Attached files
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: 000-53189
ICON Leasing Fund Twelve, LLC
(Exact name of registrant as specified in its charter)
|
Delaware
|
20-5651009
|
|
|
(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 348,650.
DOCUMENTS INCORPORATED BY REFERENCE
None.
|
Page
|
|
|
1
|
|
|
1
|
|
|
7
|
|
|
25
|
|
|
25
|
|
|
25
|
|
|
25
|
|
|
26
|
|
|
26
|
|
|
28
|
|
|
29
|
|
|
59
|
|
|
61
|
|
|
110
|
|
|
110
|
|
|
110
|
|
|
111
|
|
|
111
|
|
|
113
|
|
|
114
|
|
|
114
|
|
|
114
|
|
|
115
|
|
|
115
|
|
|
116
|
|
Forward-Looking Statements
Certain statements within this Annual Report on Form 10-K may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). These statements are being made pursuant to the PSLRA, with the intention of obtaining the benefits of the “safe harbor” provisions of the PSLRA, and, other than as required by law, we assume no obligation to update or supplement such statements. Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. You can identify these statements by the use of words such as “may,” “will,” “could,” “anticipate,” “believe,” “estimate,” “expect,” “continue,” “further,” “plan,” “seek,” “intend,” “predict” or “project” and variations of these words or comparable words or phrases of similar meaning. These forward-looking statements reflect our current beliefs and expectations with respect to future events and are based on assumptions and are subject to risks and uncertainties and other factors outside our control that may cause actual results to differ materially from those projected. We undertake no obligation to update publicly or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
Our History
ICON Leasing Fund Twelve, LLC (the “LLC” or “Fund Twelve”) was formed on October 3, 2006 as a Delaware limited liability company. The LLC will continue until December 31, 2026, unless terminated sooner. When used in this Annual Report on Form 10-K, the terms “we,” “us,” “our” or similar terms refer to the LLC and its consolidated subsidiaries.
Our manager is ICON Capital Corp., a Delaware corporation (our “Manager”). Our Manager manages and controls our business affairs, including, but not limited to, our equipment leases and other financing transactions that we enter into pursuant to the terms of our limited liability company agreement (our “LLC Agreement”).
Our offering period ended on April 30, 2009 and our operating period commenced on May 1, 2009. Our initial capitalization was $2,000, which consisted of contributions of $1,000 from our Manager and $1,000 from an officer of our Manager. We subsequently redeemed the $1,000 contributed by the officer of our Manager. We offered shares of limited liability company interests (“Shares”) on a “best efforts” basis with the intention of raising up to $410,800,000 of capital, consisting of 400,000 Shares at a purchase price of $1,000 and an additional 12,000 Shares, which were reserved for issuances pursuant to our distribution reinvestment plan (our “Distribution Reinvestment Plan”). The Distribution Reinvestment Plan allowed investors to purchase additional Shares with distributions received from us and/or certain other funds managed by our Manager at a discounted share price of $900. As of April 30, 2009, approximately 11,393 Shares were issued in connection with our Distribution Reinvestment Plan. Upon raising the minimum of $1,200,000, additional members were admitted. Additional members represent all members other than our Manager.
Our Business
We operate as an equipment leasing and finance program in which the capital our members invested was pooled together to make investments, pay fees and establish a small reserve. We primarily acquire equipment subject to lease, purchase equipment and lease it to third-party end users or finance equipment for third parties and, to a lesser degree, acquire ownership rights to items of leased equipment at lease expiration. Some of our equipment leases are acquired for cash and are expected to provide current cash flow, which we refer to as “income” leases. For our other equipment leases, we finance the majority of the purchase price through borrowings from third parties. We refer to these leases as “growth” leases. These growth leases generate little or no current cash flow because substantially all of the rental payments received from the lessee are used to service the indebtedness associated with acquiring or financing the lease. For these leases, we anticipate that the future value of the leased equipment will exceed the cash portion of the purchase price.
We divide the life of the program into three distinct phases:
(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 needed for our expenses, reserves and distributions to members. We anticipate that the operating period will end five years from the end of our offering period. However, our Manager may, at its sole discretion, extend the operating period for up to an additional three years.
(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 $594,249,580 and $620,978,386, respectively. For the year ended December 31, 2010, we had three lessees that accounted for approximately 59.4% of our total rental and finance income of $76,053,526. Net income attributable to us for the year ended December 31, 2010 was $11,875,465. For the year ended December 31, 2009, we had three lessees that accounted for approximately 56.0% of our total rental and finance income of $66,851,398. Net income attributable to us for the year ended December 31, 2009 was $13,858,916. For the year ended December 31, 2008, three lessees accounted for approximately 55.0% of our total rental and finance income of $26,635,823. Net income attributable to us for the year ended December 31, 2008 was $5,942,580.
Our initial closing date was May 25, 2007 (the “Commencement of Operations”), the date at which we raised $1,200,000. From the Commencement of Operations to April 30, 2009, we sold approximately 348,826 Shares, representing $347,686,947 of capital contributions and admitted 6,503 additional members. In addition, pursuant to the terms of our offering, we established a reserve in the amount of 0.5% of the gross offering proceeds. As of December 31, 2010, the reserve is in the amount of $1,738,435, or 0.5% of the gross offering proceeds of $347,686,947 raised as of the end of our offering on April 30, 2009. Through December 31, 2010, we repurchased 176 Shares pursuant to our repurchase plan. Beginning with the Commencement of Operations through April 30, 2009, we paid $26,995,024 of sales commissions to third parties, $5,488,440 of organizational and offering expense allowance to our Manager and $6,748,756 of underwriting fees to ICON Securities Corp., a wholly-owned subsidiary of our Manager (“ICON Securities”), the dealer-manager of our offering.
At December 31, 2010, our portfolio, which we hold either directly or through joint ventures, consisted primarily of the following investments:
Marine Vessels and Equipment
|
·
|
We have a 51% ownership interest in ICON Mayon, LLC (“ICON Mayon”), which purchased an Aframax product tanker, the Mayon Spirit, from an affiliate of the Teekay Corporation (“Teekay”) on July 24, 2007. The Mayon Spirit has a 48-month bareboat charter that expires on July 23, 2011.
|
|
·
|
Our wholly-owned subsidiaries ICON Arabian Express, LLC (“ICON Arabian”) and ICON Aegean Express, LLC (“ICON Aegean”) own two containership vessels that we acquired from Vroon Group B.V. (“Vroon”) on April 24, 2008. The vessels are each subject to 72-month bareboat charters with subsidiaries of Vroon that each expire on April 23, 2014.
|
|
·
|
Our wholly-owned subsidiary ICON Eagle Holdings, LLC (“ICON Eagle Holdings”) owns two Aframax product tankers that it acquired from Aframax Tanker I AS, the M/V Eagle Auriga (the “Eagle Auriga”) and the M/V Eagle Centaurus (the “Eagle Centaurus”). The Eagle Auriga and the Eagle Centaurus are subject to 84-month bareboat charters with AET, Inc. Limited (“AET”) that expire on November 14, 2013 and November 13, 2013, respectively.
|
|
·
|
We have a 64.3% ownership interest in ICON Eagle Carina Holdings, LLC (“ICON Carina Holdings”), which owns ICON Eagle Carina Pte. Ltd. (“ICON Eagle Carina”), which purchased the Aframax product tanker M/V Eagle Carina (the “Eagle Carina”) from Aframax Tanker II AS. The Eagle Carina is subject to an 84-month bareboat charter with AET that expires on November 14, 2013.
|
|
·
|
We have a 64.3% ownership interest in ICON Eagle Corona Holdings, LLC (“ICON Corona Holdings”), which owns ICON Eagle Corona Pte. Ltd. (“ICON Eagle Corona”), which purchased the Aframax product tanker M/V Eagle Corona (the “Eagle Corona”) from Aframax Tanker II AS. The Eagle Corona is subject to an 84-month bareboat charter that expires on November 14, 2013.
|
|
·
|
Victorious, LLC (“Victorious”), a Marshall Islands limited liability company controlled by us through our wholly-owned subsidiary, ICON Victorious, LLC (“ICON Victorious”) owns a 300-man accommodation and work barge (the “Barge”) that was purchased from Swiber Engineering Ltd. (“Swiber”). The Barge is subject to a 96-month bareboat charter with Swiber Offshore Marine Pte. Ltd. (the “Charterer”) that expires on March 23, 2017.
|
|
·
|
Our wholly-owned subsidiaries ICON Diving Marshall Islands, LLC (“ICON Diving Marshall Islands”) and ICON Diving Netherlands, B.V. own certain marine diving equipment (the “Diving Equipment”) that was purchased from Swiber. The Diving Equipment is subject to a 60-month lease with Swiber Offshore Construction Pte. Ltd. (the “Lessee”) that expires on June 30, 2014.
|
|
·
|
Our wholly-owned subsidiaries ICON Mynx Pte. Ltd. (“ICON Mynx”), ICON Stealth Pte. Ltd. (“ICON Stealth”) and ICON Eclipse Pte. Ltd. (“ICON Eclipse”) own three barges (each, a “Leighton Vessel” and, collectively, the “Leighton Vessels”). Each of the Leighton Vessels (the Leighton Mynx, the Leighton Stealth and the Leighton Eclipse) is subject to a 96-month bareboat charter that expires on June 25, 2017.
|
|
·
|
Our wholly-owned subsidiary ICON Ionian, LLC (“ICON Ionian”), a Marshall Islands limited liability company, owns a product tanker vessel, the Ocean Princess (the “Ocean Princess”). The Ocean Princess is subject to a 60-month bareboat charter that expires on October 30, 2014.
|
|
·
|
Our wholly-owned subsidiary ICON Faulkner, LLC (“ICON Faulkner”) owns a pipelay barge, the Leighton Faulkner. The Leighton Faulkner is subject to a 96-month bareboat charter that expires on January 4, 2018.
|
Manufacturing Equipment
|
·
|
We have a 93.67% ownership interest in ICON MW, LLC, (“ICON MW”), which owns machining and metal working equipment subject to leases with LC Manufacturing, LLC (“LC Manufacturing”), MW Crow, Inc. (“Crow”), MW Scott, Inc. (“Scott”), MW General, Inc. (“General”) and AMI Manchester, LLC (“AMI”), all of which are wholly-owned subsidiaries of MW Universal, Inc. (“MWU”). The AMI lease expires on December 31, 2013, with the remaining leases expiring on December 31, 2012.
|
|
·
|
Our wholly-owned subsidiary ICON French Equipment II, LLC (“ICON French Equipment II”) owns auto parts manufacturing equipment on lease to Sealynx Automotive Transieres SAS (“Sealynx”). The equipment is subject to a 60-month lease that expires on February 28, 2013.
|
|
·
|
We have a 45% ownership interest in ICON Pliant, LLC (“ICON Pliant”), which owns manufacturing equipment purchased from and simultaneously leased back to Pliant Corporation (“Pliant”). The equipment is subject to a 60-month lease that expires on September 30, 2013.
|
Assets Held for Sale
|
·
|
We have a 55% ownership interest in ICON EAR, LLC (“ICON EAR”), which purchased and simultaneously leased back semiconductor manufacturing equipment to Equipment Acquisition Resources, Inc. (“EAR”). The lease was scheduled to expire on June 30, 2013, but on October 23, 2009, EAR filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Accordingly, the assets securing the lease have been classified as held for sale on our consolidated balance sheets at December 31, 2010 and December 31, 2009.
|
Mining Equipment
|
·
|
Our wholly-owned subsidiary ICON Magnum, LLC (“ICON Magnum”) owns a Bucyrus Erie model 1570 Dragline (the “Dragline”). The Dragline is subject to a 60-month lease that expires on May 31, 2013.
|
|
·
|
Our wholly-owned subsidiary ICON Murray, LLC (“ICON Murray”) owns mining equipment that is subject to a 24-month lease that expires on March 31, 2011.
|
|
·
|
Our wholly-owned subsidiary ICON Murray II, LLC (“ICON Murray II”) owns mining equipment that is subject to a 30-month lease that expires on December 31, 2011.
|
Telecommunications Equipment
|
·
|
Our wholly-owned subsidiary ICON Global Crossing IV, LLC (“ICON Global Crossing IV”) owns telecommunications equipment that is subject to two 36-month leases and one 48-month lease with Global Crossing Telecommunications, Inc. (“Global Crossing”). The leases expire in March 2011, November 2011 and March 2012, respectively.
|
|
·
|
Our wholly-owned subsidiary ICON Broadview, LLC (“ICON Broadview”) owns telecommunications equipment that is subject to three 36-month leases with Broadview Networks Holdings, Inc. and Broadview Networks Inc. (collectively, “Broadview”). The leases expire in July 2013, August 2013 and December 2013.
|
Motor Coaches
|
·
|
Our wholly-owned subsidiary ICON Coach, LLC (“ICON Coach”) has title to certain motor coaches purchased from CUSA PRTS, LLC (“CUSA”), an affiliate of Coach America Holdings, Inc. (“Coach America”). The motor coaches are subject to a 60-month lease that expires on March 31, 2014.
|
Gas Compressors
|
·
|
We have a 49.54% ownership interest in ICON Atlas, LLC (“ICON Atlas”), which owns eight Ariel natural gas compressors (the “Gas Compressors”) that were purchased from AG Equipment Co. (“AG”). The Gas Compressors are subject to 48-month leases with Atlas Pipeline Mid-Continent, LLC (“APMC”) that expire on August 31, 2013. Although our economic interest in ICON Atlas is 49.54%, our controlling interest is 55%.
|
Notes Receivable Secured by Point-of-Sale Equipment
|
·
|
We have a 52.75% ownership interest in ICON Northern Leasing, LLC (“ICON Northern Leasing”), which holds four promissory notes (the “Notes”) issued by Northern Capital Associates XIV, L.P. (“NCA XIV”), as borrower, in favor of Merrill Lynch Commercial Finance Corp. The Notes are secured by an underlying pool of leases for point-of-sale equipment.
|
|
·
|
Our wholly-owned subsidiary ICON Northern Leasing II, LLC (“ICON Northern Leasing II”) provided a senior secured loan to Northern Capital Associates XV, L.P. (“NCA XV”) and NCA XIV. The loan is secured by an underlying pool of leases for point-of-sale equipment.
|
Notes Receivable Secured by Analog Seismic System Equipment
|
·
|
We have a 52.09% ownership interest in ICON ION, LLC (“ICON ION”), which provided secured term loans (the “ION Loans”) to ARAM Rentals Corporation, a Canadian bankruptcy remote Nova Scotia unlimited liability company (“ARC”) and ARAM Seismic Rentals Inc., a U.S. bankruptcy remote Texas corporation (“ASR,” together with ARC, collectively referred to as the “ARAM Borrowers”). The ION Loans are secured by (i) a first priority security interest in all of the analog seismic system equipment owned by the ARAM Borrowers and (ii) a pledge of all of the equity interests in the ARAM Borrowers.
|
Notes Receivable Secured by Rail Support Construction Equipment
|
·
|
We have a 49.13% interest in ICON Quattro, LLC (“ICON Quattro”), which participated in a £24,800,000 loan facility by making a second priority secured term loan to Quattro Plant Limited (“Quattro Plant”) in the aggregate amount of £5,800,000. The loan is secured by (i) all of Quattro Plant’s rail support construction equipment, which consists of railcars, attachments to railcars, bulldozers, excavators, tractors, lowboy trailers, street sweepers, service trucks, forklifts (collectively, the “Construction Equipment”) and any other existing or future asset owned by Quattro Plant, (ii) all of Quattro Plant’s accounts receivable, and (iii) a mortgage over certain real estate in London, England owned by the majority shareholder of Quattro Plant. In addition, ICON Quattro received a key man insurance policy insuring the life of the majority shareholder of Quattro Plant in the amount of £5,500,000. Although our economic interest in ICON Quattro is 49.13%, our controlling interest is 55%.
|
Notes Receivable Secured by Aframax Tankers
|
·
|
Our wholly-owned subsidiary ICON Palmali 12, LLC (“ICON Palmali 12”) participated in a $96,000,000 loan facility by making second priority secured term loans to Ocean Navigation 5 Co. Ltd. and Ocean Navigation 6 Co. Ltd. (collectively, “Ocean Navigation”) pursuant to a loan agreement (the “Palmali Loan Agreement”), which loans mature on various dates through September 14, 2016.
|
Notes Receivable Secured by Metal Cladding and Production Equipment
|
·
|
We made a secured term loan to EMS Enterprise Holdings, LLC, EMS Holdings II, LLC, EMS Engineered Materials Solutions, LLC, EMS CUP, LLC and EMS EUROPE, LLC (collectively, “EMS”) in the amount of $3,200,000 (the “EMS Loan”), which matures on September 1, 2014.
|
Notes Receivable Secured by Lifting and Transportation Equipment
|
·
|
We participated in an approximately $150,000,000 loan facility by making a secured term loan to Northern Crane Services Inc. (“Northern Crane”) in the amount of $9,750,000 (the “Northern Crane Loan”) that matures on April 1, 2015.
|
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 Securities and Exchange Commission (the “SEC”). The information contained on our Manager’s website is not deemed part of this Annual Report on Form 10-K. Our reports are also available on the SEC’s website at http://www.sec.gov.
Financial Information Regarding Geographic Areas
We have long-lived assets, which include finance leases and operating leases, and we generate revenues in geographic areas outside of the United States. For additional information, see Note 15 to our consolidated financial statements.
We are subject to a number of risks. Careful consideration should be given to the following risk factors, in addition to the other information included in this Annual Report. The risks and uncertainties described below are not the only ones we may face. Each of these risk factors could adversely affect our business operating results and/or financial condition, as well as adversely affect the value of an investment in our Shares. In addition to the following disclosures, please refer to the other information contained in this Annual Report including the consolidated financial statements and the related notes.
General Investment Risks
All or a substantial portion of your distributions may be a return of capital and not a return on capital, which will not necessarily be indicative of our performance.
The portion of total distributions that is a return of capital and the portion that is economic return will depend upon a number of factors that cannot be determined until all of our investments have been sold or otherwise matured. At that time, you will be able to compare the total amount of all cash distributions you receive to your total capital invested in order to determine your economic return.
The Internal Revenue Service (the “IRS”) may deem the majority of your distributions to be a return of capital for tax purposes during our early years. Distributions would be deemed to be a return of capital for tax purposes to the extent that we are distributing cash in an amount greater than our taxable income. The fact that the IRS deems distributions to be a return of capital in part and we report an adjusted tax basis to you on Form K-1 is not an indication that we are performing greater than or less than expectations and cannot be utilized to forecast what your final return might be.
Your ability to resell your Shares is limited by the absence of a public trading market and, therefore, you should be prepared to hold your Shares for the life of the fund.
A public market does not exist for our Shares and we do not anticipate that a public market will develop for our Shares, our Shares are not currently and will not be listed on any national securities exchange at any time, and we will take steps to 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 purchase, rather than the discounted subscription price paid by them for their Shares. As a result, investors who paid discounted prices for their investments will receive higher returns on their investments in us as compared to investors who paid the entire $1,000 per Share.
Our assets may be plan assets for ERISA purposes, which could subject our Manager to additional restrictions on its ability to operate our business.
The Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and the Internal Revenue Code of 1986, as amended (the “Code”) may apply what is known as the look-through rule to an investment in our Shares. Under that rule, the assets of an entity in which a qualified plan or IRA has made an equity investment may constitute assets of the qualified plan or IRA. If you are a fiduciary of a qualified plan or IRA, you should consult with your advisors and carefully consider the effect of that treatment if that were to occur. If the look-through rule were to apply, our Manager may be viewed as an additional fiduciary with respect to the qualified plan or IRA to the extent of any decisions relating to the undivided interest in our assets represented by the Shares held by such qualified plan or IRA. This could result in some restriction on our Manager’s willingness to engage in transactions that might otherwise be in the best interest of all Share holders due to the strict rules of ERISA regarding fiduciary actions.
The statements of value that we include in this Annual Report on Form 10-K and future Annual Reports on Form 10-K and that we will send to fiduciaries of plans subject to ERISA and to certain other parties is only an estimate and may not reflect the actual value of our Shares.
