for sale.
 
 

 
On April 24, 2008, our wholly-owned subsidiary ICON EAR II completed the purchase and simultaneous leaseback of semiconductor manufacturing equipment to EAR for a purchase price of approximately $6,348,000. The equipment was subject to a 60-month lease that expires on June 30, 2013. As additional security for the above mentioned transactions, ICON EAR and ICON EAR II received mortgages on certain parcels of real property located in Jackson Hole, Wyoming.

In October 2009, certain facts came to light that led our Manager to believe that EAR was perpetrating a fraud against EAR’s lenders, including ICON EAR and ICON EAR II. On October 23, 2009, EAR filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Although we believe that we are adequately secured under the transaction documents, due to the bankruptcy filing and ongoing investigation regarding the alleged fraud, at this time it is not possible to determine our ability to collect the amounts due to us in accordance with the leases or the additional security we received. As of December 31, 2010 and 2009, we have classified the remaining ICON EAR II assets as assets held for sale as a result of the involuntary bankruptcy of EAR.

In light of the developments surrounding the semiconductor manufacturing equipment on lease to EAR, our Manager determined that the net book value of such equipment may not be recoverable. As a result of our Manager’s review, ICON EAR II recognized a non-cash impairment charge of approximately $1,235,000 during 2009 relating to the write down in value of the semiconductor manufacturing equipment.

On June 2, 2010, ICON EAR II, in conjunction with ICON EAR, sold a parcel of real property in Jackson Hole, Wyoming that was received as additional security under their respective leases with EAR for a net purchase price of approximately $757,000.  As a result, ICON EAR II recognized a loss on assets held for sale of approximately $120,000, which was recorded on the consolidated statements of operations. In addition, on June 7, 2010, ICON EAR II and ICON EAR received judgments in New York State Supreme Court against two principals of EAR who had guaranteed EAR’s lease obligations.  ICON EAR II and ICON EAR have had the New York State Supreme Court judgments recognized in Illinois, where the principals live, and are attempting to collect on such judgments.  At this time, it is not possible to determine the ability of either ICON EAR II or ICON EAR to collect the amounts due under their respective leases from EAR’s principals. 

In light of the the sale of a parcel of real property located in Jackson Hole, Wyoming on June 2, 2010, our Manager reviewed our investment in ICON EAR II.  Based on our Manager’s review, the net book value of the remaining parcels of real property located in Jackson Hole, Wyoming exceeded their fair market value.  As a result, ICON EAR II recognized a non-cash impairment charge of approximately $517,000 during the three months ended June 30, 2010.

Based on our Manager’s periodic review of significant assets in our portfolio, the net book value of the semiconductor manufacturing equipment exceeded its fair value and, as a result, we recognized a non-cash impairment charge of approximately $1,594,000 during the year ended December 31, 2010 relating to the write down in value of the semiconductor manufacturing equipment. In light of the sale of certain parcels of real property located in Jackson Hole, Wyoming on March 16, 2011, ICON EAR II recognized an additional non-cash impairment charge of approximately $312,000 during the three months ended December 31, 2010. No amount of these impairment charges represent a cash expenditure and our Manager does not expect that any amount of these impairment charges will result in any future cash expenditures.
 
On September 28, 2007, we completed the acquisition of and simultaneously leased back substantially all of the machining and metal working equipment of W Forge, Scott, and MW Gilco, LLC (“Gilco”), wholly-owned subsidiaries of MWU, for purchase prices of $21,000,000, $600,000 and $600,000, respectively. Each of the leases commenced on January 1, 2008 and continues for a period of 60 months. On December 10, 2007, we completed the acquisition of and simultaneously leased back substantially all of the machining and metal working equipment of General and AMI Manchester, wholly-owned subsidiaries of MWU, for purchase prices of $400,000 and $1,700,000, respectively. Each of the leases’ base terms commenced on January 1, 2008 and continues for a period of 60 months.

Simultaneously with the closing of the transactions with W Forge, Scott, Gilco, General and AMI Manchester, the Participating Funds completed similar acquisitions with four other subsidiaries of MWU pursuant to which the funds purchased substantially all of the machining and metal working equipment of each subsidiary.  The MWU subsidiaries’ obligations under their leases (including the leases of W Forge, Scott, Gilco, General and AMI Manchester) are cross-collateralized and cross-defaulted, and all of the subsidiaries’ obligations are guaranteed by MWU. The Participating Funds also entered into a credit support agreement, pursuant to which losses incurred by a Participating Fund with respect to any MWU subsidiary are shared among the Participating Funds in proportion to their respective capital investments.
 
 

 
On June 9, 2008, the Participating Funds entered into a forbearance agreement with MWU, W Forge, Scott, Gilco, General, AMI Manchester and four other subsidiaries of MWU (collectively, the “MWU entities”) to cure certain defaults under their lease covenants with us.  The terms of the forbearance agreement included, among other things, the pledge of additional collateral and the grant of a warrant to us for the purchase of 300 shares of capital stock of W Forge for a purchase price of $0.01 per share, exercisable for a period of five years beginning June 9, 2008. On September 5, 2008, the Participating Funds and IEMC Corp., a subsidiary of our Manager (“IEMC”), entered into an amended forbearance agreement with the MWU entities to cure certain non-payment related defaults by the MWU entities under their lease covenants. The terms of the agreement included, among other things, the pledge of additional collateral and the grant of a warrant for the purchase of 12% of the fully diluted common stock of MWU at an aggregate exercise price of $1,000, exercisable until March 31, 2015.

On January 26, 2009, we sold the manufacturing equipment that was on lease to Gilco for approximately $591,000 and recognized a gain on the sale of approximately $85,000 during the year ended December 31, 2009.

On February 27, 2009, we, the Participating Funds and IEMC entered into a further amended forbearance agreement with the MWU entities to cure certain lease defaults. In consideration for restructuring W Forge’s lease payment schedule, we received, among other things, a $200,000 arrangement fee payable at the conclusion of the lease term and a warrant to purchase 20% of the fully diluted common stock of W Forge, at an exercise price of $0.01 per share exercisable for a period of five years from the grant date. In April 2009, we further restructured the payment obligations of W Forge to give it additional flexibility while at the same time attempting to preserve our projected economic return on our investment. In consideration for this restructuring, we received a warrant from W Forge to purchase an additional 20% of its fully diluted common stock, at an aggregate exercise price of $1,000, exercisable until March 31, 2015.

On December 31, 2009, we and W Forge agreed to terminate our lease and simultaneously with the termination, we sold the equipment to W Forge for approximately $9,437,000 and removed the equipment from the W Forge Holdings lease.  In conjunction with the sale of the equipment, Cerion MPI, delivered a promissory note to us in the principal amount of approximately $10,015,000.  The promissory note bore interest at the rate of 14% per year and was payable monthly in arrears for the period beginning January 1, 2010 and ending December 31, 2013.  The promissory note was guaranteed by Cerion MPI’s parent company, Cerion, LLC.  We recorded a gain of approximately $844,000 for the year ended December 31, 2009 in connection with the sale of the manufacturing equipment. In connection with the termination of the lease arrangement with W Forge, we also cancelled the warrants received from W Forge. We did not record a gain or loss in connection with the cancellation of the warrants.

On April 13, 2010, Cerion MPI made an unscheduled principal payment on the promissory note in the amount of approximately $6,704,000. On June 22, 2010, Cerion MPI made an additional prepayment on the promissory note in the amount of $500,000.  On July 26, 2010, Cerion MPI satisfied in full its remaining obligations under the promissory note by paying the amount of approximately $2,318,000 to us.

On September 1, 2010, we amended our schedule with AMI to restructure AMI’s payment obligations and extend the base term of the schedule through December 31, 2013.

On September 30, 2010, the Participating Funds terminated the credit support agreement.   Simultaneously with the termination, we and Fund Twelve formed ICON MW, with ownership interests of 6.33% and 93.67%, respectively, and, as contemplated by the credit support agreement, we contributed all of our interest in the assets related to the financing of the MWU subsidiaries (in the form of machining and metal working equipment subject to lease with AMI, MW General, Inc., and MW Scott, Inc.) to ICON MW to extinguish our obligations under the credit support agreement and receive an ownership interest in ICON MW. The methodology used to determine the ownership interests was at the discretion of our Manage, consistent with the intent of the credit support agreement. In connection with this contribution and the related termination of the credit support agreement, we recorded a loss of approximately $215,000 in the third quarter of 2010.

On March 30, 2007, our wholly-owned subsidiary ICON Heuliez entered into a purchase and sale agreement (the “Heuliez Agreement”) with HSA and Heuliez to purchase certain auto parts manufacturing equipment from Heuliez.  In connection with the Heuliez Agreement, ICON Heuliez agreed to lease back the equipment to HSA and Heuliez, respectively, for an initial term of 60 months.  The purchase price for the equipment was approximately $11,994,000 (€9,000,000) at March 30, 2007.  The leases expire on December 31, 2014.
 
 

 
On October 26, 2007, HSA and Groupe Henri Heuliez (“GHH”), the guarantor of the leases with ICON Heuliez, filed for “procedure de sauvegarde,” a procedure only available to a solvent company seeking to reorganize its business affairs under French law.  HSA and Heuliez paid all amounts due under the leases through January 1, 2008. As of February 1, 2008, ICON Heuliez entered into an agreement with the administrator of the “procedure de sauvegarde” to accept reduced payments from HSA and Heuliez for the period beginning February 1, 2008 and ending July 31, 2008. On August 13, 2008, the administrator of the “procedure de sauvegarde” confirmed a continuation plan for HSA, Heuliez and GHH. The terms of such plan included HSA and Heuliez making reduced payments to ICON Heuliez until January 31, 2009.  Beginning February 1, 2009, full payments under the leases would resume.  In addition, each lease with ICON Heuliez would be extended for an additional year.  During the one year extension, HSA and Heuliez made monthly payments to repay the shortfall resulting from the reduced payments ICON Heuliez received between February 1, 2008 and January 31, 2009.   

On April 15, 2009, Groupe Henri Heuliez (the guarantor of our leases with HSA and Heuliez) and HSA filed for “Redressement Judiciaire,” a proceeding under French law similar to a Chapter 11 reorganization under the U.S. Bankruptcy Code. Heuliez subsequently filed for Redressement Judiciaire on June 10, 2009. Since the time of the Redressement Judiciaire filings, two French government agencies agreed to provide Heuliez with financial support and a third party, Bernard Krief Consultants (“BKC”), agreed to purchase Heuliez. On July 8, 2009, the French Commercial Court approved the sale of Heuliez to BKC, which approval included the transfer of our leases. Subsequently, BKC defaulted on its obligation to purchase Heuliez and Heuliez re-entered Redressement Judiciaire.  Our Manager assessed that the collectability of the outstanding accounts receivable balance at December 31, 2009 of approximately $513,000 was doubtful and established a reserve against the receivable.  On June 30, 2010, the administrator for the Redressement Judiciaire sold Heuliez to Baelen Gaillard (“Baelen”). We and Baelen have agreed to restructure our leases so that we can recover our investment.

Effective October 5, 2010, we amended our lease with HSA and Heuliez to restructure the lease payment obligations and extend the base term of the lease schedules through December 31, 2014. Accordingly, the lease has been reclassified as a direct financing lease. Based on our Manager’s review at the time of restructure, the net book value of the leased equipment exceeded its fair value and, as a result, we recorded a non-cash impairment charge of approximately $3,085,000 during the year ended December 31, 2010.

Notes Receivable Secured by Point-of-Sale Equipment

On November 25, 2008, ICON Northern Leasing, a joint venture among us, Fund Ten and Fund Twelve, purchased the Northern Notes issued by Northern Capital Associates XIV, L.P., as borrower, in favor of Merrill Lynch Commercial Finance Corp. and received an assignment of the underlying master loan and security agreement (the “MLSA”), dated July 28, 2006. We, Fund Ten and Fund Twelve have ownership interests of 35%, 12.25% and 52.75%, respectively, in ICON Northern Leasing. The aggregate purchase price for the Northern Notes was approximately $31,573,000, net of a discount of approximately $5,165,000. The Northern Notes are secured by an underlying pool of leases for point-of-sale equipment. Northern Leasing Systems, Inc., (“Northern Leasing Systems”), the originator and servicer of the Northern Notes, provided a limited guarantee of the MLSA for payment deficiencies up to approximately $6,355,000.  The Northern Notes accrue interest at rates ranging from 7.97% to 8.40% per year and require monthly payments ranging from approximately $183,000 to $422,000.  Our share of the purchase price of the Northern Notes was approximately $11,051,000.

The Northern Notes were scheduled to mature between October 15, 2010 and August 14, 2011 and require balloon payments at the end of each note ranging from approximately $594,000 to $1,255,000.

On December 23, 2010, ICON Northern Leasing restructured the Northern Notes owned by it by extending each Northern Note’s term and increasing each Northern Note’s interest rate by 1.50%.  The Northern Notes now accrue interest at rates ranging from 9.47% to 9.90% per year and the Northern Notes are scheduled to mature at various dates between December 15, 2011 and February 15, 2013.
 

 
 
Note Receivable on Financing Facility

On August 13, 2007, we, along with a consortium of other lenders, entered into an equipment financing facility with Solyndra, Inc. (“Solyndra”), a privately-held manufacturer of solar panels, for the building of a new production facility.  The financing facility was scheduled to mature on June 30, 2013 and was secured by the equipment as well as all other assets of Solyndra.  In connection with the transaction, we received a warrant for the purchase of up to 40,290 shares of Solyndra common stock at an exercise price of $4.96 per share.  The warrant expires on April 6, 2014.  On July 27, 2008, Solyndra fully repaid the outstanding note receivable and the entire financing facility was terminated. We received approximately $4,437,000 from the repayment, which consisted of principal and accrued interest. The repayment did not affect the warrant held by us and we retain our rights thereunder. At December 31, 2010, our Manager determined that the fair value of this warrant was $70,669.

Recently Adopted Accounting Pronouncements

In 2010, we adopted the accounting pronouncement related to the disclosures about the credit quality of financing receivables and the allowance for credit losses.  The pronouncement requires entities to provide disclosures designed to facilitate financial statements users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowances for credit losses.  Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses and class of financing receivable. The required disclosures include, among other things, a rollforward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators.  The pronouncement is effective for our consolidated financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period will be required for our financial statements that include periods beginning on or after January 1, 2011.  See Note 2 to our consolidated financial statements.

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;
·  
Notes receivable;
·  
Initial direct costs;
·  
Acquisition fees;
·  
Foreign currency translation;
·  
Warrants;
·  
Derivative financial instruments; and
·  
Allowance for doubtful accounts.
 
 

 
Lease Classification and Revenue Recognition

Each equipment lease we enter into is classified as a finance lease, an operating lease or a time charter, which is determined based upon the terms of each lease. For a finance lease, initial direct costs are capitalized and amortized over the lease term.  For an operating lease and a time charter, initial direct costs are included as a component of the cost of the equipment and depreciated over the lease term.

For time charters, the vessels are stated at cost. Expenditures subsequent to acquisition for conversions and major improvements are capitalized when such expenditures appreciably extend the life, increase the earning capacity or improve the efficiency or safety of the vessels. Repairs and maintenance are charged to expense as incurred, are included in vessel operating expenses in our consolidated statements of operations.

For finance leases, we record, at lease inception, the total minimum lease payments receivable from the lessee, the estimated unguaranteed residual value of the equipment at lease termination, the initial direct costs related to the lease and the related unearned income. Unearned income represents the difference between the sum of the minimum lease payments receivable, plus the estimated unguaranteed residual value, minus the cost of the leased equipment.  Unearned income is recognized as finance income over the term of the lease using the effective interest rate method.
 
For operating leases, rental income is recognized on a straight-line basis over the lease term.  Billed operating lease receivables are included in accounts receivable until collected.  Accounts receivable are stated at their estimated net realizable value.  Deferred revenue is the difference between the timing of the receivables billed and the income recognized on a straight-line basis.

For time charters, we recognize revenue ratably over the period of such charters. Vessel operating expenses are recognized as incurred.

Our Manager has an investment committee that approves each new equipment lease and other financing transaction.  As part of its process, the investment committee determines the residual value, if any, to be used once the investment has been approved.  The factors considered in determining the residual value include, but are not limited to, the creditworthiness of the potential lessee, the type of equipment considered, how the equipment is integrated into the potential lessee’s business, the length of the lease and the industry in which the potential lessee operates.  Residual values are reviewed for impairment in accordance with our impairment review policy.

The residual value assumes, among other things, that the asset would be utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the marketplace are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly.  The residual value is calculated using information from various external sources, such as trade publications, auction data, equipment dealers, wholesalers and industry experts, as well as inspection of the physical asset and other economic indicators.

For notes receivable, we use the effective interest rate method to recognize interest income, which produces a constant periodic rate of return on the investment, when earned.
 
The recognition of revenue may be suspended when deemed appropriate by our Manager based on uncollectability, creditworthiness and other considerations, after which revenue will be recognized and a cash basis.
 
Asset Impairments

The significant assets in our portfolio are periodically reviewed, no less frequently than annually or when indicators of impairment exist, to determine whether events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss will be recognized only if the carrying value of a long-lived asset is not recoverable and exceeds its fair market value. If there is an indication of impairment, we will estimate the future cash flows (undiscounted and without interest charges) expected from the use of the asset and its eventual disposition. Future cash flows are the future cash inflows expected to be generated by an asset less the future outflows expected to be necessary to obtain those inflows.  If an impairment is determined to exist, the impairment loss will be measured as the amount by which the carrying value of a long-lived asset exceeds its fair value and recorded in the consolidated statement of operations in the period the determination is made.
 
 

 
The events or changes in circumstances that generally indicate that an asset may be impaired are (i) the estimated fair value of the underlying equipment is less than its carrying value or (ii) the lessee is experiencing financial difficulties and it does not appear likely that the estimated proceeds from the disposition of the asset will be sufficient to satisfy the residual position in the asset and, if applicable, the remaining obligation to the non-recourse lender.  Generally in the latter situation, the residual position relates to equipment subject to third-party non-recourse debt where the lessee remits its rental payments directly to the lender and we do not recover our residual position until the non-recourse debt is repaid in full. The preparation of the undiscounted cash flows requires the use of assumptions and estimates, including the level of future rents, the residual value expected to be realized upon disposition of the asset, estimated downtime between re-leasing events and the amount of re-leasing costs. Our Manager’s review for impairment includes a consideration of the existence of impairment indicators including third-party appraisals, published values for similar assets, recent transactions for similar assets, adverse changes in market conditions for specific asset types and the occurrence of significant adverse changes in general industry and market conditions that could affect the fair value of the asset.

Depreciation

We record depreciation expense, in our consolidated statements of operations, on equipment when the lease is classified as an operating lease.  In order to calculate depreciation, we first determine the depreciable equipment cost, which is the cost less the estimated residual value. The estimated residual value is our estimate of the value of the equipment at lease termination. Depreciation expense is recorded by applying the straight-line method of depreciation to the depreciable equipment cost over the lease term.

Notes Receivable

Notes receivable are reported in our consolidated balance sheets at the outstanding principal balance net of any unamortized deferred fees, premiums or discounts on purchased loans. Costs on originated loans are reported as other current and other non-current assets in our consolidated balance sheets. Unearned income, discounts and premiums are amortized to income as a component of interest income using the effective interest method in our consolidated statement of operations.  Interest receivable related to the unpaid principal is recorded separately from the outstanding balance in our consolidated balance sheets.

Notes receivable are generally placed in a non-accrual status when payments are more than 90 days past due.  Additionally, we periodically review the creditworthiness of companies with payments outstanding less than 90 days.  Based upon our 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 we believe recovery of the remaining unpaid receivable is probable.  Revenue on non-accrual accounts is recognized only when cash has been received.

Initial Direct Costs

We capitalize initial direct costs associated with the origination and funding of leased assets and other financing transactions in accordance with the accounting pronouncement that accounts for nonrefundable fees and costs associated with originating or acquiring loans and initial direct costs of leases. 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 direct finance leases and notes receivable in our consolidated statements of operations. Costs related to leases or other financing transactions that are not consummated are expensed as an acquisition expense in our consolidated statements of operations.

Acquisition Fees

Pursuant to our LLC Agreement, we pay acquisition fees to our Manager equal to 3% of the purchase price for our investments. These fees are capitalized and included in the cost of the investment in our consolidated balance sheets.


 

Foreign Currency Translation
 
Assets and liabilities having non-U.S. dollar functional currencies are translated at month-end exchange rates. Contributed capital accounts are translated at the historical rate of exchange when the capital was contributed or distributed. Revenues, expenses and cash flow items are translated at the weighted average exchange rate for the period. Resulting translation adjustments are recorded as a separate component of accumulated other comprehensive income or loss (“AOCI”) in our consolidated balance sheets.

Warrants

Warrants held by us are not registered for public sale and are revalued on a quarterly basis.  The revaluation of warrants is calculated using the Black-Scholes option pricing model.  The assumptions utilized in the Black-Scholes model include share price, strike price, expiration date, risk-free rate and the volatility percentage.  The change in the fair value of warrants is recognized in our consolidated statements of operations.

Derivative Financial Instruments

We may enter into derivative transactions for purposes of hedging specific financial exposures, including movements in foreign currency exchange rates and changes in interest rates on our non-recourse long-term debt. We enter into these instruments only for hedging underlying exposures. We do not hold or issue derivative financial instruments for purposes other than hedging, except for warrants, which are not hedges. Certain derivatives may not meet the established criteria to be designated as qualifying accounting hedges, even though we believe that these are effective economic hedges.

We account for derivative financial instruments in accordance with the accounting pronouncements that established accounting and reporting standards for derivative financial instruments.  These accounting pronouncements require us to recognize all derivatives as either assets or liabilities on the consolidated balance sheets and measure those instruments at fair value. We recognize the fair value of all derivatives as either assets or liabilities on the consolidated balance sheets and changes in the fair value of such instruments are recognized immediately in earnings unless certain accounting criteria established by the accounting pronouncements are met. These criteria demonstrate that the derivative is expected to be highly effective at offsetting changes in the fair value or expected cash flows of the underlying exposure at both the inception of the hedging relationship and on an ongoing basis and include an evaluation of the counterparty risk and the impact, if any, on the effectiveness of the derivative. If these criteria are met, which we must document and assess at inception and on an ongoing basis, we recognize the changes in fair value of such instruments in AOCI, a component of equity on the consolidated balance sheets. Changes in the fair value of the ineffective portion of all derivatives are recognized immediately in earnings.