The statements of estimated value are based on the estimated value of each Share (i) as of the close of our fiscal year, for the annual statements included in this and future Annual Reports on Form 10-K and (ii) as of September 30 of each fiscal year, for annual statements sent to fiduciaries of plans subject to ERISA and certain other parties. Management, in part, will rely upon third-party sources and advice in arriving at this estimated value. No independent appraisals on the particular value of our Shares will be obtained and the value will be based upon an estimated fair market value as of the referenced date for such value. Because this is only an estimate, we may subsequently revise any valuation that is provided. We cannot 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 and those reimbursements and fees are likely to exceed the income portion of distributions made to you during our early years.
Before making any distributions to our members, we will reimburse our Manager and its affiliates for expenses incurred on our behalf, and pay our Manager and its affiliates substantial fees for acquiring, managing, and realizing our investments for us. The expense reimbursements and fees of our Manager and its affiliates were established by our Manager in compliance with the NASAA Guidelines (the North American Securities Administrators Association guidelines for publicly offered, finite-life equipment leasing and finance funds) in effect on the date of our prospectus, are not based on arm’s-length negotiations, but are subject to the limitations set forth in our LLC Agreement. Nevertheless, the amount of these expense reimbursements and fees is likely to exceed the income portion of distributions made to you in our early years.
In general, expense reimbursements and fees are paid without regard to the amount of our cash distributions to our additional members, and regardless of the success or profitability of our operations. Some of those fees and expense reimbursements will be required to be paid as we acquire our portfolio and we may pay other expenses, such as accounting and interest expenses, costs for supplies, etc., even though we may not yet have begun to receive revenues from all of our investments. This lag between the time when we must pay fees and expenses at the time when we receive revenues may result in losses to us during our early years, which our Manager believes is typical for start-up companies such as us.
Furthermore, we are likely to borrow a significant portion of the purchase price of our investments. This use of indebtedness should permit us to make more investments than if borrowings were not utilized. As a consequence, we will pay greater fees to our Manager than if no indebtedness were incurred because management and acquisition fees are based upon the gross payments earned or receivable from, or the purchase price (including any indebtedness incurred) of, our investments. Also, our Manager will determine the amount of cash reserves that we will maintain for future expenses, contingencies or investments. The reimbursement of expenses, payment of fees or creation of reserves could adversely affect our ability to make distributions to our additional members.
Our Manager may have difficulty managing its growth, which may divert its resources and limit its ability to expand its operations successfully.
The amount of assets that our Manager manages has grown substantially since our Manager was formed in 1985 and our Manager and its affiliates intend to continue to sponsor and manage, as applicable, funds similar to us that may be concurrent with us and they expect to experience further growth in their respective assets under management. Our Manager’s future success will depend on the ability of its and its affiliates’ officers and key employees to implement and improve their operational, financial and management controls, reporting systems and procedures, and manage a growing number of assets and investment funds. They, however, may not implement improvements to their management information and control systems in an efficient or timely manner and they may discover deficiencies in their existing systems and controls. Thus, our Manager’s anticipated growth may place a strain on its administrative and operations infrastructure, which could increase its costs and reduce its efficiency and could negatively impact our operations, business and financial condition.
Operational risks may disrupt our business and result in losses.
We may face operational risk from errors made in the execution, confirmation or settlement of transactions. We may also face operational risk from our transactions not being properly recorded, evaluated or accounted for. We rely heavily on our Manager’s financial, accounting, and other software systems. If any of these systems fail to operate properly or become disabled, we could suffer financial loss and a disruption of our business. In addition, we are highly dependent on our Manager’s information systems and technology. There can be no assurance that these information systems and technology will be able to accommodate our Manager’s growth or that the cost of maintaining such systems will not increase from its current level. Such a failure to accommodate growth, or an increase in costs related to such information systems, could also negatively affect our liquidity and cash flows, and could negatively affect our profitability. Furthermore, we depend on the headquarters of our Manager, which are located in New York City, for the operation of our business. A disaster or a disruption in the infrastructure that supports our businesses, including a disruption involving electronic communications or other services used by us or third parties with whom we conduct business, or directly affecting our headquarters, may have an adverse impact on our ability to continue to operate our business without interruption that could have a material adverse effect on us. Although we have disaster recovery programs in place, there can be no assurance that these will be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for any losses. Finally, we rely on third-party service providers for certain aspects of our business, including certain accounting and financial services. Any interruption or deterioration in the performance of these third parties could impair the quality of our operations and could adversely affect our business and result in losses.
Our internal controls over financial reporting may not be effective, 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 could materially affect our financial condition and results of operations. The equipment leasing and financing industry is influenced by factors such as interest rates, inflation, employment rates and other macroeconomic factors over which we have no control. Any decline in economic activity as a result of these factors typically results in a decrease in the number of transactions in which we participate and in our profitability.
Uncertainties associated with the equipment leasing and financing industry may have an adverse effect on our business and may adversely affect our ability to give you any economic return from our Shares or a complete return of your capital.
There are a number of uncertainties associated with the equipment leasing and financing industry that may have an adverse effect on our business and may adversely affect our ability to make cash distributions to you that will, in total, be equal to a return of all of your capital, or provide for any economic return from our Shares. These include:
|
·
|
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”), ICON Income Fund Ten, LLC (“Fund Ten”), ICON Leasing Fund Eleven, LLC (“Fund Eleven”) and ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P. (“Fund Fourteen”), are party to the revolving line of credit agreement with CB&T, as amended. The terms of that agreement could restrict us from paying distributions to our members if such payments would cause us not to be in compliance with our financial covenants in that agreement. For additional information on the terms of our credit agreement, see “Item 7. Manager’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
Guarantees made by the guarantors of some of our lessees, borrowers and other counterparties may be voided under certain circumstances and we may be required to return payments received from such guarantors.
Under federal bankruptcy law and comparable provisions of State fraudulent transfer laws, a guarantee could be voided, or claims in respect of a guarantee could be subordinated to all other debts of that guarantor if, among other things, the guarantor, at the time it incurred the indebtedness evidenced by its guarantee:
|
·
|
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 that we will be taxed as a partnership and not as a corporation, that opinion is not binding on the IRS as of the time of the offering 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
|
8,370
|
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 May 2014. We paid distributions to additional members totaling $33,648,098, $31,554,863 and $16,072,151 for the years ended December 31, 2010, 2009 and 2008, respectively. Additionally, we paid our Manager distributions of $339,880, $318,725 and $162,440 for the years ended December 31, 2010, 2009 and 2008, respectively. The terms of our loan agreement with CB&T, as amended, could restrict us from paying cash distributions to our members if such payment would cause us to not be in compliance with our financial covenants. See “Item 7. Manager’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
In order for Financial Industry Regulatory Authority, Inc. (“FINRA”) members and their associated persons to have participated in the offering and sale of Shares pursuant to the offering or to participate in any future offering of our Shares, we are required pursuant to FINRA Rule 2310(b)(5) to disclose in each annual report distributed to our members a per Share estimated value of our Shares, the method by which we developed the estimated value, and the date used to develop the estimated value. In addition, our Manager prepares statements of our estimated Share values to assist fiduciaries of retirement plans subject to the annual reporting requirements of ERISA in the preparation of their reports relating to an investment in our Shares. For these purposes, the estimated value of our Shares is deemed to be $708.26 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 $708.26 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 fees;
|
|
·
|
that the foregoing valuation, or the method used to establish value, will satisfy the technical requirements imposed on plan fiduciaries under ERISA; or
|
|
·
|
that the foregoing valuation, or the method used to establish value, will not be subject to challenge by the IRS if used for any tax (income, estate, gift or otherwise) valuation purposes as an indicator of the current value of the Shares.
|
The 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 $708.26 per Share does not reflect the amount that a member would currently receive under our repurchase plan. In addition, there can be no assurance that you will be able to redeem your Shares under our repurchase plan.
The selected financial data should be read in conjunction with the consolidated financial statements and related notes included in “Item 8. Consolidated Financial Statements and Supplementary Data” contained elsewhere in this Annual Report on Form 10-K.
|
Years Ended December 31,
|
|||||||||||||||||||||
|
2010
|
2009
|
2008
|
2007 (e)
|
||||||||||||||||||
|
Total revenue (a)
|
$ | 91,069,326 | $ | 78,491,218 | $ | 29,346,502 | $ | 4,830,315 | |||||||||||||
|
Net income attributable to Fund Twelve (b)
|
$ | 11,875,465 | $ | 13,858,916 | $ | 5,942,580 | $ | 116,852 | |||||||||||||
|
Net income attributable to Fund Twelve allocable to the additional members
|
$ | 11,756,710 | $ | 13,720,327 | $ | 5,883,154 | $ | 115,683 | |||||||||||||
|
Net income attributable to Fund Twelve allocable to the Manager
|
$ | 118,755 | $ | 138,589 | $ | 59,426 | $ | 1,169 | |||||||||||||
|
Weighted average number of additional shares of
|
|||||||||||||||||||||
|
|
limited liability company interests outstanding
|
348,679 | 333,979 | 181,777 | 47,186 | ||||||||||||||||
|
Net income attributable to Fund Twelve per weighted average
|
|||||||||||||||||||||
|
additional share of limited liability company interests outstanding
|
$ | 33.72 | $ | 41.08 | $ | 32.36 | $ | 2.45 | |||||||||||||
|
Distributions to additional members
|
$ | 33,648,098 | $ | 31,554,863 | $ | 16,072,151 | $ | 2,040,455 | |||||||||||||
|
Distributions per weighted average additional share of
|
|||||||||||||||||||||
|
limited liability company interests
|
$ | 96.50 | $ | 94.48 | $ | 88.42 | $ | 43.24 | |||||||||||||
|
Distributions to the Manager
|
$ | 339,880 | $ | 318,725 | $ | 162,440 | $ | 20,561 | |||||||||||||
|
December 31,
|
|||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||
|
Total assets (c)
|
$ | 594,249,580 | $ | 620,978,386 | $ | 438,585,542 | $ | 114,242,189 | $ | 2,000 | |||||||||||
|
Non-recourse long-term debt and other liabilities (a)
|
$ | 265,771,158 | $ | 264,349,884 | $ | 162,575,068 | $ | 22,480,270 | $ | - | |||||||||||
|
Members' equity (d)
|
$ | 247,928,256 | $ | 273,079,715 | $ | 223,487,730 | $ | 79,289,609 | $ | 2,000 | |||||||||||
|
(a)
|
Increases in total revenue and non-recourse long-term debt and other liabilities were primarily due to our investments in equipment leases and other financing transactions for each of the three years in the period ended December 31, 2010. Our non-recourse long-term debt and other liabilities increased because of debt agreements entered into in connection with our acquisitions. We are currently in our operating period, during which we will continue to reinvest the cash generated from our initial investments to the extent that cash is not used for our expenses, debt obligations, reserves and distributions to members.
|
||||||||||||||||||||
|
(b)
|
In 2010, net income attributable to Fund Twelve decreased $1,983,451 from 2009. The decrease in 2010 was primarily a result of the increase in the amounts of bad debt expense and impairment loss during 2010, as compared to 2009. The decrease was partially offset by the increase in rental and finance income resulting from our acquisitions of certain equipment. In 2009, net income attributable to Fund Twelve increased $7,916,336 from 2008. In 2008, net income attributable to Fund Twelve increased $5,825,728 from 2007. Such increases were a result of the increase in rental and finance income resulting from our acquisitions of marine vessels, telecommunications equipment, coal-mining equipment and manufacturing equipment, which was primarily offset by the recognition of depreciation and amortization expense associated with the assets acquired.
|
||||||||||||||||||||
|
(c)
|
In 2010, total assets decreased primarily due to distributions to additional members and depreciation and amortization of our assets, partially offset by an increase in our net income and debt acquired in connection with an increase in our net investment in finance leases. For each year from the Commencement of Operations on May 25, 2007, total assets increased primarily due to our equity raise, debt acquired in connection with our investment in leased assets and increases in our net income.
|
||||||||||||||||||||
|
(d)
|
In 2010, member's equity decreased primarily due to distributions to additional members, partially offset by the increase in our net income. Prior to 2010, members' equity increased each year from the Commencement of Operations on May 25, 2007, primarily due to our equity raise, along with the increases in our net income.
|
||||||||||||||||||||
|
(e)
|
The Commencement of Operations was on May 25, 2007. As a result, no operating activities are presented for the year ended December 31, 2006.
|
||||||||||||||||||||
Our Manager’s Discussion and Analysis of Financial Condition and Results of Operations relates to our consolidated financial statements and should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. Statements made in this section may be considered forward-looking. These statements are not guarantees of future performance and are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of these risks and assumptions, including, among other things, factors discussed in “Part I. Forward-Looking Statements” and “Item 1A. Risk Factors” located elsewhere in this Annual Report on Form 10-K.
Overview
Our offering period ended on April 30, 2009 and our operating period commenced on May 1, 2009. We operate as an equipment leasing and finance program in which the capital our members invested was pooled together to make investments, pay fees and establish a small reserve. With the proceeds from the sale of our Shares, we invested and continue to invest in equipment subject to leases, other equipment financing, and residual ownership rights in items of leased equipment and establish a cash reserve. After the net offering proceeds were invested, additional investments will be made with the cash generated from our initial investments to the extent that cash is not used for expenses, reserves and distributions to members. The investment in additional equipment in this manner is called “reinvestment.” We anticipate investing in equipment from time to time for five years. This time frame is called the “operating period” and may be extended, at the sole discretion of our Manager, for up to an additional three years. After the operating period, we will then sell our assets in the ordinary course of business during a time frame called the “liquidation period.”
Our Manager manages and controls our business affairs, including, but not limited to, our equipment leases and other financing transactions, under the terms of our LLC Agreement. Our initial closing was on May 25, 2007, when the minimum offering of $1,200,000 was achieved. From the Commencement of Operations through April 30, 2009, the end of the offering period, we raised total equity of $347,686,947.
Current Business Environment and Outlook
Recent trends indicate that domestic and global equipment financing volume is correlated to overall business investments in equipment, which are typically impacted by general economic conditions. As the economy slows or builds momentum, the demand for productive equipment generally slows or builds and equipment financing volume generally decreases or increases, depending on a number of factors. These factors include the availability of liquidity to provide equipment financing and/or provide it on terms satisfactory to borrowers, lessees, and other counterparties, as well as the desire to upgrade equipment and/or expand operations during times of growth, but also in times of recession in order to, among other things, seize the opportunity to obtain competitive advantage over distressed competitors and/or increase business as the economy recovers.
Industry Trends Prior to the Recent 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.
Significant Transactions
We engaged in the following significant transactions during the years ended December 31, 2010, 2009 and 2008:
Telecommunications Equipment
On March 11, 2008, ICON Global Crossing IV purchased additional telecommunications equipment for approximately $5,939,000 that is subject to a lease with Global Crossing. The lease expires on March 31, 2011.
During March 2009, ICON Global Crossing IV purchased additional telecommunications equipment for approximately $3,859,000 that is subject to a lease with Global Crossing. The lease expires on March 31, 2012.
On June 25, 2010, ICON Global Crossing IV borrowed approximately $12,449,000 from CapitalSource Bank.
On June 29, 2010, our wholly-owned subsidiary ICON Broadview entered into a master lease agreement for information technology equipment with Broadview, pursuant to which ICON Broadview will acquire up to four schedules of information technology equipment, which will be leased to Broadview. The aggregate purchase price for the equipment will be equal to at least $5,000,000.
On July 15, 2010, ICON Broadview purchased information technology equipment for the purchase price of approximately $602,000 and simultaneously leased the equipment to Broadview. The base term of the schedule is for a period of 36 months, which commenced on August 1, 2010.
On August 17, 2010, ICON Broadview purchased information technology equipment for the purchase price of approximately $613,000 and simultaneously leased the equipment to Broadview. The base term of the schedule is for a period of 36 months, which commenced on September 1, 2010.
On December 23, 2010, ICON Broadview purchased information technology equipment for the purchase price of approximately $1,860,000 and simultaneously leased the equipment to Broadview. The base term of the schedule is for a period of 36 months, which commenced on January 1, 2011.
Marine Vessels and Equipment
On April 24, 2008, our wholly-owned subsidiaries ICON Arabian and ICON Aegean acquired two containership vessels from Vroon, the Aegean Express and the Far Vizag (f/k/a the Arabian Express) (collectively, the “Vroon Vessels”), for an aggregate purchase price of $51,000,000, of which $38,700,000 of non-recourse debt was borrowed from BNP Paribas (“Paribas,” f/k/a Fortis Bank SA/NV). Simultaneously with the purchase, the Vroon Vessels were bareboat chartered back to subsidiaries of Vroon for a period of 72 months.
On November 18, 2008, ICON Eagle Auriga Pte. Ltd. (“ICON Eagle Auriga”), a wholly-owned subsidiary of ICON Eagle Holdings, purchased an Aframax product tanker, the Eagle Auriga, from Aframax Tanker I AS for $42,000,000, of which $28,000,000 of non-recourse debt was borrowed from Paribas and DVB Bank SE (“DVB”). On November 21, 2008, ICON Eagle Centaurus Pte. Ltd. (“ICON Eagle Centaurus”), also a wholly-owned subsidiary of ICON Eagle Holdings, purchased an Aframax product tanker, the Eagle Centaurus, for $40,500,000, of which $27,000,000 of non-recourse debt was borrowed from Paribas and DVB. The Eagle Auriga and the Eagle Centaurus are subject to 84-month bareboat charters with AET that expire on November 14, 2013 and November 13, 2013, respectively.
On December 3, 2008, ICON Eagle Carina, a Singapore corporation wholly-owned by ICON Carina Holdings, a Marshall Islands limited liability company owned 64.3% by us and 35.7% by Fund Ten, executed a Memorandum of Agreement to purchase an Aframax product tanker, the Eagle Carina, from Aframax Tanker II AS. On December 18, 2008, the Eagle Carina was purchased for $39,010,000, of which $27,000,000 was financed as non-recourse debt borrowed from Paribas and DVB. The Eagle Carina is subject to an 84-month bareboat charter with AET that expires on November 14, 2013.
On December 3, 2008, ICON Eagle Corona, a Singapore corporation wholly-owned by ICON Corona Holdings, a Marshall Islands limited liability company owned 64.3% by us and 35.7% by Fund Ten, executed a Memorandum of Agreement to purchase an Aframax product tanker, the Eagle Corona, from Aframax Tanker II AS. On December 31, 2008, the Eagle Corona was purchased for $41,270,000, of which $28,000,000 was financed as non-recourse debt borrowed from Paribas and DVB. The Eagle Corona is subject to an 84-month bareboat charter with AET that expires on November 14, 2013.
On March 24, 2009, Victorious purchased the Barge from Swiber for $42,500,000. Simultaneously with the purchase, the Barge was chartered back to the Charterer for 96 months. The purchase price of the Barge was funded by (i) a $19,125,000 equity investment from ICON Victorious, (ii) an $18,375,000 contribution-in-kind by Swiber and (iii) a subordinated, non-recourse and unsecured $5,000,000 payable. The payable bears interest at 3.5% per year, accrues interest quarterly, is only required to be repaid after we achieve our minimum targeted return and is recorded within other noncurrent liabilities. At the end of the charter, the Charterer has the option to purchase the Barge for $21,000,000 plus 50% of the difference between the then fair market value less $21,000,000. ICON Victorious is the sole manager of Victorious and holds a senior, controlling equity interest and all management rights with respect to Victorious. Swiber holds a subordinate, noncontrolling equity interest in Victorious and the obligations of the Swiber entities that are parties to the transaction are guaranteed by Swiber’s parent company, Swiber Holdings Limited (“Swiber Holdings”).
On June 25, 2009, our wholly-owned subsidiaries ICON Diving Marshall Islands and ICON Diving Netherlands, B.V. purchased the Diving Equipment from Swiber for $10,000,000. Simultaneously with the purchase of the Diving Equipment, we entered into a 60-month lease with the Lessee, which commenced on July 1, 2009. The purchase price for the Diving Equipment was funded by $8,000,000 in cash and a subordinated, interest-free $2,000,000 payable to Swiber, which is due upon sale of the Diving Equipment at the conclusion of the lease term. The $2,000,000 payable is recorded on a discounted basis within other non-current liabilities and is being accreted to its carrying value as interest expense over its term. If an event of loss or an event of default occurs, our obligation to repay the payable is terminated.