Allowance for Doubtful Accounts
 
When evaluating the adequacy of the allowance for doubtful accounts, we estimate the uncollectibility of receivables by analyzing lessee, borrower and other counterparty concentrations, creditworthiness and current economic trends. We record an allowance for doubtful accounts when the analysis indicates that the probability of full collection is unlikely. At December 31, 2010 and 2009, we recorded an allowance for doubtful accounts of $0 and $1,506,313, respectively.
 
 

Results of Operations for the Years Ended December 31, 2010 (“2010”) and 2009 (“2009”)

We are currently in our operating period, which is anticipated to last until April 2012, unless that date is extended, at our Manager’s sole discretion, for up to an additional three years.  During our operating period, we will continue to make investments with the cash generated from our initial investments and our additional investments to the extent that the cash is not needed for expenses, reserves and distributions to members. As our investments mature, we may reinvest the proceeds in additional investments in equipment or other financing transactions. We anticipate incurring gains or losses on our investments during our operating period.  Additionally, our rental income and finance income may increase, as well as related expenses, such as depreciation and amortization expense and interest expense. We anticipate that the fees we pay our Manager to manage our investment portfolio may increase during this period as the value of, and volume of activity in, our investment portfolio increases. Our results of operations for 2010 differed from our expectations due to (i) the sale of the vessels owned by ICON European Container and ICON Faithful during 2010, (ii) the sale of the Remaining Top Ships LLCs, and (iii) impairment losses that were recognized during the year.  The impact of the transactions discussed above and other significant factors that drove the changes in our results of operations for 2010 as compared to 2009 are discussed below.

Revenue for 2010 and 2009 is summarized as follows:

   
Years Ended December 31,
       
   
2010
   
2009
   
Change
 
 Rental income
  $ 35,387,167     $ 64,099,850     $ (28,712,683 )
 Time charter revenue
    8,677,496       5,559,524       3,117,972  
 Finance income
    1,834,316       2,548,139       (713,823 )
 (Loss) income from investments in joint ventures
    (1,751,045 )     345,938       (2,096,983 )
 Net gain on sales of equipment
    17,593,002       2,050,594       15,542,408  
 Net (loss) gain on lease termination
    (218,890 )     25,141,909       (25,360,799 )
 Loss on settlement of interfund agreement
    (214,524 )     -       (214,524 )
 Interest and other income
    4,056,270       3,448,283       607,987  
                         
 Total revenue
  $ 65,363,792     $ 103,194,237     $ (37,830,445 )

Total revenue for 2010 decreased $37,830,445, or 36.7%, as compared to 2009. The decrease in total revenue was primarily due to (i) a decrease in rental income and (ii) no significant gains or losses on lease termination during 2010.  The decrease in rental income was primarily the result of (i) the Bareboat Charter Termination during June 2009, (ii) the liquidation of our investment in ICON Global Crossing, (iii) the sale of certain equipment on lease by ICON Global Crossing III, (iv) the sale of equipment previously on lease to W Forge, (v) the restructured bareboat charters for the ZIM Vessels, and (vi) the bankruptcy of EAR, which took place during October 2009.  The net gain on lease termination was a result of the Bareboat Charter Termination, which took place during 2009.  The decrease in total revenue was partially offset by increases in (i) the net gain on sales of leased equipment, and (ii) an increase in time charter revenue. The increase in the net gain on sales of leased equipment relates to the gain on the sale of the vessels owned by ICON European Container, ICON Faithful and the sale of the Remaining Top Ships LLCs during 2010. The increase in time charter revenue was due to our assumption of the underlying time charters in connection with the Bareboat Charter Termination during June 2009.
 
 

 
Expenses for 2010 and 2009 are summarized as follows:

   
Years Ended December 31,
       
   
2010
   
2009
   
Change
 
 Management fees - Manager
  $ 541,090     $ 2,185,858     $ (1,644,768 )
 Administrative expense reimbursements - Manager
    1,417,858       1,951,850       (533,992 )
 General and administrative
    4,950,740       3,683,435       1,267,305  
 Vessel operating expense
    10,771,786       13,926,255       (3,154,469 )
 Depreciation and amortization
    35,137,176       73,052,380       (37,915,204 )
 Impairment loss
    13,827,241       42,208,124       (28,380,883 )
 Interest
    7,959,504       9,937,136       (1,977,632 )
 Gain on financial instruments
    (3,918,539 )     (346,739 )     (3,571,800 )
                         
 Total expenses
  $ 70,686,856     $ 146,598,299     $ (75,911,443 )

Total expenses for 2010 decreased $75,911,443, or 51.8%, as compared to 2009. The decrease in total expenses was primarily due to (i) a decrease in depreciation and amortization expense as a result of the liquidation of our investment in ICON Global Crossing, the sale of certain equipment on lease by ICON Global Crossing III and equipment previously on lease to W Forge and the bankruptcy of EAR during October 2009, (ii) a change in year over year activity, because we recognized less impairment charges during 2010 (related to a parcel of real property recorded under assets held for sale for ICON EAR II and on certain of our equipment on lease previously to AMI, ICON Heuliez, and the Top Ships Vessels) as compared to 2009 (related to our ZIM Vessels and our equipment on lease to EAR), (iii) an increase in the fair value of our derivative instruments, and (iv) a decrease in vessel operating expense related to our management of the Top Ships Vessels, which commenced on June 24, 2009.
 
Provision (Benefit) for Income Taxes

Certain of our direct and indirect wholly-owned subsidiaries are unlimited liability companies and are taxed as corporations under the laws of Canada. Other indirect wholly-owned subsidiaries are taxed as corporations in Barbados. For 2010, the provision (benefit) for income taxes was comprised of $597,930 in current taxes and ($34,094) in deferred taxes.

Noncontrolling Interests

Net income attributable to noncontrolling interests for 2010 decreased $1,035,741, or 56.1%, as compared to 2009 due to the liquidation of our investment in ICON Global Crossing during 2009.

Net Loss Attributable to Fund Eleven

As a result of the foregoing factors, net loss attributable to us for 2010 and 2009 was $6,696,493 and $45,095,916, respectively. Net loss attributable to us per weighted average additional Share for 2010 and 2009 was $18.28 and $122.94, 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
  $ 64,099,850     $ 90,009,529     $ (25,909,679 )
 Time charter revenue
    5,559,524       -       5,559,524  
 Finance income
    2,548,139       4,651,273       (2,103,134 )
 Income from investments in joint ventures
    345,938       2,071,019       (1,725,081 )
 Net gain on lease termination
    25,141,909       -       25,141,909  
 Net gain on sales of new equipment
    -       278,082       (278,082 )
 Net gain (loss) on sales of equipment
    2,050,594       (720,385 )     2,770,979  
 Net loss on sale of portfolio
    -       (11,921,785 )     11,921,785  
 Interest and other income
    3,448,283       2,399,168       1,049,115  
                         
 Total revenue
  $ 103,194,237     $ 86,766,901     $ 16,427,336  

Total revenue for 2009 increased $16,427,336, or 18.9%, as compared to 2008. The increase in total revenue was primarily the result of (i) the net gain on lease termination of $25,141,909 recorded in connection with the Bareboat Charter Termination during 2009, (ii) the impact of the net loss on the sale of portfolio of $11,921,785 recorded in connection with the sale of the Remaining Net Assets during 2008, (iii) the time charter revenue of $5,559,524 recorded as a result of the assumption of the underlying time charters in connection with the Bareboat Charter Termination during 2009, and (iv) the net gain recorded on the sales of leased equipment of $2,050,594 during 2009. The increase in total revenue was partially offset by a decrease in rental income, finance income and income from investments in joint ventures. The decrease in rental income was the result of (i) the sale of the Remaining Net Assets, (ii) our Manager’s decision to put the leases with ICON Heuliez on a cash basis, (iii) the amendment of the lease with W Forge, (iv) the Bareboat Charter Termination, and (v) the liquidation of our investment in ICON Global Crossing, whose results of operations were deconsolidated as of September 30, 2009. These factors accounted for a cumulative decrease of approximately $27,480,000 during 2009. These decreases were partially offset by an increase in rental income of approximately $2,033,000 related to (i) the telecommunications equipment acquired by ICON Global Crossing III in June 2008 and (ii) the manufacturing equipment acquired by ICON Pliant in June 2008. The decrease in finance income was primarily the result of the sale of the Remaining Net Assets, which accounted for approximately $1,839,000 of the decrease in finance income during 2009. The decrease in income from investments in joint ventures was due to (i) our investment in ICON EAR, which recorded an impairment loss, bad debt expense and anticipated selling costs for the asset held for sale in connection with EAR’s bankruptcy filing that accounted for a decrease of approximately $1,930,000 for 2009 and (ii) a gain on foreign currency translation of approximately $1,147,000 recorded during 2008. These decreases in income from investments in joint ventures were partially offset by an increase in income from investments in joint ventures from ICON Northern Leasing in the amount of approximately $1,696,000 during 2009 as compared to 2008.


 

Expenses for 2009 and 2008 are summarized as follows:

   
Years Ended December 31,
       
   
2009
   
2008
   
Change
 
 Management fees - Manager
  $ 2,185,858     $ 5,110,375     $ (2,924,517 )
 Administrative expense reimbursements - Manager
    1,951,850       3,586,973       (1,635,123 )
 General and administrative
    3,683,435       3,711,909       (28,474 )
 Vessel operating expense
    13,926,255       -       13,926,255  
 Depreciation and amortization
    73,052,380       65,065,983       7,986,397  
 Interest
    9,937,136       13,674,261       (3,737,125 )
 Impairment loss
    42,208,124       -       42,208,124  
 (Gain) loss on financial instruments
    (346,739 )     830,336       (1,177,075 )
                         
 Total expenses
  $ 146,598,299     $ 91,979,837     $ 54,618,462  

Total expenses for 2009 increased $54,618,462, or 59.4%, as compared to 2008. The increase in total expenses was primarily due to an increase in (i) impairment loss, (ii) vessel operating expense, and (iii) depreciation and amortization. The impairment loss of $42,208,124 was due to the impairment on our equipment on lease to ZIM and EAR and the M/T Faithful. The increase in vessel operating expense of $13,926,255 during 2009 was a result of our management of the Top Ships Vessels, which commenced in June 2009. The increase in depreciation and amortization expense was primarily due to approximately $20,552,000 of additional depreciation and amortization expense recorded during 2009, which included depreciation and amortization expense for (i) the Top Ships Vessels as a result of the Bareboat Charter Termination and (ii) the full year impact of the 2008 acquisitions of equipment by ICON Global Crossing III and ICON Pliant. This increase in depreciation and amortization expense was partially offset by a decrease in depreciation and amortization expense related to (i) the sale of the Remaining Net Assets and (ii) the liquidation of our investment in ICON Global Crossing. These factors resulted in a decrease of approximately $12,435,000 during 2009. The increase in total expenses was offset by a decrease in interest expense, management fees – Manager, administrative expense reimbursements – Manager and general and administrative expenses recorded during 2009. In addition, the increase in total expenses was partially offset by a gain on financial instruments recorded during 2009 as compared to a loss recorded during 2008.  The decrease in interest expense was due to (i) the continued repayment of our outstanding non-recourse debt balance during 2009, (ii) a payment of $8,500,000 of our outstanding non-recourse debt in connection with the termination payments received in connection with the Bareboat Charter Termination, and (iii) the transfer of all of the non-recourse debt outstanding in connection with the sale of the Remaining Net Assets. The decrease in management fees – Manager was due to our Manager’s suspension of its collection of a portion of management fees through December 31, 2009. The decrease in administrative expense reimbursements – Manager and general and administrative expenses were primarily attributable to the sale of the Remaining Net Assets in the prior year.

Benefit for Income Taxes

Certain of our direct and indirect wholly-owned subsidiaries are unlimited liability companies and are taxed as corporations under the laws of Canada. Other indirect wholly-owned subsidiaries are taxed as corporations in Barbados. For 2009, the (provision) benefit for income taxes was comprised of $(495,291) in current taxes and $648,771 in deferred taxes.

Noncontrolling Interests

Net income attributable to noncontrolling interests for 2009 decreased $202,103, as compared to 2008.

Net Loss Attributable to Fund Eleven

As a result of the foregoing factors, net loss attributable to us for 2009 and 2008 was $45,095,916 and $5,797,721, respectively. Net loss attributable to us per weighted average additional Share for 2009 and 2008 was $122.94 and $15.79, respectively.




Financial Condition

This section discusses the major balance sheet variances from 2010 compared to 2009.

Total Assets

Total assets decreased $113,906,911, from $272,120,852 at December 31, 2009 to $158,213,941 at December 31, 2010.  The decrease was primarily due to (i) approximately $35,137,000 of continued depreciation and amortization of our leased equipment, (ii) approximately $36,899,000 of cash distributions to our members and noncontrolling interests, (iii) approximately $35,158,000 relating to the sale of the vessels owned by ICON European Container and ICON Faithful, and sale of the Remaining Top Ships LLCs during 2010, and (iv) approximately $13,827,000 of aggregate impairment charges recognized on a parcel of real property recorded under assets held for sale for ICON EAR II and on our equipment previously on lease to AMI, ICON Heuliez and the Top Ships Vessels. These decreases were partially offset by an increase of approximately $14,273,000 in accounts receivable relating to the ZIM Vessels.

Current Assets

Current assets decreased $6,028,142, from $34,711,095 at December 31, 2009 to $28,682,953 at December 31, 2010. The decrease was primarily due to (i) approximately $36,899,000 of cash distributions to our members and noncontrolling interests and (ii) approximately $28,485,000 of cash used to reduce our non-recourse long-term debt outstanding relating to ICON Faithful and ICON European Container.  This decrease was partially offset by (i) approximately $28,750,000 in proceeds received from the sale of the vessels owned by ICON European Container and ICON Faithful, (ii) an increase in assets held for sale of approximately $12,191,000 as a result of the execution of the ZIM MOA, (iii) $10,015,000 of scheduled and unscheduled principal repayments received on our note receivable with Cerion MPI, (iv) approximately $11,126,000 in finance lease payments received with respect to our finance leases, and (v) approximately $5,129,000 in cash distributions received from our joint ventures.

Total Liabilities

Total liabilities decreased $70,533,922, from $128,538,345 at December 31, 2009 to $58,004,423 at December 31, 2010. The decrease was primarily due to (i) an approximately $28,485,000 reduction of our non-recourse debt outstanding in connection with the sale of the vessels owned by ICON European Container and ICON Faithful, (ii) an approximately $19,125,000 reduction of our non-recourse debt relating to sale of the Remaining Top Ships LLCs, (iii) approximately $6,700,000 of unscheduled payments of our non-recourse debt relating to the proceeds received from the sale of ICON European Container, (iv) approximately $4,732,000 of scheduled repayments of our non-recourse debt, (v) a decrease of approximately $3,951,000 of accrued expenses and other liabilities primarily due to the payment of accrued expenses and the sale of the Top Ships Vessels, and (vi) a decrease of approximately $3,355,000 in the fair value of our derivative instruments.
 
Current Liabilities

Current liabilities decreased $37,362,122, from $57,202,845 at December 31, 2009 to $19,840,723 at December 31, 2010. The decrease was primarily due to (i) an approximately $28,485,000 reduction of the current portion of our non-recourse long-term debt outstanding in connection with the sale of ICON European Container and ICON Faithful and the Remaining Top Ships LLCs during 2010, (ii) a decrease of approximately $3,951,000 of accrued expenses and other liabilities primarily due to the payment of accrued expenses and the sale of the Top Ships Vessels, and (iii) a decrease of approximately $3,355,000 in the fair value of our derivative instruments.

Equity

Equity decreased $43,372,989 from $143,582,507 at December 31, 2009 to $100,209,518 at December 31, 2010. The decrease was primarily due to the net loss recorded during 2010 and distributions to our members and noncontrolling interests.
 
 

Liquidity and Capital Resources

Summary

At December 31, 2010 and 2009, we had cash and cash equivalents of $4,621,512 and $18,615,323, respectively. During our operating period, our main source of cash has been from rental and finance lease payments and our main use of cash has been in (i) investments in leasing and other financing transactions, (ii) distributions to our members and noncontrolling interests and (iii) repayment of our non-recourse long-term debt. Our liquidity will vary in the future, increasing to the extent cash flows from investments and proceeds from the sale of our investments exceed expenses and decreasing as we enter into new investments, pay distributions to our members and to the extent that expenses exceed cash flows from operations and the proceeds from the sale of our investments.

We currently have adequate cash balances and generate a sufficient amount of cash flow from operations to meet our short-term working capital requirements. We expect to generate sufficient cash flows from operations to sustain our working capital requirements in the foreseeable future. In the event that our working capital is not adequate to fund our short-term liquidity needs, we could borrow against our revolving line of credit. Our revolving line of credit is discussed in further detail in “Financings and Borrowings” below.

We anticipate that our liquidity requirements for the remaining life of the fund will be financed by the expected results of operations, as well as cash received from our investments at maturity.

We anticipate being able to meet our liquidity requirements into the foreseeable future. However, our ability to generate cash in the future is subject to general economic, financial, competitive, regulatory and other factors that affect us and our lessees’ and borrowers’ businesses that are beyond our control.  See “Item 1A. Risk Factors.”

As we previously indicated to our investors, we have experienced liquidity pressures in our portfolio as a result of the recent unprecedented economic environment, coupled with our prior investment strategy that, among other things, relied significantly on third parties to originate investments, used a substantial amount of non-recourse debt to make investments, and was highly dependent on the residual value of equipment to achieve investment returns.  As a result, we reduced our distribution rate from 9.1% per year to 4.0% per year commencing with the January 1, 2011 distribution.  While we believe that recent actions taken by our Manager have improved our position, we will have significant difficulty meeting our investment objectives, particularly by the end of the intended three-year liquidation period.
 


Cash Flows
 
The following table sets forth summary cash flow data:
 
   
Years Ended December 31,
 
   
2010
   
2009
   
2008
 
                   
Net cash provided by (used in):
                 
                   
Operating activities
  $ 10,552,651     $ 53,024,219     $ 70,054,623  
Investing activities
    41,860,448       29,461,051       (39,218,252 )
Financing activities
    (66,407,605 )     (71,472,911 )     (65,745,239 )
Effects of exchange rates on cash and cash equivalents
    695       (67,965 )     240,248  
                         
Net (decrease) increase in cash and cash equivalents
  $ (13,993,811 )   $ 10,944,394     $ (34,668,620 )

Note: See the Consolidated Statements of Cash Flows included in “Item 8. Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for additional information.
 
Operating Activities
 
Cash provided by operating activities decreased $42,471,568, from $53,024,219 in 2009 to $10,552,651 in 2010. The decrease was primarily due to (i) less impairment losses recorded during 2010, (ii) a decrease in depreciation and amortization expense during 2010 and (iii) an increase in the gain on sale of equipment relating to the sale of the Remaining Top Ships LLCs and ICON European Container. These amounts were partially offset by (i) a decrease in the net gain on lease termination and (ii) a decrease in the net loss recorded in 2010 compared to the net loss recorded in 2009.

Investing Activities
 
Cash provided by investing activities increased $12,399,397, from $29,461,051 in 2009 to $41,860,448 in 2010. This increase was primarily due to an increase in the repayments from our note receivable with Cerion MPI, an increase in the proceeds from sales of leased equipment, offset by a decrease in the distributions received from joint ventures in excess of profits.

Financing Activities
 
Cash used in financing activities decreased $5,065,306, from $71,472,911 in 2009 to $66,407,605 in 2010.  The decrease was primarily related to a decrease in the distributions paid to noncontrolling interests, partially offset by proceeds received from non-recourse long-term debt and a reduction in the net repayments of our revolving line of credit.

Financings and Borrowings

Non-Recourse Long-Term Debt

We had non-recourse long-term debt obligations at December 31, 2010 of $52,534,957. Most of our non-recourse long-term debt obligations consist of notes payable in which the lender has a security interest in the equipment and an assignment of the rental payments under the lease, in which case the lender is being paid directly by the lessee. In other cases, we receive the rental payments and pay the lender. If the lessee were to default on the non-recourse long-term debt, the equipment would be returned to the lender in extinguishment of the non-recourse long-term debt.

Revolving Line of Credit, Recourse

We and certain other entities managed by our Manager, ICON Income Fund Eight B L.P., Fund Nine, Fund Ten, Fund Twelve and ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P, (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 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 us. On March 17, 2011, we repaid $1,450,000, which reduced our 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.

Distributions

We, at our Manager’s discretion, pay monthly distributions to our additional members and noncontrolling interests starting with the first month after each additional member’s admission and the commencement of our joint venture operations, respectively, and we expect to continue to pay such distributions until the end of our operating period. We paid distributions to our additional members of $33,005,773, $33,047,095 and $33,072,923 respectively, for the years ended December 31, 2010, 2009 and 2008. We paid distributions to our Manager of $333,391, $333,811 and $334,071, respectively, for the years ended December 31, 2010, 2009 and 2008. We paid distributions to our noncontrolling interests of $3,559,725, $5,659,651 and $5,591,936, respectively, for the years ended December 31, 2010, 2009 and 2008. Commencing January 1, 2011 we reduced our distribution rate from 9.1% per year to 4.0%.

Commitments and Contingencies and Off-Balance Sheet Transactions

Commitments and Contingencies

At December 31, 2010, we had non-recourse debt obligations. The lender has a security interest in the equipment collateralizing each non-recourse long-term debt instrument and an assignment of the rental payments under the lease associated with the equipment. In such cases, the lender is being paid directly by the lessee. If the lessee defaults on the lease, the equipment would be returned to the lender in extinguishment of the non-recourse debt. At December 31, 2010, our outstanding non-recourse long-term indebtedness, inclusive of certain accrued interest, was $52,534,957. We are a party to the Facility as discussed in the Financing and Borrowings section above. We had borrowed $1,450,000 under the Facility at December 31, 2010.

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      3 - 5  
   
Total
   
Year
   
Years
   
Years
 
 Non-recourse debt
  $ 52,534,957     $ 14,371,257     $ 26,165,700     $ 11,998,000  
 Non-recourse interest
    6,456,105       3,023,885       2,807,010       625,210  
 The Facility
    1,450,000       1,450,000       -       -  
                                 
    $ 60,441,062     $ 18,845,142     $ 28,972,710     $ 12,623,210  

The Participating Funds entered into a credit support agreement, pursuant to which losses incurred by a Participating Fund with respect to any financing provided to any subsidiary of MWU would be shared among the Participating Funds in proportion to their respective capital investments.  As contemplated by the credit support agreement, the credit support agreement was terminated on September 30, 2010 in connection with the extinguishment of the Participating Funds obligations there under (see Note 8 to our consolidated financial statements).

We have entered into a remarketing agreement with a third party. In connection with this agreement, residual proceeds received in excess of specific amounts will be shared with this third party based on specific formulas. The obligation related to this agreement is recorded at fair value.

Off-Balance Sheet Transactions

None.

Inflation and Interest Rates

The potential effects of inflation on us are difficult to predict.  If the general economy experiences significant rates of inflation, it could affect us in a number of ways.  We do not currently have or expect to have rent escalation clauses tied to inflation in our leases. The anticipated residual values to be realized upon the sale or re-lease of equipment upon lease termination (and thus the overall cash flow from our leases) may increase with inflation as the cost of similar new and used equipment increases.  If interest rates increase significantly, leases already in place would generally not be affected.

 
 


We, like most other companies, are exposed to certain market risks, which include changes in interest rates and the demand for equipment owned by us.  We believe that our exposure to other market risks, including foreign currency exchange rate risk, commodity risk and equity price risk, are insignificant, at this time, to both our financial position and our results of operations.

We currently have four outstanding notes payable (ICON European Container II, ICON Senang, ICON Sebarok, and the Facility), of which three are non-recourse long-term debt and the other is associated with our recourse revolving line of credit.  With respect to the non-recourse long-term debt that is subject to variable interest, the interest rate for each non-recourse debt obligation is fixed pursuant to an interest rate swap to allow us to mitigate interest rate fluctuations.  As a result, we consider this a fixed position and, therefore, the conditions in the credit markets as of December 31, 2010 have not had any impact on us. In addition, we have considered the risk of counterparty performance of our interest rate swaps by considering, among other things, the credit agency ratings of our counterparties. Based on this assessment, we believe that the risk of counterparty non-performance is minimal. As of December 31, 2010, we had outstanding borrowings under the Facility of $1,450,000. Our Manager has evaluated the impact of the condition of the credit markets on our future cash flows and we do not expect any adverse impact on our cash flows should credit conditions in general remain the same or deteriorate further.

We have engaged in leasing and other financing transactions relating to the use of equipment by domestic and foreign lessees and borrowers outside of the United States. Although certain of our transactions are denominated in Euros, pounds sterling and Canadian dollars, substantially all of our transactions are denominated in the U.S. dollar, therefore reducing our risk to currency translation exposures. In addition, to further reduce this risk, we at times enter into currency hedges to reduce our risk to currency translation exposure on our foreign denominated transactions.  To date, our exposure to exchange rate volatility has not been significant.  Nevertheless, there can be no assurance that currency translation exposures will not have a material impact on our financial position, results of operations or cash flow in the future.

To hedge our variable interest rate risk, we have and may in the future enter into interest rate swap contracts that will effectively convert the underlying floating interest rates to a fixed interest rate. In general, these swap agreements will reduce our interest rate risk associated with variable interest rate borrowings.  However, we will be exposed to and will manage credit risk associated with our counterparties to our swap agreements by dealing only with institutions our Manager considers financially sound.

As of December 31, 2010, we had three floating-to-fixed interest rate swaps relating to ICON Senang, ICON Sebarok and ICON European Container II designated as cash flow hedges with an aggregate notional amount of approximately $46,870,000. These interest rate swaps have maturity dates ranging from January 19, 2011 to April 11, 2012.  As of December 31, 2010, the assets owned by ICON European Container II were classified as assets held for sale.

We manage our exposure to equipment and residual risk by monitoring the markets our equipment is in and maximizing remarketing proceeds through the re-lease or sale of equipment.
 
 

 
 
 
 



 
 
The Members
ICON Leasing Fund Eleven, LLC


We have audited the accompanying consolidated balance sheets of ICON Leasing Fund Eleven, LLC (the “Company”) as of December 31, 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 Leasing Fund Eleven, 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 31, 2011
New York, New York
 

 

 
(A Delaware Limited Liability Company)
 
Consolidated Balance Sheets
 
   
Assets
 
             
   
December 31,
 
   
2010
   
2009
 
 Current assets:
           
 Cash and cash equivalents
  $ 4,621,512     $ 18,615,323  
 Current portion of net investment in finance leases
    4,795,901       9,448,439  
 Accounts receivable, net
    16,579       594,082  
 Current portion of note receivable
    1,520,408       725,049  
 Assets held for sale, net
    16,004,231       3,813,647  
 Other current assets
    1,724,322       1,514,555  
                 
 Total current assets
    28,682,953       34,711,095  
                 
 Non-current assets:
               
 Net investment in finance leases, less current portion
    14,705,170       15,232,713  
 Leased equipment at cost (less accumulated depreciation of
               
     $29,762,549 and $158,488,912, respectively)
    79,587,412       183,614,179  
 Mortgage note receivable
    12,722,006       12,722,006  
 Note receivable, less current portion
    6,691,681       9,289,951  
 Investments in joint ventures
    5,749,598       11,578,687  
 Deferred income taxes, net
    1,026,931       943,053  
 Other non-current assets, net
    9,048,190       4,029,168  
                 
 Total non-current assets
    129,530,988       237,409,757  
                 
 Total Assets
  $ 158,213,941     $ 272,120,852  
                 
Liabilities and Equity
 
                 
 Current liabilities:
               
 Current portion of non-recourse long-term debt
  $ 14,371,257     $ 43,603,558  
 Revolving line of credit, recourse
    1,450,000       2,260,000  
 Derivative instruments
    1,694,776       5,049,327  
 Deferred revenue
    147,661       148,098  
 Due to Manager and affiliates
    286,590       300,223  
 Accrued expenses and other liabilities
    1,890,439       5,841,639  
                 
 Total current liabilities
    19,840,723       57,202,845  
                 
 Non-current liabilities:
               
 Non-recourse long-term debt, less current portion
    38,163,700       71,335,500  
                 
 Total Liabilities
    58,004,423       128,538,345  
                 
 Commitments and contingencies (Note 20)
               
                 
 Equity:
               
 Members' Equity:
               
 Additional members
    99,715,745       139,684,262  
 Manager
    (2,220,734 )     (1,820,378 )
 Accumulated other comprehensive loss
    (1,739,624 )     (1,485,640 )
                 
 Total Members' Equity
    95,755,387       136,378,244  
                 
 Noncontrolling Interests
    4,454,131       7,204,263  
                 
 Total Equity
    100,209,518       143,582,507  
                 
 Total Liabilities and Equity
  $ 158,213,941     $ 272,120,852  
 
 
See accompanying notes to consolidated financial statements.
 

 
(A Delaware Limited Liability Company)
 
Consolidated Statements of Operations
 
   
   
   
Years Ended December 31,
 
   
2010
   
2009
   
2008
 
 Revenue:
                 
 Rental income
  $ 35,387,167     $ 64,099,850     $ 90,009,529  
 Time charter revenue
    8,677,496       5,559,524       -  
 Finance income
    1,834,316       2,548,139       4,651,273  
 (Loss) income from investments in joint ventures
    (1,751,045 )     345,938       2,071,019  
 Net gain (loss) on sales of equipment
    17,593,002       2,050,594       (720,385 )
 Net (loss) gain on lease termination
    (218,890 )     25,141,909       -  
 Loss on settlement of interfund agreement
    (214,524 )     -       -  
 Net gain on sales of new equipment
    -       -       278,082  
 Net loss on sale of portfolio
    -       -       (11,921,785 )
 Interest and other income
    4,056,270       3,448,283       2,399,168  
                         
 Total revenue
    65,363,792       103,194,237       86,766,901  
                         
 Expenses:
                       
 Management fees - Manager
    541,090       2,185,858       5,110,375  
 Administrative expense reimbursements - Manager
    1,417,858       1,951,850       3,586,973  
 General and administrative
    4,950,740       3,683,435       3,711,909  
 Vessel operating expense
    10,771,786       13,926,255       -  
 Depreciation and amortization
    35,137,176       73,052,380       65,065,983  
 Impairment loss
    13,827,241       42,208,124       -  
 Interest
    7,959,504       9,937,136       13,674,261  
 (Gain) loss on financial instruments
    (3,918,539 )     (346,739 )     830,336  
                         
 Total expenses
    70,686,856       146,598,299       91,979,837  
                         
 Loss before income taxes
    (5,323,064 )     (43,404,062 )     (5,212,936 )
                         
 (Provision) benefit for income taxes
    (563,836 )     153,480       1,462,652  
                         
 Net loss
    (5,886,900 )     (43,250,582 )     (3,750,284 )
                         
 Less: Net income attributable to noncontrolling interests
    809,593       1,845,334       2,047,437  
                         
 Net loss attributable to Fund Eleven
  $ (6,696,493 )   $ (45,095,916 )   $ (5,797,721 )
                         
 Net loss attributable to Fund Eleven allocable to:
                       
 Additional members
  $ (6,629,528 )   $ (44,644,957 )   $ (5,739,744 )
 Manager
    (66,965 )     (450,959 )     (57,977 )
                         
    $ (6,696,493 )   $ (45,095,916 )   $ (5,797,721 )
                         
 Weighted average number of additional shares of
                       
 limited liability company interests outstanding
    362,674       363,139       363,414  
                         
 Net loss attributable to Fund Eleven per weighted
                       
 average additional share of limited liability company interests outstanding
  $ (18.28 )   $ (122.94 )   $ (15.79 )
 
 
See accompanying notes to consolidated financial statements.


 
(A Delaware Limited Liability Company)
 
Consolidated Statements of Changes in Equity
 
   
   
Members' Equity
             
   
Additional Shares
                                     
   
of
Limited Liability
   
 
         
Accumulated Other
   
Total
   
 
   
 
 
   
Company Interests
   
Additional
Members
   
Manager
   
Comprehensive
Income (Loss)
   
Members'
 Equity
   
Noncontrolling
Interests
   
Total
Equity
 
Balance, December 31, 2007
    363,859     $ 256,754,095     $ (643,560 )   $ 5,113,341     $ 261,223,876     $ 12,389,412     $ 273,613,288  
                                                         
 Comprehensive (loss) income:
                                                       
 Net (loss) income
    -       (5,739,744 )     (57,977 )     -       (5,797,721 )     2,047,437       (3,750,284 )
 Change in valuation of derivative instruments
    -       -       -       (3,769,112 )     (3,769,112 )     -       (3,769,112 )
 Currency translation adjustments
    -       -       -       (7,619,508 )     (7,619,508 )     -       (7,619,508 )
 Total comprehensive (loss) income
                            (11,388,620 )     (17,186,341 )     2,047,437       (15,138,904 )
 Shares of limited liability company interests                                                        
 repurchased
    (603 )     (444,760 )     -       -       (444,760 )     -       (444,760 )
 Cash distributions
    -       (33,072,923 )     (334,071 )     -       (33,406,994 )     (5,591,936 )     (38,998,930 )
 Investment in joint venture by noncontrolling interest
    -       -       -       -       -       5,615,733       5,615,733  
                                                         
Balance, December 31, 2008
    363,256       217,496,668       (1,035,608 )     (6,275,279 )     210,185,781       14,460,646       224,646,427  
                                                         
 Comprehensive (loss) income:
                                                       
 Net (loss) income
    -       (44,644,957 )     (450,959 )     -       (45,095,916 )     1,845,334       (43,250,582 )
 Change in valuation of derivative instruments
    -       -       -       4,570,879       4,570,879       -       4,570,879  
 Currency translation adjustments
    -       -       -       218,760       218,760       -       218,760  
 Total comprehensive income (loss)
                            4,789,639       (40,306,277 )     1,845,334       (38,460,943 )
 Shares of limited liability company interests                                                        
 repurchased
    (163 )     (120,354 )     -       -       (120,354 )     -       (120,354 )
 Deconsolidation of a noncontrolling interest
    -       -       -       -       -       (3,442,066 )     (3,442,066 )
 Cash distributions
    -       (33,047,095 )     (333,811 )     -       (33,380,906 )     (5,659,651 )     (39,040,557 )
                                                         
Balance, December 31, 2009
    363,093       139,684,262       (1,820,378 )     (1,485,640 )     136,378,244       7,204,263       143,582,507  
                                                         
 Comprehensive (loss) income:
                                                       
 Net (loss) income
    -       (6,629,528 )     (66,965 )     -       (6,696,493 )     809,593       (5,886,900 )
 Change in valuation of derivative instruments
    -       -       -       430,344       430,344       -       430,344  
 Currency translation adjustments
    -       -       -       (684,328 )     (684,328 )     -       (684,328 )
 Total comprehensive (loss) income
    -       -       -       (253,984 )     (6,950,477 )     809,593       (6,140,884 )
 Shares of limited liability company interests                                                        
 repurchased
    (437 )     (333,216 )     -       -       (333,216 )     -       (333,216 )
 Cash distributions
    -       (33,005,773 )     (333,391 )     -       (33,339,164 )     (3,559,725 )     (36,898,889 )
                                                         
Balance, December 31, 2010
    362,656     $ 99,715,745     $ (2,220,734 )   $ (1,739,624 )   $ 95,755,387     $ 4,454,131     $ 100,209,518  


See accompanying notes to consolidated financial statements.

 
(A Delaware Limited Liability Company)
 
Consolidated Statements of Cash Flows
 
   
   
Years Ended December 31,
 
   
2010
   
2009
   
2008
 
 Cash flows from operating activities:
                 
 Net loss
  $ (5,886,900 )   $ (43,250,582 )   $ (3,750,284 )
 Adjustments to reconcile net loss to net cash
                       
  provided by operating activities:
                       
 Rental income paid directly to lenders by lessees
    (12,410,000 )     (12,478,000 )     (12,872,440 )
 Finance income
    (1,834,316 )     (2,548,139 )     (4,651,273 )
 Loss (income) from investments in joint ventures
    1,751,045       (345,938 )     (2,071,019 )
 Net gain on sales of new equipment
    -       -       (278,082 )
 Net (gain) loss on sales of equipment
    (17,593,002 )     (2,050,594 )     720,385  
 Net loss (gain) on lease termination
    218,890       (12,468,659 )     -  
 Loss on settlement of interfund agreement
    214,524       -       -  
 Net loss on sale of portfolio
    -       -       11,921,785  
 Depreciation and amortization
    35,137,176       73,052,376       65,065,983  
 Amortization of deferred time charter expense
    466,331       2,235,738       -  
 Impairment loss
    13,827,241       42,208,124       -  
 Bad debt expense
    -       1,569,221       -  
 Interest expense on non-recourse financing paid directly to lenders by lessees
    3,344,986       4,062,952       3,815,247  
 Interest expense from amortization of debt financing costs
    232,198       356,227       523,882  
 (Gain) loss on financial instruments
    (3,918,539 )     (755,739 )     710,938  
 Deferred tax (benefit) provision
    (35,711 )     (648,771 )     595,016  
 Changes in operating assets and liabilities:
                       
 Collection of finance leases
    11,126,064       9,142,256       19,820,439  
 Accounts receivable
    577,503       (2,756,653 )     (1,768,596 )
 Other assets, net
    (14,769,042 )     (2,829,868 )     2,968,201  
 Payables, deferred revenue and other current liabilities
    (7,308 )     (1,331,415 )     (11,591,135 )
 Due to/from Manager and affiliates
    (49,307 )     11,421       59,610  
 Accrued expenses and other liabilities
    (811,856 )     -       -  
 Distributions from joint ventures
    972,674       1,850,262       835,966  
                         
 Net cash provided by operating activities
    10,552,651       53,024,219       70,054,623  
                         
 Cash flows from investing activities:
                       
 Investments in equipment subject to lease
    -       -       (45,040,317 )
 Proceeds from sales of new and leased equipment
    28,968,068       23,911,312       7,842,386  
 Proceeds from sale of portfolio
    -       -       7,316,137  
 Repayments of note receivable
    10,015,000       -       -  
 Investment in financing facility
    -       -       (164,822 )
 Repayment of financing facility
    -       -       4,367,055  
 Investments in joint ventures
    -       -       (15,458,255 )
 Distributions received from joint ventures in excess of profits
    4,156,570       5,576,318       1,432,688  
 Other assets, net
    (1,279,190 )     (26,579 )     486,876  
                         
 Net cash provided by (used in) investing activities
    41,860,448       29,461,051       (39,218,252 )
                         
 Cash flows from financing activities:
                       
 Proceeds from non-recourse long-term debt
    1,500,000       -       14,044,437  
 Repayments of non-recourse long-term debt
    (29,865,500 )     (29,572,000 )     (50,961,719 )
 Proceeds from revolving line of credit, recourse
    1,450,000       2,260,000       5,000,000  
 Repayments of revolving line of credit, recourse
    (2,260,000 )     (5,000,000 )     -  
 Repurchase of additional shares of limited liability company interests
    (333,216 )     (120,354 )     (444,760 )
 Cash distributions to members
    (33,339,164 )     (33,380,906 )     (33,406,994 )
 Investments in joint ventures by noncontrolling interests
    -       -       5,615,733  
 Distributions to noncontrolling interests
    (3,559,725 )     (5,659,651 )     (5,591,936 )
                         
 Net cash used in financing activities
    (66,407,605 )     (71,472,911 )     (65,745,239 )
                         
 Effects of exchange rates on cash and cash equivalents
    695       (67,965 )     240,248  
                         
 Net (decrease) increase in cash and cash equivalents
    (13,993,811 )     10,944,394       (34,668,620 )
 Cash and cash equivalents, beginning of the year
    18,615,323       7,670,929       42,339,549  
                         
 Cash and cash equivalents, end of the year
  $ 4,621,512     $ 18,615,323     $ 7,670,929  

 
See accompanying notes to consolidated financial statements.

 

ICON Leasing Fund Eleven, LLC
 
(A Delaware Limited Liability Company)
 
Consolidated Statements of Cash Flows
 
   
   
   
Years Ended December 31,
 
   
2010
   
2009
   
2008
 
 Supplemental disclosure of cash flow information:
                 
 Cash paid during the year for interest
  $ 3,316,652     $ 5,195,787     $ 9,338,831  
                         
 Cash paid during the year for income taxes
  $ 523,132     $ 629,763     $ 177,252  
                         
 Supplemental disclosure of non-cash investing and financing activities:
                       
                         
 Principal and interest paid on non-recourse long term debt
                       
 directly to lenders by lessees
  $ 12,410,000     $ 12,478,000     $ 12,872,440  
                         
 Transfer of non-recourse debt in connection with the
                       
 sale of a leasing portfolio
  $ -     $ -     $ 73,187,369  
                         
 Deconsolidation of noncontrolling interest in connection with
                       
 the sale of a controlling interest in ICON Global Crossing, LLC
  $ -     $ 3,442,066     $ -  
                         
 Deconsolidation of the carrying value of leased equipment in connection
                       
 with the sale of a controlling interest in ICON Global Crossing, LLC
  $ -     $ 3,370,458     $ -  
                         
 Note receivable received in connection with the sale of manufacturing
                       
 equipment to W Forge Holdings, Inc.
  $ -     $ 10,015,000     $ -  
                         
 Transfer of leased equipment at cost to assets held for sale
   14,952,257      3,914,775      -  
                         
    Contribution of certain assets for noncontrolling interest in ICON MW, LLC
  $ 1,051,201     $ -     $ -  
 
 
See accompanying notes to consolidated financial statements.
 
51

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(1) 
Organization
 
ICON Leasing Fund Eleven, LLC (the “LLC”) was formed on December 2, 2004 as a Delaware limited liability company.  The LLC is engaged in one business segment, the business of purchasing equipment and leasing it to third parties, providing equipment and other financing, acquiring equipment subject to lease and, to a lesser degree, acquiring ownership rights to items of leased equipment at lease expiration. The LLC will continue until December 31, 2024, unless terminated sooner.

The LLC’s principal investment objective is to obtain the maximum economic return from its investments for the benefit of its members.  To achieve this objective, the LLC: (i) has acquired and continues to acquire a diversified portfolio by making investments in leases, notes receivable and other financing transactions; (ii) has made and continues to make monthly cash distributions, at the LLC’s manager’s discretion, to its members commencing with each member’s admission to the LLC, continuing until the end of the operating period; (iii) has reinvested and continues to reinvest substantially all undistributed cash from operations and cash from sales of equipment and other financing transactions during the operating period; and (iv) will dispose of its investments and distribute the excess cash from such dispositions to its members beginning with the commencement of the liquidation period. The LLC is currently in its operating period, which commenced in April 2007.

The manager of the LLC is ICON Capital Corp., a Delaware corporation (the “Manager”).  The Manager manages and controls the business affairs of the LLC, including, but not limited to, the equipment leases and other financing transactions that the LLC enters into pursuant to the terms of the LLC’s amended and restated limited liability company agreement (the “LLC Agreement”).  Additionally, the Manager has a 1% interest in the profits, losses, cash distributions and liquidation proceeds of the LLC.

The initial capitalization of the LLC of $2,000 was contributed on December 17, 2004, which consisted of $1,000 from the Manager and $1,000 from an officer of the Manager.  The LLC subsequently repurchased the $1,000 contributed by the officer of the Manager. The LLC initially offered shares of limited liability company interests (the “Shares”) with the intention of raising up to $200,000,000 of capital.  On March 8, 2006, the LLC commenced a consent solicitation of its additional members to amend and restate its limited liability company agreement in order to increase the maximum offering amount from up to $200,000,000 to up to $375,000,000.  The consent solicitation was completed on April 21, 2006 with the requisite consents received from the LLC’s members.  The LLC filed a new registration statement (the “New Registration Statement”) to register up to an additional $175,000,000 of Shares with the Securities and Exchange Commission (the “SEC”) on May 2, 2006.  The New Registration Statement was declared effective by the SEC on July 3, 2006, and the LLC commenced the offering of the additional 175,000 Shares thereafter.