At the conclusion of the lease, the Lessee has the option to (x) purchase the Diving Equipment for $4,250,000 (the “Purchase Option”) and pay an amount equal to 50% of the difference between the fair market value of the Diving Equipment less $4,250,000 or (y) return the Diving Equipment. In the event the Lessee does not exercise the Purchase Option and the Diving Equipment is not sold to a third party, but rather the lease is renewed or is re-leased to a third party, all lease payments received by us will be paid as follows: (i) first, to us until we receive in full our purchase price of $10,000,000 less the $2,000,000 payable and achieve a return thereon at an agreed-upon rate; and (ii) then, to Swiber to repay in full the $2,000,000 payable without interest thereon. In addition, Victorious, ICON Victorious and Swiber granted our subsidiaries a first priority mortgage in the Barge as security for the Lessee’s obligations under the lease. The obligations of the Lessee, Swiber, and Swiber Holdings under the operative transactional documents are subordinate only to ICON Victorious’ rights in the Barge. The obligations of the Lessee are guaranteed by Swiber Holdings.
On June 26, 2009, ICON Mynx, ICON Stealth and ICON Eclipse executed Memoranda of Agreement (“MOA”) to purchase the Leighton Vessels from Leighton Contractors (Singapore) Pte. Ltd. (“Leighton”) for an aggregate purchase price of $133,000,000. Simultaneously with the execution of the MOA, each of ICON Mynx, ICON Stealth and ICON Eclipse entered into a bareboat charter to charter the Leighton Vessel that it owns to Leighton for a term of 96 months. During the term of the bareboat charters, Leighton will have the option to purchase each of the Leighton Vessels for a specified purchase option price on the dates defined in each respective bareboat charter. All of Leighton’s obligations are guaranteed by its ultimate parent company, Leighton Holdings Limited (“Leighton Holdings”), a publicly traded company that is listed on the Australian Stock Exchange.
Two of the three Leighton Vessels were acquired on June 26, 2009 for $58,000,000, including the incurrence of $34,800,000 of senior debt (the “Senior Tranche”) pursuant to a $79,800,000 senior facility agreement (the “Facility Agreement”) with Standard Chartered Bank, Singapore Branch (“Standard Chartered”) and $20,500,000 of subordinated seller’s credit (the “Subordinated Tranche”) pursuant to a $47,000,000 seller’s credit agreement with Leighton (the “Seller’s Credit Agreement”). The Seller’s Credit Agreement is subordinated only to the Facility Agreement. The Senior Tranche will be repaid by us in 20 quarterly principal and interest payments beginning on September 30, 2009. The Senior Tranche bore an interest rate of 4.8475% during the period from June 26, 2009 to September 30, 2009, and, thereafter, the interest rate was fixed pursuant to a swap agreement at 7.05%. The interest-free Subordinated Tranche will be repaid by us in eight annual principal payments that began on June 25, 2010. The Subordinated Tranche is recorded on a discounted basis within other non-current liabilities and is being accreted to its carrying value as interest expense over its term. The bareboat charter for each of these two Leighton Vessels expires on June 25, 2017.
On October 28, 2009, ICON Eclipse purchased the remaining third Leighton Vessel from Leighton for $75,000,000. To purchase the Leighton Vessel, ICON Eclipse borrowed $45,000,000 of senior debt (the “Eclipse Senior Tranche”) pursuant to the Facility Agreement and $26,500,000 of subordinated seller’s credit (the “Eclipse Subordinated Tranche”) pursuant to the Seller’s Credit Agreement. The Eclipse Senior Tranche will be repaid by us in 20 quarterly principal and interest payments that began on December 31, 2009. The interest-free Eclipse Subordinated Tranche will be repaid by us in eight annual principal payments that began on October 28, 2010. The Eclipse Subordinated Tranche is recorded on a discounted basis within other non-current liabilities and is being accreted to its carrying value as interest expense over its term.
On March 31, 2010, ICON Mynx entered into an agreement with Leighton Offshore Pte. Ltd. (“Leighton Offshore”) to upgrade the Leighton Mynx by acquiring certain equipment and making certain upgrades to the Leighton Mynx in an amount equal to $20,000,000. The upgrades include the addition of a helicopter deck, as well as a new crane and accommodation unit. The cost of the upgrades was financed with $2,000,000 in cash and $18,000,000 in non-recourse indebtedness, which included an interest-free $4,000,000 subordinated contractor’s credit and $14,000,000 of senior debt pursuant to an amended senior facility agreement (the “Amended Facility Agreement”). The Amended Facility Agreement will be repaid in quarterly installments beginning on March 31, 2011 and interest has been fixed pursuant to a swap agreement with Standard Chartered. In consideration for financing the upgrades, ICON Mynx and Leighton Offshore agreed to amend the bareboat charter for the Leighton Mynx to, among other things, increase the amount of monthly charter hire payable by Leighton Offshore and increase the purchase option price at the expiry of the charter. All of Leighton Offshore's obligations are guaranteed by Leighton Holdings.
On August 20, 2010, ICON Mynx entered into an agreement with Leighton Offshore to further upgrade the Leighton Mynx for $3,500,000. The upgrade includes the installation of a Manitowoc crawler crane. The cost of the upgrade was financed with $1,050,000 in cash and $2,450,000 in a non-recourse loan pursuant to the Amended Facility Agreement. In consideration for financing the upgrades, ICON Mynx and Leighton Offshore agreed to amend the bareboat charter for the Leighton Mynx to, among other things, increase the amount of monthly charter hire payable by Leighton Offshore and increase the purchase option price at the expiry of the bareboat charter.
On November 12, 2010, the upgrade to the Leighton Mynx was completed and the barge resumed operations. All of Leighton Offshore’s obligations are guaranteed by Leighton Holdings.
On October 30, 2009, ICON Ionian purchased the Ocean Princess from Lily Shipping Ltd. (“Lily Shipping”), a wholly-owned subsidiary of the Ionian Group (“Ionian”) for the purchase price of $10,750,000. Simultaneously with the purchase, the Ocean Princess was bareboat chartered back to Lily Shipping for 60 months. The purchase price was funded by (i) a non-recourse loan in the amount of $5,500,000 from Nordea Bank Norge ASA (“Nordea”), (ii) $950,000 in cash and (iii) a subordinated, non-interest bearing $4,300,000 seller’s credit to Lily Shipping, which is due upon the sale of the Ocean Princess in accordance with the terms of the bareboat charter. If an event of default occurs, ICON Ionian’s obligation to repay the seller’s credit to Lily Shipping is terminated. The obligations of Lily Shipping are guaranteed by Delta Petroleum Ltd., a wholly-owned subsidiary of Ionian.
On December 18, 2009, ICON Faulkner entered into a Memorandum of Agreement (the “Faulkner MOA”) to purchase the pipelay barge, the Leighton Faulkner, from Leighton Contractors (Asia) Limited (“Leighton Contractors”) for $20,000,000. Simultaneously with the execution of the Faulkner MOA, ICON Faulkner entered into a bareboat charter with Leighton Contractors for a period of 96 months commencing on January 5, 2010. The purchase price for the Leighton Faulkner was funded by $1,000,000 in cash and $19,000,000 in non-recourse indebtedness, which included $12,000,000 of senior debt pursuant to a senior facility agreement with Standard Chartered and a $7,000,000 subordinated seller’s credit. The loan from Standard Chartered has a term of five years, with an option to extend for another three years. The interest rate has been fixed pursuant to a swap agreement. All of Leighton Contractors’ obligations are guaranteed by Leighton Holdings.
Manufacturing Equipment
On September 28, 2007, we completed the acquisition of and simultaneously leased back substantially all of the machining and metal working equipment of LC Manufacturing for a purchase price of $14,890,000. The lease term 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 Crow for a purchase price of $4,100,000. The lease term commenced on January 1, 2008 and continues for a period of 60 months.
Simultaneously with the closing of the transactions with LC Manufacturing and Crow, Fund Ten and Fund Eleven (together with us, the “Participating Funds”) completed similar acquisitions with seven other subsidiaries of MWU, pursuant to which the funds purchased substantially all of the machining and metal working equipment of each subsidiary. The MWU subsidiaries’ obligations under their leases (including the leases of LC Manufacturing and Crow) are cross-collateralized and cross-defaulted, and all of the subsidiaries’ obligations are guaranteed by MWU. The Participating Funds also entered into a credit support agreement, pursuant to which losses incurred by a Participating Fund with respect to any MWU subsidiary are shared among the Participating Funds in proportion to their respective capital investments. On September 5, 2008, the Participating Funds and IEMC Corp., a subsidiary of our Manager (“IEMC”) entered into an amended forbearance agreement with MWU, LC Manufacturing, Crow and seven other subsidiaries of MWU (collectively, the “MWU entities”) to cure certain non-payment related defaults by the MWU entities under their lease covenants with us. The terms of the agreement included, among other things, the pledge of additional collateral and the grant of a warrant for the purchase of 12% of the fully diluted common stock of MWU at an aggregate exercise price of $1,000, exercisable until March 31, 2015. The obligations of the MWU entities are guaranteed by their affiliate, American Metals Industries, Inc.
On February 27, 2009, the Participating Funds and IEMC entered into a further amended forbearance agreement with the MWU entities to cure certain lease defaults. In consideration for restructuring LC Manufacturing’s lease payment schedule, we received, among other things, a warrant, exercisable until March 31, 2015, to purchase 10% of the fully diluted membership interests of LC Manufacturing at the time of exercise at an aggregate exercise price of $1,000.
On June 1, 2009, we amended and restructured the master lease agreement with LC Manufacturing dated September 28, 2007 to reduce the assets under lease from $14,890,000 to approximately $12,420,000. Contemporaneously, we entered into a new lease with Metavation, LLC, an affiliate of LC Manufacturing (“Metavation”), for the assets previously under lease with LC Manufacturing with a cost of approximately $2,470,000. The equipment is subject to a 43-month lease with Metavation that expires on December 31, 2012. The obligations of Metavation under the lease are guaranteed by its parent company, Cerion, LLC. In consideration for restructuring LC Manufacturing’s lease payment schedule, we received a warrant, exercisable until March 31, 2015, to purchase 65% of the fully diluted membership interests of LC Manufacturing at the time of exercise at an aggregate exercise price of $1,000.
On January 13, 2010, we further amended the lease with LC Manufacturing to reduce LC Manufacturing’s payment obligations under the lease and to provide us with an excess cash flow sweep in the event that excess cash flow is available in the future. On May 31, 2010, MWU sold its equity interest in LC Manufacturing to an entity controlled by LC Manufacturing’s management and the personal guaranty of MWU’s principal was reduced to $6,500,000 with respect to LC Manufacturing.
On July 26, 2010, we sold the machining and metal working equipment subject to lease with Metavation to Metavation for approximately $2,423,000, which represented all amounts due under the lease, and simultaneously terminated the lease. As a result, we recognized a gain on sale of approximately $522,000.
On September 30, 2010, we further amended the lease with LC Manufacturing to reduce LC Manufacturing’s monthly rental payments to $25,000 through December 31, 2011. In consideration for reducing the monthly rent, LC Manufacturing agreed to an increase in the amount of the end of lease purchase option to approximately $4,000,000.
On September 30, 2010, the Participating Funds terminated the credit support agreement. Simultaneously with the termination, we and Fund Eleven formed ICON MW with ownership interests of 93.67% and 6.33%, 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 Crow and LC Manufacturing) 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, 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 net gain of approximately $1,057,000 during the three months ended September 30, 2010.
On March 3, 2008, we, through ICON French Equipment II, purchased auto parts manufacturing equipment and simultaneously leased back the equipment to Sealynx. The purchase price was approximately $11,626,000 (€7,638,400). The lease term commenced on March 3, 2008 and continues for a period of 60 months. As additional security for Sealynx’s obligations under the lease, we were granted a lien on property owned by Sealynx in France, valued at €3,746,400 at the acquisition date, and a guarantee from Sealynx’s parent company, Sealynx Automotive Holding.
Subsequently, due to the global downturn in the automotive industry, Sealynx requested a restructuring of its lease payments during the third quarter of 2009 and we agreed to reduce Sealynx’s lease payments. On January 4, 2010, we restructured the payment obligations of Sealynx under the lease to provide it with cash flow flexibility while at the same time attempting to preserve our projected economic return on this investment. As additional security for restructuring the payment obligations, we received an additional mortgage on certain real property owned by Sealynx located in Charleval, France.
On July 5, 2010, Sealynx filed for a conciliation procedure with the Commercial Court of Nanterre requesting that it be permitted to repay, over a two year period, approximately $1,900,000 of rental payments that had been due to us on July 1, 2010.
As a result of recent offers to purchase the equipment under lease by ICON French Equipment II made by third parties during 2011 and the uncertainty regarding our ability to collect all remaining amounts that are due under the lease, we recorded approximately $4,409,000 of bad debt expense during the year ended December 31, 2010 to write the asset down to net realizable value.
On June 30, 2008, we and Fund Eleven formed ICON Pliant, which entered into an agreement with Pliant to acquire manufacturing equipment for a purchase price of $12,115,000, of which we paid approximately $5,452,000. On July 16, 2008, we and Fund Eleven completed the acquisition of and simultaneously leased back manufacturing equipment to Pliant. We and Fund Eleven have ownership interests in ICON Pliant of 45% and 55%, respectively. The lease expires on September 30, 2013.
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.
Assets Held for Sale
On December 11, 2007, we and Fund Eleven formed ICON EAR, with ownership interests of 55% and 45%, respectively. On December 28, 2007, ICON EAR purchased and simultaneously leased back semiconductor manufacturing equipment to EAR for a purchase price of $6,935,000, of which our share was approximately $3,814,000. During June 2008, we and Fund Eleven made additional contributions to ICON EAR, which were used to complete another purchase and simultaneous leaseback of additional semiconductor manufacturing equipment to EAR for a total purchase price of approximately $8,795,000, of which our share was approximately $4,837,000. We and Fund Eleven retained ownership interests of 55% and 45%, respectively, subsequent to this transaction. The lease term commenced on July 1, 2008 and expires on June 30, 2013. As additional security for the purchase and lease, ICON EAR received mortgages on certain parcels of real property located in Jackson Hole, Wyoming.
In October 2009, certain facts came to light that led our Manager to believe that EAR was perpetrating a fraud against EAR’s lenders, including ICON EAR. On October 23, 2009, EAR filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Due to the bankruptcy filing and ongoing investigation regarding the alleged fraud, at this time it is not possible to determine our ability to collect the amounts due to us in accordance with the leases or the additional security we received. Accordingly, such assets have been classified as held for sale, net of estimated selling costs, on the accompanying consolidated balance sheets at December 31, 2010 and 2009.
Our Manager periodically reviews the significant assets in our portfolio to determine whether events or changes in circumstances indicate that the net book value of an asset may not be recoverable. In light of the developments surrounding the semiconductor manufacturing equipment on lease to EAR, our Manager determined that the net book value of such equipment may not be recoverable. The following factors, among others, indicated that the net book value of the equipment may not be recoverable: (i) EAR’s failure to pay rental payments for the period from August 2009 through the date it filed for bankruptcy; and (ii) EAR’s petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Based on our Manager’s review, the net book value of the semiconductor manufacturing equipment exceeded the undiscounted cash flows and exceeded the fair value and, as a result, we 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. No amount of this impairment charge represents a cash expenditure and our Manager does not expect that any amount of this impairment charge will result in any future cash expenditures. In addition, ICON EAR had a net accounts receivable balance outstanding of approximately $573,000, which was charged to bad debt expense during the year ended December 31, 2009 in accordance with our accounting policies and the above mentioned factors.
On June 2, 2010, ICON EAR, in conjunction with ICON EAR II, LLC, a wholly-owned subsidiary of Fund Eleven, 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, we recognized a loss on assets held for sale of approximately $298,000, which was recorded on the consolidated statements of operations. In addition, on June 7, 2010, ICON EAR received judgments in New York State Supreme Court against two principals of EAR who had guaranteed EAR’s lease obligations. ICON EAR 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 ICON EAR to collect the amounts due under its respective 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, our Manager reviewed our investment in ICON EAR. 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 recognized an additional non-cash impairment charge of approximately $1,283,000 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 $3,593,000 during the year ended December 31, 2010 relating to the write down in value of the semiconductor manufacturing equipment. No amount of this impairment charge represents a cash expenditure and our Manager does not expect that any amount of this impairment charge will result in any future cash expenditures.
In 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.
Mining Equipment
On May 5, 2008, our wholly-owned subsidiary ICON Magnum purchased the Dragline from Magnum Coal Company for a purchase price of approximately $12,461,000. The Dragline was simultaneously leased back to Magnum Coal Company and its subsidiaries. The lease term commenced on June 1, 2008 and continues for a period of 60 months.
On February 18, 2009, our wholly-owned subsidiary ICON Murray purchased mining equipment for approximately $3,348,000 that is subject to a lease with American Energy Corp. and Ohio American Energy, Incorporated (collectively, “American Energy”). The lease expires on March 31, 2011. The payment and performance obligations of American Energy Corp. are secured by a guarantee of its parent company, Murray Energy Corporation.
On September 10, 2010, American Energy notified our Manager of their intention to purchase the mining equipment on lease from ICON Murray. On March 4, 2011, our Manager negotiated an end of lease term purchase price on behalf of ICON Murray for the equipment on lease to American Energy in the amount of approximately $1,798,000.
On May 26, 2009, our wholly-owned subsidiary ICON Murray II purchased mining equipment subject to a lease between Varilease Finance, Inc. (“Varilease”), as lessor, and American Energy Corp. and The Ohio Valley Coal Company, as lessees. The equipment was purchased from Varilease for approximately $3,196,000 and is subject to a 30-month lease that expires on December 31, 2011.
Motor Coaches
On April 1, 2009, our wholly-owned subsidiary ICON Coach acquired title to certain motor coaches from CUSA for approximately $5,314,000. The motor coaches are subject to a 60-month lease with CUSA that expires on March 31, 2014. The payment and performance obligations of CUSA are guaranteed by Coach America.
On December 11, 2009, ICON Coach borrowed approximately $3,207,000 from Wells Fargo Equipment Finance, Inc. (“Wells Fargo”). The terms of the loan require ICON Coach to make 38 monthly payments of approximately $95,000 each from January 1, 2010 through February 1, 2013. Interest is computed at a rate of 7.5% per year throughout the term of the loan. In consideration for making the loan, Wells Fargo received a first priority security interest in (i) the fourteen 2009 MCI Model D4505 passenger motor coaches owned by ICON Coach, (ii) the master lease agreement between ICON Coach and CUSA, and (iii) the guaranty of Coach America. ICON Coach has the option to prepay the loan (a) beginning January 1, 2011 through December 31, 2011 in consideration for a fee of 3% of the amount being prepaid or (b) beginning January 1, 2012 through the end of the term in consideration for a fee of 2% of the amount being prepaid.
Gas Compressors
On June 26, 2009, we and Fund Fourteen entered into a joint venture, ICON Atlas, for the purpose of investing in eight new Gas Compressors from AG. On June 26, 2009, ICON Atlas purchased four of the Gas Compressors from AG for approximately $4,270,000. Simultaneously with the purchase, ICON Atlas entered into a lease with APMC, an affiliate of Atlas Pipeline Partners, L.P. (“APP”).
On August 17, 2009, ICON Atlas purchased the other four Gas Compressors from AG for approximately $7,028,000. Simultaneously with that purchase, ICON Atlas entered into a second schedule to the lease with APMC. Each schedule is for a period of 48 months and expires on August 31, 2013. The obligations of APMC are guaranteed by its parent company, APP. As of December 31, 2009, our and Fund Fourteen’s ownership interests in ICON Atlas were 55% and 45%, respectively.
On April 1, 2010, we sold to an unaffiliated third party, Hardwood Partners, LLC (“Hardwood Partners”) a 5.46% nonvoting, noncontrolling interest in ICON Atlas for the purchase price of $550,000. As a result, we recorded a gain on sale in the amount of approximately $1,000, which was included in members’ equity, and our economic interest in ICON Atlas was reduced to 49.54%, although our controlling interest remained at 55%.
Note Receivable Secured by Solar Panel Production Equipment
On August 13, 2007, we, along with a consortium of other lenders, entered into an equipment financing facility with Solyndra, Inc. (“Solyndra”), a privately-held manufacturer of solar panels, for the building of a new production facility. The financing facility was set to mature on June 30, 2013 and was secured by the equipment as well as all other assets of Solyndra. In connection with the transaction, we received a warrant for the purchase of up to 40,290 shares of Solyndra common stock at an exercise price of $4.96 per share. The warrant is set to expire on April 6, 2014. 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.
Note Receivable Secured by a Machine Paper Coating Manufacturing Line
On November 7, 2008, our wholly-owned subsidiary ICON Appleton, LLC (“ICON Appleton”) made a secured term loan to Appleton Papers, Inc. (“Appleton”) in the amount of $22,000,000. The loan is secured by a machine paper coating manufacturing line. Interest on the term note accrued at 12.5% per year and was payable monthly in arrears in accordance with the promissory note for a period of 60 months.
On March 26, 2009, the loan and security agreement and the secured term loan note issued by Appleton were amended due to a default on one of the covenants in Appleton’s credit facility. As a result of the cross-default provisions of the loan and security agreement, the interest on the term note was adjusted to accrue interest at 14.25% per year and is payable monthly in arrears. On February 26, 2010, we amended certain financial covenants in the loan agreement with Appleton.
On April 1, 2010, we sold to Hardwood Partners a 5.10% noncontrolling interest in ICON Appleton for the purchase price of $1,000,000. As of result, we recorded a gain on sale in the amount of approximately $6,000, which was included in members’ equity, and our controlling interest in ICON Appleton was reduced to 94.90%.
On July 20, 2010, we amended the loan agreement to release two borrowers, American Plastics Company, Inc. and New England Extrusion, Inc., that were being sold by Appleton to a third party.
On November 1, 2010, Appleton satisfied in full its remaining obligations under the loan agreement by prepaying the aggregate outstanding principal and interest in the amount of approximately $17,730,000. In connection with the prepayment, ICON Appleton collected an additional prepayment fee in the amount of $1,210,000.
Notes Receivable Secured by Point-of-Sale Equipment
On November 25, 2008, ICON Northern Leasing, a joint venture among us, Fund Ten and Fund Eleven, purchased the Notes and received an assignment of the underlying master loan and security agreement (the “MLSA”), dated July 28, 2006. We, Fund Ten and Fund Eleven have ownership interests of 52.75%, 12.25% and 35%, respectively, in ICON Northern Leasing. The aggregate purchase price for the Notes was approximately $31,573,000, net of a discount of approximately $5,165,000. The Notes are secured by an underlying pool of leases for point-of-sale equipment. Northern Leasing Systems, Inc. (“Northern Leasing Systems”), the originator and servicer of the Notes, provided a limited guarantee of the MLSA for payment deficiencies up to approximately $6,355,000. The Notes accrue interest at rates ranging from 7.97% to 8.40% per year and require monthly payments ranging from approximately $183,000 to $422,000. The Notes 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. Our share of the purchase price of the Notes was approximately $16,655,000.
On December 23, 2010, ICON Northern Leasing restructured the Notes owned by it by extending each Note’s term and increasing each Note’s interest rate 1.50%. Interest on the Notes now accrues at rates ranging from 9.47% to 9.895% per year and the Notes are scheduled to mature at various dates between December 15, 2011 and February 15, 2013.
On March 31, 2009, our wholly-owned subsidiary ICON Northern Leasing II provided a senior secured loan in the amount of approximately $7,870,000 (the “Northern Leasing II Loan”) to NCA XV and NCA XIV, pursuant to the MLSA dated March 31, 2009. The Northern Leasing II Loan accrues interest at a rate of 18% per year and is secured by a first priority security interest in an underlying pool of leases for point-of-sale equipment of NCA XV and a second priority security interest in an underlying pool of leases for point-of-sale equipment of NCA XIV (subject only to the first priority security interest of ICON Northern Leasing). Northern Leasing Systems, the originator and servicer of the Northern Leasing II Loan, provided a limited guarantee for payment deficiencies of up to 10% of the Northern Leasing II Loan, or approximately $787,000.
On December 23, 2010, ICON Northern Leasing II restructured the payment obligations under its loan with NCA XV and NCA XIV and extended the term of the loan through November 15, 2013.
Notes Receivable Secured by Analog Seismic System Equipment
On June 29, 2009, we and Fund Fourteen entered into a joint venture, ICON ION, for the purpose of making the ION Loans in the aggregate amount of $20,000,000 to the ARAM Borrowers. On that date, ICON ION funded the first tranche of the ION Loans in the amounts of $8,825,000 and $3,675,000 to ARC and ASR, respectively. On July 20, 2009, ICON ION funded the second tranche of the ION Loans to ARC in the amount of $7,500,000.
The ARAM Borrowers are wholly-owned subsidiaries of ION Geophysical Corporation, a Delaware corporation (“ION”). The ION Loans are secured by (i) a first priority security interest in all of the ARAM analog seismic system equipment owned by the ARAM Borrowers and (ii) a pledge of all of the equity interests in the ARAM Borrowers. In addition, ION guaranteed all obligations of the ARAM Borrowers under the ION Loans. Interest accrues at the rate of 15% per year and the ION Loans are payable monthly in arrears for a period of 60 months beginning on August 1, 2009. As of December 31, 2009, our and Fund Fourteen’s ownership interests in ICON ION were 55% and 45%, respectively.
On April 1, 2010, we sold to Hardwood Partners a 2.913% noncontrolling interest in ICON ION for the purchase price of $550,000. As a result, we recorded a gain on sale in the amount of approximately $4,000, which was included in members’ equity, and our controlling interest in ICON ION was reduced to 52.09%.
Note Receivable Secured by Rail Support Construction Equipment
On December 23, 2009, ICON Quattro, a joint venture owned 55% by us and 45% by Fund Fourteen, participated in a £24,800,000 facility by making a second priority secured term loan to Quattro Plant in the amount of £5,800,000. Quattro Plant is a wholly-owned subsidiary of Quattro Group Limited (“Quattro Group”). The loan is secured by (i) all of Quattro Plant’s Construction Equipment and any other existing or future asset owned by Quattro Plant, (ii) all of Quattro Plant’s accounts receivable, and (iii) a mortgage over certain real estate in London, England owned by the majority shareholder of Quattro Plant. In addition, ICON Quattro received a key man insurance policy insuring the life of the majority shareholder of Quattro Plant in the amount of £5,500,000. All of Quattro Plant’s obligations under the loan are guaranteed by Quattro Group and its subsidiaries, Quattro Hire Limited and Quattro Occupational Academy Limited (collectively, the “Quattro Companies”).
Interest on the secured term loan accrues at a rate of 20% per year and the loan will be amortized to a balloon payment of 15% at the end of the term. The loan is payable monthly in arrears for a period of 33 months, which began on January 1, 2010. Quattro Plant has the option to prepay the entire outstanding amount of the loan beginning January 1, 2012 in consideration for a fee of 5% of the amount being prepaid.
Simultaneously with ICON Quattro’s loan, KBC Bank N.V. (“KBC”) participated in the £24,800,000 loan financing by making a loan of £19,000,000 to Quattro Plant (the “KBC Loan”). The KBC Loan is secured by (i) a first priority security interest in all of Quattro Plant’s construction equipment and any other existing or future asset owned by Quattro Plant and (ii) a first priority security interest in all of Quattro Plant’s accounts receivable.
Simultaneously with the consummation of ICON Quattro’s loan and the KBC Loan, ICON Quattro, KBC, Quattro Plant, Quattro Group, Quattro Hire Limited and Quattro Occupational Academy Limited entered into an intercreditor deed governing the relationship between ICON Quattro and KBC. In the event either ICON Quattro or KBC seeks to enforce its security interest under its respective loan, the proceeds from the enforcement of any security interest will be applied (i) first, to pay all costs and expenses incurred by or on behalf of ICON Quattro or KBC, (ii) second, to KBC in an amount that would allow KBC to receive its return on its investment, and (iii) third, to ICON Quattro in an amount that would allow ICON Quattro to receive its return on its investment.
On April 1, 2010, we sold to Hardwood Partners a 5.873% nonvoting, noncontrolling interest in ICON Quattro for the purchase price of $550,000. As a result, we recorded a loss on sale in the amount of approximately $37,000, which was included in members’ equity, and our economic interest in ICON Quattro was reduced to 49.127%, although our controlling interest remained at 55%.
On September 20, 2010, ICON Quattro was notified that Quattro Plant was in default under its senior loan agreement with KBC. As a result of the default, Quattro Plant’s principal payment obligations to ICON Quattro were suspended. During the suspension period, ICON Quattro received interest only payments from Quattro Plant. Subsequent to September 30, 2010, Quattro Plant cured the default under its senior loan agreement and was permitted to resume payments of principal to ICON Quattro beginning November 1, 2010. As of December 31, 2010, Quattro Plant had made all required payments due under the loan agreement.
On February 25, 2011, ICON Quattro was notified that Quattro Plant was in default under its senior loan agreement with PNC Financial Services UK Ltd. (“PNC,” f/k/a KBC). As a result of the default, Quattro Plant’s principal payment obligations to ICON Quattro were suspended for a period of 28 days. On March 7, 2011, ICON Quattro notified Quattro Plant that it was in default under its loan agreement relating to, among other things, its default under the senior loan agreement with PNC. Our Manager expects ICON Quattro to receive all past due principal amounts due under the loan agreement plus default interest.
Note Receivable Secured by Aframax Tankers
On June 30, 2010, our wholly-owned subsidiary ICON Palmali 12 participated in a $96,000,000 loan facility by making a second priority secured term loan to Ocean Navigation pursuant to the Palmali Loan Agreement. The proceeds of the loan were used by Ocean Navigation to purchase two Aframax tanker vessels, the Shah Deniz and the Absheron (each a “Vessel”). On July 28, 2010 and September 14, 2010, ICON Palmali 12 funded the loan in the aggregate amount of $9,600,000 to Ocean Navigation. Interest on the secured term loan accrues at a rate of 15.25% per year and is payable quarterly in arrears for a period of 72 months from the delivery date of each Vessel.
Note Receivable Secured by Metal Cladding and Production Equipment
On September 1, 2010, we made a secured term loan to EMS in the amount of $3,200,000. Interest on the loan accrues at a rate of 13% per year and is payable monthly in arrears for a period of 48 months.
Note Receivable Secured by Lifting and Transportation Equipment
On September 24, 2010, we participated in an approximately $150,000,000 loan facility by making a secured term loan to Northern Crane in the amount of $9,750,000. Interest on the loan accrues at a rate of 15.75% per year and is payable quarterly in arrears for a period of 54 months beginning on October 1, 2010. With the final payment, we will receive a one time balloon payment in the aggregate amount of 32.50% of the outstanding loan amount.
Acquisition Fees
In connection with the transactions that we entered into during the year ended December 31, 2010, we paid acquisition fees to our Manager in the aggregate amount of approximately $3,849,000.
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; and
|
|
·
|
Derivative financial instruments.
|
Lease Classification and Revenue Recognition
Each equipment lease we enter into is classified as either a finance lease or an operating lease, which is determined based upon the terms of each lease. For a finance lease, initial direct costs are capitalized and amortized over the lease term. For an operating lease, the initial direct costs are included as a component of the cost of the equipment and depreciated over the lease term.
For finance leases, we record, at lease inception, the total minimum lease payments receivable from the lessee, the estimated unguaranteed residual value of the equipment at lease termination, the initial direct costs related to the lease and the related unearned income. Unearned income represents the difference between the sum of the minimum lease payments receivable, plus the estimated unguaranteed residual value, minus the cost of the leased equipment. Unearned income is recognized as finance income over the term of the lease using the effective interest rate method.
For operating leases, rental income is recognized on a straight-line basis over the lease term. Billed operating lease receivables are included in accounts receivable until collected. Accounts receivable are stated at their estimated net realizable value. Deferred revenue is the difference between the timing of the receivables billed and the income recognized on a straight-line basis.
For notes receivable, we use the effective interest rate method to recognize interest income, which produces a constant periodic rate of return on the investment, when earned.
The recognition of revenue may be suspended when deemed appropriate by our Manager in accordance with our policy on doubtful accounts.
Our Manager has an investment committee that approves each new equipment lease and other financing transaction. As part of its process, the investment committee determines the residual value, if any, to be used once the investment has been approved. The factors considered in determining the residual value include, but are not limited to, the creditworthiness of the potential lessee, the type of equipment considered, how the equipment is integrated into the potential lessee’s business, the length of the lease and the industry in which the potential lessee operates. Residual values are reviewed for impairment in accordance with our impairment review policy.
The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the marketplace are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. The residual value is calculated using information from various external sources, such as trade publications, auction data, equipment dealers, wholesalers and industry experts, as well as inspection of the physical asset and other economic indicators.
Asset Impairments
The significant assets in our portfolio are periodically reviewed, no less frequently than annually or when indicators of impairment exist, to determine whether events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss will be recognized only if the carrying value of a long-lived asset is not recoverable and exceeds its fair market value. If there is an indication of impairment, we will estimate the future cash flows (undiscounted and without interest charges) expected from the use of the asset and its eventual disposition. Future cash flows are the future cash inflows expected to be generated by an asset less the future outflows expected to be necessary to obtain those inflows. If an impairment is determined to exist, the impairment loss will be measured as the amount by which the carrying value of a long-lived asset exceeds its fair value and recorded in the consolidated statement of operations in the period the determination is made.
The events or changes in circumstances that generally indicate that an asset may be impaired are (i) the estimated fair value of the underlying equipment is less than its carrying value or (ii) the lessee is experiencing financial difficulties and it does not appear likely that the estimated proceeds from the disposition of the asset will be sufficient to satisfy the residual position in the asset and, if applicable, the remaining obligation to the non-recourse lender. Generally in the latter situation, the residual position relates to equipment subject to third-party non-recourse debt where the lessee remits its rental payments directly to the lender and we do not recover our residual position until the non-recourse debt is repaid in full. The preparation of the undiscounted cash flows requires the use of assumptions and estimates, including the level of future rents, the residual value expected to be realized upon disposition of the asset, estimated downtime between re-leasing events and the amount of re-leasing costs. Our Manager’s review for impairment includes a consideration of the existence of impairment indicators including third-party appraisals, published values for similar assets, recent transactions for similar assets, adverse changes in market conditions for specific asset types and the occurrence of significant adverse changes in general industry and market conditions that could affect the fair value of the asset.
Depreciation
We record depreciation expense on equipment when the lease is classified as an operating lease. In order to calculate depreciation, we first determine the depreciable equipment cost, which is the cost less the estimated residual value. The estimated residual value is our estimate of the value of the equipment at lease termination. Depreciation expense is recorded by applying the straight-line method of depreciation to the depreciable equipment cost over the lease term.
Notes Receivable
Notes receivable are reported in our consolidated balance sheets at the outstanding principal balance net of any unamortized deferred fees, premiums or discounts on purchased loans. Costs on originated loans are reported as other current and other non-current assets in our consolidated balance sheets. Unearned income, discounts and premiums are amortized to income as a component of interest income using the effective interest 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.
Results of Operations for the Years Ended December 31, 2010 (“2010”) and 2009 (“2009”)
Our offering period ended on April 30, 2009 and our operating period commenced on May 1, 2009. We invested most of the net proceeds from our offering in equipment leases and other financing transactions. During our operating period, we have made and will continue to make investments with the cash generated from our initial investments and our additional investments to the extent that the cash is not used for expenses, reserves and distributions to members. As our investments mature, we may reinvest the proceeds in additional investments in equipment or other financing transactions. We anticipate incurring gains or losses on our investments during our operating period. Additionally, we expect to see our rental income and finance income increase, as well as related expenses, such as depreciation and amortization expense and interest expense. We anticipate that the fees we pay our Manager to operate and manage our investment portfolio will increase during this period as the value of, and volume of activity in, our investment portfolio increases.
Revenue for 2010 and 2009 is summarized as follows:
|
Years Ended December 31,
|
||||||||||||
|
2010
|
2009
|
Change
|
||||||||||
|
Rental income
|
$ | 61,086,036 | $ | 59,604,472 | $ | 1,481,564 | ||||||
|
Finance income
|
14,967,490 | 7,246,926 | 7,720,564 | |||||||||
|
Income from investment in joint venture
|
626,726 | 573,040 | 53,686 | |||||||||
|
Interest and other income
|
12,026,217 | 11,066,780 | 959,437 | |||||||||
|
Gain on settlement of interfund agreement
|
1,056,555 | - | 1,056,555 | |||||||||
|
Gain on prepayment of note receivable
|
1,082,257 | - | 1,082,257 | |||||||||
|
Gain on sale of leased assets
|
521,909 | - | 521,909 | |||||||||
|
Loss on assets held for sale
|
(297,864 | ) | - | (297,864 | ) | |||||||
|
Total revenue
|
$ | 91,069,326 | $ | 78,491,218 | $ | 12,578,108 | ||||||
Total revenue for 2010 increased $12,578,108, or 16.0%, as compared to 2009. The increase in total revenue was primarily due to an increase in finance income of approximately $7,721,000, which was primarily due to the acquisitions of (i) certain information technology equipment by ICON Broadview in December 2010 and June 2010 and (ii) the vessel by ICON Faulkner in January 2010. In addition, we recorded a full year of finance income during 2010 relating to the acquisition of (i) the vessels by ICON Ionian and ICON Eclipse in October 2009, (ii) the vessel by ICON Stealth in June 2009 and (iii) the additional telecommunications equipment by ICON Global Crossing IV in March 2009. The increase in rental income of approximately $1,482,000 was primarily due to our recording a full year of rental income on the acquisitions of (i) the Gas Compressors by ICON Atlas in June 2009 and August 2009, (ii) the diving equipment by ICON Diving Marshall Islands in June 2009, (iii) the mining equipment by ICON Murray in February 2009 and ICON Murray II in May 2009, (iv) the motor coaches by ICON Coach in April 2009 and (v) the Barge by Victorious in March 2009. The gain on prepayment of the note receivable was due to the Appleton prepayment fee in the amount of approximately $1,210,000 that was made in conjunction with Appleton satisfying in full its remaining obligations under the loan agreement during November 2010. The gain on the settlement of the interfund agreement relating to financing provided to the MWU subsidiaries was recorded during 2010.
Expenses for 2010 and 2009 are summarized as follows:
|
Years Ended December 31,
|
||||||||||||
|
2010
|
2009
|
Change
|
||||||||||
|
|
||||||||||||
|
Management fees - Manager
|
$ | 4,302,374 | $ | 3,390,239 | $ | 912,135 | ||||||
|
Administrative expense reimbursements - Manager
|
3,184,449 | 3,594,400 | (409,951 | ) | ||||||||
|
General and administrative
|
2,429,136 | 2,276,211 | 152,925 | |||||||||
|
Interest
|
16,888,836 | 11,616,105 | 5,272,731 | |||||||||
|
Depreciation and amortization
|
36,264,305 | 34,507,641 | 1,756,664 | |||||||||
|
Bad debt expense
|
4,409,062 | 572,721 | 3,836,341 | |||||||||
|
Impairment loss
|
5,648,959 | 3,429,316 | 2,219,643 | |||||||||
|
Loss on financial instruments
|
247,772 | 25,642 | 222,130 | |||||||||
|
Total expenses
|
$ | 73,374,893 | $ | 59,412,275 | $ | 13,962,618 | ||||||
Total expenses for 2010 increased $13,962,618, or 23.5%, as compared to 2009. The increase in total expenses was primarily due to an increase in interest expense of approximately $5,273,000. The increase in interest expense was primarily due to the interest incurred on the debt obligations owed by ICON Mynx, ICON Global Crossing IV, and ICON Faulkner in 2010. In addition, we had a full year of interest incurred on the debt obligations owed by ICON Coach, ICON Ionian, ICON Eclipse, and ICON Stealth during 2010. The increase in total expenses was also due to the year over year increase in bad debt in the amount of approximately $3,836,000 relating to receivables of certain leases that were estimated not to be collectible. The increase in total expenses was also due to the year over year increase of approximately $2,220,000 in the non-cash impairment charge recorded by ICON EAR during 2010 as compared to 2009. The increase in depreciation and amortization expense of approximately $1,757,000 was primarily due to our recording a full year of depreciation and amortization on our acquisitions of (i) the Gas Compressors by ICON Atlas in June 2009 and August 2009, (ii) the diving equipment by ICON Diving Marshall Islands in June 2009, (iii) mining equipment by ICON Murray in February 2009 and ICON Murray II in May 2009, (iv) motor coaches by ICON Coach in April 2009, and (v) the Barge by Victorious in March 2009. Furthermore, the increase in depreciation and amortization expense was also due to the amortization expense for capitalized fees on direct finance leases for the acquisitions of (i) the technology equipment by ICON Broadview in December 2010 and June 2010, (ii) the vessel by ICON Faulkner in January 2010, (iii) the vessels by ICON Ionian and ICON Eclipse in October 2009, (iv) the vessel by ICON Stealth in June 2009 and (v) the telecommunications equipment by ICON Global Crossing IV in March 2009, as well as the amortization expense for capitalized fees on the notes receivable with the Northern Crane Loan and the EMS Loan in September 2010 and the notes receivable acquired by (i) ICON Quattro in December 2009, (ii) ICON ION in June 2009 and July 2009 and (iii) ICON Northern Leasing II in March 2009.