The LLC commenced business operations on its initial closing date, May 6, 2005, with admission of investors holding 1,200 Shares representing $1,200,000 of capital contributions.  Through April 21, 2007, the final closing date, the LLC admitted investors holding 365,199 Shares, representing $365,198,690 of capital contributions.  Through December 31, 2010, the LLC repurchased 2,543 Shares, bringing the total number of Shares outstanding to 362,656. From May 6, 2005 through April 21, 2007, the LLC paid sales commissions to third parties and various fees to the Manager and ICON Securities Corp. (“ICON Securities”), a wholly-owned subsidiary of the Manager.  These sales commissions and fees paid to the Manager and its affiliate were recorded as a reduction to the LLC’s equity.  Through December 31, 2007, the LLC paid (i) $29,210,870 of sales commissions to third parties, (ii) $6,978,355 of organizational and offering expenses to the Manager, and (iii) $7,304,473 of underwriting fees to ICON Securities.
 
 
52

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(1) 
Organization - continued
 
The LLC invested most of the net proceeds from its offering in equipment subject to leases, other financing transactions and residual ownership rights in leased equipment.  After the net offering proceeds were invested, additional investments have been and will continue to be made with the cash generated from the LLC’s initial investments to the extent that cash is not used for expenses, reserves and distributions to members. The investment in additional equipment leases and other financing transactions in this manner is called “reinvestment.” The LLC currently anticipates investing in equipment leases, other financing transactions and residual ownership rights in leased equipment from time to time until April 2012, unless that date is extended, at the Manager’s sole discretion, for up to an additional three years.  After the operating period, the LLC will sell its assets in the ordinary course of business during the liquidation period.

Members’ capital accounts are increased for their initial capital contribution plus their proportionate share of earnings and decreased by their proportionate share of losses and distributions. Profits, losses, cash distributions and liquidation proceeds are allocated 99% to the additional members and 1% to the Manager until each additional member has (a) received cash distributions and liquidation proceeds sufficient to reduce its adjusted capital account to zero and (b) received, in addition, other distributions and allocations that would provide an 8% per year cumulative return, compounded daily, on its outstanding adjusted capital account. After such time, distributions will be allocated 90% to the additional members and 10% to the Manager.
 
(2) 
Summary of Significant Accounting Policies
 
Basis of Presentation and Consolidation

The accompanying consolidated financial statements of the LLC have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”). In the opinion of the Manager, all adjustments considered necessary for a fair presentation have been included.

The consolidated financial statements include the accounts of the LLC and its majority-owned subsidiaries and other controlled entities. All intercompany accounts and transactions have been eliminated in consolidation. In joint ventures where the LLC has majority ownership, the financial condition and results of operations of the joint venture are consolidated.  Noncontrolling interest represents the minority owner’s proportionate share of its equity in the joint venture. The noncontrolling interest is adjusted for the minority owner’s share of the earnings, losses, investments and distributions of the joint venture.

The LLC accounts for its noncontrolling interest in a joint venture where the LLC has influence over financial and operational matters, generally 50% or less ownership interest, under the equity method of accounting. In such case, the LLC’s original investment is recorded at cost and adjusted for its share of earnings, losses and distributions.  The LLC accounts for its investment in a joint venture where the LLC has virtually no influence over financial and operational matters using the cost method of accounting.  In such case, the LLC’s original investment is recorded at cost and any distributions received are recorded as revenue.  All of the LLC’s investments in joint ventures are subject to its impairment review policy.

The LLC reports noncontrolling interests as a separate component of consolidated equity and net income attributable to the noncontrolling interest is included in consolidated net income. The attribution of income between controlling and noncontrolling interests is disclosed on the accompanying consolidated statements of operations.

 
53

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(2) 
Summary of Significant Accounting Policies - continued
 
Cash and Cash Equivalents and Restricted Cash

Cash and cash equivalents include cash in banks and highly liquid investments with original maturity dates of three months or less. The LLC's cash and cash equivalents are held principally at three financial institutions and at times may exceed insured limits. The LLC has placed these funds in high quality institutions in order to minimize risk relating to exceeding insured limits.

Restricted cash consists primarily of proceeds received for the holdback of amounts for certain foreign tax obligations. Restricted cash is included in other current and non-current assets.
 
Risks and Uncertainties

In the normal course of business, the LLC is exposed to two significant types of economic risk: credit and market.  Credit risk is the risk of a lessee, borrower or other counterparty’s inability or unwillingness to make contractually required payments.  Concentrations of credit risk with respect to lessees, borrowers or other counterparties are dispersed across different industry segments within the United States of America and throughout the world.  Although the LLC does not currently foresee a concentrated credit risk associated with its lessees, borrowers or other counterparties, contractual payments are dependent upon the financial stability of the industry segments in which such counterparties operate. See Note 17 for a discussion of concentrations of risk.

Market risk reflects the change in the value of debt instruments, derivatives and credit facilities due to changes in interest rate spreads or other market factors.  The LLC believes that the carrying value of its investments and derivative obligations is reasonable, taking into consideration these risks, along with estimated collateral values, payment history and other relevant information.

Debt Financing Costs

Expenses associated with the incurrence of debt are capitalized and amortized over the term of the debt instrument using the effective interest rate method. These costs are included in other non-current assets.

Leased Equipment at Cost

Investments in leased equipment are stated at cost less accumulated depreciation. Leased equipment is depreciated on a straight-line basis over the lease term, which typically ranges from 3 to 8 years, to the asset’s residual value.

The Manager has an investment committee that approves each new equipment lease and other financing transaction.  As part of its process, the investment committee determines the residual value, if any, to be used once the investment has been approved.  The factors considered in determining the residual value include, but are not limited to, the creditworthiness of the potential lessee, the type of equipment considered, how the equipment is integrated into the potential lessee’s business, the length of the lease and the industry in which the potential lessee operates.  Residual values are reviewed for impairment in accordance with the LLC’s impairment review policy.
 

 
54

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(2) 
Summary of Significant Accounting Policies - continued
 
The residual value assumes, among other things, that the asset would be utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the marketplace are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly.  The residual value is calculated using information from various external sources, such as trade publications, auction data, equipment dealers, wholesalers and industry experts, as well as inspection of the physical asset and other economic indicators.

Asset Impairments

The significant assets in the LLC’s portfolio are periodically reviewed, no less frequently than annually or when indicators of impairment exist, to determine whether events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss will be recognized only if the carrying value of a long-lived asset is not recoverable and exceeds its fair market value. If there is an indication of impairment, the LLC will estimate the future cash flows (undiscounted and without interest charges) expected from the use of the asset and its eventual disposition. Future cash flows are the future cash inflows expected to be generated by an asset less the future outflows expected to be necessary to obtain those inflows.  If an impairment is determined to exist, the impairment loss will be measured as the amount by which the carrying value of a long-lived asset exceeds its fair value and recorded in the consolidated statement of operations in the period the determination is made.

     The events or changes in circumstances that generally indicate that an asset may be impaired are (i) the estimated fair value of the underlying equipment is less than its carrying value or (ii) the lessee is experiencing financial difficulties and it does not appear likely that the estimated proceeds from the disposition of the asset will be sufficient to satisfy the residual position in the asset and, if applicable, the remaining obligation to the non-recourse lender. Generally in the latter situation, the residual position relates to equipment subject to third-party non-recourse debt where the lessee remits its rental payments directly to the lender and the LLC does not recover its residual position until the non-recourse debt is repaid in full. The preparation of the undiscounted cash flows requires the use of assumptions and estimates, including the level of future rents, the residual value expected to be realized upon disposition of the asset, estimated downtime between re-leasing events and the amount of re-leasing costs. The Manager’s review for impairment includes a consideration of the existence of impairment indicators including third-party appraisals, published values for similar assets, recent transactions for similar assets, adverse changes in market conditions for specific asset types and the occurrence of significant adverse changes in general industry and market conditions that could affect the fair value of the asset.

Assets Held for Sale, Net

Assets held for sale or lease is recorded at the lower of cost or estimated fair value, less anticipated costs to sell, and consists of assets previously leased to end users that has been returned to the LLC following lease expiration or upon lease termination.

 
 
55

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(2) 
Summary of Significant Accounting Policies - continued
 
Assets held for sale are not depreciated and related deferred costs are not amortized. Subsequent changes to the asset’s fair value, either increases or decreases, are recorded as adjustments to the carrying value of the equipment; however, any such adjustment would not exceed the original carrying value of the assets held for sale.

Revenue Recognition

The LLC leases equipment to third parties and each such lease is classified as a finance lease, an operating lease or time charter, which is determined based upon the terms of each lease.  For a finance lease and a time charter, initial direct costs are capitalized and amortized over the term of the related lease.  For an operating lease, the initial direct costs are included as a component of the cost of the equipment and depreciated over the lease term.

For finance leases, the LLC records, at lease inception, the total minimum lease payments receivable from the lessee, the estimated unguaranteed residual value of the equipment at lease termination, the initial direct costs related to the lease and the related unearned income.  Unearned income represents the difference between the sum of the minimum lease payments receivable, plus the estimated unguaranteed residual value, minus the cost of the leased equipment.  Unearned income is recognized as finance income over the term of the lease using the effective interest rate method.

For operating leases, rental income is recognized on a straight-line basis over the lease term.  Billed operating lease receivables are included in accounts receivable until collected.  Accounts receivable are stated at their estimated net realizable value.  Deferred revenue is the difference between the timing of the receivables billed and the income recognized on a straight-line basis.

For time charters, the LLC recognizes revenue ratably over the period of such charters.  Vessel operating expenses are recognized as incurred and are included in the LLC’s consolidated statements of operations.

For notes receivable, the LLC uses the effective interest rate method to recognize interest income, which produces a constant periodic rate of return on the investment, when earned.

The recognition of revenue may be suspended when deemed appropriate by the Manager based on uncollectability, creditworthiness and other considerations, after which revenue will be recognized on a cash basis.

Allowance for Doubtful Accounts
 
When evaluating the adequacy of the allowance for doubtful accounts, the LLC estimates the uncollectibility of receivables by analyzing lessee, borrower and other counterparty concentrations, creditworthiness and current economic trends. The LLC records an allowance for doubtful accounts when the analysis indicates that the probability of full collection is unlikely.  At December 31, 2010 and 2009, the LLC recorded an allowance for doubtful accounts of $0 and $1,506,313, respectively.
 

 
56

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(2) 
Summary of Significant Accounting Policies - continued
 
Notes Receivable

Notes receivable are reported in the LLC’s consolidated balance sheets at the outstanding principal balance net of any unamortized deferred fees, premiums or discounts on purchased loans. Costs on originated loans are reported as other current and other non-current assets in the LLC’s consolidated balance sheets. Unearned income, discounts and premiums are amortized to interest income using the effective interest rate method in the LLC’s consolidated statements of operations. Interest receivable related to the unpaid principal is recorded separately from the outstanding balance in the LLC’s consolidated balance sheets.

Notes receivable are generally placed in a non-accrual status when payments are more than 90 days past due. Additionally, the LLC periodically reviews the creditworthiness of companies with payments outstanding less than 90 days.  Based upon the Manager’s judgment, accounts may be placed in a non-accrual status.  Accounts on a non-accrual status are only returned to an accrual status when the account has been brought current and the LLC believes recovery of the remaining unpaid receivable is probable. Revenue on non-accrual accounts is recognized only when cash has been received.

Initial Direct Costs

The LLC capitalizes initial direct costs associated with the origination and funding of leased assets and other financing transactions in accordance with the accounting pronouncement that accounts for nonrefundable fees and costs associated with originating or acquiring loans and initial direct costs of leases. 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 and notes receivable in the LLC’s consolidated statements of operations. Costs related to leases or other financing transactions that are not consummated are expensed as an acquisition expense in the LLC’s consolidated statement of operations.

Acquisition Fees

Pursuant to the LLC Agreement, the LLC pays acquisition fees to the Manager equal to 3% of the purchase price of the LLC’s investments. These fees are capitalized and included in the cost of the investment in the LLC’s consolidated balance sheets.

Income Taxes

The LLC is taxed as a partnership for federal and State income tax purposes.  No provision for income taxes has been recorded since the liability for such taxes is that of each of the individual members rather than the LLC. The LLC's income tax returns are subject to examination by the federal and State taxing authorities, and changes, if any, could adjust the individual income tax of the members.

      Some of the LLC’s wholly-owned foreign subsidiaries are taxed as corporations in their local tax jurisdictions. For these entities, the LLC uses the liability method of accounting for income taxes as required by the accounting pronouncement for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established when it is determined that it is more likely than not that the deferred tax assets will not be realized.
 
 
 
57

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(2) 
Summary of Significant Accounting Policies - continued
 
In accordance with the accounting standard on accounting for uncertainty of income taxes, the LLC records a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The LLC recognizes interest and penalties, if any, related to unrecognized tax benefit in income tax expense.

Per Share Data

Net (loss) income attributable to the LLC per weighted average additional Share is based upon the weighted average number of additional Shares outstanding during the year.

Share Repurchase

The LLC may, at its discretion, repurchase Shares from a limited number of its additional members, as provided for in the LLC Agreement.  The repurchase price for any Shares approved for repurchase is based upon a formula, as provided in the LLC Agreement.  Additional members are required to hold their Shares for at least one year before repurchases will be permitted.

Comprehensive (Loss) Income

Comprehensive (loss) income is reported in the accompanying consolidated statements of changes in equity and consists of net (loss) income and other gains and losses affecting equity that are excluded from net (loss) income.

Warrants

Warrants held by the LLC are not registered for public sale and are revalued on a quarterly basis.  The revaluation of warrants is calculated using the Black-Scholes option pricing model.  The assumptions utilized in the Black-Scholes model include share price, strike price, expiration date, risk-free rate and the volatility percentage.  The change in the fair value of warrants is recognized in the consolidated statements of operations.

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires the Manager to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates primarily include the determination of allowance for doubtful accounts, depreciation and amortization, impairment losses, estimated useful lives and residual values.  Actual results could differ from those estimates.

Derivative Financial Instruments

The LLC may enter into derivative transactions for purposes of hedging specific financial exposures, including movements in foreign currency exchange rates and changes in interest rates on its non-recourse long-term debt. The LLC enters into these instruments only for hedging underlying exposures. The LLC does not hold or issue derivative financial instruments for purposes other than hedging, except for warrants, which are not hedges.  Certain derivatives may not meet the established criteria to be designated as qualifying accounting hedges, even though the LLC believes that these are effective economic hedges.
 
 
 
58

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(2) 
Summary of Significant Accounting Policies - continued
 
The LLC accounts for derivative financial instruments in accordance with the accounting pronouncements that established accounting and reporting standards for derivative financial instruments.  These accounting pronouncements require the LLC to recognize all derivatives as either assets or liabilities on the consolidated balance sheets and measure those instruments at fair value.

The LLC recognizes the fair value of all derivatives as either assets or liabilities on the consolidated balance sheets and changes in the fair value of such instruments are recognized immediately in earnings unless certain accounting criteria established by the accounting pronouncements are met.  These criteria demonstrate that the derivative is expected to be highly effective at offsetting changes in the fair value or expected cash flows of the underlying exposure at both the inception of the hedging relationship and on an ongoing basis and include an evaluation of the counterparty risk and the impact, if any, on the effectiveness of the derivative.  If these criteria are met, which the LLC must document and assess at inception and on an ongoing basis, the LLC recognizes the changes in fair value of such instruments in accumulated other comprehensive income (“AOCI”), a component of equity on the consolidated balance sheets.  Changes in the fair value of the ineffective portion of all derivatives are recognized immediately in earnings.

Foreign Currency Translation
 
Assets and liabilities having non-U.S. dollar functional currencies are translated at month-end exchange rates. Contributed capital accounts are translated at the historical rate of exchange when the capital was contributed or distributed.  Revenues, expenses and cash flow items are translated at the weighted average exchange rate for the period.  Resulting translation adjustments are recorded as a separate component of AOCI in the LLC’s consolidated balance sheets.

Reclassifications

Certain reclassifications have been made to the accompanying consolidated financial statements in prior years to conform to the current presentation.

Recently Adopted Accounting Pronouncements

In 2010, the LLC adopted the accounting pronouncement related to the disclosures about the credit quality of financing receivables and the allowance for credit losses. The pronouncement requires entities to provide disclosures designed to facilitate financial statements users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowances for credit losses.  Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses and class of financing receivable. The required disclosures include, among other things, a rollforward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators.  The pronouncement is effective for our consolidated financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period.  Disclosures that relate to activity during a reporting period will be required for our financial statements that include periods beginning on or after January 1, 2011. The adoption of these additional disclosures did not have a material effect on the LLC’s consolidated financial statements as of December 31, 2010.
 
 
 
59

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(2) 
Summary of Significant Accounting Policies - continued

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 us beginning January 1, 2010. The adoption of this accounting pronouncement did not have a material impact on the LLC’s consolidated financial statements as of December 31, 2010.
 
(3) 
Leasing Portfolio
 
On May 19, 2008, the LLC sold substantially all of the remaining net assets of an acquired leasing portfolio (the “Remaining Net Assets”) to affiliates of U.S. Micro Corporation, an unaffiliated third party. As a result, the LLC recorded a net loss of approximately $11,922,000 during the year ended December 31, 2008.
 
(4) 
Net Investment in Finance Leases
 
Net investment in finance leases consisted of the following at December 31, 2010 and 2009:

   
2010
   
2009
 
 Minimum rents receivable
  $ 18,357,633     $ 24,311,785  
 Estimated residual values
    4,404,224       3,070,295  
 Initial direct costs, net
    211,846       361,899  
 Unearned income
    (3,472,632 )     (3,062,827 )
                 
 Net investment in finance leases
    19,501,071       24,681,152  
                 
 Less: Current portion of net investment in finance leases
    4,795,901       9,448,439  
                 
 Net investment in finance leases, less current portion
  $ 14,705,170     $ 15,232,713  

Lumber Processing Equipment
 
       On November 8, 2006, the LLC’s wholly-owned subsidiaries, ICON Teal Jones, LLC and ICON Teal Jones, ULC (collectively, “ICON Teal Jones”), entered into a lease financing arrangement with The Teal Jones Group and Teal Jones Lumber Services, Inc. (collectively, “Teal Jones”) by acquiring from Teal Jones substantially all of the equipment, plant and machinery used by Teal Jones in its lumber processing operations in Canada and the United States and leasing it back to Teal Jones.  The 84-month lease began on December 1, 2006 and grants Teal Jones the right to end the lease early if certain lump sum payments are made to ICON Teal Jones.  The total lease financing amount was approximately $22,224,000.  
 
 
 
60

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(4) 
Net Investment in Finance Leases - continued
 
In connection with the lease financing arrangement, Teal Cedar Products Ltd., an affiliate of The Teal Jones Group, delivered a secured promissory note to ICON Teal Jones, ULC (the “Teal Jones Note”). The Teal Jones Note is secured by a lien on certain land located in British Columbia, Canada owned by Teal Jones, where substantially all of the equipment is operated.  The Teal Jones Note is in the amount of approximately $13,291,000, accrues interest at 20.629% per year and matures on December 1, 2013.  The Teal Jones Note requires quarterly payments of $568,797 through September 1, 2013. On December 1, 2013, a balloon payment of approximately $18,519,000 is due and payable.  At December 31, 2010 and 2009, the principal balance of the Teal Jones Note was $12,722,006 and was reflected as mortgage note receivable on the accompanying consolidated balance sheets (see Note 7 for Credit Quality of Notes Receivable and Allowance for Credit Losses). At December 31, 2010 and 2009, the balance of the deferred costs was approximately $232,000 and $303,000, respectively. At December 31, 2010 and 2009 no allowance for Credit Losses was required.

On December 10, 2009, ICON Teal Jones restructured the lease payment obligations of Teal Jones. The restructuring was intended to preserve the LLC’s projected economic return on this investment.

Telecommunications Equipment
 
On December 20, 2007, the LLC, along with ICON Income Fund Ten, LLC (“Fund Ten”), an entity also managed by the Manager, formed ICON Global Crossing V, LLC (“ICON Global Crossing V”), with ownership interests of 55% and 45%, respectively, to purchase telecommunications equipment from various vendors for approximately $12,982,000. This equipment was subject to a 36-month lease with Global Crossing Telecommunications, Inc. (“Global Crossing”), which expired on December 31, 2010. The total capital contributions made to ICON Global Crossing V were approximately $12,982,000, of which the LLC’s share was approximately $7,140,000.

On January 3, 2011, upon the conclusion of the lease, ICON Global Crossing V sold the telecommunications equipment to Global Crossing for approximately $2,077,000 and accordingly, the LLC expects to record a gain on the sale of approximately $779,000 during 2011.

On September 23, 2008, the LLC’s wholly-owned subsidiary ICON Global Crossing III, LLC (“ICON Global Crossing III”) acquired additional telecommunications equipment for a purchase price of approximately $3,991,000.  The equipment is subject to a 36-month lease with Global Crossing, which expires on September 30, 2011. 
 
Manufacturing Equipment
 
      On March 30, 2007, the LLC‘s wholly-owned subsidiary ICON French Equipment I, LLC (“ICON Heuliez”) entered into a purchase and sale agreement (the “Heuliez Agreement”) with Heuliez SA (“HSA”) and Heuliez Investissements SNC (“Heuliez”) to purchase certain auto parts manufacturing equipment from Heuliez.  In connection with the Heuliez Agreement, ICON Heuliez agreed to lease back the equipment to HSA and Heuliez, respectively, for an initial term of 60 months.  The purchase price for the equipment was approximately $11,994,000 (€9,000,000) at March 30, 2007.  The leases expire on December 31, 2014.

 
 
61

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(4) 
Net Investment in Finance Leases - continued
 
On October 26, 2007, HSA and Groupe Henri Heuliez (“GHH”), the guarantor of the leases with ICON Heuliez, filed for “procedure de sauvegarde,” a procedure only available to a solvent company seeking to reorganize its business affairs under French law.  HSA and Heuliez paid all amounts due under the leases through January 1, 2008. As of February 1, 2008, ICON Heuliez entered into an agreement with the administrator of the “procedure de sauvegarde” to accept reduced payments from HSA and Heuliez for the period beginning February 1, 2008 and ending July 31, 2008. On August 13, 2008, the administrator of the “procedure de sauvegarde” confirmed a continuation plan for HSA, Heuliez and GHH. The terms of such plan included HSA and Heuliez making reduced payments to ICON Heuliez until January 31, 2009.  Beginning February 1, 2009, full payments under the leases would resume.  In addition, each lease with ICON Heuliez would be extended for an additional year.  During the one year extension, HSA and Heuliez made monthly payments to repay the shortfall resulting from the reduced payments ICON Heuliez received between February 1, 2008 and January 31, 2009.  

     On April 15, 2009, GHH and HSA filed for “Redressement Judiciaire,” a proceeding under French law similar to a Chapter 11 reorganization under the U.S. Bankruptcy Code. Heuliez subsequently filed for Redressement Judiciaire on June 10, 2009. Since the time of the Redressement Judiciaire filings, two French government agencies agreed to provide Heuliez with financial support and a third party, Bernard Krief Consultants (“BKC”), agreed to purchase Heuliez. On July 8, 2009, the French Commercial Court approved the sale of Heuliez to BKC, which approval included the transfer of the LLC’s leases. Subsequently, BKC defaulted on its obligation to purchase Heuliez and Heuliez re-entered Redressement Judiciaire. On June 30, 2010, the administrator for the Redressement Judiciaire sold Heuliez to Baelen Gaillard (“Baelen”). The LLC and Baelen have agreed to restructure the LLC’s leases so that the LLC can recover its investment.

Effective October 5, 2010, the LLC amended its lease with HSA and Heuliez to restructure the lease payment obligations and extend the base term of the lease schedules through December 31, 2014. Accordingly, the lease has been reclassified as a direct financing lease. Based on the Manager’s review at the time of restructure, the net book value of the leased equipment exceeded its fair value and, as a result, the LLC recorded a non-cash impairment charge of approximately $3,085,000 during the year ended December 31, 2010.

Non-cancelable minimum annual amounts due on investment in finance leases over the next four years were as follows at December 31, 2010. There will be no amounts due after 2014.

Years Ending December 31,
     
       
 2011
  $ 6,158,209  
 2012
    5,528,142  
 2013
    4,947,312  
 2014
    1,723,970  
    $ 18,357,633  

 
 
62

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(5) 
Leased Equipment at Cost
 
Leased equipment at cost consisted of the following at December 31, 2010 and 2009:

   
2010
   
2009
 
 Marine vessels
           
 Container vessels
  $ -     $ 107,353,324  
 Handymax product tankers
    -       109,270,860  
 Aframax product tankers
    90,798,632       90,798,632  
 Manufacturing equipment
    12,971,831       29,100,777  
 Telecommunications equipment
    5,579,498       5,579,498  
                 
      109,349,961       342,103,091  
                 
 Less: Accumulated depreciation
    29,762,549       158,488,912  
                 
    $ 79,587,412     $ 183,614,179  

Depreciation expense was approximately $34,905,000, $72,634,000 and $64,420,000 for the years ended December 31, 2010, 2009 and 2008, respectively.

Handymax Product Tankers

On June 16, 2006, the LLC’s wholly-owned subsidiaries ICON Doubtless, LLC (“ICON Doubtless”), ICON Faithful, LLC (“ICON Faithful”), ICON Spotless, LLC (“ICON Spotless”), and ICON Vanguard, LLC (“ICON Vanguard”) (collectively, the “Companies”) acquired four Handymax product tankers, the M/T Doubtless, the M/T Faithful, the M/T Spotless, and the M/T Vanguard (collectively, the “Top Ships Vessels”), from subsidiaries of Oceanbulk Maritime, S.A. The Companies acquired the Top Ships Vessels directly, except for ICON Vanguard, which acquired the M/T Vanguard through its wholly-owned Cypriot subsidiary, Isomar Marine Company Limited (“Isomar” and, together with the Companies, the “Top Ships Purchasers”).

The Top Ships Vessels were subject to bareboat charters with subsidiaries of Top Ships, Inc. (“Top Ships”). The bareboat charters were to expire in February 2011. The purchase price for the Top Ships Vessels was approximately $115,097,000, including (i) the assumption of approximately $80,000,000 of senior non-recourse debt obligations and (ii) the assumption of approximately $10,000,000 of junior non-recourse debt obligations, less approximately $1,222,000 of discounted interest on the junior non-recourse debt obligations.

      On June 24, 2009, the Top Ships Purchasers terminated the bareboat charters with subsidiaries of Top Ships at the request of Top Ships (the “Bareboat Charter Termination”). As consideration for the Bareboat Charter Termination, Top Ships (i) paid $8,500,000 as a termination fee, which was used to pay down a portion of the outstanding balance of the non-recourse long-term debt related to the Top Ships Vessels, (ii) paid $2,250,000 for costs associated with repairs, upgrades and surveys of the Top Ships Vessels, (iii) paid $1,000,000 for transaction costs, (iv) waived its rights to the second priority non-recourse debt obligations of $10,000,000 related to the Top Ships Vessels, and (v) agreed to pay all rentals due under the current bareboat charters through June 15, 2009. Simultaneously, the Top Ships Purchasers were assigned the rights to the underlying time charter for each bareboat charter. The time charters expired at various dates ranging from May 2010 to November 2010. In connection with the assumed time charters, the LLC recorded a deferred time charter expense of approximately $5,076,000, representing the portion of the time charter that is above current market rates.
 
 
63

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(5) 
Leased Equipment at Cost - continued
 
     In light of developments in the market for product tankers and the related impact on the shipping industry, the Manager reviewed the LLC’s investment in the M/T Faithful, which is subject to a time charter. Based on the Manager’s review, the net book value exceeded the undiscounted cash flows and exceeded the fair value and, as a result, the LLC recognized a non-cash impairment charge of approximately $5,827,000 during 2009 relating to the write down in value of the M/T Faithful.

As a result of the loss on sale of the M/T Faithful in the third quarter of 2010, the Manager determined that an indicator of impairment existed. As a result, the Manager reviewed the LLC’s remaining investments in the M/T Doubtless, the M/T Spotless, and the M/T Vanguard (the “Remaining Top Ships Vessels”). Based on the Manager’s review, the net book value exceeded the remaining undiscounted cash flows and exceeded the fair value of the Remaining Top Ships Vessels. As a result, in third quarter of 2010, the LLC recognized a non-cash impairment charge of approximately $7,753,000.

On September 23, 2009, the Top Ships Purchasers defaulted on the non-recourse secured loan (the “New Paribas Loan”) with BNP Paribas (“Paribas,” f/k/a Fortis Bank SA/NV), due to their failure to make required payments under the loan agreement. On April 1, 2010, the LLC, through the Top Ships Purchasers, amended the terms of the New Paribas Loan. In connection with the amendment of the New Paribas Loan, Paribas agreed to waive all defaults under the loan and the Top Ships Purchasers paid $1,000,000 towards repayment of the outstanding balance of the non-recourse long-term debt related to the Top Ships Vessels and paid $3,000,000 towards funding the operation of the Top Ships Vessels.

On December 24, 2010, the LLC sold ICON Doubtless, ICON Spotless, and ICON Vanguard (the “Remaining Top Ships LLCs”) to an unaffiliated third party.  As a result, the Remaining Top Ships LLCs were released from their obligations as borrowers under the loan with Paribas.  The LLC recorded a gain of approximately $3,095,000 for the year ended December 31, 2010, in connection with the sale of the Remaining Top Ships LLCs.

Aframax Product Tankers

On April 11, 2007, the LLC’s wholly-owned subsidiaries ICON Senang, LLC (“ICON Senang”) and ICON Sebarok, LLC (“ICON Sebarok”) (collectively the “Teekay Purchasers”), acquired two Aframax product tankers, the M/T Senang Spirit and the M/T Sebarok Spirit (collectively, the “Teekay Vessels”), from an affiliate of Teekay Corporation (“Teekay”). The purchase price for the Teekay Vessels was approximately $88,000,000, including borrowings of approximately $66,660,000 of non-recourse debt under a secured loan agreement (the “Teekay Loan Agreement”) with Fortis Capital Corporation (“Fortis Capital”). Simultaneously with the closing of the purchase of the Teekay Vessels, the Teekay Purchasers entered into a bareboat charter for each of the Teekay Vessels with an affiliate of Teekay for a term of 60 months. The bareboat charters expire in April 2012.

Telecommunications Equipment

On November 17, 2005, the LLC, along with Fund Ten and ICON Income Fund Eight A L.P. (“Fund Eight A”), both entities managed by the Manager, formed ICON Global Crossing, LLC (“ICON Global Crossing”), with ownership interests of 44%, 44% and 12%, respectively, to purchase telecommunications equipment from various vendors. On March 31, 2006, the LLC made an additional capital contribution to ICON Global Crossing of approximately $7,733,000, which changed the LLC’s, Fund Eight A’s and Fund Ten’s ownership interests to 61.39%, 7.99% and 30.62%, respectively. Accordingly, the LLC consolidated the balance sheet of ICON Global Crossing as of March 31, 2006. The total capital contributions made to ICON Global Crossing were approximately $25,131,000, of which the LLC’s share was approximately $15,428,000.
 
 
 
64

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(5) 
Leased Equipment at Cost - continued
 
ICON Global Crossing purchased approximately $22,100,000 of equipment during February and March 2006 and approximately $3,200,000 of additional equipment during April 2006, all of which was subject to a 48-month lease. On September 30, 2009, ICON Global Crossing sold certain telecommunications equipment on lease to Global Crossing back to Global Crossing for a purchase price of $5,493,000. The LLC recorded a gain of approximately $111,000 for the year ended December 31, 2009 in connection with the sale of the telecommunications equipment.  In addition, the LLC sold its 61.39% membership interest in ICON Global Crossing and the LLC deconsolidated ICON Global Crossing in 2009.
 
On December 29, 2006, ICON Global Crossing III purchased telecommunications equipment for approximately $9,779,000. This equipment was subject to a 48-month lease with Global Crossing and Global Crossing North American Networks, Inc. (collectively, the “Global Crossing Group”), which expired on December 31, 2010. During February 2007, ICON Global Crossing III purchased approximately $6,893,000 of additional equipment that is subject to a lease with the Global Crossing Group, which expires on February 28, 2011. On June 27, 2008 and September 23, 2008, ICON Global Crossing III acquired additional telecommunications equipment for aggregate purchase prices of approximately $5,417,000 and $3,991,000, respectively. The equipment is subject to a 36-month lease with Global Crossing, which expires on June 30, 2011 and September 30, 2011, respectively. 

On December 1, 2009, ICON Global Crossing III and Global Crossing agreed to terminate certain schedules to its lease and, simultaneously with the termination, ICON Global Crossing III sold the equipment to Global Crossing for the aggregate purchase price of approximately $8,391,000 and removed the equipment from the lease. The LLC recorded a gain of approximately $1,010,000 for the year ended December 31, 2009 in connection with the sale of the telecommunications equipment.

Manufacturing Equipment
 
  On September 28, 2007, the LLC completed the acquisition of and simultaneously leased back substantially all of the machining and metal working equipment of W Forge Holdings, Inc. (“W Forge”), MW Scott, Inc. (“Scott”), and MW Gilco, LLC (“Gilco”), wholly-owned subsidiaries of MW Universal, Inc. (“MWU”), for purchase prices of $21,000,000, $600,000 and $600,000, respectively.  Each of the leases commenced on January 1, 2008 and continues for a period of 60 months. On December 10, 2007, the LLC completed the acquisition of and simultaneously leased back substantially all of the machining and metal working equipment of MW General, Inc. (“General”) and AMI Manchester, LLC (“AMI Manchester”), wholly-owned subsidiaries of MWU, for purchase prices of $400,000 and $1,700,000, respectively. Each of the lease’s base terms commenced on January 1, 2008 and continues for a period of 60 months.

Simultaneously with the closing of the transactions with W Forge, Scott, Gilco, General and AMI Manchester, Fund Ten and ICON Leasing Fund Twelve, LLC, an entity also managed by the Manager (“Fund Twelve” and, together with the LLC and Fund Ten, the “Participating Funds”), completed similar acquisitions with four other subsidiaries of MWU pursuant to which the funds purchased substantially all of the machining and metal working equipment of each subsidiary.  The MWU subsidiaries’ obligations under their leases (including the leases of W Forge, Scott, Gilco, General and AMI Manchester) are cross-collateralized and cross-defaulted, and all of the subsidiaries’ obligations are guaranteed by MWU.  The Participating Funds also entered into a credit support agreement, pursuant to which losses incurred by a Participating Fund with respect to any MWU subsidiary are shared among the Participating Funds in proportion to their respective capital investments.
 
 
 
65

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(5) 
Leased Equipment at Cost - continued
 
     On June 9, 2008, the Participating Funds entered into a forbearance agreement with MWU, W Forge, Scott, Gilco, General, AMI Manchester and four other subsidiaries of MWU (collectively, the “MWU entities”) to cure certain defaults under their lease covenants with the LLC.  The terms of the forbearance agreement included, among other things, the pledge of additional collateral and the grant of a warrant to the LLC for the purchase of 300 shares of capital stock of W Forge for a purchase price of $0.01 per share, exercisable for a period of five years beginning June 9, 2008. On September 5, 2008, the Participating Funds and IEMC Corp., a subsidiary of the Manager (“IEMC”), entered into an amended forbearance agreement with the MWU entities to cure certain non-payment related defaults by the MWU entities under their lease covenants with the LLC. The terms of the agreement included, among other things, the pledge of additional collateral and the grant of a warrant for the purchase of 12% of the fully diluted common stock of MWU at an aggregate exercise price of $1,000, exercisable until March 31, 2015.

On January 26, 2009, the LLC sold the manufacturing equipment that was on lease to Gilco for approximately $591,000 and recognized a gain on the sale of approximately $85,000 during the year ended December 31, 2009.

On February 27, 2009, the Participating Funds and IEMC entered into a further amended forbearance agreement with the MWU entities to cure certain lease defaults. In consideration for restructuring W Forge’s lease payment schedule, the LLC received, among other things, a $200,000 arrangement fee payable at the conclusion of the lease term and a warrant to purchase 20% of the fully diluted common stock of W Forge, at an exercise price of $0.01 per share exercisable for a period of five years from the grant date. In April 2009, the LLC further restructured the payment obligations of W Forge to give it additional flexibility while at the same time attempting to preserve the LLC’s projected economic return on the LLC’s investment. In consideration for this restructuring, the LLC received a warrant from W Forge to purchase an additional 20% of its fully diluted common stock, at an aggregate exercise price of $1,000, exercisable until March 31, 2015.
 
On December 31, 2009, the LLC and W Forge agreed to terminate their lease and simultaneously with the termination, the LLC sold the equipment to W Forge for approximately $9,437,000 and removed the equipment from the W Forge Holdings lease. In conjunction with the sale of the equipment, Cerion MPI, LLC, (“Cerion MPI”), an entity affiliated with W Forge delivered a promissory note to the LLC in the principal amount of approximately $10,015,000.  The promissory note bore interest at the rate of 14% per year and was payable monthly in arrears for the period beginning January 1, 2010 and ending December 31, 2013.  The promissory note was guaranteed by Cerion MPI’s parent company, Cerion, LLC. The LLC recorded a gain of approximately $844,000 for the year ended December 31, 2009 in connection with the sale of the manufacturing equipment. In connection with the termination of the lease arrangement with W Forge, the LLC also cancelled the warrants received from W Forge. The LLC did not record a gain or loss in connection with the cancellation of the warrants (see Note 8).

On September 1, 2010, the LLC amended its schedule with AMI Manchester and Gallant Steel, Inc. (collectively, “AMI”) to restructure AMI’s payment obligations and extend the base term of the schedule through December 31, 2013.
 
 On June 30, 2008, the LLC and Fund Twelve formed ICON Pliant, LLC (“ICON Pliant”), which entered into an agreement with Pliant Corporation (“Pliant”) to acquire manufacturing equipment for a purchase price of $12,115,000, of which the LLC paid approximately $6,663,000. On July 16, 2008, the LLC and Fund Twelve completed the acquisition of and simultaneously leased back the manufacturing equipment to Pliant. The LLC and Fund Twelve have ownership interests in ICON Pliant of 55% and 45%, respectively. The lease expires on September 30, 2013.

On February 11, 2009, Pliant commenced a voluntary Chapter 11 proceeding in U.S. Bankruptcy Court to eliminate all of its high-yield debt. In connection with this action, Pliant submitted a financial restructuring plan to eliminate its debt as part of a pre-negotiated package with its high yield creditors. On September 22, 2009, Pliant assumed its lease with ICON Pliant and on December 3, 2009, Pliant emerged from bankruptcy. To date, Pliant has made all of its lease payments.

Aggregate annual minimum future rentals receivable from the LLC’s non-cancelable leases over the next three years consisted of the following at December 31, 2010. There will be no additional rents receivable after 2013.

Years ending December 31,  
     
 2011
  $ 15,349,990  
 2012
    6,339,990  
 2013
    2,230,493  
         
 
 
 
66

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(6) 
Assets Held for Sale
 
Container Vessels

On June 21, 2006, the LLC’s wholly-owned subsidiaries, ICON  European Container KS (“ICON European Container”) and ICON European Container KS II (“ICON European Container II” and, together with ICON European Container, the “ZIM Purchasers”), acquired four container vessels from Old Course Investments LLC (“Old Course”).  These vessels (collectively, the “ZIM Vessels”) are subject to bareboat charters with ZIM Integrated Shipping Services Ltd. (“ZIM”). The M/V ZIM Andaman Sea (f/k/a ZIM America) and the M/V ZIM Japan Sea (both owned by ICON European Container) were subject to bareboat charters that expired in November 2010. The M/V ZIM Hong Kong and the M/V ZIM Israel (both owned by ICON European Container II) were subject to bareboat charters that expired in January 2011. 

In light of developments in the market for containership vessels and the related impact on the shipping industry, the Manager reviewed the LLC’s investments in the ZIM Vessels that were subject to bareboat charters with ZIM. Based on the Manager’s review, the net book value exceeded the fair value of the container vessels and, as a result, the LLC recognized a non-cash impairment charge of approximately $35,147,000 relating to the write down in value of the ZIM Vessels during 2009. No amount of this impairment charge represents a cash expenditure.

On October 30, 2009, the ZIM Purchasers amended the bareboat charters for the ZIM Vessels to restructure each respective charterer’s payment obligations so that the LLC will continue to receive payments, subsequent to the end of each bareboat in November 2010 and January 2011, through September 30, 2014 in accordance with each amended charter (the “European Containers Charter Amendments”).
 
On September 23, 2010, ICON European Container and ICON European Container II entered into memoranda of agreement (the “ZIM MOAs”) to sell the ZIM Vessels to unaffiliated third parties for the purchase price of $11,250,000 per vessel. In connection with the ZIM MOAs, each purchaser paid a deposit in the amount of $1,125,000 for its respective vessel.
 
On November 10, 2010 and on November 22, 2010, ICON European Container sold the M/V ZIM Japan Sea and the M/V ZIM Andaman Sea, respectively, pursuant to the terms of the applicable ZIM MOAs.  The proceeds of the sale were used to make a prepayment under the HSH Loan Agreement in the amount of approximately $10,950,000 and $11,160,000, respectively. The LLC recorded a gain on the sale of leased equipment of approximately $14,618,000 for the year ended December 31, 2010.

On February 28, 2011, ICON European Container II sold the M/V ZIM Hong Kong pursuant to the terms of the applicable ZIM MOA.  The proceeds of the sale were used to make a prepayment under the HSH Loan Agreement in the amount of approximately $10,869,000.

On March 16, 2011, ICON European Container II sold the M/V ZIM Israel pursuant to the terms of the applicable ZIM MOA.  The proceeds of the sale were used to make a prepayment under the HSH Loan Agreement in the amount of approximately $5,751,000.
 
 
 
67

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(6) 
Assets Held for Sale - continued

Manufacturing Equipment

On April 24, 2008, the LLC’s wholly-owned subsidiary ICON EAR II, LLC (“ICON EAR II”) completed the purchase and simultaneous leaseback of semiconductor manufacturing equipment to Equipment Acquisition Resources, Inc. (“EAR”) for approximately $6,348,000. The equipment was subject to a 60-month lease that expires on June 30, 2013.  As additional security for the purchase and lease, ICON EAR II received mortgages on certain parcels of real property located in Jackson Hole, Wyoming.

In October 2009, certain facts came to light that led the Manager to believe that EAR was perpetrating a fraud against EAR’s lenders, including ICON EAR II. On October 23, 2009, EAR filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code.  Due to the bankruptcy filing and ongoing investigation regarding the alleged fraud, at this time it is not possible to determine the LLC’s ability to collect the amounts due to it in accordance with the leases or the additional security it received. As of December 31, 2010 and 2009, the LLC classified the remaining ICON EAR II assets as assets held for sale.

In light of the developments surrounding the semiconductor manufacturing equipment on lease to EAR, the Manager determined that the net book value of such equipment may not be recoverable.  As a result of the Manager’s review, ICON EAR II recognized a non-cash impairment charge of approximately $1,235,000 during 2009.

     On June 2, 2010, ICON EAR II, a wholly-owned subsidiary of the LLC, in conjunction with ICON EAR, LLC (“ICON EAR”), a joint venture owned 45% by the LLC and 55% by Fund Twelve, sold a parcel of real property in Jackson Hole, Wyoming that was received as additional security under their respective leases with EAR. The real property was sold for a net purchase price of approximately $757,000.  As a result, ICON EAR II recognized a loss on assets held for sale of approximately $120,000. In addition, on June 7, 2010, ICON EAR II and ICON EAR received judgments in New York State Supreme Court against two principals of EAR who had guaranteed EAR’s lease obligations.  ICON EAR II and ICON EAR have had the New York State Supreme Court judgments recognized in Illinois, where the principals live, and are attempting to collect on such judgments.  At this time, it is not possible to determine the ability of either ICON EAR II or ICON EAR to collect the amounts due under their respective leases from EAR’s principals.

In light of the sale of a parcel of real property located in Jackson Hole, Wyoming on June 2, 2010, the Manager reviewed the LLC’s investment in ICON EAR II.  Based on the Manager’s review, the net book value of the remaining parcels of real property located in Jackson Hole, Wyoming exceeded their fair market value.  As a result, ICON EAR II recognized a non-cash impairment charge of approximately $517,000 during the three months ended June 30, 2010.

Based on the Manager’s periodic review of significant assets in the LLC’s portfolio, the net book value of the semiconductor manufacturing equipment exceeded its fair value and, as a result, the LLC recognized a non-cash impairment charge of approximately $1,594,000 during the year ended December 31, 2010 relating to the write down in value of the semiconductor manufacturing equipment. In light of the sale of certain parcels of real property located in Jackson Hole, Wyoming on March 16, 2011, ICON EAR II recognized an additional non-cash impairment charge of approximately $312,000 during the three months ended December 31, 2010.  
 