Noncontrolling Interests
Net income attributable to noncontrolling interests for 2010 increased $598,941, or 11.5%, as compared to 2009. The increase in net income attributable to noncontrolling interests was primarily due to (i) our investment in a controlling interest in ICON MW, an investment in which Fund Eleven has a noncontrolling interest, during 2010, (ii) Hardwood Partners’ investment in a noncontrolling interest in each of ICON Quattro, ICON Atlas, ICON ION and ICON Appleton during 2010 and (iii) our investments in controlling interests in ICON Quattro, ICON Atlas and ICON ION during 2009, which are investments in which Fund Fourteen has a noncontrolling interest. The increase was partially offset by the year over year increase in the non-cash impairment charges recorded by ICON EAR during 2010 and 2009, which is an investment in which Fund Eleven has a noncontrolling interest.
Net Income Attributable to Fund Twelve
As a result of the foregoing factors, net income attributable to us for 2010 and 2009 was $11,875,465 and $13,858,916, respectively. Net income attributable to us per weighted average additional Share for 2010 and 2009 was $33.72 and $41.08, 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
|
$ | 59,604,472 | $ | 22,940,645 | $ | 36,663,827 | ||||||
|
Finance income
|
7,246,926 | 3,695,178 | 3,551,748 | |||||||||
|
Income from investment in joint venture
|
573,040 | 325,235 | 247,805 | |||||||||
|
Interest and other income
|
11,066,780 | 2,385,444 | 8,681,336 | |||||||||
|
Total revenue
|
$ | 78,491,218 | $ | 29,346,502 | $ | 49,144,716 | ||||||
Total revenue for 2009 increased $49,144,716 as compared to 2008. The increase in total revenue was primarily due to increases in rental income of approximately $36,664,000 due to the acquisitions of (i) the Gas Compressors by ICON Atlas in June 2009 and August 2009, (ii) the Diving Equipment by ICON Diving Marshall Islands in June 2009, (iii) mining equipment by ICON Murray in February 2009 and ICON Murray II in May 2009, (iv) motor coaches by ICON Coach in April 2009, and (v) the Barge by Victorious in March 2009. In addition, we recorded a full year of rental income during 2009 related to the acquisitions of (i) marine vessels by ICON Carina Holdings and ICON Corona Holdings in December 2008, (ii) marine vessels by ICON Eagle Holdings in November 2008, (iii) additional manufacturing equipment by ICON EAR in June 2008, (iv) the Dragline by ICON Magnum in May 2008, (v) marine vessels by ICON Aegean and ICON Arabian in April 2008 and (vi) the additional telecommunications equipment by ICON Global Crossing IV in March 2008. The increase in interest and other income was primarily due to the interest received from the notes receivable invested in by ICON ION in June 2009 and July 2009 and ICON Northern Leasing II in March 2009 and the interest earned in our money market accounts. In addition, we recorded a full year of interest income for the notes receivable invested in by ICON Appleton and ICON Northern Leasing in November 2008. The increase in interest and other income was primarily offset by a decrease in interest income from Solyndra, as this note was paid in full in July 2008. The increase in finance income was primarily due to the acquisitions of (i) the vessel by ICON Eclipse and the Ocean Princess by ICON Ionian in October 2009, (ii) the other two vessels by ICON Mynx and ICON Stealth in June 2009, and (iii) the additional telecommunications equipment by ICON Global Crossing IV in March 2009. In addition, we recorded a full year of finance income during 2009 related to the acquisition of auto parts manufacturing equipment by ICON French Equipment II in March 2008.
Expenses for 2009 and 2008 are summarized as follows:
|
Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
Change
|
||||||||||
|
|
||||||||||||
|
Management fees - Manager
|
$ | 3,390,239 | $ | 1,474,993 | $ | 1,915,246 | ||||||
|
Administrative expense reimbursements - Manager
|
3,594,400 | 2,705,118 | 889,282 | |||||||||
|
General and administrative
|
2,276,211 | 1,350,134 | 926,077 | |||||||||
|
Interest
|
11,616,105 | 3,086,275 | 8,529,830 | |||||||||
|
Depreciation and amortization
|
34,507,641 | 12,875,095 | 21,632,546 | |||||||||
|
Bad debt expense
|
572,721 | - | 572,721 | |||||||||
|
Impairment loss
|
3,429,316 | - | 3,429,316 | |||||||||
|
Loss on financial instruments
|
25,642 | 55,495 | (29,853 | ) | ||||||||
|
Total expenses
|
$ | 59,412,275 | $ | 21,547,110 | $ | 37,865,165 | ||||||
Total expenses for 2009 increased $37,865,165 as compared to 2008. The increase in total expenses was primarily due to increases in depreciation and amortization expense of approximately $21,633,000 due to the acquisitions of (i) the Gas Compressors by ICON Atlas in June 2009 and August 2009, (ii) the Diving Equipment by ICON Diving Marshall Islands in June 2009, (iii) mining equipment by ICON Murray in February 2009 and ICON Murray II in May 2009, (iv) motor coaches by ICON Coach in April 2009, and (v) the Barge by Victorious in March 2009. The increase in depreciation and amortization expense was also due to the amortization expense for capitalized fees on direct finance leases for (i) the vessel acquired by ICON Eclipse and the Ocean Princess acquired by ICON Ionian in October 2009, (ii) the other two vessels acquired by ICON Mynx and ICON Stealth in June 2009, and (iii) the additional telecommunications equipment acquired by ICON Global Crossing IV in March 2009, as well as the amortization expense for capitalized fees on the notes receivable invested in by ICON ION in June 2009 and July 2009 and ICON Northern Leasing II in March 2009. In addition, we recorded a full year of depreciation and amortization expense during 2009 related to the acquisitions of (i) marine vessels by ICON Carina Holdings and ICON Corona Holdings in December 2008, (ii) marine vessels by ICON Eagle Holdings in November 2008, (iii) the notes receivable invested in by ICON Appleton and ICON Northern Leasing in November 2008, (iv) the Dragline by ICON Magnum in May 2008, (v) marine vessels by ICON Aegean and ICON Arabian in April 2008 and (vi) auto parts manufacturing equipment by ICON French Equipment II in March 2008. The increase in interest expense was primarily due to the interest incurred on the non-recourse debt owed by ICON Eclipse, ICON Ionian, ICON Mynx, ICON Stealth, ICON Eagle Holdings, ICON Corona Holdings, ICON Carina Holdings, ICON Mayon, ICON Aegean and ICON Arabian. The increase in impairment loss was due to the impairment charge recognized on the semiconductor manufacturing equipment owned by ICON EAR in 2009. The increase in Management fees – Manager and Administrative expense reimbursements – Manager resulted from our increased investment in equipment subject to lease and other financing transactions during 2009. The increase in general and administrative expense was primarily due to the accounts receivable balance for ICON EAR that was charged to bad debt expense and the increase in professional fees during 2009.
Noncontrolling Interests
Net income attributable to noncontrolling interests for 2009 increased $3,363,215 as compared to 2008. The increase in income attributable to noncontrolling interests was primarily due to our investment in controlling interests in (i) ICON Quattro, ICON Atlas and ICON ION during 2009, in each of which Fund Fourteen has a noncontrolling interest, (ii) Victorious in March 2009, in which Swiber has a noncontrolling interest and (iii) ICON Carina Holdings, ICON Corona Holdings and ICON Northern Leasing in 2008, in each of which Fund Ten has a noncontrolling interest. In addition, Fund Eleven acquired a noncontrolling interest in ICON Northern Leasing in 2008, which contributed to the increase in income attributable to noncontrolling interests. The increase in income attributable to noncontrolling interests was offset by the impairment loss recorded by ICON EAR, in which Fund Eleven has a noncontrolling interest.
Net Income Attributable to Fund Twelve
As a result of the foregoing factors, net income attributable to us for 2009 and 2008 was $13,858,916 and $5,942,580, respectively. Net income attributable to us per weighted average additional Share for 2009 and 2008 was $41.08 and $32.36, respectively.
Financial Condition
This section discusses the major balance sheet variances from 2010 compared to 2009.
Total Assets
Total assets decreased $26,728,806, from $620,978,386 at December 31, 2009 to $594,249,580 at December 31, 2010. The decrease was primarily due to (i) the depreciation of leased equipment at cost, (ii) the sale and impairment of certain assets held for sale relating to EAR and (iii) cash distributions to our members and noncontrolling interests. The decrease was partially offset by (i) the Leighton Mynx upgrades, (ii) the acquisition of the vessel made by ICON Faulkner and (iii) cash received from the remaining obligations satisfied under the loan agreement with Appleton and from the debt borrowed by ICON Global Crossing IV in June 2010.
Current Assets
Current assets decreased $3,417,039, from $78,149,655 at December 31, 2009 to $74,732,616 at December 31, 2010. The decrease was due to (i) the sale and impairment of assets held for sale relating to ICON EAR in 2010, (ii) the decline in the current assets portion of the notes receivable balance due to scheduled repayments and (iii) cash distributions to our members and noncontrolling interests. The decrease was offset by (i) cash received from the remaining obligations satisfied under the loan agreement with Appleton, (ii) an increase in the current portion of the net investment in finance lease as a result of certain upgrades made to the vessel by ICON Mynx during 2010, (iii) the sale of certain leased equipment, (iv) cash received from the debt borrowed by ICON Global Crossing IV in June 2010 and (v) an increase in the current portion of the net investment in finance lease as a result of the acquisition of the vessel by ICON Faulkner in January 2010.
Total Liabilities
Total liabilities increased $4,190,822, from $279,343,161 at December 31, 2009 to $283,533,983 at December 31, 2010. The increase was primarily due to debt obligations incurred by ICON Mynx, ICON Global Crossing IV and ICON Faulkner and an increase in derivative instrument obligations during 2010. The increase was partially offset by scheduled repayments of our non-recourse long-term debt in 2010.
Current Liabilities
Current liabilities increased $15,735,341, from $58,299,215 at December 31, 2009 to $74,034,556 at December 31, 2010. The increase was primarily due to the current portion of non–recourse long-term debt obligations incurred by ICON Mynx, ICON Global Crossing IV and ICON Faulkner during 2010, and the increase in our derivative instrument obligations during 2010.
Equity
Equity decreased $30,919,628, from $341,635,225 at December 31, 2009 to $310,715,597 at December 31, 2010. The decrease was primarily due to the distributions paid to our members and noncontrolling interests and the change in fair value of derivative instruments and currency translation adjustments during 2010. The decrease was partially offset by net income and the investment in joint ventures by noncontrolling interests during 2010.
Liquidity and Capital Resources
Summary
At December 31, 2010 and 2009, we had cash and cash equivalents of $29,219,287 and $27,075,059, respectively. During our offering period, our main source of cash was from financing activities and our main use of cash was in investing activities. During our operating period, our main source of cash is typically from operating activities and our main use of cash is in investing and financing activities. Our liquidity will vary in the future, increasing to the extent cash flows from investments and proceeds from sale of our investments exceed expenses and decreasing as we enter into new investments, meet our debt obligations, pay distributions to our members and to the extent expenses exceed cash flows from operations and proceeds from sale of our investments.
We currently have adequate cash balances and generate a sufficient amount of cash flow from operating and financing activities to meet our short-term working capital requirements. We expect to generate sufficient cash flows from operating and financing activities 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 to meet such requirements. Our revolving line of credit is discussed in further detail in “Revolving Line of Credit, Recourse” below.
We anticipate that our liquidity requirements for the remaining life of the fund will be financed by the expected results of operating and financing activities, as well as cash received from our investments at maturity.
We anticipate being able to meet our liquidity requirements into the foreseeable future. However, our ability to generate cash in the future is subject to general economic, financial, competitive, regulatory and other factors that affect us and our lessees’ and borrowers’ businesses that are beyond our control. See “Item 1A. Risk Factors.”
Cash Flows
The following table sets forth summary cash flow data:
|
Years Ended December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Net cash provided by (used in):
|
||||||||||||
|
Operating activities
|
$ | 44,770,484 | $ | 28,769,289 | $ | 13,684,207 | ||||||
|
Investing activities
|
9,124,414 | (88,951,923 | ) | (159,142,765 | ) | |||||||
|
Financing activities
|
(51,738,522 | ) | 41,819,222 | 168,713,518 | ||||||||
|
Effects of exchange rates on cash and cash equivalents
|
(12,148 | ) | 30,093 | (1,485 | ) | |||||||
|
Net increase (decrease) in cash and cash equivalents
|
$ | 2,144,228 | $ | (18,333,319 | ) | $ | 23,253,475 | |||||
Note: See the Consolidated Statements of Cash Flows included in “Item 8. Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for additional information.
Operating Activities
Cash provided by operating activities increased $16,001,195, from $28,769,289 in 2009 to $44,770,484 in 2010. The increase was primarily due to increases in the collection of finance leases, bad debt expense, impairment loss, depreciation and amortization and a decrease in the year over year increase in other assets in 2010. Such amounts were partially offset by an increase in finance income, a decrease net income during 2010 and a year over year increase in deferred revenue.
Investing Activities
Cash provided by investing activities increased $98,076,337, from a use of cash of $88,951,923 in 2009 to a source of cash of $9,124,414 in 2010. We invested in three equipment leases and three other financing transactions during 2010 as compared to eleven equipment leases and three other financing transactions during 2009. The decrease in the cash used in investing activities was also due to the increase in the repayments of a portion of our notes receivable and proceeds from the sale of equipment during 2010.
Financing Activities
Cash used in financing activities increased $93,557,744, from a source of cash of $41,819,222 in 2009 to a use of cash of $51,738,522 in 2010. The net use of cash was primarily due to a decrease in the proceeds we received from the issuance of additional Shares as compared to 2009, as our offering period ended on April 30, 2009. The net use of cash in financing activities was also due to the decrease in the investment in joint ventures by noncontrolling interests, the net increase in our repayments of our non-recourse long-term debt and the increase in distributions paid to our members and noncontrolling interests.
Non-Recourse Long-Term Debt
We had non-recourse long-term debt obligations at December 31, 2010 of $212,511,305. Most of our non-recourse long-term debt obligations consist of notes payable in which the lender has a security interest in the equipment and an assignment of the rental payments under the lease, in which case the lender is being paid directly by the lessee. In other cases, we receive the rental payments and pay the lender. If the lessee were to default on the non-recourse long-term debt, the equipment would be returned to the lender in extinguishment of the non-recourse long-term debt.
Revolving Line of Credit, Recourse
We and certain entities managed by our Manager, Fund Eight B, Fund Nine, Fund Ten, Fund Eleven and Fund Fourteen (collectively, the “ICON Borrowers”), are parties to a Commercial Loan Agreement, as amended (the “Loan Agreement”), with CB&T. The Loan Agreement provides for a revolving line of credit of up to $30,000,000 pursuant to a senior secured revolving loan facility (the “Facility”), which is secured by all assets of the ICON Borrowers not subject to a first priority lien, as defined in the Loan Agreement. Each of the ICON Borrowers is jointly and severally liable for all amounts borrowed under the Facility. At December 31, 2010, no amounts were accrued related to our joint and several obligations under the Facility. Amounts available under the Facility are subject to a borrowing base that is determined, subject to certain limitations, on the present value of the future receivables under certain lease agreements and loans in which the ICON Borrowers have a beneficial interest.
The Facility expires on June 30, 2011 and the ICON Borrowers may request a one year extension to the revolving line of credit within 390 days of the then-current expiration date, but CB&T has no obligation to extend. The interest rate for general advances under the Facility is CB&T’s prime rate and the interest rate on up to five separate non-prime rate advances that are permitted to be made under the Facility is the rate at which U.S. dollar deposits can be acquired by CB&T in the London Interbank Eurocurrency Market plus 2.5% per year, provided that neither interest rate is permitted to be less than 4.0% per year. The interest rate at December 31, 2010 was 4.0%. In addition, the ICON Borrowers are obligated to pay a quarterly commitment fee of 0.50% on unused commitments under the Facility.
Aggregate borrowings by all Borrowers under the Facility amounted to $1,450,000 at December 31, 2010, all of which was borrowed by Fund Eleven. We had no borrowings outstanding under the Facility as of such date. Subsequent to December 31, 2010, Fund Eleven repaid $1,450,000, which reduced its outstanding loan balance to $0.
Pursuant to the Loan Agreement, the ICON Borrowers are required to comply with certain covenants. At December 31, 2010, the ICON Borrowers were in compliance with all covenants. For additional information, see Note 9 to our consolidated financial statements.
Distributions
We, at our Manager’s discretion, pay monthly distributions to our members and noncontrolling interests starting with the first month after each 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 $33,648,098, $31,554,863 and $16,072,151, respectively, for the years ended December 31, 2010, 2009 and 2008. We paid distributions to our Manager of $339,880, $318,725 and $162,440, respectively, for the years ended December 31, 2010, 2009 and 2008. We paid distributions to our noncontrolling interests of $15,576,612, $13,458,787 and $1,943,705, respectively, for the years ended December 31, 2010, 2009 and 2008.
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 majority of the equipment relating to each non-recourse debt instrument and an assignment of the rental payments under the lease associated with the equipment. In such cases, the lender is being paid directly by the lessee. If the lessee defaults on the lease, the equipment would be returned to the lender in extinguishment of the non-recourse debt. At December 31, 2010, our outstanding non-recourse long-term indebtedness was $212,511,305. We are a party to the Facility and had no borrowings 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 | 4 -5 | ||||||||||||||
|
Total
|
Year
|
Years
|
Years
|
|||||||||||||
|
Non-recourse debt
|
$ | 212,511,305 | $ | 56,271,731 | $ | 95,158,324 | $ | 61,081,250 | ||||||||
|
Non-recourse interest
|
27,926,247 | 11,049,925 | 14,578,366 | 2,297,956 | ||||||||||||
| $ | 240,437,552 | $ | 67,321,656 | $ | 109,736,690 | $ | 63,379,206 | |||||||||
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 were to be shared among the Participating Funds in proportion to their respective capital investments. The credit support agreement was terminated on September 30, 2010.
In connection with the acquisitions of the Eagle Auriga, the Eagle Centaurus, the Eagle Carina and the Eagle Corona, ICON Eagle Holdings, ICON Carina Holdings and ICON Corona Holdings maintain four restricted cash accounts with Paribas. These restricted cash accounts consist of the free cash balances that result from the difference between the bareboat charter payments from AET and the repayments on the non-recourse long-term debt to Paribas and DVB. The account of ICON Eagle Holdings is cross-collateralized and the free cash remains in the restricted cash account until an aggregate amount of $500,000 is funded into the account. Thereafter, all cash in excess of $500,000 can be distributed. The free cash for ICON Carina Holdings and ICON Corona Holdings remain in their restricted cash accounts until $500,000 is funded into each account. Thereafter, all free cash in excess of $500,000 can be distributed from the respective accounts.