(7) 
Notes Receivable
 
On August 13, 2007, the LLC, along with a consortium of other lenders, entered into an equipment financing facility with Solyndra, Inc. (“Solyndra”), a privately-held manufacturer of solar panels, for the building of a new production facility.  The financing facility was scheduled to mature on June 30, 2013 and was secured by the equipment as well as all other assets of Solyndra.  In connection with the transaction, the LLC received a warrant for the purchase of up to 40,290 shares of Solyndra common stock at an exercise price of $4.96 per share.  The warrant expires on April 6, 2014.  On July 27, 2008, Solyndra fully repaid the outstanding note receivable and the entire financing facility was terminated. The LLC received approximately $4,437,000 from the repayment, which consisted of principal and accrued interest. The repayment did not affect the warrant held by the LLC and the LLC retains its rights thereunder. At December 31, 2010, the Manager determined that the fair value of this warrant was $70,669.
 
 
 
68

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(7) 
Notes Receivable - continued

On April 13, 2010, Cerion MPI made an unscheduled principal payment on the promissory note in the amount of approximately $6,704,000.  On June 22, 2010, Cerion MPI made an additional prepayment on the promissory note in the amount of $500,000.  On July 26, 2010, Cerion MPI satisfied in full its remaining obligations under the promissory note by paying the amount of approximately $2,318,000 to the LLC.

Credit Quality of Notes Receivable and Allowance for Credit Losses

The LLC’s weighs all credit decisions on a combination of external credit ratings as well as internal credit evaluations of all potential borrowers.  A potential borrower’s credit application is analyzed using those credit ratings as well as the potential borrower’s financial statements and other financial data deemed relevant.
 
The Manager notes receivables are limited in number and are spread across a wide range of industries. Accordingly, the LLC does not aggregate notes receivable into portfolio segments or classes.  Due to the limited number of notes receivable, the LLC is able to estimate the allowance for credit losses based on a detailed analysis of each note receivable as opposed to using portfolio based metrics and allowance for credit losses. Notes are analyzed quarterly and categorized as either performing or nonperforming based on payment history. If a note becomes non-performing due to a borrower’s missed scheduled payments or failed financial covenants, the Manager analyzes if a reserve should be established or if the note should be restructured. As of December 31, 2010 and 2009, the Manager determined that no allowance for credit losses was required.
 
(8) 
Investments in Joint Ventures
 
The LLC and certain of its affiliates, entities also managed and controlled by the Manager, formed four joint ventures, discussed below, for the purpose of acquiring and managing various assets. The LLC and these affiliates have substantially identical investment objectives and participate on the same terms and conditions.  The LLC and the other joint venture members have a right of first refusal to purchase the equipment, on a pro-rata basis, if any of the other joint venture members desires to sell its interests in the equipment or joint venture.

The four joint ventures described below are minority owned and accounted for under the equity method.

ICON Global Crossing II, LLC

      On September 27, 2006, Fund Ten and ICON Income Fund Nine, LLC (“Fund Nine”) formed ICON Global Crossing II, LLC (“ICON Global Crossing II”), with original ownership interests of approximately 83% and 17%, respectively. The total capital contributions made to ICON Global Crossing II were approximately $12,000,000, of which Fund Ten’s share was approximately $10,000,000 and Fund Nine’s share was approximately $2,000,000.  On September 28, 2006, ICON Global Crossing II purchased approximately $12,000,000 of telecommunications equipment that was subject to a 48-month lease with the Global Crossing Group that expired on October 31, 2010.  On October 31, 2006, the LLC made a capital contribution of approximately $1,800,000 to ICON Global Crossing II. The contribution changed the ownership interests of ICON Global Crossing II for the LLC, Fund Nine and Fund Ten at October 31, 2006 to 13.26%, 14.40% and 72.34%, respectively.  The additional contribution was used to purchase telecommunications equipment subject to a 48-month lease with the Global Crossing Group that expired on October 31, 2010.

On October 29, 2010, upon the conclusion of the lease and in accordance with the terms of the lease, ICON Global Crossing II sold telecommunications equipment to Global Crossing for approximately $3,298,000. The LLC’s share of the gain was approximately $69,000.

ICON EAR, LLC

On December 11, 2007, the LLC and Fund Twelve formed ICON EAR, with ownership interests of 45% and 55%, respectively.  On December 28, 2007, ICON EAR purchased and simultaneously leased back semiconductor manufacturing equipment for a purchase price of $6,935,000, of which the LLC’s share was approximately $3,121,000. During June 2008, the LLC and Fund Twelve made additional contributions to ICON EAR, which were used to complete another purchase and simultaneous leaseback of additional semiconductor manufacturing equipment for a total purchase price of approximately $8,795,000, of which the LLC’s share was approximately $3,958,000. The LLC and Fund Twelve retained ownership interests of 45% and 55%, respectively, subsequent to this transaction. The lease term commenced on July 1, 2008 and was to expire on June 30, 2013. As additional security for the purchase and lease, ICON EAR received mortgages on certain parcels of real property located in Jackson Hole, Wyoming. ICON EAR and ICON EAR II jointly foreclosed on the property.
 
 
 
69

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(8) 
Investments in Joint Ventures - continued
 
In light of the developments surrounding the semiconductor manufacturing equipment on lease to EAR, the Manager determined that the net book value of such equipment may not be recoverable.  Based on the Manager’s review, the net book value of the semiconductor manufacturing equipment exceeded the undiscounted cash flows and exceeded the fair value and, as a result, the LLC recognized a non-cash impairment charge of approximately $3,429,000 during the year ended December 31, 2009. The LLC’s share of the impairment loss was approximately $1,543,000 and was included in the (loss) income from investments in joint ventures in the consolidated statement of operations for the year ended December 31, 2009.

Based on the Manager’s periodic review of significant assets in the LLC’s portfolio, the net book value of the semiconductor manufacturing equipment exceeded its fair value and, as a result, ICON EAR recognized a non-cash impairment charge of approximately $3,593,000 during the year ended December 31, 2010 relating to the write down in value of the semiconductor manufacturing equipment. In light of the sale of certain parcels of real property located in Jackson Hole, Wyoming on March 16, 2011, ICON EAR recognized an additional non-cash impairment charge of approximately $773,000 during the three months ended December 31, 2010. The LLC’s share of the impairment loss was approximately $1,965,000 and was included in the loss from investments in joint ventures in the consolidated statement of operations for the year ended December 31, 2010. The joint venture has classified the assets as held for sale.

ICON Northern Leasing, LLC

On November 25, 2008, ICON Northern Leasing, LLC (“ICON Northern Leasing”), a joint venture among the LLC, Fund Ten and Fund Twelve, purchased four promissory notes (the “Northern Notes”) issued by Northern Capital Associates XIV, L.P., as borrower, in favor of Merrill Lynch Commercial Finance Corp. and received an assignment of the underlying master loan and security agreement (the “MLSA”), dated July 28, 2006. The LLC, Fund Ten and Fund Twelve have ownership interests of 35%, 12.25% and 52.75%, respectively, in ICON Northern Leasing. The aggregate purchase price for the Northern Notes was approximately $31,573,000, net of a discount of approximately $5,165,000. The Northern Notes are secured by an underlying pool of leases for point-of-sale equipment. Northern Leasing Systems, Inc. (“Northern Leasing Systems”), the originator and servicer of the Northern Notes, provided a limited guarantee of the MLSA for payment deficiencies up to approximately $6,355,000. The Northern Notes accrue interest at rates ranging from 7.97% to 8.40% per year and require monthly payments ranging from approximately $183,000 to $422,000. The LLC’s share of the purchase price of the Northern Notes was approximately $11,051,000.

The Northern Notes were scheduled to mature between October 15, 2010 and August 14, 2011 and require balloon payments at the end of each note ranging from approximately $594,000 to $1,255,000.

On December 23, 2010, ICON Northern Leasing restructured the Northern Notes owned by it by extending each Northern Note’s term and increasing each Northern Note’s interest rate by 1.50%.  The Northern Notes now accrue intertest at rates ranging from 9.47% to 9.90% per year and the Northern Notes are scheduled to mature at various dates between December 15, 2011 and February 15, 2013.

 
 
70

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(8) 
Investments in Joint Ventures - continued
 
Information as to the results of operations of ICON Northern Leasing:

   
Years Ended December 31,
    For the period from November 25, 2008 (Commencement of Operations) through December 31,  
   
 
2010
   
 
2009
   
2008
 
 Revenue
  $ 2,482,966     $ 5,446,823     $ 819,836  
 Expenses
    256,504       556,061       83,673  
 Net income
  $ 2,226,462     $ 4,890,762     $ 736,163  
 LLC's share of net income
  $ 772,571     $ 1,695,186     $ 254,975  

ICON MW, LLC

On September 30, 2010, the Participating Funds terminated the credit support agreement (see Note 20).   Simultaneously with the termination, the LLC and Fund Twelve formed ICON MW, LLC (“ICON MW”), with ownership interests of 6.33% and 93.67%, respectively, and, as contemplated by the credit support agreement, the LLC contributed all of its interest in the assets related to the financing of the MWU subsidiaries (primarily in the form of machining and metal working equipment subject to lease with AMI, General, and Scott) to ICON MW to extinguish its obligations under the credit support agreement and receive an ownership interest in ICON MW. The methodology used to determine the ownership interests was at the discretion of the Manager, consistent with the intent of the credit support agreement. In connection with this contribution and the related termination of the credit support agreement, the LLC recorded a loss of approximately $215,000 in the third quarter of 2010.
 
(9) 
Non-Recourse Long-Term Debt
 
The LLC had the following non-recourse long-term debt at December 31, 2010 and 2009:

   
2010
   
2009
 
 ICON European Container, LLC
  $ -     $ 19,112,200  
 ICON European Container II, LLC
    20,164,957       26,905,800  
 ICON Senang, LLC
    16,185,000       21,210,529  
 ICON Sebarok, LLC
    16,185,000       21,210,529  
 ICON Doubtless, LLC
    -       6,625,000  
 ICON Spotless, LLC
    -       6,625,000  
 ICON Faithful, LLC
    -       6,625,000  
 Isomar Marine Company Limited
    -       6,625,000  
                 
 Total non-recourse long-term debt
    52,534,957       114,939,058  
                 
 Less: Current portion of non-recourse long-term debt
    14,371,257       43,603,558  
                 
 Total non-recourse long-term debt, less current portion
  $ 38,163,700     $ 71,335,500  

 
 
71

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(9) 
Non-Recourse Long-Term Debt- continued
 
Container Vessels

On November 10, 2010 and November 22, 2010, ICON European Container sold the M/V ZIM Japan Sea and the M/V ZIM Andaman Sea pursuant to the terms of the applicable ZIM MOAs.  The proceeds of the sales were used to make prepayments under the HSH Loan Agreement in the amounts of approximately $10,950,000 and $11,160,000, respectively.  As a result of the sale of the M/V ZIM Japan Sea and the M/V ZIM Andaman Sea, the related interest rate swap contract was settled.

On February 28, 2011, ICON European Container II sold the M/V ZIM Hong Kong pursuant to the terms of the applicable ZIM MOA.  The proceeds of the sale were used to make a prepayment under the HSH Loan Agreement in the amount of approximately $10,869,000.

On March 16, 2011, ICON European Container II sold the M/V ZIM Israel pursuant to the terms of the applicable ZIM MOA.  The proceeds of the sale were used to make a prepayment under the HSH Loan Agreement in the amount of approximately $5,751,000.

In connection with the senior non-recourse debt obligations of ICON European Container II the LLC assumed two interest rate swap contracts. These interest rate swap contracts were established in order to fix the variable interest rates on such debt obligations and minimize the LLC’s risk of interest rate fluctuations.  The interest rate swap contracts had a fixed interest rate of 5.99% for the M/V ZIM Hong Kong and the M/V ZIM Israel. These interest rate contracts expired during January 2011.

At December 31, 2010 and 2009, the outstanding balance of the senior and junior non-recourse long-term debt obligations related to M/V ZIM Hong Kong and the M/V ZIM Israel was $20,164,957 and $26,905,800, respectively.

Handymax Product Tankers

On October 13, 2010, the LLC terminated the M/T Faithful time charter and sold the M/T Faithful to the Faithful Purchaser (see Note 5). The Faithful Purchase Price along with certain excess funds in the operating accounts of ICON Faithful, Isomar, ICON Doubtless, and ICON Spotless ("Remaining Top Ships LLCs”), were used to make a prepayment on the loan with Paribas in the amount of $6,375,000.

On December 24, 2010, the LLC sold the Remaining Top Ships LLCs to an unaffiliated third party. As a result, the Remaining Top Ships LLCs' obligations under the New Paribas Loan were assumed by the buyer. 
 
Aframax Product Tankers

In connection with the acquisition of the Teekay Vessels (see Note 5), the Teekay Purchasers borrowed approximately $66,660,000 of non-recourse debt under the Teekay Loan Agreement with Fortis Capital. Pursuant to the terms of the Teekay Loan Agreement, there were two advances of approximately $33,330,000 each for the acquisition of the M/T Senang Spirit and the M/T Sebarok Spirit, respectively. The LLC paid and capitalized approximately $880,000 in debt financing costs. The advances are both cross-collateralized, have a maturity date of April 11, 2012 and accrue interest at LIBOR plus 1.00% per year.

 
 
72

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(9) 
Non-Recourse Long-Term Debt- continued

The advances require monthly principal payments ranging from approximately $202,000 to $1,006,000.  On April 11, 2012, a balloon payment of approximately $18,800,000 is due.  The LLC may, at its discretion, make periodic prepayments of the outstanding principal balance without penalty. At December 31, 2010 and 2009, the outstanding balance of the non-recourse long-term debt obligations related to the Teekay Vessels was approximately $32,370,000 and $42,421,000, respectively.

     On April 11, 2007, the LLC entered into two additional interest rate swap contracts with Fortis Bank Nederland in order to fix the variable interest rate on the LLC’s non-recourse long-term debt with regards to the Teekay Vessels and to minimize the LLC’s risk for interest rate fluctuations. After giving effect to the swap agreements, the LLC has a fixed interest rate of 6.125% per year. The LLC accounted for these swap contracts as cash flow hedges.

As of December 31, 2010 and December 31, 2009, the LLC had capitalized net debt financing costs of $128,602 and $563,955, respectively. For the years ended December 31, 2010, 2009 and 2008, the LLC recognized amortization expense of $232,198, $418,762 and $532,882, respectively.

The aggregate maturities of non-recourse long-term debt over the next four years were as follows at December 31, 2010. There are no additional maturities of non-recourse long-term debt after 2014.


For the year ending December 31, 2011
  $ 14,371,257  
For the year ending December 31, 2012
    22,970,700  
For the year ending December 31, 2013
    3,195,000  
For the year ending December 31, 2014
    11,998,000  
         
    $ 52,534,957  
 
(10) 
Revolving Line of Credit, Recourse
 
      The LLC and certain other entities managed by the Manager, ICON Income Fund Eight B L.P., Fund Nine, Fund Ten, Fund Twelve and ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P, (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.
 
 
 
73

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(10) 
Revolving Line of Credit, Recourse - continued
 
Aggregate borrowings by all Borrowers under the Facility amounted to $1,450,000 at December 31, 2010, all of which was borrowed by the LLC. On March 17, 2011, the LLC 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.
 
(11) 
Foreign Income Taxes

Certain of the LLC’s direct and indirect wholly-owned subsidiaries are unlimited liability companies and are taxed as corporations under the laws of Canada.  Other indirect wholly-owned subsidiaries are taxed as corporations in Barbados. 

The components of loss before income taxes were:

   
Years Ended December 31,
 
   
2010
   
2009
   
2008
 
 Non-taxable  (1)
  $ (6,938,966 )   $ (44,793,430 )   $ (859,198 )
 Taxable  (1)
    1,615,902       1,389,368       (4,353,738 )
 Loss before income taxes
  $ (5,323,064 )   $ (43,404,062 )   $ (5,212,936 )
                         
(1) The distinction of the taxable and non-taxable activities were determined based on the locations of the taxing authorities.
 

The components of the benefit (provision) for income taxes are as follows:
 
   
Years Ended December 31,
 
   
2010
   
2009
   
2008
 
 Current:
                 
 Foreign national and provincial (provision) benefit
  $ (597,930 )   $ (495,291 )   $ 2,057,668  
                         
 Deferred:
                       
 Foreign national and provincial benefit (provision)
    34,094       648,771       (595,016 )
                         
 (Provision) benefit for income taxes
  $ (563,836 )   $ 153,480     $ 1,462,652  
 
As of December 31, 2010 and 2009, the LLC has a net deferred tax asset of approximately $1,026,931 and $943,053, respectively, relating to (i) net operating losses that are currently expected to expire starting in 2027 through 2028 and (ii) a net unrealized capital loss on foreign currency for a net note receivable. This net deferred tax asset includes a valuation allowance of $3,090,491 and $3,021,502 at December 31, 2010 and December 31, 2009 respectively. The remaining components of the deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and for income tax purposes.

 
 
74

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(11) 
Foreign Income Taxes - continued

The significant components of deferred taxes consisted of the following:

   
December 31,
 
   Non-current deferred tax assets:
 
2010
   
2009
 
 Leased equipment at cost, less accumulated depreciation
  $ 4,185,593     $ 4,675,969  
 Unrealized taxable capital loss
    92,572       298,051  
 Net operating loss carryforward, net of current portion
    3,090,491       2,945,597  
   Total non-current deferred tax assets before valuation allowance
    7,368,656       7,919,617  
 Valuation allowance
    (3,090,491 )     (3,021,502 )
    Total deferred tax assets
  $ 4,278,165     $ 4,898,115  
                 
   Non-current deferred tax liabilities:
               
 Net investment in finance leases
  $ (2,920,143 )   $ (3,732,916 )
 Unrealized taxable capital gain
    (331,091 )     (222,146 )
                 
   Total deferred tax liabilities
    (3,251,234 )     (3,955,062 )
                 
   Net deferred tax assets
  $ 1,026,931     $ 943,053  
 
Reconciliations from the benefit (provision) for income taxes at the U.S. federal statutory tax rate to the effective tax rate for the benefit (provision) for income taxes are as follows:
 
   
2010
   
2009
   
2008
 
 U.S. Federal statutory income tax rate
    (34.0 )%     (34.0 )%     (34.0 )%
 Rate benefit for U.S. partnership operations
    34.0 %     34.0 %     34.0 %
 Foreign taxes
    (28.5 )%     (0.4 )%     20.1 %
      (28.5 )%     (0.4 )%     20.1 %

The LLC’s Canadian subsidiaries, under the laws of Canada, are subject to income tax examination for the 2006 through 2010 periods. The LLC has not identified any uncertain tax positions as of December 31, 2010.
 
(12) 
Transactions with Related Parties
 
In accordance with the terms of the LLC Agreement, the LLC pays or paid the Manager (i) management fees ranging from 1% to 7% based on a percentage of the rentals and other contractual payments recognized either directly by the LLC or through its joint ventures, and (ii) acquisition fees, through the end of the operating period, of 3% of the purchase price of the LLC’s investments.  In addition, the Manager is reimbursed for administrative expenses incurred in connection with the LLC’s operations.  The Manager also has a 1% interest in the LLC’s profits, losses, cash distributions and liquidation proceeds.
 
       The Manager performs certain services relating to the management of the LLC’s equipment leasing and other financing activities.  Such services include, but are not limited to, the collection of lease payments from the lessees of the equipment or loan payments from borrowers, re-leasing services in connection with equipment that is off-lease, inspections of the equipment, liaising with and general supervision of lessees and borrowers to ensure that the equipment is being properly operated and maintained, monitoring performance by the lessees of their obligations under the leases and the payment of operating expenses.

 
 
75

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(12) 
Transactions with Related Parties - continued
 
Administrative expense reimbursements are costs incurred by the Manager or its affiliates that are necessary to the LLC’s operations.  These costs include the Manager’s and its affiliates’ legal, accounting, investor relations and operations personnel costs, as well as professional fees and other costs that are charged to the LLC based upon the percentage of time such personnel dedicate to the LLC.  Excluded are salaries and related costs, office rent, travel expenses and other administrative costs incurred by individuals with a controlling interest in the Manager.

During the twelve months ended December 31, 2010, the Manager suspended the collection of a portion of its management fees.

The LLC paid distributions to the Manager of $333,391, $333,811 and $334,071 for the years ended December 31, 2010, 2009 and 2008, respectively.  Additionally, the Manager’s interest in the net loss attributable to Fund Eleven was $66,965, $450,959 and $57,977 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:
 
Entity
 
 Capacity
 
 Description
 
2010
   
2009
   
2008
 
 ICON Capital Corp.
 
 Manager
 
 Acquisition fees (1)
  $ -     $ -     $ 1,204,384  
 ICON Capital Corp.
 
 Manager
 
 Management fees (2) (3)
    541,090       2,185,858       5,110,375  
 ICON Capital Corp.
 
 Manager
 
 Administrative expense reimbursements (2)
    1,417,858       1,951,850       3,586,973  
 Total
          $ 1,958,948     $ 4,137,708     $ 9,901,732  
                                 
(1) Capitalized and amortized to operations over the estimated service period in accordance with the LLC's accounting policies.
 
(2) Charged directly to operations.
 
(3) The Manager suspended the collection of a portion of its management fees in the amount of $1,440,269 and $1,355,498 during the years ended December 31, 2010 and 2009, respectively.
 

At December 31, 2010 and 2009, the LLC had a net payable of $286,590 and $300,223 due to the Manager and its affiliates that consisted primarily of accruals due to the Manager for administrative expense reimbursements.
 
(13) 
Derivative Financial Instruments
 
The LLC may enter into derivative transactions for purposes of hedging specific financial exposures, including movements in foreign currency exchange rates and changes in interest rates on its non-recourse long-term debt. The LLC enters into these instruments only for hedging underlying exposures. The LLC does not hold or issue derivative financial instruments for purposes other than hedging, except for warrants, which are not hedges.  Certain derivatives may not meet the established criteria to be designated as qualifying accounting hedges, even though the LLC believes that these are effective economic hedges.

The LLC accounts for derivative financial instruments in accordance with the accounting pronouncements that established accounting and reporting standards for derivative financial instruments.  These accounting pronouncements require the LLC to recognize all derivatives as either assets or liabilities on the consolidated balance sheets and measure those instruments at fair value. The LLC recognizes the fair value of all derivatives as either assets or liabilities on the consolidated balance sheets and changes in the fair value of such instruments are recognized immediately in earnings unless certain accounting criteria established by the accounting pronouncements are met. These criteria demonstrate that the derivative is expected to be highly effective at offsetting changes in the fair value or expected cash flows of the underlying exposure at both the inception of the hedging relationship and on an ongoing basis and include an evaluation of the counterparty risk and the impact, if any, on the effectiveness of the derivative. If these criteria are met, which the LLC must document and assess at inception and on an ongoing basis, the LLC recognizes the changes in fair value of such instruments in AOCI, a component of equity on the consolidated balance sheets. Changes in the fair value of the ineffective portion of all derivatives are recognized immediately in earnings.
 
 
 
76

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(13) 
Derivative Financial Instruments - continued
 
Interest Rate Risk

The LLC’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements on its variable non-recourse debt. The LLC’s hedging strategy to accomplish this objective is to match the projected future cash flows with the underlying debt service. Interest rate swaps designated as cash flow hedges involve the receipt of floating-rate interest payments from a counterparty in exchange for the LLC making fixed interest rate payments over the life of the agreements without exchange of the underlying notional amount. 

As of December 31, 2010, the LLC had three floating-to-fixed interest rate swaps relating to ICON Senang, ICON Sebarok and ICON European Container II designated as cash flow hedges with an aggregate notional amount of approximately $46,870,000. These interest rate swaps have maturity dates ranging from January 19, 2011 to April 11, 2012.  As of December 31, 2010, the assets owned by ICON European Container II were classified as assets held for sale.

As of December 31, 2009, the LLC had four floating-to-fixed interest rate swaps relating to ICON Senang, ICON Sebarok, ICON European Container and ICON European Container II designated as cash flow hedges with an aggregate notional amount of approximately $78,131,000. These interest rate swaps have maturity dates ranging from November 19, 2010 to April 11, 2012.

      For these derivatives, the LLC records the gain or loss from the effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges in AOCI and such gain or loss is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings and within the same line item on the statements of operations as the impact of the hedged transaction. During the year ended December 31, 2010 and 2008, the LLC recorded hedge ineffectiveness in the amount of approximately $3,211,000 and $12,000, as a component of the (gain) loss on financial instruments in the consolidated statements of operations. During the year ended December 31, 2009, the LLC recorded no hedge ineffectiveness in earnings and estimates that approximately $1,191,000 will be transferred from AOCI to interest expense.

Non-designated Derivatives

The LLC holds warrants that are held for purposes other than hedging. All changes in the fair value of the interest rate swap not designated as a hedge and the warrants are recorded directly in earnings. 

 
 
77

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(13) 
Derivative Financial Instruments - continued
 
The table below presents the fair value of the LLC’s derivative financial instruments as well as their classification within the LLC’s consolidated balance sheets as of December 31, 2010 and December 31, 2009:
 
                         
     
Asset Derivatives
     
Liability Derivatives
 
     
December 31,
   
December 31,
     
December 31,
   
December 31,
 
     
2010
   
2009
     
2010
   
2009
 
 
Balance Sheet Location
 
Fair Value
   
Fair Value
 
Balance Sheet Location
 
Fair Value
   
Fair Value
 
 Derivatives designated as hedging instruments:
                           
             Interest rate swaps
    $ -     $ -  
Derivative instruments
  $ 1,694,776     $ 3,942,837  
                                     
 Derivatives not designated as hedging instruments:
                                   
             Interest rate swaps
    $ -     $ -  
Derivative instruments
  $ -     $ 1,106,490  
             Warrants
Other non-current assets
  $ 70,669     $ 79,371       $ -     $ -  

The tables 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 years ended December 31, 2010 and December 31, 2009:

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)
 
Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
 
Location of Gain (Loss)
Recognized in Income
on Derivative (Ineffective
Portion and Amounts Excluded
from  Effectiveness Testing)
 
Gain (Loss)
Recognized in Income
on Derivative (Ineffective Portion and Amounts Excluded from Effectiveness Testing)
 
                       
 Interest rate swaps
  $ 2,932,596  
 Interest expense
  $ 3,362,940  
 Gain (loss) on financial instruments
  $ -  

The LLC’s derivative financial instruments not designated as hedging instruments generated a gain on the statements of operations for the year ended December 31, 2010 of $3,918,539. This gain was recorded as a component of (gain) loss on financial instruments. The gain recorded for the year ended December 31, 2010 was comprised of $3,927,241 relating to interest rate swap contracts and a loss of $8,702 relating to warrants.

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)
 
Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
 
Location of Gain (Loss)
Recognized in Income
on Derivative (Ineffective
Portion and Amounts Excluded
from Effectiveness Testing)
 
Gain (Loss)
Recognized in Income
on Derivative (Ineffective Portion and Amounts Excluded from Effectiveness Testing)
 
                       
 Interest rate swaps
  $ 454,962  
 Interest expense
  $ (4,115,917 )
 Gain (loss) on financial instruments
  $ -  
 
 
 
 
78

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(13) 
Derivative Financial Instruments - continued
 
The LLC’s derivative financial instruments not designated as hedging instruments generated a gain on the statements of operations for the year ended December 31, 2009 of $346,739. This gain was recorded as a component of (gain) loss on financial instruments. The gain recorded for the year ended December 31, 2009 was comprised of $328,947 relating to interest rate swap contracts and $17,792 relating to warrants.
 
The LLC’s derivative financial instruments not designated as hedging instruments generated a  loss on the statements of operations for the year ended December 31, 2008 of $830,336.  The loss was recorded as a component of (gain) loss on financial instruments. The loss recorded for the year ended December 31, 2008 was comprised of $802,274 relating to interest rate swap contracts and $28,062 relating to warrants.
 
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 $1,694,776 and $5,049,327, 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 $1,724,928.
 
(14) 
Accumulated Other Comprehensive Loss
 
AOCI includes accumulated losses on derivative financial instruments and accumulated losses on currency translation adjustments of $1,431,590 and $308,034, respectively, at December 31, 2010 and accumulated losses on derivative financial instruments and accumulated gains on currency translation adjustments of $1,861,934 and $376,294, respectively, at December 31, 2009.
 
(15) 
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.
 
 
 
79

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(15) 
Fair Value Measurements - continued
 
Financial Assets and Liabilities Measured on a Recurring Basis

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Manager’s assessment, on the LLC’s behalf, of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.

 The following table summarizes the valuation of the LLC’s material financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2010:
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                       
                         
Warrants
  $ -     $ -     $ 70,669     $ 70,669  
                                 
                                 
Liabilities:
                               
                                 
Derivative liabilities
  $ -     $ 1,694,776     $ -     $ 1,694,776  
      
The following table summarizes the valuation of the LLC’s material financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2009:

   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                       
                         
Warrants
  $ -     $ -     $ 79,371     $ 79,371  
                                 
                                 
Liabilities:
                               
                                 
Derivative liabilities
  $ -     $ 5,049,327     $ -     $ 5,049,327  

The LLC’s derivative contracts, including interest rate swaps and warrants, are valued using models based on readily observable or unobservable market parameters for all substantial terms of the LLC’s derivative contracts and are classified within Level 2 or Level 3. As permitted by the accounting pronouncements, the LLC uses market prices and pricing models for fair value measurements of its derivative instruments.  The fair value of the warrants was recorded in other non-current assets and the fair value of the derivative liabilities was recorded in derivative instruments within the consolidated balance sheets.
 
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The LLC is required, on a nonrecurring basis, to adjust the carrying value or provide valuation allowances for certain assets and liabilities using fair value measurements.  The LLC’s non-financial assets, such as leased equipment at cost, are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment charge is recognized.  The following table summarizes the valuation of the LLC’s material non-financial assets and liabilities measured at fair value on a nonrecurring basis for the year ended December 31, 2010:

   
December 31, 2010
   
Level 1
   
Level 2
   
Level 3
   
Total Impairment Loss
 
Assets held for sale, net
  $ 1,051,974       -       -     $ 1,051,974     $ 2,423,903  
Leased equipment at cost
    -       -       -     $ 4,585,810     $ 11,403,338  

The LLC's non-financial assets are valued using inputs that are generally unobservable and cannot be corroborated by market data and are classified within Level 3. As permitted by the accounting pronouncements, the LLC uses projected cash flows for fair value measurements of its non-financial assets.
 
The following table summarizes the valuation of the LLC’s material non-financial assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2009:

   
December 31, 2009
   
Level 1
   
Level 2
   
Level 3
   
Total Impairment Loss
 
Assets held for sale, net
  $ 3,813,647       -       -     3,914,775     $ 40,973,570  
Leased equipment at cost
  $ 49,113,909       -     $ 7,934,802     $ 46,000,000     $ 1,234,554  
 
The LLC's non-financial assets are valued using inputs that are generally unobservable and cannot be corroborated by market data and are classified within Level 2 or Level 3. As permitted by the accounting pronouncements, the LLC uses projected cash flows for fair value measurements of its non-financial assets.
 
 
80

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(15) 
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 carrying value of the LLC's non-recourse debt approximates its fair value due to its floating interest rates. The estimated fair value of the LLC’s mortgage note receivable was based on the discounted value of future cash flows expected to be received from the loan based on terms consistent with the range of the LLC’s internal pricing strategies for transactions of this type.  The LLC determined that the carrying value of the above leased equipment at cost exceeded its fair value determined using a discounted cash flow analysis and therefore an impairment was recorded as of December 31, 2010.

   
December 31, 2010
 
   
Carrying Amount
   
Fair Value
 
             
Non-recourse long-term debt
  $ 3,529,757     $ 3,519,305  
Mortgage note and interest receivable
  $ 12,722,006     $ 14,813,814  
 
(16) 
Share Repurchase
 
The LLC repurchased 437, 163, and 603 Shares for the years ended December 31, 2010, 2009 and 2008, respectively. The repurchase amounts are calculated according to a specified repurchase formula pursuant to the LLC Agreement.  Repurchased Shares have no voting rights and do not share in distributions. The LLC Agreement limits the number of Shares that can be repurchased in any one year and repurchased Shares may not be reissued. Repurchased Shares are accounted for as a reduction of members' equity.
 
(17) 
Concentrations of Risk
 
For the year ended December 31, 2010, the LLC had two lessees that accounted for approximately 80.1% of its total rental and finance income. For the year ended December 31, 2009, the LLC had three lessees that accounted for approximately 63.0% of rental and finance income.  For the year ended December 31, 2008, the LLC had three lessees that accounted for approximately 55.4% of rental and finance income. No other lessees accounted for more than 10% of rental and finance income.

At December 31, 2010, the LLC had three lessees that accounted for approximately 78.1% of total assets and one lender that accounted for approximately 55.8% of total liabilities.

At December 31, 2009, the LLC had three lessees that accounted for approximately 59.9% of total assets and one lender that accounted for approximately 53.4% of total liabilities.
 
(18) 
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 mortgage notes receivable, are as follows:

   
Year Ended December 31, 2010
 
   
United
                         
   
States
   
Canada
   
Europe
   
Vessels (a)
   
Total
 
 Revenue:
                             
 Rental income    5,377,242      -      182,628      29,827,297      35,387,167  
 Time charter income
  $ -     $ -     $ -     $ 8,677,496     $ 8,677,496  
 Finance income
  $ 843,253     $ 834,390     $ 156,673     $ -     $ 1,834,316  
 Loss from investments in joint ventures
  $ (1,751,045 )   $ -     $ -     $ -     $ (1,751,045 )
       Interest and other income   $ 667,403      $  2,929,602     $  -     $  459,265     $  4,056,270  
                                         
   
At December 31, 2010
 
   
United
                                 
   
States
   
Canada
   
Europe
   
Vessels (a)
   
Total
 
 Long-lived assets:
                                       
 Net investment in finance leases
  $ 3,588,754     $ 11,493,923     $ 4,418,394     $ -     $ 19,501,071  
 Leased equipment at cost, net
  $ 10,814,413     $ -     $ -     $ 68,772,999     $ 79,587,412  
 Mortgage note receivable
  $ -     $ 12,722,006     $ -     $ -     $ 12,722,006  
 Investments in joint ventures
  $ 5,749,598     $ -     $ -     $ -     $ 5,749,598  
 Note receivable
  $ 8,212,089     $ -     $ -     $ -     $ 8,212,089  
 Assets held for sale, net
  $ 16,004,231     $ -     $ -     $ -     $ 16,004,231  
                                         
      (a)  The LLC's vessels were chartered to three separate companies: four vessels were chartered to ZIM, the Top Ships Vessels were time chartered to Empire, and two vessels were chartered to Teekay. When the LLC charters a vessel to a charterer, the charterer is free to trade the vessel worldwide. As of December 31, 2010, the Top Ships Vessels and two of the Zim Vessels were sold.
 
 
 
 
81

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(18) 
Geographic Information - continued
 
   
Year Ended December 31, 2009
 
   
United
                         
   
States
   
Canada
   
Europe
   
Vessels (a)
   
Total
 
 Revenue:
                             
 Rental income
  $ 21,174,455     $ -     $ 923,749     $ 42,001,646     $ 64,099,850  
 Time charter income
  $ -     $ -     $ -     $ 5,559,524     $ 5,559,524  
 Finance income
  $ 1,626,327     $ 921,812     $ -     $ -     $ 2,548,139  
 Income from investments in joint ventures
  $ 345,938     $ -     $ -     $ -     $ 345,938  
          Interest and other income   $  471,689     $  2,853,685     $  135     $  122,774     $  3,448,283  
                                         
   
At December 31, 2009
 
   
United
                                 
   
States
   
Canada
   
Europe
   
Vessels (a)
   
Total
 
 Long-lived assets:
                                       
 Net investment in finance leases
  $ 9,749,463     $ 14,931,689     $ -     $ -     $ 24,681,152  
 Leased equipment at cost, net
  $ 15,853,373     $ -     $ 9,120,432     $ 158,640,374     $ 183,614,179  
 Mortgage note receivable
  $ -     $ 12,722,006     $ -     $ -     $ 12,722,006  
 Investments in joint ventures
  $ 11,578,687     $ -     $ -     $ -     $ 11,578,687  
 Note receivable
  $ 10,015,000     $ -     $ -     $ -     $ 10,015,000  
 Assets held for sale, net
  $ 3,813,647     $ -     $ -     $ -     $ 3,813,647  
                                         
(a) The LLC's vessels are chartered to four separate companies: four vessels are chartered to ZIM, the Top Ships Vessels are time chartered to two companies, and two vessels are chartered to Teekay. When the LLC charters a vessel to a charterer, the charterer is free to trade the vessel worldwide.
 
 
(19) 
Selected Quarterly Financial Data (Unaudited)
 
The following table is a summary of selected financial data by quarter:

         
(unaudited)
           Year ended  
   
Quarters Ended in 2010
   
 December 31,
 
   
March 31,
   
June 30,
   
September 30,
   
December 31,
   
 2010
 
 Total revenue
  $ 14,437,753     $ 11,216,346     $ 14,243,206     $ 25,466,487     $ 65,363,792  
 Net (loss) income attributable to Fund Eleven allocable to additional members
  $ (2,146,341 )   $ (5,958,623 )   $ (11,744,308 )   $ 13,219,744     $ (6,629,528 )
 Weighted average number of additional shares of
                                       
 limited liability company interests outstanding
    362,736       362,654       362,654       362,654       362,674  
 Net (loss) income attributable to Fund Eleven per
                                       
 weighted average additional share of limited liability company interests
  $ (5.92 )   $ (16.43 )   $ (32.38 )   $ 36.45     $ (18.28 )
                                         
                                         
           
(unaudited)
           
Year ended December 31, 2009
 
   
Quarters Ended in 2009
 
   
March 31,
   
June 30,
   
September 30,
   
December 31,
 
 Total revenue
  $ 22,025,271     $ 47,778,040     $ 17,746,329     $ 15,644,597     $ 103,194,237  
 Net income (loss) attributable to Fund Eleven allocable to additional members
  $ 2,508,338     $ 26,936,132     $ (53,056,688 )   $ (21,032,739 )   $ (44,644,957 )
 Weighted average number of additional shares of
                                       
 limited liability company interests outstanding
    363,188       363,152       363,120       363,099       363,139  
 Net income (loss) attributable to Fund Eleven  per weighted average
                                       
 additional share of limited liability company interests
  $ 6.91     $ 74.17     $ (146.11 )   $ (57.93 )   $ (122.94 )

 
 
82

(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010

 
(20) 
Commitments and Contingencies and Off-Balance Sheet Transactions
 
At the time the LLC acquires or divests of its interest in an equipment lease or other financing transaction, the LLC may, under very limited circumstances, agree to indemnify the seller or buyer for specific contingent liabilities.  The Manager believes that any liability that may arise as a result of any such indemnification obligations will not have a material adverse effect on the consolidated financial condition of the LLC taken as a whole.

The Participating Funds entered into a credit support agreement, pursuant to which losses incurred by a Participating Fund with respect to any financing provided to any subsidiary of MWU would be shared among the Participating Funds in proportion to their respective capital investments.  As contemplated by the credit support agreement, the credit support agreement was terminated on September 30, 2010 in connection with the extinguishment of the Participating Funds’ obligations thereunder (see Note 8).

The LLC has entered into a remarketing agreement with a third party. In connection with this agreement, residual proceeds received in excess of specific amounts will be shared with this third party based on specific formulas. The obligation related to this agreement is recorded at fair value.
 
(21) 
Income Tax Reconciliation (Unaudited)
 
At December 31, 2010 and 2009, the members’ capital accounts included in the consolidated financial statements totaled $95,755,387 and $136,378,244, respectively.  The members’ capital for federal income tax purposes at December 31, 2010 and 2009 totaled $160,862,104 and $269,480,692, respectively.  The difference arises primarily from sales and offering expenses reported as a reduction in the additional members’ capital accounts for financial reporting purposes, but not for federal income tax reporting purposes, and the differences in gain (loss) on the sales of equipment and portfolio, depreciation and amortization between financial reporting purposes and federal income tax purposes.

 The following table reconciles net loss attributable to Fund Eleven for financial statement reporting purposes to the net (loss) income attributable to Fund Eleven for federal income tax purposes for the years ended December 31, 2010, 2009 and 2008:

   
December 31,
 
   
2010
   
2009
   
2008
 
 Net loss attributable to Fund Eleven per consolidated financial statements
  $ (6,696,493 )   $ (45,095,916 )   $ (5,797,721 )
                         
 Depreciation and amortization
    4,912,506       37,333,436       (8,242,341 )
   Finance income        (1,379,067      -        -  
 Rental income
    2,237,485       (9,208,865 )     (29,135,836 )
 Gain on sale of portfolio
    (44,980 )     -       26,261,885  
 (Loss) gain on consolidated joint venture
    5,582,042       6,101,571       -  
 Loss on sale of leased equipment
    (96,179,712 )     (7,469,387 )     -  
 Impairment loss
    17,362,194       42,208,124       -  
 Bad debt expense
    (1,286,909 )     2,389,977       -  
 Other items
    520,802       (451,939 )     (2,952,423 )
                         
 Net (loss) income attributable to Fund Eleven for federal income tax purposes
  $ (74,972,132 )   $ 25,807,001     $ (19,866,436 )

 

 
                                     
         
 
                         
   
Balance at
   
Additions
Charged to
   
Additions
           
Other Charges
   
Balance at
 
   
Beginning
   
Costs and
   
Charged to
         
Additions
   
End
 
 Description
 
of Year
   
Expenses
   
Asset
   
Deductions
   
(Deductions)
   
of Year
 
                                     
 Valuation allowance for deferred tax assets:
                                   
 Year ended December 31, 2010
                                   
 Valuation allowance for deferred tax assets
                                   
 (deducted from deferred tax asset)
  $ 3,021,502       -       -       -     $ 68,989  (a)   $ 3,090,491  
                                                 
 Year ended December 31, 2009
                                               
 Valuation allowance for deferred tax assets
                                               
 (deducted from deferred tax asset)
  $ 2,529,455    $   75,905       -       -     $ 416,142  (a)   $ 3,021,502  
                                                 
 Year ended December 31, 2008
                                               
 Valuation allowance for deferred tax assets
                                               
 (deducted from deferred tax assets)
  $ 2,716,674    $   (187,219 )     -       -       -     $ 2,529,455  
                                                 
                                                 
 Allowance for doubtful accounts:
                                               
                                                 
 Year ended December 31, 2010
                                               
 Allowance for doubtful accounts
                                               
 (deducted from accounts receivable)
  $ 1,506,313       -       -       (1,480,907 )(b)   $ (25,406 )(a)   $ -  
                                                 
 Year ended December 31, 2009
                                               
 Allowance for doubtful accounts
                                               
 (deducted from accounts receivable)
    -     $ 1,569,221       -       -     $ (62,908 )(a)   $ 1,506,313  
                                                 
 Year ended December 31, 2008
                                               
 Allowance for doubtful accounts
                                               
 (deducted from accounts receivable)
  $ 73,321       -       -     $ (73,321 )     -       -  
                                                 
(a) Currency translation adjustment.
 
(b) Amount written off against the asset balance.
 

 
 
 
None.


Evaluation of disclosure controls and procedures

In connection with the preparation of this Annual Report on Form 10-K for the period ended December 31, 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.


Not applicable.
 


 
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 investments. These services include collecting payments due from lessees, borrowers, and other counterparties; remarketing equipment that is off-lease; inspecting equipment; serving as a liaison with lessees, borrowers, and other counterparties; supervising equipment maintenance; and monitoring performance by lessees, borrowers, and other counterparties of their obligations, including payment of contractual payments and all operating expenses.
 
Name
 
Age
 
Title
Michael A. Reisner
 
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 financing solutions to complement public and private companies’ capital structure.  Prior to that role, from February 2003 to October 2006, Mr. Kramer was Senior Vice President, National Sales Manager with GMAC Commercial Equipment Finance, leading a direct sales organizational team; from 2001 to 2003, Senior Vice President and National Sales Manager for ORIX Commercial Structured Equipment Finance division; and President of Kramer, Clark & Company for 12 years, providing financial consulting services to private and public companies, including structuring and syndicating private placements, equipment leasing and recapitalizations.  Mr. Kramer received a B.S. from Glassboro State College.

David J. Verlizzo has been Senior Vice President – Business and Legal Affairs since July 2007.  Mr. Verlizzo was formerly Vice President and Deputy General Counsel from February 2006 to July 2007 and was Assistant Vice President and Associate General Counsel from May 2005 until January 2006.  Previously, from May 2001 to May 2005, Mr. Verlizzo was an attorney with Cohen Tauber Spievack & Wagner LLP in New York, concentrating on public and private securities offerings, securities law compliance and corporate and commercial transactions.  Mr. Verlizzo received a J.D. from Hofstra University School of Law and a B.S. from The University of Scranton.