In connection with the acquisitions of the Leighton Vessels, we, through ICON Mynx, ICON Stealth and ICON Eclipse, are required to maintain a minimum aggregate cash balance of $550,000 among the respective bank accounts of ICON Mynx, ICON Stealth and ICON Eclipse.
In connection with the acquisition of the Ocean Princess, we, through ICON Ionian, are required to maintain a minimum cash balance of $300,000 with Nordea at all times.
In connection with the acquisition of the Leighton Faulkner, we, through ICON Faulkner, are required to maintain a minimum cash balance of $75,000 with ICON Faulkner’s bank account.
The aforementioned cash amounts are presented within other non-current assets in our consolidated balance sheets as of December 31, 2010 and 2009.
We have entered into certain residual sharing and remarketing agreements with various third parties. In connection with these agreements, residual proceeds received in excess of specific amounts will be shared with these third parties based on specific formulas. The obligations related to these agreements are recorded at fair value. As of December 31, 2010 and 2009, amounts recorded in aggregate for such obligations were approximately $835,000 and $879,000, respectively.
Off-Balance Sheet Transactions
None.
Subsequent Events
On March 29, 2011, we and Fund Fourteen entered into a joint venture, ICON AET Holdings, LLC (“ICON AET”), owned 25% by the LLC and 75% by Fund Fourteen, for the purpose of acquiring two Aframax tankers and two Very Large Crude Carriers (the “VLCCs”). The Aframax tankers were each acquired for a purchase price of $13,000,000, of which $9,000,000 of non-recourse debt was borrowed from DVB, and were simultaneously bareboat chartered to AET for a period of three years. The VLCCs were each acquired for a purchase price of $72,000,000, of which $55,000,000 of non-recourse debt was borrowed from DVB, and were simultaneously bareboat chartered to AET for a period of 10 years.
To acquire the vessels, wholly-owned subsidiaries of ICON AET borrowed an aggregate amount of $128,000,000 in non-recourse debt (the "Loan") from DVB pursuant to the terms of a loan agreement. The proceeds of the Loan used to purchase the Aframax tankers have a three year term and the proceeds of the Loan used to purchase the VLCCs have a 10 year term. The Loan is secured by, among other things, a first priority security interest in each of the vessels, the earnings from each of the vessels, and the equity interests of each of ICON AET’s subsidiaries that directly owns a vessel. The obligations of AET under each of the bareboat charters are guaranteed by AET’s parent, AET Tanker Holdings Sdn. Bhd.
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 thirteen outstanding notes payable, which are our non-recourse debt obligations. With respect to the non-recourse debt that is subject to variable interest, the interest rate for each non-recourse debt obligation is fixed pursuant to an interest rate swap to allow us to mitigate interest rate fluctuations. As a result, we consider this a fixed position and, therefore, the conditions in the credit markets as of December 31, 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. With respect to our revolving line of credit, which is subject to a variable interest rate, we have no outstanding amounts due as of December 31, 2010. Our Manager has evaluated the impact of the condition of the credit markets on our future cash flows and we do not expect any adverse impact on our cash flows should credit conditions in general remain the same or deteriorate further.
We engage in leasing and other financing transactions relating to the use of equipment by domestic and foreign lessees and borrowers outside of the United States. Although certain of our transactions are denominated in Euros and pounds sterling, substantially all of our transactions are denominated in the U.S. dollar, therefore reducing our risk to currency translation exposures. In addition, to further reduce this risk, we at times enter into currency hedges to reduce our risk to currency translation exposure on our foreign denominated transactions. To date, our exposure to exchange rate volatility has not been significant. We have also considered the risk of counterparty performance on our foreign currency hedges by considering, among other things, the credit ratings of our counterparty. Nevertheless, there can be no assurance that currency translation exposures will not have a material impact on our financial position, results of operations or cash flow in the future.
To hedge our variable interest rate risk, we have and may in the future enter into interest rate swap contracts that will effectively convert the underlying floating interest rates to a fixed interest rate. In general, these swap agreements will reduce our interest rate risk associated with variable interest rate borrowings. However, we will be exposed to and will manage credit risk associated with our counterparties to our swap agreements by dealing only with institutions our Manager considers financially sound. See Note 11 to our consolidated financial statements.
As of December 31, 2010, we had twelve floating-to-fixed interest rate swaps, one relating to each of ICON Stealth, ICON Eclipse, ICON Eagle Corona Holdings, ICON Eagle Carina Holdings, ICON Aegean, ICON Arabian Express, LLC and ICON Mayon, two relating to ICON Eagle Holdings, and three relating to ICON Mynx, that are designated and qualifying as cash flow hedges with an aggregate notional amount of $186,304,333. These interest rate swaps have maturity dates ranging from July 25, 2011 to September 30, 2014.
As of December 31, 2010, we had two interest rate swaps, one relating to each of ICON Faulkner and ICON Ionian, with an aggregate notional balance of $15,625,806 that are not speculative and are used to meet our objectives in using interest rate derivatives to add stability to interest expense and to manage its exposure to interest rate movements. Our hedging strategy to accomplish this objective is to match the projected future cash flows with the underlying debt service. The interest rate swaps involve the receipt of floating-rate interest payments from a counterparty in exchange for us making fixed interest rate payments over the life of the agreement without exchange of the underlying notional amount.
We manage our exposure to equipment and residual risk by monitoring the markets our equipment is in and maximizing remarketing proceeds through the re-lease or sale of equipment.
|
Page
|
|
|
|
62
|
|
|
63
|
|
|
64
|
|
|
65
|
|
|
66
|
|
|
68
|
The Members
ICON Leasing Fund Twelve, LLC
We have audited the accompanying consolidated balance sheets of ICON Leasing Fund Twelve, LLC (the “Company”) as of December 31, 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. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ICON Leasing Fund Twelve, LLC at December 31, 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.
/s/ Ernst & Young, LLP
March 29, 2011
New York, New York
|
(A Delaware Limited Liability Company)
|
||||||||
|
Consolidated Balance Sheets
|
||||||||
|
Assets
|
||||||||
|
December 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 29,219,287 | $ | 27,075,059 | ||||
|
Current portion of net investment in finance leases
|
23,535,746 | 17,565,862 | ||||||
|
Current portion of notes receivable
|
16,178,391 | 22,786,334 | ||||||
|
Other current assets
|
3,303,029 | 1,740,046 | ||||||
|
Assets held for sale, net
|
2,496,163 | 8,982,354 | ||||||
|
Total current assets
|
74,732,616 | 78,149,655 | ||||||
|
Non-current assets:
|
||||||||
|
Net investment in finance leases, less current portion
|
155,010,865 | 139,014,358 | ||||||
|
Leased equipment at cost (less accumulated depreciation of
|
||||||||
|
$76,473,310 and $43,506,562, respectively)
|
301,715,924 | 335,480,153 | ||||||
|
Notes receivable, less current portion
|
45,393,778 | 51,122,271 | ||||||
|
Investment in joint venture
|
3,864,617 | 4,609,644 | ||||||
|
Other non-current assets, net
|
13,531,780 | 12,602,305 | ||||||
|
Total non-current assets
|
519,516,964 | 542,828,731 | ||||||
|
Total Assets
|
$ | 594,249,580 | $ | 620,978,386 | ||||
|
Liabilities and Equity
|
||||||||
|
Current liabilities:
|
||||||||
|
Current portion of non-recourse long-term debt
|
$ | 56,271,731 | $ | 43,305,938 | ||||
|
Derivative instruments
|
7,481,194 | 4,779,552 | ||||||
|
Deferred revenue
|
7,063,111 | 6,576,971 | ||||||
|
Due to Manager and affiliates
|
319,479 | 482,301 | ||||||
|
Accrued expenses and other current liabilities
|
2,899,041 | 3,154,453 | ||||||
|
Total current liabilities
|
74,034,556 | 58,299,215 | ||||||
|
Non-current liabilities:
|
||||||||
|
Non-recourse long-term debt, less current portion
|
156,239,574 | 176,961,900 | ||||||
|
Other non-current liabilities
|
53,259,853 | 44,082,046 | ||||||
|
Total non-current liabilities
|
209,499,427 | 221,043,946 | ||||||
|
Total Liabilities
|
283,533,983 | 279,343,161 | ||||||
|
Commitments and contingencies (Note 17)
|
||||||||
|
Equity:
|
||||||||
|
Members' Equity:
|
||||||||
|
Additional Members
|
256,441,129 | 278,405,366 | ||||||
|
Manager
|
(522,927 | ) | (301,542 | ) | ||||
|
Accumulated other comprehensive loss
|
(7,989,946 | ) | (5,024,109 | ) | ||||
|
Total Members' Equity
|
247,928,256 | 273,079,715 | ||||||
|
|
||||||||
|
Noncontrolling Interests
|
62,787,341 | 68,555,510 | ||||||
|
|
||||||||
|
Total Equity
|
310,715,597 | 341,635,225 | ||||||
|
Total Liabilities and Equity
|
$ | 594,249,580 | $ | 620,978,386 | ||||
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
|
$ | 61,086,036 | $ | 59,604,472 | $ | 22,940,645 | ||||||
|
Finance income
|
14,967,490 | 7,246,926 | 3,695,178 | |||||||||
|
Income from investment in joint venture
|
626,726 | 573,040 | 325,235 | |||||||||
|
Interest and other income
|
12,026,217 | 11,066,780 | 2,385,444 | |||||||||
|
Gain on settlement of interfund
|
||||||||||||
|
agreement (Note 4)
|
1,056,555 | - | - | |||||||||
|
Gain on prepayment of note receivable
|
1,082,257 | - | - | |||||||||
|
Gain on sale of leased assets
|
521,909 | - | - | |||||||||
|
Loss on assets held for sale
|
(297,864 | ) | - | - | ||||||||
|
Total revenue
|
91,069,326 | 78,491,218 | 29,346,502 | |||||||||
|
Expenses:
|
||||||||||||
|
Management fees - Manager
|
4,302,374 | 3,390,239 | 1,474,993 | |||||||||
|
Administrative expense reimbursements - Manager
|
3,184,449 | 3,594,400 | 2,705,118 | |||||||||
|
General and administrative
|
2,429,136 | 2,276,211 | 1,350,134 | |||||||||
|
Interest
|
16,888,836 | 11,616,105 | 3,086,275 | |||||||||
|
Depreciation and amortization
|
36,264,305 | 34,507,641 | 12,875,095 | |||||||||
|
Bad debt expense
|
4,409,062 | 572,721 | - | |||||||||
|
Impairment loss (Note 6)
|
5,648,959 | 3,429,316 | - | |||||||||
|
Loss on financial instruments
|
247,772 | 25,642 | 55,495 | |||||||||
|
Total expenses
|
73,374,893 | 59,412,275 | 21,547,110 | |||||||||
|
Net income
|
17,694,433 | 19,078,943 | 7,799,392 | |||||||||
|
Less: Net income attributable to noncontrolling interests
|
(5,818,968 | ) | (5,220,027 | ) | (1,856,812 | ) | ||||||
|
Net income attributable to Fund Twelve
|
$ | 11,875,465 | $ | 13,858,916 | $ | 5,942,580 | ||||||
|
Net income attributable to Fund Twelve allocable to:
|
||||||||||||
|
Additional Members
|
$ | 11,756,710 | $ | 13,720,327 | $ | 5,883,154 | ||||||
|
Manager
|
118,755 | 138,589 | 59,426 | |||||||||
| $ | 11,875,465 | $ | 13,858,916 | $ | 5,942,580 | |||||||
|
Weighted average number of additional shares of
|
||||||||||||
|
limited liability company interests outstanding
|
348,679 | 333,979 | 181,777 | |||||||||
|
Net income attributable to Fund Twelve per weighted
|
||||||||||||
|
average additional share of limited liability company
|
||||||||||||
|
interests outstanding
|
$ | 33.72 | $ | 41.08 | $ | 32.36 | ||||||
See accompanying notes to consolidated financial statements.
|
(A Delaware Limited Liability Company)
|
||||||||||||||||||||||||||||
|
Consolidated Statements of Changes in Equity
|
||||||||||||||||||||||||||||
|
Members' Equity
|
||||||||||||||||||||||||||||
| Additional |
|
|||||||||||||||||||||||||||
|
Shares of
|
Accumulated
|
|||||||||||||||||||||||||||
|
Limited Liability
|
|
Other
|
Total
|
|
|
|||||||||||||||||||||||
|
Company
Interests
|
Additional
Members |
Manager
|
Comprehensive
Loss |
Members'
Equity
|
Noncontrolling
Interests |
Total
Equity |
||||||||||||||||||||||
|
Balance, December 31, 2007
|
93,805 | $ | 79,657,951 | $ | (18,392 | ) | $ | (349,950 | ) | $ | 79,289,609 | $ | 10,862,758 | $ | 90,152,367 | |||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||
|
Net income
|
- | 5,883,154 | 59,426 | - | 5,942,580 | 1,856,812 | 7,799,392 | |||||||||||||||||||||
|
Change in valuation of
|
||||||||||||||||||||||||||||
|
derivative instruments
|
- | - | - | (4,455,706 | ) | (4,455,706 | ) | (279,661 | ) | (4,735,367 | ) | |||||||||||||||||
|
Currency translation adjustment
|
- | - | - | (945,976 | ) | (945,976 | ) | - | (945,976 | ) | ||||||||||||||||||
|
Total comprehensive income
|
540,898 | 1,577,151 | 2,118,049 | |||||||||||||||||||||||||
|
Proceeds from issuance of additional shares
|
||||||||||||||||||||||||||||
|
of limited liability company interests
|
180,184 | 179,455,836 | - | - | 179,455,836 | - | 179,455,836 | |||||||||||||||||||||
|
Sales and offering expenses
|
- | (19,564,022 | ) | - | - | (19,564,022 | ) | - | (19,564,022 | ) | ||||||||||||||||||
|
Cash distributions
|
- | (16,072,151 | ) | (162,440 | ) | - | (16,234,591 | ) | (1,943,705 | ) | (18,178,296 | ) | ||||||||||||||||
|
Investments in joint ventures by noncontrolling interests
|
- | - | - | - | - | 29,608,538 | 29,608,538 | |||||||||||||||||||||
|
Balance, December 31, 2008
|
273,989 | 229,360,768 | (121,406 | ) | (5,751,632 | ) | 223,487,730 | 40,104,742 | 263,592,472 | |||||||||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||
|
Net income
|
- | 13,720,327 | 138,589 | - | 13,858,916 | 5,220,027 | 19,078,943 | |||||||||||||||||||||
|
Change in valuation of
|
||||||||||||||||||||||||||||
|
derivative instruments
|
- | - | - | 555,127 | 555,127 | 231,872 | 786,999 | |||||||||||||||||||||
|
Currency translation adjustment
|
- | - | - | 172,396 | 172,396 | - | 172,396 | |||||||||||||||||||||
|
Total comprehensive income
|
14,586,439 | 5,451,899 | 20,038,338 | |||||||||||||||||||||||||
|
Proceeds from issuance of additional shares
|
||||||||||||||||||||||||||||
|
of limited liability company interests
|
74,837 | 74,561,816 | - | - | 74,561,816 | - | 74,561,816 | |||||||||||||||||||||
|
Sales and offering expenses
|
- | (7,580,626 | ) | - | - | (7,580,626 | ) | - | (7,580,626 | ) | ||||||||||||||||||
|
Cash distributions
|
- | (31,554,863 | ) | (318,725 | ) | - | (31,873,588 | ) | (13,458,787 | ) | (45,332,375 | ) | ||||||||||||||||
|
Shares of limited liability company interests repurchased
|
(117 | ) | (102,056 | ) | - | - | (102,056 | ) | - | (102,056 | ) | |||||||||||||||||
|
Investments in joint ventures by noncontrolling interests
|
- | - | - | - | - | 36,457,656 | 36,457,656 | |||||||||||||||||||||
|
Balance, December 31, 2009
|
348,709 | 278,405,366 | (301,542 | ) | (5,024,109 | ) | 273,079,715 | 68,555,510 | 341,635,225 | |||||||||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||
|
Net income
|
- | 11,756,710 | 118,755 | - | 11,875,465 | 5,818,968 | 17,694,433 | |||||||||||||||||||||
|
Change in valuation of
|
||||||||||||||||||||||||||||
|
derivative instruments
|
- | - | - | (2,233,508 | ) | (2,233,508 | ) | 47,876 | (2,185,632 | ) | ||||||||||||||||||
|
Currency translation adjustment
|
- | - | - | (732,329 | ) | (732,329 | ) | - | (732,329 | ) | ||||||||||||||||||
|
Total comprehensive income
|
8,909,628 | 5,866,844 | 14,776,472 | |||||||||||||||||||||||||
|
Cash distributions
|
- | (33,648,098 | ) | (339,880 | ) | - | (33,987,978 | ) | (15,576,612 | ) | (49,564,590 | ) | ||||||||||||||||
|
Shares of limited liability company interests repurchased
|
(59 | ) | (47,129 | ) | - | - | (47,129 | ) | - | (47,129 | ) | |||||||||||||||||
|
Investments in joint ventures by noncontrolling interests
|
- | (25,720 | ) | (260 | ) | - | (25,980 | ) | 3,941,599 | 3,915,619 | ||||||||||||||||||
|
Balance, December 31, 2010
|
348,650 | $ | 256,441,129 | $ | (522,927 | ) | $ | (7,989,946 | ) | $ | 247,928,256 | $ | 62,787,341 | $ | 310,715,597 | |||||||||||||
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 income
|
$ | 17,694,433 | $ | 19,078,943 | $ | 7,799,392 | ||||||
|
Adjustments to reconcile net income to net cash provided by
|
||||||||||||
|
operating activities:
|
||||||||||||
|
Rental income paid directly to lenders by lessees
|
(37,274,684 | ) | (36,136,272 | ) | (11,314,201 | ) | ||||||
|
Finance income
|
(14,967,490 | ) | (7,246,926 | ) | (3,695,178 | ) | ||||||
|
Income from investment in joint venture
|
(626,726 | ) | (573,040 | ) | (325,235 | ) | ||||||
|
Depreciation and amortization
|
36,264,305 | 34,507,641 | 12,875,095 | |||||||||
|
Interest expense on non-recourse financing paid directly
|
||||||||||||
|
to lenders by lessees
|
6,135,867 | 7,422,605 | 2,944,076 | |||||||||
|
Interest expense from amortization of debt financing costs
|
1,251,909 | 959,712 | 142,199 | |||||||||
|
Accretion of seller's credit and other
|
2,261,077 | 756,948 | - | |||||||||
|
Impairment loss
|
5,648,959 | 3,429,316 | - | |||||||||
|
Bad debt expense
|
4,409,062 | 572,721 | - | |||||||||
|
Gain on settlement of interfund agreement
|
(1,056,555 | ) | - | - | ||||||||
|
Gain on prepayment of note receivable
|
(1,082,257 | ) | - | - | ||||||||
|
Gain on sale of leased assets
|
(521,909 | ) | - | - | ||||||||
|
Loss on assets held for sale
|
297,864 | - | - | |||||||||
|
Loss on financial instruments
|
247,772 | 25,642 | 55,495 | |||||||||
|
Changes in operating assets and liabilities:
|
||||||||||||
|
Collection of finance leases
|
32,015,785 | 15,788,477 | 9,244,453 | |||||||||
|
Other assets, net
|
(5,921,316 | ) | (11,727,785 | ) | (4,617,634 | ) | ||||||
|
Accrued expenses and other current liabilities
|
(1,926,815 | ) | (692,743 | ) | 1,194,823 | |||||||
|
Deferred revenue
|
615,268 | 1,968,260 | (1,342,076 | ) | ||||||||
|
Due to/from Manager and affiliates, net
|
679,209 | 62,750 | 397,763 | |||||||||
|
Distributions from joint venture
|
626,726 | 573,040 | 325,235 | |||||||||
|
Net cash provided by operating activities
|
44,770,484 | 28,769,289 | 13,684,207 | |||||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Purchase of equipment
|
(8,701,948 | ) | (69,304,587 | ) | (120,866,253 | ) | ||||||
|
Proceeds from sale of equipment
|
2,962,240 | - | - | |||||||||
|
Investment in joint venture
|
- | - | (5,615,735 | ) | ||||||||
|
Distributions received from joint venture in excess of profits
|
745,027 | 765,255 | 240,836 | |||||||||
|
Restricted cash
|
(921,979 | ) | (1,071,816 | ) | - | |||||||
|
Investment in notes receivable
|
(22,550,000 | ) | (38,359,443 | ) | (38,599,487 | ) | ||||||
|
Repayment of notes receivable
|
37,591,074 | 19,018,668 | 5,697,874 | |||||||||
|
Net cash provided by (used in) investing activities
|
9,124,414 | (88,951,923 | ) | (159,142,765 | ) | |||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Proceeds from non-recourse long-term debt
|
12,448,656 | 3,205,167 | 27,000,000 | |||||||||
|
Repayments of non-recourse long-term debt
|
(17,439,876 | ) | (1,740,000 | ) | - | |||||||
|
Issuance of additional shares of limited liability company interests,
|
||||||||||||
|
net of sales and offering expenses
|
- | 66,981,190 | 159,891,814 | |||||||||
|
Shares of limited liability company interests repurchased
|
(47,129 | ) | (102,056 | ) | - | |||||||
|
Investment in joint ventures by noncontrolling interests
|
2,864,417 | 18,807,296 | - | |||||||||
|
Distributions to noncontrolling interests
|
(15,576,612 | ) | (13,458,787 | ) | (1,943,705 | ) | ||||||
|
Cash distributions to members
|
(33,987,978 | ) | (31,873,588 | ) | (16,234,591 | ) | ||||||
|
Net cash (used in) provided by financing activities
|
(51,738,522 | ) | 41,819,222 | 168,713,518 | ||||||||
|
Effects of exchange rates on cash and cash equivalents
|
(12,148 | ) | 30,093 | (1,485 | ) | |||||||
|
Net increase (decrease) in cash and cash equivalents
|
2,144,228 | (18,333,319 | ) | 23,253,475 | ||||||||
|
Cash and cash equivalents, beginning of the year
|
27,075,059 | 45,408,378 | 22,154,903 | |||||||||
|
Cash and cash equivalents, end of the year
|
$ | 29,219,287 | $ | 27,075,059 | $ | 45,408,378 | ||||||
See accompanying notes to consolidated financial statements.