Craig A. Jackson has been Senior Vice President – Remarketing and Asset Management since March 2008. Mr. Jackson was previously Vice President – Remarketing and Portfolio Management from February 2006 through March 2008. Previously, from October 2001 to February 2006, Mr. Jackson was President and founder of Remarketing Services, Inc., a transportation equipment remarketing company. Prior to 2001, Mr. Jackson served as Vice President of Remarketing and Vice President of Operations for Chancellor Fleet Corporation (an equipment leasing company).  Mr. Jackson received a B.A. from Wilkes University.

Harry Giovani, Senior Vice President – Credit, joined ICON in April 2008. Most recently, from March 2007 to January 2008, Mr. Giovani was Vice President for FirstLight Financial Corporation, responsible for underwriting and syndicating middle market leveraged loan transactions. Previously, from April 2004 to March 2007, he worked at GE Commercial Finance, initially as an Assistant Vice President in the Intermediary Group, where he was responsible for executing middle market transactions in a number of industries including manufacturing, steel, paper, pharmaceutical, technology, chemicals and automotive, and later as a Vice President in the Industrial Project Finance Group, where he originated highly structured project finance transactions. Mr. Giovani started his career in 1997 at Citigroup’s Citicorp Securities and CitiCapital divisions, where he spent six years in a variety of roles of increasing responsibility including underwriting, origination and strategic marketing/business development. Mr. Giovani graduated from Cornell University in 1996 with a B.S. in Finance.

 


Code of Ethics
 
 
Our Manager, on our behalf, has adopted a code of ethics for its Co-Chief Executive Officers and  Chief Financial Officer.  The Code of Ethics is available free of charge by requesting it in writing from our Manager.  Our Manager's address is 100 Fifth Avenue, 4th Floor, New York, New York 10011.


We have no directors or officers.  Our Manager and its affiliates were paid or accrued the following compensation and reimbursement for costs and expenses for the years ended December 31, 2010, 2009 and 2008:

                           
 Entity
 
 Capacity
 
 Description
 
2010
   
2009
   
2008
 
 ICON Capital Corp.
 
 Manager
 
 Acquisition fees (1)
  $ -     $ -     $ 1,204,384  
 ICON Capital Corp.
 
 Manager
 
 Management fees (2) (3)
    541,090       2,185,858       5,110,375  
 ICON Capital Corp.
 
 Manager
 
 Administrative expense reimbursements (2)
    1,417,858       1,951,850       3,586,973  
 Total
          $ 1,958,948     $ 4,137,708     $ 9,901,732  
                                 
(1) Capitalized and amortized to operations over the estimated service period in accordance with the LLC's accounting policies.
 
(2) Charged directly to operations.
 
(3) The Manager suspended the collection of a portion of its management fees in the amount of $1,440,269 and $1,355,498 during the years ended December 31, 2010 and 2009, respectively.
 
 
Our Manager also has a 1% interest in our profits, losses, cash distributions and liquidation proceeds.  We paid distributions to our Manager of $333,391, $333,811 and $334,071 for the years ended December 31, 2010, 2009 and 2008, respectively.  Additionally, our Manager’s interest in the net loss attributed to us was $66,965, $450,959 and $57,977 for the years ended December 31, 2010, 2009 and 2008, respectively.

 
(a)
We do not have any securities authorized for issuance under any equity compensation plan. No person of record owns, or is known by us to own, beneficially more than 5% of any class of our securities.

 
(b)
As of March 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.


See “Item 11. Executive Compensation” for a discussion of our related party transactions.  See Notes 8 and 12 to our consolidated financial statements for a discussion of our investments in joint ventures and transactions with related parties, respectively.

Because we are not listed on any national securities exchange or inter-dealer quotation system, we have elected to use the Nasdaq Stock Market’s definition of “independent director” in evaluating whether any of our Manager’s directors are independent. Under this definition, the board of directors of our Manager has determined that our Manager does not have any independent directors, nor are we required to have any.
 

 
88

 
 

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
  $ 427,200     $ 522,000  
Tax fees
    108,714       81,500  
                 
    $ 535,914     $ 603,500  
 



 
 

(a)
1. Financial Statements
   
 
See index to financial statements included as Item 8 to this Annual Report on Form 10-K hereof.
   
 
2. Financial Statement Schedules
 
 
 
Financial Statement Schedule II – Valuation and Qualifying Accounts is filed with this Annual Report on Form 10-K. Schedules not listed above have been omitted because they are not applicable or the information required to be set forth therein is included in the financial statements or notes thereto.
   
 
3. Exhibits:
   
 
3.1    Certificate of Formation of Registrant (Incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the Registration Statement on Form S-1 filed with the SEC on February 15, 2005 (File No. 333-121790)).
   
 
4.1    Amended and Restated Limited Liability Company Agreement of Registrant (Incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registration Statement on Form S-1 filed with the SEC on June 29, 2006 (File No. 333-133730)).
   
 
4.2    Amendment No. 1 to the Amended and Restated Limited Liability Company Agreement of Registrant (Incorporated by reference to Exhibit 4.3 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006, filed August 23, 2006).
   
 
10.1   Commercial Loan Agreement, dated as of August 31, 2005, by and between California Bank & Trust and ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON Income Fund Ten, LLC and ICON Leasing Fund Eleven, LLC (Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated August 31, 2005).
   
 
10.2   Loan Modification Agreement, dated as of December 26, 2006, by and between California Bank & Trust and ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON Income Fund Ten, LLC and ICON Leasing Fund Eleven, LLC (Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated December 26, 2006).
   
 
10.3   Loan Modification Agreement, dated as of June 20, 2007, by and between California Bank & Trust and ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON Income Fund Ten, LLC, ICON Leasing Fund Eleven, LLC and ICON Leasing Fund Twelve, LLC (Incorporated by reference to Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009, filed November 16, 2009).
   
 
10.4   Third Loan Modification Agreement, dated as of May 1, 2008, by and between California Bank & Trust and ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON Income Fund Ten, LLC, ICON Leasing Fund Eleven, LLC and ICON Leasing Fund Twelve, LLC (Incorporated by reference to Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008, filed June 6, 2008).
   
 
10.5  Fourth Loan Modification Agreement, dated as of August 12, 2009, by and between California Bank & Trust and ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON Income Fund Ten, LLC, ICON Leasing Fund Eleven, LLC, ICON Leasing Fund Twelve, LLC and ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P. (Incorporated by reference to Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009, filed August 14, 2009).
   
 
31.1   Rule 13a-14(a)/15d-14(a) Certification of Co-Chief Executive Officer.
   
 
31.2   Rule 13a-14(a)/15d-14(a) Certification of Co-Chief Executive Officer.
   
 
31.3   Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
   
 
32.1   Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
 
32.2   Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
 
32.3   Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
 (b) 1. Financial Statements of ICON EAR, LLC. 
 
 
 

ICON EAR, LLC
(A Delaware Limited Liability Company)


Table of Contents
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Members
ICON EAR, LLC
 
 
We have audited the accompanying balance sheet of ICON EAR, LLC (the “Company”) as of December 31, 2010, and the related statements of operations, changes in members’ equity, and cash flows for the year ended December 31, 2010.  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 audit.
 
We conducted our audit 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 audit 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 audit provides a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ICON EAR, LLC at December 31, 2010, and the results of its operations and its cash flows for the year ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
 
 
 
                                                                                             /s/ Ernst & Young, LLP       
 
 
March 31, 2011
New York, New York
 
 

 
(A Delaware Limited Liability Company)
 
Balance Sheets
 
   
Assets
 
   
   
   
December 31,
 
   
2010
   
2009
 
         
(unaudited)
 
 Current assets:
           
 Cash
  $ 45,231     $ 60,408  
 Assets held for sale, net
    2,448,263       8,982,354  
                 
 Total Assets
  $ 2,493,494     $ 9,042,762  
                 
                 
Members’ Equity
 
 Members’ Equity:
               
 Total Members’ Equity
    2,493,494       9,042,762  
                 
 Total Members’ Equity
  $ 2,493,494     $ 9,042,762  
 
 
See accompanying notes to financial statements.

 
 
(A Delaware Limited Liability Company)
 
Statements of Operations
 
   
   
                   
   
Year Ended
   
Year Ended
   
Year Ended
 
   
December 31, 2010
   
December 31, 2009
   
December 31, 2008
 
         
(unaudited)
   
(unaudited)
 
 Revenue:
                 
 Rental and other income
  $ 2,000     $ 2,691,322       2,702,306  
 Loss on sales of assets held for sale
    (297,864 )     -       -  
 Total revenue
    (295,864 )     2,691,322       2,702,306  
                         
 Expenses:
                       
 General and administrative
    18,177       253,254       5,810  
 Depreciation and amortization
    -       1,778,975       1,751,178  
 Impairment loss
    5,696,859       3,429,316       -  
 Bad debt expense      -        572,721        -  
 Total expenses
    5,715,036       6,034,266       1,756,988  
                         
 Net (loss) income
  $ (6,010,900 )   $ (3,342,944 )   $ 945,318  
 
 
See accompanying notes to financial statements.

 
(A Delaware Limited Liability Company)
 
Statements of Changes in Members’ Equity
 
   
       
       
   
Members’ Equity
 
       
 Balance, December 31, 2008 (unaudited)
  $ 14,477,731  
         
 Net loss
    (3,342,944 )
 Cash distributions
    (2,092,025 )
         
 Balance, December 31, 2009 (unaudited)
    9,042,762  
         
 Net loss
    (6,010,900 )
 Cash distributions
    (538,368 )
         
 Balance, December 31, 2010
  $ 2,493,494  


See accompanying notes to financial statements.


 
(A Delaware Limited Liability Company)
 
Statements of Cash Flows
 
   
   
   
   
   
Year Ended
   
Year Ended
   
Year Ended
 
   
December 31, 2010
   
December 31, 2009
   
December 31, 2008
 
         
(unaudited)
   
(unaudited)
 
 Cash flows from operating activities:
                 
 Net (loss) income
  $ (6,010,900 )   $ (3,342,944 )   $ 945,318  
Adjustments to reconcile net (loss) income to net cash
                       
  (used in) provided by operating activities:
                       
     Net loss on sales of assets held for sale
    297,864       -       -  
     Depreciation
    -       1,778,975       1,751,178  
     Impairment loss
    5,696,859       3,429,316       -  
     Bad Debt expense
    -       572,721       -  
 Changes in operating assets and liabilities:
                       
     Other Assets
    -       (323,850 )     17,328  
     Accrued expenses and other liabilities
    -       (475 )     475  
                         
 Net cash (used in) provided by operating activities
    (16,177 )     2,113,743       2,714,299  
                         
 Cash flows from investing activities:
                       
    Proceeds from sales of equipment
    539,368       -       -  
                         
 Net cash used in investing activities
    539,368       -       -  
                         
 Cash flows from financing activities:
                       
 Cash distributions to members
    (538,368 )     (2,092,025 )     (1,571,342 )
 Additional members pending subscriptions
    -       -       (1,104,267 )
                         
 Net cash (used in) provided by financing activities
    (538,368 )     (2,092,025 )     (2,675,609 )
                         
 Net increase in cash
    (15,177 )     21,718       38,690  
 Cash, beginning of period
    60,408       38,690       -  
                         
 Cash, end of period
  $ 45,231     $ 60,408     $ 38,690  

 
See accompanying notes to financial statements.
 
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2010
(unaudited with respect to the years ended December 31, 2009 and 2008)

(1)
Organization

 
ICON EAR, LLC (the “LLC”) was formed on December 11, 2007, as a Delaware limited liability company, for the purpose of investing in semiconductor manufacturing equipment from Equipment Acquisition Resources, Inc. (“EAR”).  The LLC is a joint venture between two affiliated entities, ICON Leasing Fund Twelve, LLC (“Fund Twelve”) and ICON Leasing Fund Eleven, LLC (“Fund Eleven”) (collectively, the LLC’s Members”). Fund Twelve and Fund Eleven have a 55% and 45% ownership percentage, respectively, in the LLC’s profits, losses and cash distributions.  EAR’s obligations under the lease are secured by semiconductor manufacturing equipment and mortgages on certain parcels of real property located in Jackson Hole, Wyoming.
 
The LLC is engaged in one business segment, the business of purchasing business essential equipment and corporate infrastructure and leasing to businesses. The LLC is engaged in one business segment, the business of purchasing business essential equipment and corporate infrastructure and leasing to businesses.

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 financing transactions that the LLC entered into pursuant to the terms of the respective limited partnership or limited liability company agreement of each of the LLC’s Members.

(2)
Summary of Significant Accounting Policies

Basis of Presentation

The accompanying 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.

Cash

The LLC’s cash is held principally at one financial institution and at times may exceed insured limits. The LLC has placed these funds in a high quality institution 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. 
 
Market risk reflects the change in the value of investments 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.

 
 
ICON EAR, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2010
(unaudited with respect to the years ended December 31, 2009 and 2008)
 

(2)
Summary of Significant Accounting Policies- continued
 
Leased Equipment at Cost
 
Investments in leased equipment are stated at cost less accumulated depreciation. Leased equipment is depreciated on a straight-line basis over the lease term, which typically ranges from 3 to 8 years, to the asset’s residual value.
 
The Manager has an investment committee that approves each new equipment lease and other financing transaction.  As part of its process, the investment committee determines the residual value, if any, to be used once the investment has been approved.  The factors considered in determining the residual value include, but are not limited to, the creditworthiness of the potential lessee, the type of equipment considered, how the equipment is integrated into the potential lessee’s business, the length of the lease and the industry in which the potential lessee operates.  Residual values are reviewed for impairment in accordance with the LLC’s impairment review policy.
 
The residual value assumes, among other things, that the asset would be utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the marketplace are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly.  The residual value is calculated using information from various external sources, such as trade publications, auction data, equipment dealers, wholesalers and industry experts, as well as inspection of the physical asset and other economic indicators.  At December 31, 2009, the LLC reclassified leased equipment at cost to assets held for sale.
 
Asset Impairments

The significant assets in the LLC’s portfolio are periodically reviewed, no less frequently than annually or when indicators of impairment exist, to determine whether events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss will be recognized only if the carrying value of a long-lived asset is not recoverable and exceeds its fair market value.  If there is an indication of impairment, the LLC will estimate the future cash flows (undiscounted and without interest charges) expected from the use of the asset and its eventual disposition. Future cash flows are the future cash inflows expected to be generated by an asset less the future outflows expected to be necessary to obtain those inflows.  If an impairment is determined to exist, the impairment loss will be measured as the amount by which the carrying value of a long-lived asset exceeds its fair value and recorded in the consolidated statement of operations in the period the determination is made.

The events or changes in circumstances that generally indicate that an asset may be impaired are (i) the estimated fair value of the underlying equipment is less than its carrying value or (ii) the lessee is experiencing financial difficulties and it does not appear likely that the estimated proceeds from the disposition of the asset will be sufficient to satisfy the residual position in the asset and, if applicable, the remaining obligation to the non-recourse lender.  Generally in the latter situation, the residual position relates to equipment subject to third-party non-recourse debt where the lessee remits its rental payments directly to the lender and the LLC does not recover its residual position until the non-recourse debt is repaid in full. The preparation of the undiscounted cash flows requires the use of assumptions and estimates, including the level of future rents, the residual value expected to be realized upon disposition of the asset, estimated downtime between re-leasing events and the amount of re-leasing costs. The Manager’s review for impairment includes a consideration of the existence of impairment indicators including third-party appraisals, published values for similar assets, recent transactions for similar assets, adverse changes in market conditions for specific asset types and the occurrence of significant adverse changes in general industry and market conditions that could affect the fair value of the asset.

 
 
ICON EAR, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2010
(unaudited with respect to the years ended December 31, 2009 and 2008)
 

(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.
 
Acquisition Fees

Pursuant to the LLC Agreement, the LLC pays acquisition fees to the Manager equal to 3% of the purchase price of the LLC’s investments. These fees are capitalized and included in the cost of the investment in the LLC’s balance sheets.

Income Taxes

The LLC is taxed as a partnership for federal and State income tax purposes.  No provision for income taxes has been recorded since the liability for such taxes is that of each of the 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, the disclosure of contingent assets and liabilities as of the date of the 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 impairment losses.  Actual results could differ from those estimates.

(3)
Assets Held for Sale
 
On December 28, 2007, the LLC purchased and simultaneously leased back semiconductor manufacturing equipment for a purchase price of $6,935,000. During June 2008, the LLC’s Members made additional contributions to the LLC, which were used to complete another purchase and simultaneous leaseback of additional semiconductor manufacturing equipment for a total purchase price of approximately $8,795,000. The LLC’s Members retained their initial ownership interests (see Note 1) subsequent to this transaction. The lease term commenced on July 1, 2008 and was to expire on June 30, 2013. As additional security for the purchase and lease, the LLC received mortgages on certain parcels of real property located in Jackson Hole, Wyoming.

In October 2009, certain facts came to light that led the Manager to believe that EAR was perpetrating a fraud against its lenders, including the LLC. On October 23, 2009, EAR filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The manufacturing equipment on lease to EAR, along with the leased assets of ICON EAR II, LLC (“ICON EAR II”), a wholly-owned subsidiary of Fund Eleven, and other assets with security interests claimed by unrelated third parties are part of a pool of related assets controlled by a trustee as a result of the bankruptcy proceedings.  All parties have various claims to the pool of assets.  The LLC foreclosed on the mortgages and, in conjunction with ICON EAR II, took title to the land. Due to the bankruptcy filing and ongoing investigation regarding the alleged fraud, at this time it is not possible to determine the LLC’s Members ability to collect the amounts due to it in accordance with the leases or the additional security it received.  Accordingly, such assets have been classified as held for sale, net of estimated selling costs, on the accompanying consolidated balance sheets at December 31, 2010 and 2009.

 
 
ICON EAR, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2010
(unaudited with respect to the years ended December 31, 2009 and 2008)
 

(3)
Assets Held for Sale - continued
 
The Manager periodically reviews the significant assets in the LLC’s Members portfolio to determine whether events or changes in circumstances indicate that the net book value of an asset may not be recoverable. In light of the developments surrounding the semiconductor manufacturing equipment on lease to EAR, the Manager determined that the net book value of such equipment may not be recoverable. The following factors, among others, indicated that the net book value of the equipment may not be recoverable: (i) EAR’s failure to pay rental payments for the period from August 2009 through the date it filed for bankruptcy and (ii) EAR’s petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Based on the Manager’s review, the net book value of the semiconductor manufacturing equipment exceeded the fair market value and, as a result, the LLC recognized a non-cash impairment charge of approximately $3,429,000 during the year ended December 31, 2009 relating to the write down in value of the semiconductor manufacturing equipment.  In addition, the LLC had a net accounts receivable balance outstanding of approximately $573,000, which was charged to bad debt expense which is included in general and administrative expense, during the year ended December 31, 2009 in accordance with the LLC’s accounting policies and the above mentioned factors.

On June 2, 2010, the LLC, in conjunction with ICON EAR II sold a parcel of real property in Jackson Hole, Wyoming that was received as additional security under their respective leases with EAR for a net purchase price of approximately $757,000.  The LLC’s proportional share of the proceeds from the sale was approximately $539,000.  As a result, the LLC recorded a loss on assets held for sale of approximately $298,000 for the year ended December 31, 2010.  In addition, on June 7, 2010, the LLC received judgments in New York State Supreme Court against two principals of EAR who had guaranteed EAR’s lease obligations.  The LLC has had the New York State Supreme Court judgments recognized in Illinois, where the principals live, and are attempting to collect on such judgments.  At this time, it is not possible to determine the ability of the LLC to collect the amounts due under its lease from EAR’s principals.

In light of recent developments in the real estate market and the sale of a parcel of real property located in Jackson Hole, Wyoming on June 2, 2010, the Manager reviewed the LLC’s Members’ investment in the LLC.  Based on the Manager’s review, the net book value of the remaining parcels of real property located in Jackson Hole, Wyoming exceeded their fair market value.  As a result, the LLC recognized a non-cash impairment charge of approximately $1,283,000 during the year ended December 31, 2010.

Based on the Manager’s 2010 review of significant assets in our portfolio, the net book value of the semiconductor manufacturing equipment recorded as part of assets held for sale exceeded its fair value and, as a result, the LLC recognized a non-cash impairment charge of approximately $4,366,000 during the year ended December 31, 2010 relating to the write down in value of the semiconductor manufacturing equipment and land.

 
 
ICON EAR, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2010
(unaudited with respect to the years ended December 31, 2009 and 2008)
 

(3)
Assets Held for Sale - continued
 
On March 16, 2011, the LLC sold certain parcels of real property located in Jackson Hole, Wyoming, for its carrying value.
 
(4)
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 Nonrecurring Basis

The LLC is required, on a nonrecurring basis, to adjust the carrying value or provide valuation allowances for certain assets and liabilities using fair value measurements.  The LLC’s non-financial assets, such as leased equipment at cost, are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment charge is recognized.

The following table summarizes the valuation of the LLC’s material non-financial assets and liabilities measured at fair value on a nonrecurring basis for the year ended December 31, 2010:
 
   
December 31, 2010
   
Level 1
   
Level 2
   
Level 3
   
Total Impairment Loss
 
Assets held for sale, net
  $ 2,448,263     $ -     $ -     $ 2,448,263     $ 5,696,859  

The following table summarizes the valuation of the LLC’s material non-financial assets and liabilities measured at fair value on a nonrecurring basis for the year ended December 31, 2009:

   
December 31, 2009
   
Level 1
   
Level 2
   
Level 3
   
Total Impairment Loss
 
Assets held for sale, net
  $ 8,982,354     $ -     $ -     $ 8,982,354     $ 3,429,316  
 
The LLC’s non-financial assets are valued using inputs that are generally unobservable and cannot be corroborated by market data and are classified within Level 3. As permitted by the accounting pronouncements, the LLC uses projected cash flows for fair value measurements of its non-financial assets.
 


 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
ICON Leasing Fund Eleven, LLC
(Registrant)

By: ICON Capital Corp.
      (Manager of the Registrant)

March 31, 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 Leasing Fund Eleven, LLC
(Registrant)

By: ICON Capital Corp.
      (Manager of the Registrant)

March 31, 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)

 
102