|
ICON Leasing Fund Twelve 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 period for interest
|
$ | 7,254,306 | $ | 1,723,285 | $ | - | ||||||
|
Supplemental disclosure of non-cash investing and financing activities:
|
||||||||||||
|
Principal and interest on non-recourse long-term debt
|
||||||||||||
|
paid directly to lenders by lessees
|
$ | 37,274,684 | $ | 36,136,272 | $ | 11,314,201 | ||||||
|
Equipment purchased with non-recourse long-term debt paid directly by lender
|
$ | 28,450,000 | $ | 85,300,000 | $ | 121,699,640 | ||||||
|
Equipment purchased with subordinated financing provided by seller
|
$ | 11,000,000 | $ | 58,300,000 | $ | - | ||||||
|
Investment in joint venture by noncontrolling interest
|
$ | 1,051,201 | $ | 18,381,998 | $ | 28,548,220 | ||||||
See accompanying notes to consolidated financial statements.
67
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(1)
|
Organization
|
ICON Leasing Fund Twelve, LLC (the “LLC”) was formed on October 3, 2006 as a Delaware limited liability company. The LLC is engaged in one business segment, the business of purchasing equipment and leasing it to third parties, providing equipment and other financing, acquiring equipment subject to lease and, to a lesser degree, acquiring ownership rights to items of leased equipment at lease expiration. The LLC will continue until December 31, 2026, unless terminated sooner.
The LLC’s principal investment objective is to obtain the maximum economic return from its investments for the benefit of its members. To achieve this objective, the LLC: (i) acquires a diversified portfolio by making investments in leases, notes receivable and other financing transactions; (ii) makes monthly cash distributions, at the LLC’s manager’s discretion, to its members commencing the month after each member’s admission to the LLC, continuing until the end of the operating period; (iii) reinvests substantially all undistributed cash from operations and cash from sales of equipment and other financing transactions during the operating period; and (iv) will dispose of its investments and distribute the excess cash from such dispositions to its members beginning with the commencement of the liquidation period. The LLC is currently in its operating period, which commenced on May 1, 2009.
The manager of the LLC is ICON Capital Corp., a Delaware corporation (the “Manager”). The Manager manages and controls the business affairs of the LLC, including, but not limited to, the equipment leases and other financing transactions that the LLC enters into pursuant to the terms of the LLC’s limited liability company agreement (the “LLC Agreement”). Additionally, the Manager has a 1% interest in the profits, losses, cash distributions and liquidation proceeds of the LLC.
The LLC offered shares of limited liability company interests (the “Shares”) with the intent to raise up to $410,800,000 of capital, consisting of 400,000 Shares at a purchase price of $1,000 per share and an additional 12,000 Shares, which were reserved for the LLC’s distribution reinvestment plan (the “Distribution Reinvestment Plan”). The Distribution Reinvestment Plan allowed investors to purchase additional Shares with distributions received from the LLC and/or certain other funds managed by the Manager at a discounted share price of $900. The LLC had its initial closing on May 25, 2007 (the “Commencement of Operations”) with the admission of investors that purchased Shares.
The LLC’s offering period ended on April 30, 2009, and its operating period commenced on May 1, 2009. Through April 30, 2009, the LLC sold approximately 348,826 Shares, including approximately 11,393 Shares issued in connection with the LLC’s Distribution Reinvestment Plan, representing $347,686,947 of capital contributions. Through December 31, 2010, 176 Shares have been repurchased by the LLC pursuant to its repurchase plan. Beginning with the Commencement of Operations through December 31, 2010, the LLC paid $26,995,024 of sales commissions to third parties, $5,488,440 of organizational and offering expense allowance to the Manager and $6,748,756 of underwriting fees to ICON Securities Corp., a wholly-owned subsidiary of the Manager (“ICON Securities”), the dealer-manager of the LLC’s offering.
68
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(1)
|
Organization - continued
|
Members’ capital accounts are increased for their initial capital contribution plus their proportionate share of earnings and decreased by their proportionate share of losses and distributions. Profits, losses, cash distributions and liquidation proceeds are allocated 99% to the additional members and 1% to the Manager until each additional member has (a) received cash distributions and liquidation proceeds sufficient to reduce its adjusted capital account to zero and (b) received, in addition, other distributions and allocations that would provide an 8% per year cumulative return, compounded daily, on its outstanding adjusted capital account. After such time, distributions will be allocated 90% to the additional members and 10% to the Manager.
|
(2)
|
Summary of Significant Accounting Policies
|
Basis of Presentation and Consolidation
The accompanying consolidated financial statements of the LLC have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”). In the opinion of the Manager, all adjustments considered necessary for a fair presentation have been included.
The consolidated financial statements include the accounts of the LLC and its majority-owned subsidiaries and other controlled entities. All intercompany accounts and transactions have been eliminated in consolidation. In joint ventures where the LLC has majority ownership, the financial condition and results of operations of the joint venture are consolidated. Noncontrolling interest represents the minority owner’s proportionate share of its equity in the joint venture. The noncontrolling interest is adjusted for the minority owner’s share of the earnings, losses, investments and distributions of the joint venture.
The LLC accounts for its noncontrolling interest in a joint venture where the LLC has influence over financial and operational matters, generally 50% or less ownership interest, under the equity method of accounting. In such case, the LLC’s original investment is recorded at cost and adjusted for its share of earnings, losses and distributions. The LLC accounts for its investment in a joint venture where the LLC has virtually no influence over financial and operational matters using the cost method of accounting. In such case, the LLC’s original investment is recorded at cost and any distributions received are recorded as revenue. All of the LLC’s investments in joint ventures are subject to its impairment review policy.
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.
Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and highly liquid investments with original maturity dates of three months or less.
69
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(2)
|
Summary of Significant Accounting Policies - continued
|
The LLC’s cash and cash equivalents are held principally at two financial institutions and at times may exceed insured limits. The LLC has placed these funds in high quality institutions in order to minimize risk relating to exceeding insured limits.
Risks and Uncertainties
In the normal course of business, the LLC is exposed to two significant types of economic risk: credit and market. Credit risk is the risk of a lessee, borrower or other counterparty’s inability or unwillingness to make contractually required payments. Concentrations of credit risk with respect to lessees, borrowers or other counterparties are dispersed across different industry segments within the United States of America and throughout the world. Although the LLC does not currently foresee a concentrated credit risk associated with its lessees, borrowers or other counterparties, contractual payments are dependent upon the financial stability of the industry segments in which such counterparties operate. See Note 14 for a discussion of concentrations of risk.
Market risk reflects the change in the value of debt instruments, derivatives and credit facilities due to changes in interest rate spreads or other market factors. The LLC believes that the carrying value of its investments and derivative obligations is reasonable, taking into consideration these risks, along with estimated collateral values, payment history and other relevant information.
Debt Financing Costs
Expenses associated with the incurrence of debt are capitalized and amortized over the term of the debt instrument using the effective interest rate method. These costs are included in other current and other non-current assets.
Leased Equipment at Cost
Investments in leased equipment are stated at cost less accumulated depreciation. Leased equipment is depreciated on a straight-line basis over the lease term, which typically ranges from 3 to 8 years, to the asset’s residual value.
The Manager has an investment committee that approves each new equipment lease and other financing transaction. As part of its process, the investment committee determines the residual value, if any, to be used once the investment has been approved. The factors considered in determining the residual value include, but are not limited to, the creditworthiness of the potential lessee, the type of equipment considered, how the equipment is integrated into the potential lessee’s business, the length of the lease and the industry in which the potential lessee operates. Residual values are reviewed for impairment in accordance with the LLC’s impairment review policy.
The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the marketplace are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. The residual value is calculated using information from various external sources, such as trade publications, auction data, equipment dealers, wholesalers and industry experts, as well as inspection of the physical asset and other economic indicators.
70
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(2)
|
Summary of Significant Accounting Policies - continued
|
Asset Impairments
The significant assets in the LLC’s portfolio are periodically reviewed, no less frequently than annually or when indicators of impairment exist, to determine whether events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss will be recognized only if the carrying value of a long-lived asset is not recoverable and exceeds its fair market value. If there is an indication of impairment, the LLC will estimate the future cash flows (undiscounted and without interest charges) expected from the use of the asset and its eventual disposition. Future cash flows are the future cash inflows expected to be generated by an asset less the future outflows expected to be necessary to obtain those inflows. If an impairment is determined to exist, the impairment loss will be measured as the amount by which the carrying value of a long-lived asset exceeds its fair value and recorded in the consolidated statement of operations in the period the determination is made.
The events or changes in circumstances that generally indicate that an asset may be impaired are (i) the estimated fair value of the underlying equipment is less than its carrying value or (ii) the lessee is experiencing financial difficulties and it does not appear likely that the estimated proceeds from the disposition of the asset will be sufficient to satisfy the residual position in the asset and, if applicable, the remaining obligation to the non-recourse lender. Generally in the latter situation, the residual position relates to equipment subject to third-party non-recourse debt where the lessee remits its rental payments directly to the lender and the LLC does not recover its residual position until the non-recourse debt is repaid in full. The preparation of the undiscounted cash flows requires the use of assumptions and estimates, including the level of future rents, the residual value expected to be realized upon disposition of the asset, estimated downtime between re-leasing events and the amount of re-leasing costs. The Manager’s review for impairment includes a consideration of the existence of impairment indicators including third-party appraisals, published values for similar assets, recent transactions for similar assets, adverse changes in market conditions for specific asset types and the occurrence of significant adverse changes in general industry and market conditions that could affect the fair value of the asset.
Revenue Recognition
The LLC leases equipment to third parties and each such lease is classified as either a finance lease or an operating lease, which is determined based upon the terms of each lease. For a finance lease, initial direct costs are capitalized and amortized over the term of the related lease. For an operating lease, the initial direct costs are included as a component of the cost of the equipment and depreciated over the lease term.
For finance leases, the LLC records, at lease inception, the total minimum lease payments receivable from the lessee, the estimated unguaranteed residual value of the equipment at lease termination, the initial direct costs related to the lease and the related unearned income. Unearned income represents the difference between the sum of the minimum lease payments receivable, plus the estimated unguaranteed residual value, minus the cost of the leased equipment. Unearned income is recognized as finance income over the term of the lease using the effective interest rate method.
For operating leases, rental income is recognized on a straight-line basis over the lease term. Billed operating lease receivables are included in accounts receivable until collected. Accounts receivable are stated at their estimated net realizable value. Deferred revenue is the difference between the timing of the receivables billed and the income recognized on a straight-line basis.
71
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(2)
|
Summary of Significant Accounting Policies - continued
|
For notes receivable, the LLC uses the effective interest rate method to recognize interest income, which produces a constant periodic rate of return on the investment, when earned.
Allowance for Doubtful Accounts
When evaluating the adequacy of the allowance for doubtful accounts, the LLC estimates the uncollectibility of receivables by analyzing lessee, borrower and other counterparty concentrations, creditworthiness and current economic trends. The LLC records an allowance for doubtful accounts when the analysis indicates that the probability of full collection is unlikely. Accounts receivable are generally placed in a non-accrual status (i.e., no revenue is recognized) when payments are more than 90 days past due. Additionally, the LLC periodically reviews the creditworthiness of companies with payments outstanding less than 90 days. Based upon the Manager’s judgment, accounts may be placed in a non-accrual status. Accounts on a non-accrual status are only returned to an accrual status when the account has been brought current and the LLC believes recovery of the remaining unpaid receivable is probable. Revenue on non-accrual accounts is recognized only when cash has been received. No allowance was deemed necessary at December 31, 2010 and 2009.
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.
72
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(2)
|
Summary of Significant Accounting Policies - continued
|
Foreign Currency Translation
Assets and liabilities having non-U.S. dollar functional currencies are translated at month-end exchange rates. Contributed capital accounts are translated at the historical rate of exchange when the capital was contributed or distributed. Revenues, expenses and cash flow items are translated at the weighted average exchange rate for the period. Resulting translation adjustments are recorded as a separate component of accumulated other comprehensive income or loss (“AOCI”) in the LLC’s consolidated balance sheets.
Warrants
Warrants held by the LLC are not registered for public sale and are revalued on a quarterly basis. The revaluation of warrants is calculated using the Black-Scholes option pricing model. The assumptions utilized in the Black-Scholes model include share price, strike price, expiration date, risk-free rate and the volatility percentage. The change in the fair value of warrants is recognized in the consolidated statements of operations.
Derivative Financial Instruments
The LLC may enter into derivative transactions for purposes of hedging specific financial exposures, including movements in foreign currency exchange rates and changes in interest rates on its non-recourse long-term debt. The LLC enters into these instruments only for hedging underlying exposures. The LLC does not hold or issue derivative financial instruments for purposes other than hedging, except for warrants, which are not hedges. Certain derivatives may not meet the established criteria to be designated as qualifying accounting hedges, even though the LLC believes that these are effective economic hedges.
The LLC accounts for derivative financial instruments in accordance with the accounting pronouncements that established accounting and reporting standards for derivative financial instruments. These accounting pronouncements require the LLC to recognize all derivatives as either assets or liabilities on the consolidated balance sheets and measure those instruments at fair value. The LLC recognizes the fair value of all derivatives as either assets or liabilities on the consolidated balance sheets and changes in the fair value of such instruments are recognized immediately in earnings unless certain accounting criteria established by the accounting pronouncements are met. These criteria demonstrate that the derivative is expected to be highly effective at offsetting changes in the fair value or expected cash flows of the underlying exposure at both the inception of the hedging relationship and on an ongoing basis and include an evaluation of the counterparty risk and the impact, if any, on the effectiveness of the derivative. If these criteria are met, which the LLC must document and assess at inception and on an ongoing basis, the LLC recognizes the changes in fair value of such instruments in AOCI, a component of equity on the consolidated balance sheets. Changes in the fair value of the ineffective portion of all derivatives are recognized immediately in earnings.
Income Taxes
The LLC is taxed as a partnership for federal and State income tax purposes. No provision for income taxes has been recorded since the liability for such taxes is that of each of the individual members rather than the LLC. The LLC’s income tax returns are subject to examination by the federal and State taxing authorities, and changes, if any, could adjust the individual income tax of the members.
73
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(2)
|
Summary of Significant Accounting Policies - continued
|
Per Share Data
Net income attributable to the LLC per weighted average additional Share is based upon the weighted average number of additional Shares outstanding during the year.
Share Repurchase
The LLC may, at its discretion, repurchase Shares from a limited number of its additional members, as provided for in its LLC Agreement. The repurchase price for any Shares approved for repurchase is based upon a formula, as provided in the LLC Agreement. Additional members are required to hold their Shares for at least one year before repurchases will be permitted.
Reclassifications
Certain reclassifications have been made to the accompanying consolidated financial statements in prior years to conform to the current presentation.
Comprehensive Income (Loss)
Comprehensive income (loss) is reported in the accompanying consolidated statements of changes in equity and consists of net income and other gains and losses affecting equity that are excluded from net income.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires the Manager to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates primarily include the determination of allowance for doubtful accounts, depreciation and amortization, impairment losses, estimated useful lives and residual values. Actual results could differ from those estimates.
Recently Adopted Accounting Pronouncements
In 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 the LLC’s 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.
74
ICON Leasing Fund Twelve, LLC
(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 the LLC beginning January 1, 2010. The adoption of this accounting pronouncement did not have a material effect on the LLC’s consolidated financial statements as of December 31, 2010.
|
(3)
|
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
|
$ | 225,642,237 | $ | 203,775,000 | ||||
|
Estimated residual values
|
21,928,543 | 16,545,104 | ||||||
|
Initial direct costs, net
|
5,657,967 | 5,663,856 | ||||||
|
Unearned income
|
(74,682,136 | ) | (69,403,740 | ) | ||||
|
Net investment in finance leases
|
178,546,611 | 156,580,220 | ||||||
|
Less: Current portion of net
|
||||||||
|
investment in finance leases
|
23,535,746 | 17,565,862 | ||||||
|
Net investment in finance leases,
|
||||||||
|
less current portion
|
$ | 155,010,865 | $ | 139,014,358 | ||||
Telecommunications Equipment
During 2007, the LLC’s wholly-owned subsidiary ICON Global Crossing IV, LLC (“ICON Global Crossing IV”) purchased telecommunications equipment for approximately $21,294,000 that is subject to a lease with Global Crossing Telecommunications, Inc. (“Global Crossing”). The lease expires on November 30, 2011.
During March 2009, ICON Global Crossing IV purchased additional telecommunications equipment for approximately $3,859,000 that is subject to a lease with Global Crossing. The lease expires on March 31, 2012.
75
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(3)
|
Net Investment in Finance Leases - continued
|
On June 29, 2010, the LLC’s wholly-owned subsidiary ICON Broadview, LLC (“ICON Broadview”) entered into a master lease agreement for information technology equipment with Broadview Networks Holdings, Inc. and Broadview Networks Inc. (collectively, “Broadview”), pursuant to which ICON Broadview will acquire up to four schedules of information technology equipment, which will be leased to Broadview. The aggregate purchase price for the equipment will be equal to at least $5,000,000.
On July 15, 2010, ICON Broadview purchased information technology equipment for the purchase price of approximately $602,000 and simultaneously leased the equipment to Broadview. The base term of the schedule is for a period of 36 months, which commenced on August 1, 2010.
On August 17, 2010, ICON Broadview purchased information technology equipment for the purchase price of approximately $613,000 and simultaneously leased the equipment to Broadview. The base term of the schedule is for a period of 36 months, which commenced on September 1, 2010.
On December 23, 2010, ICON Broadview purchased information technology equipment for the purchase price of approximately $1,860,000 and simultaneously leased the equipment to Broadview. The base term of the schedule is for a period of 36 months, which commenced on January 1, 2011.
Manufacturing Equipment
On March 3, 2008, the LLC’s wholly-owned subsidiary ICON French Equipment II, LLC (“ICON French Equipment II”) purchased auto parts manufacturing equipment and simultaneously leased back the equipment to Sealynx Automotive Transieres SAS (“Sealynx”). The purchase price was approximately $11,626,000 (€7,638,400). The lease term commenced on March 3, 2008 and continues for a period of 60 months from such date. As additional security for Sealynx’s obligations under the lease, the LLC granted a lien on property owned by Sealynx in France, valued at €3,746,400 at the acquisition date, and a guarantee from Sealynx’s parent company, Sealynx Automotive Holding.
Subsequently, due to the global downturn in the automotive industry, Sealynx requested a restructuring of its lease payments during the third quarter of 2009 and the LLC agreed to reduce Sealynx’s lease payments. On January 4, 2010, the LLC restructured the payment obligations of Sealynx under the lease to provide it with cash flow flexibility while at the same time attempting to preserve the LLC’s projected economic return on this investment. As additional security for restructuring the payment obligations, ICON French Equipment II received an additional mortgage on certain real property owned by Sealynx located in Charleval, France.
On July 5, 2010, Sealynx filed for a conciliation procedure with the Commercial Court of Nanterre requesting that it be permitted to repay, over a two year period, approximately $1,900,000 of rental payments that had been due to the LLC on July, 1 2010.
As a result of recent offers to purchase the equipment under lease by ICON French Equipment II made by third parties during 2011 and the uncertainty regarding the LLC’s ability to collect all remaining amounts that are due under the lease, the LLC recorded approximately $4,409,000 of bad debt expense during the year ended December 31, 2010 to write the asset down to net realizable value.
76
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(3)
|
Net Investment in Finance Leases - continued
|
Marine Vessels
On June 26, 2009, the LLC’s wholly-owned subsidiaries ICON Mynx Pte. Ltd. (“ICON Mynx”), ICON Stealth Pte. Ltd. (“ICON Stealth”) and ICON Eclipse Pte. Ltd. (“ICON Eclipse”), each a Singapore corporation, executed Memoranda of Agreement (“MOA”) to purchase three barges (each a “Leighton Vessel” and collectively the “Leighton Vessels”) from Leighton Contractors (Singapore) Pte. Ltd. (“Leighton”) for an aggregate purchase price of $133,000,000. Simultaneously with the execution of the MOA, each of ICON Mynx, ICON Stealth and ICON Eclipse entered into a bareboat charter to charter the vessel that it owns to Leighton for a term of 96 months. During the term of the bareboat charters, Leighton will have the option to purchase each of the Leighton Vessels for a specified purchase option price on the dates defined in each respective bareboat charter. All of Leighton’s obligations are guaranteed by its ultimate parent company, Leighton Holdings Limited (“Leighton Holdings”), a publicly traded company that is listed on the Australian Stock Exchange.
Two of the three Leighton Vessels were acquired on June 26, 2009 for $58,000,000, including the incurrence of $34,800,000 of senior debt (the “Senior Tranche”) pursuant to a $79,800,000 senior facility agreement (the “Facility Agreement”) with Standard Chartered Bank, Singapore Branch (“Standard Chartered”) and $20,500,000 of subordinated seller’s credit (the “Subordinated Tranche”) pursuant to a $47,000,000 seller’s credit agreement with Leighton (the “Seller’s Credit Agreement”). The Seller’s Credit Agreement is subordinated only to the Facility Agreement. The Senior Tranche will be repaid by the LLC in 20 quarterly principal and interest payments beginning on September 30, 2009. The Senior Tranche bore an annual interest rate of 4.8475% during the period from June 26, 2009 to September 30, 2009 (the “Stub Period”) and, thereafter, the interest rate was fixed pursuant to a swap agreement at 7.05%. The interest-free Subordinated Tranche will be repaid by the LLC in eight annual principal payments beginning on June 25, 2010. The Subordinated Tranche is recorded on a discounted basis within other non-current liabilities and is being accreted to its carrying value as interest expense over its term. The bareboat charter for each of these two Leighton Vessels expires on June 25, 2017.
On October 28, 2009, ICON Eclipse purchased the remaining third Leighton Vessel from Leighton for $75,000,000. To purchase the Leighton Vessel, ICON Eclipse borrowed $45,000,000 of senior debt (the “Eclipse Senior Tranche”) pursuant to the Facility Agreement and $26,500,000 of subordinated seller’s credit (the “Eclipse Subordinated Tranche”) pursuant to the Seller’s Credit Agreement. The Eclipse Senior Tranche will be repaid by the LLC in 20 quarterly principal and interest payments beginning on December 31, 2009. The interest-free Eclipse Subordinated Tranche will be repaid by the LLC in eight annual principal payments beginning on October 28, 2010. The Eclipse Subordinated Tranche is recorded on a discounted basis within other non-current liabilities and is being accreted to its carrying value as interest expense over its term.
77
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(3)
|
Net Investment in Finance Leases - continued
|
On March 31, 2010, ICON Mynx entered into an agreement with Leighton Offshore Pte. Ltd. (“Leighton Offshore”) to upgrade the accommodation and work barge, the Leighton Mynx, by acquiring certain equipment and making certain upgrades to the Leighton Mynx in an amount equal to $20,000,000. The upgrades include the addition of a helicopter deck, as well as a new crane and accommodation unit. The cost of the upgrades was financed with $2,000,000 in cash and $18,000,000 in non-recourse indebtedness, which included an interest-free $4,000,000 of subordinated contractor’s credit and $14,000,000 of senior debt pursuant to an amended senior facility agreement (the “Amended Facility Agreement”) with Standard Chartered. The Amended Facility Agreement will be repaid in quarterly installments beginning on March 31, 2011 and interest has been fixed pursuant to a swap agreement with Standard Chartered. In consideration for financing the upgrades, ICON Mynx and Leighton Offshore agreed to amend the bareboat charter for the Leighton Mynx to, among other things, increase the amount of monthly charter hire payable by Leighton Offshore and increase the purchase option price at the expiry of the charter. All of Leighton Offshore's obligations are guaranteed by Leighton Holdings.
On August 20, 2010, ICON Mynx entered into an agreement with Leighton Offshore to further upgrade the Leighton Mynx for $3,500,000. The upgrade includes the installation of a Manitowoc crawler crane. The cost of the upgrade was financed with $1,050,000 in cash and $2,450,000 in a non-recourse loan pursuant to the Amended Facility Agreement. In consideration for financing the upgrades, ICON Mynx and Leighton Offshore agreed to amend the bareboat charter for the Leighton Mynx to, among other things, increase the amount of monthly charter hire payable by Leighton Offshore and increase the purchase option price at the expiry of the bareboat charter.
On November 12, 2010, the upgrade to the Leighton Mynx was completed and the barge resumed operations. All of Leighton Offshore’s obligations are guaranteed by Leighton Holdings.
On October 30, 2009, ICON Ionian, LLC (“ICON Ionian”), a Marshall Islands limited liability company that is wholly-owned by the LLC, purchased a product tanker vessel, the Ocean Princess (the “Ocean Princess”), from Lily Shipping Ltd. (“Lily Shipping”), a wholly-owned subsidiary of the Ionian Group (“Ionian”), for the purchase price of $10,750,000. Simultaneously with the purchase, the Ocean Princess was bareboat chartered back to Lily Shipping for 60 months. The purchase price was funded by (i) a non-recourse loan in the amount of $5,500,000 from Nordea Bank Norge ASA (“Nordea”), (ii) $950,000 in cash and (iii) a subordinated, non-interest bearing $4,300,000 seller’s credit to Lily Shipping, which is due upon the sale of the Ocean Princess in accordance with the terms of the bareboat charter. If an event of default occurs, ICON Ionian’s obligation to repay the seller’s credit to Lily Shipping is terminated. The obligations of Lily Shipping are guaranteed by Delta Petroleum Ltd., a wholly-owned subsidiary of Ionian. The seller’s credit to Lily Shipping is recorded on a discounted basis within other non-current liabilities and is being accreted to its carrying value as interest expense over its term.
78
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(3)
|
Net Investment in Finance Leases - continued
|
On December 18, 2009, the LLC’s wholly-owned subsidiary ICON Faulkner, LLC (“ICON Faulkner”) entered into a Memorandum of Agreement (the “Faulkner MOA”) to purchase the pipelay barge, the Leighton Faulkner, from Leighton Contractors (Asia) Limited (“Leighton Contractors”) for $20,000,000. Simultaneously with the execution of the Faulkner MOA, ICON Faulkner entered into a bareboat charter with Leighton Contractors for a period of 96 months commencing on January 5, 2010. The purchase price for the Leighton Faulkner was funded by $1,000,000 in cash and $19,000,000 in non-recourse indebtedness, which included $12,000,000 of senior debt pursuant to a senior facility agreement with Standard Chartered and an interest free $7,000,000 subordinated seller’s credit. The subordinated seller’s credit is recorded on a discounted basis within other non-current liabilities and is being accreted to its carrying value as interest expense over its term. The loan from Standard Chartered has a term of five years, with an option to extend for another three years. The interest rate has been fixed pursuant to a swap agreement. All of Leighton Contractors’ obligations are guaranteed by Leighton Holdings.
Non-cancelable minimum annual amounts due on investment in finance leases over the next five years were as follows at December 31, 2010:
|
Years Ending December 31,
|
||||
|
2011
|
$ | 36,698,912 | ||
|
2012
|
27,028,296 | |||
|
2013
|
26,332,081 | |||
|
2014
|
29,429,530 | |||
|
2015
|
23,770,530 | |||
|
Thereafter
|
82,382,888 | |||
| $ | 225,642,237 | |||
|
(4)
|
Leased Equipment at Cost
|
Leased equipment at cost consisted of the following at December 31, 2010 and 2009:
|
2010
|
2009
|
|||||||
|
Marine vessels and equipment
|
$ | 316,103,074 | $ | 316,103,074 | ||||
|
Manufacturing equipment
|
18,762,219 | 19,559,700 | ||||||
|
Mining equipment
|
20,122,452 | 20,122,452 | ||||||
|
Telecommunications equipment
|
6,116,887 | 6,116,887 | ||||||
|
Motor coaches
|
5,473,082 | 5,473,082 | ||||||
|
Gas compressors
|
11,611,520 | 11,611,520 | ||||||
| 378,189,234 | 378,986,715 | |||||||
|
Less: Accumulated depreciation
|
76,473,310 | 43,506,562 | ||||||
| $ | 301,715,924 | $ | 335,480,153 | |||||
Depreciation expense was $33,588,592, $32,869,210 and $12,354,313 for the years ended December 31, 2010, 2009 and 2008, respectively.
79
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(4)
|
Leased Equipment at Cost - continued
|
Marine Vessels and Equipment
On June 26, 2007, the LLC and ICON Income Fund Ten, LLC (“Fund Ten”), an entity also managed by the Manager, formed ICON Mayon, LLC (“ICON Mayon”), with ownership interests of 51% and 49%, respectively. On July 24, 2007, ICON Mayon purchased a 98,507 deadweight ton (“DWT”) Aframax product tanker, the Mayon Spirit, from an affiliate of Teekay Corporation (“Teekay”). The purchase price for the Mayon Spirit was approximately $40,250,000, with approximately $15,312,000 funded in the form of a capital contribution to ICON Mayon and approximately $24,938,000 of non-recourse debt borrowed from BNP Paribas (“Paribas,” f/k/a Fortis Bank SA/NV). Simultaneously with the closing of the purchase of the Mayon Spirit, the Mayon Spirit was bareboat chartered back to Teekay for a term of 48 months. The charter commenced on July 24, 2007. The total capital contributions made to ICON Mayon were approximately $16,020,000.
On April 24, 2008, the LLC’s wholly-owned subsidiaries, ICON Arabian Express, LLC (“ICON Arabian”) and ICON Aegean Express, LLC (“ICON Aegean”), acquired two containership vessels from Vroon Group B.V. (“Vroon”), the Aegean Express and the Far Vizag (f/k/a the Arabian Express) (collectively, the “Vroon Vessels”), for an aggregate purchase price of $51,000,000, of which $38,700,000 of non-recourse debt was borrowed from Paribas. Simultaneously with the purchase, the Vroon Vessels were bareboat chartered back to the subsidiaries of Vroon for a period of 72 months.
On November 18, 2008, ICON Eagle Auriga Pte. Ltd. (“ICON Eagle Auriga”), a wholly-owned subsidiary of ICON Eagle Holdings, LLC (“ICON Eagle Holdings”), purchased an Aframax product tanker, the M/V Eagle Auriga (the “Eagle Auriga”), from Aframax Tanker I AS for $42,000,000, of which $28,000,000 of non-recourse debt was borrowed from Paribas and DVB Bank SE (“DVB”). On November 21, 2008, ICON Eagle Centaurus Pte. Ltd. (“ICON Eagle Centaurus”), also a wholly-owned subsidiary of ICON Eagle Holdings, purchased an Aframax product tanker, the M/V Eagle Centaurus (the “Eagle Centaurus”), for $40,500,000, of which $27,000,000 of non-recourse debt was borrowed from Paribas and DVB. The Eagle Auriga and the Eagle Centaurus are subject to 84-month bareboat charters with AET, Inc. Limited (“AET”) that expire on November 14, 2013 and November 13, 2013, respectively.
On December 3, 2008, ICON Eagle Carina Pte. Ltd., a Singapore corporation wholly-owned by ICON Eagle Carina Holdings, LLC (“ICON Carina Holdings”), a Marshall Islands limited liability company owned 64.3% by the LLC and 35.7% by ICON Income Fund Ten, LLC (“Fund Ten”), an entity also managed by the Manager, executed a Memorandum of Agreement to purchase an Aframax product tanker, the M/V Eagle Carina (the “Eagle Carina”), from Aframax Tanker II AS. On December 18, 2008, the Eagle Carina was purchased for $39,010,000, of which $27,000,000 was financed as non-recourse debt borrowed from Paribas and DVB. The Eagle Carina is subject to an 84-month bareboat charter with AET that expires on November 14, 2013.
On December 3, 2008, ICON Eagle Corona Pte. Ltd., a Singapore corporation wholly-owned by ICON Eagle Corona Holdings, LLC (“ICON Corona Holdings”), a Marshall Islands limited liability company owned 64.3% by the LLC and 35.7% by Fund Ten, executed a Memorandum of Agreement to purchase an Aframax product tanker, the M/V Eagle Corona (the “Eagle Corona”), from Aframax Tanker II AS. On December 31, 2008, the Eagle Corona was purchased for $41,270,000, of which $28,000,000 was financed as non-recourse debt borrowed from Paribas and DVB. The Eagle Corona is subject to an 84-month bareboat charter with AET that expires on November 14, 2013.
80
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(4)
|
Leased Equipment at Cost - continued
|
On March 24, 2009, Victorious, LLC (“Victorious”), a Marshall Islands limited liability company that is controlled by the LLC’s wholly-owned subsidiary ICON Victorious, LLC (“ICON Victorious”), purchased a new, 300-man accommodation and work barge (the “Barge”) from Swiber Engineering Ltd. (“Swiber”) for $42,500,000. Simultaneously with the purchase, the Barge was chartered back to Swiber Offshore Marine Pte. Ltd. (the “Charterer”) for 96 months. The purchase price of the Barge was funded by (i) a $19,125,000 equity investment from ICON Victorious, (ii) an $18,375,000 contribution-in-kind by Swiber and (iii) a subordinated, non-recourse and unsecured $5,000,000 payable. The payable bears interest at 3.5% per year, accrues interest quarterly, is only required to be repaid after the LLC achieves its minimum targeted return and is recorded within other non-current liabilities. At the end of the charter, the Charterer has the option to purchase the Barge for $21,000,000 plus 50% of the difference between the then fair market value less $21,000,000. ICON Victorious is the sole manager of Victorious and holds a senior, controlling equity interest and all management rights with respect to Victorious. Swiber holds a subordinated, noncontrolling equity interest in Victorious and the obligations of the Swiber entities that are parties to the transaction are guaranteed by Swiber’s parent company, Swiber Holdings Limited (“Swiber Holdings”).
On June 25, 2009, the LLC’s wholly-owned subsidiaries ICON Diving Marshall Islands and ICON Diving Netherlands, B.V., purchased certain marine diving equipment (the “Diving Equipment”) from Swiber for $10,000,000. Simultaneously with the purchase of the Diving Equipment, the LLC entered into a 60-month lease with Swiber Offshore Construction Pte. Ltd. (the “Lessee”), which commenced on July 1, 2009. The purchase price for the Diving Equipment was funded by $8,000,000 in cash and a subordinated, interest-free $2,000,000 payable to Swiber, which is due upon sale of the Diving Equipment at the conclusion of the lease term. The $2,000,000 payable is recorded on a discounted basis within other non-current liabilities and is being accreted to its carrying value as interest expense over its term. If an event of loss or an event of default occurs, the LLC’s obligation to repay the payable is terminated.
At the conclusion of the lease, the Lessee has the option to (x) purchase the Diving Equipment for $4,250,000 (the “Purchase Option”) and pay an amount equal to 50% of the difference between the fair market value of the Diving Equipment less $4,250,000 or (y) return the Diving Equipment. In the event the Lessee does not exercise the Purchase Option and the Diving Equipment is not sold to a third party, but rather the lease is renewed or is re-leased to a third party, all lease payments received by the LLC will be paid as follows: (i) first, to the LLC until it receives in full its purchase price of $10,000,000 less the $2,000,000 payable and achieves a return thereon at an agreed-upon rate; and (ii) then, to Swiber to repay in full the $2,000,000 payable without interest thereon. In addition, Victorious, ICON Victorious and Swiber granted the LLC’s subsidiaries a first priority mortgage in the Barge as security for the Lessee’s obligations under the lease. The obligations of the Lessee, Swiber, and Swiber Holdings under the operative transactional documents are subordinate only to ICON Victorious’ rights in the Barge. The obligations of the Lessee are guaranteed by Swiber Holdings.
81
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(4)
|
Leased Equipment at Cost - continued
|
Manufacturing Equipment
On September 28, 2007, the LLC completed the acquisition of and simultaneously leased back substantially all of the machining and metal working equipment of LC Manufacturing, LLC (“LC Manufacturing”), a wholly-owned subsidiary of MW Universal, Inc. (“MWU”), for a purchase price of $14,890,000. The lease term commenced on January 1, 2008 and continues for a period of 60 months. On December 10, 2007, the LLC completed the acquisition of and simultaneously leased back substantially all of the machining and metal working equipment of MW Crow, Inc. (“Crow”), another wholly-owned subsidiary of MWU, for a purchase price of $4,100,000. The lease term commenced on January 1, 2008 and continues for a period of 60 months.
Simultaneously with the closing of the transactions with LC Manufacturing and Crow, Fund Ten and ICON Leasing Fund Eleven, LLC (“Fund Eleven”), entities also managed by the Manager (together with the LLC, the “Participating Funds”), completed similar acquisitions with seven other subsidiaries of MWU, pursuant to which the funds purchased substantially all of the machining and metal working equipment of each subsidiary. The MWU subsidiaries’ obligations under their leases (including the leases of LC Manufacturing and Crow) are cross-collateralized and cross-defaulted, and all of the subsidiaries’ obligations are guaranteed by MWU. The Participating Funds have also entered into a credit support agreement, pursuant to which losses incurred by a Participating Fund with respect to any MWU subsidiary are shared among the Participating Funds in proportion to their respective capital investments. On September 5, 2008, the Participating Funds and IEMC Corp., a subsidiary of the Manager (“IEMC”), entered into an amended forbearance agreement with MWU, LC Manufacturing, Crow and seven other subsidiaries of MWU (collectively, the “MWU entities”) to cure certain non-payment related defaults by the MWU entities under their lease covenants with the LLC. The terms of the agreement included, among other things, the pledge of additional collateral and the grant of a warrant for the purchase of 12% of the fully diluted common stock of MWU at an aggregate exercise price of $1,000, exercisable until March 31, 2015. The obligations of the MWU entities are guaranteed by their affiliate, American Metals Industries, Inc.
On February 27, 2009, the Participating Funds and IEMC entered into a further amended forbearance agreement with the MWU entities to cure certain lease defaults. In consideration for restructuring LC Manufacturing’s lease payment schedule, the LLC received, among other things, a warrant, exercisable until March 31, 2015, to purchase 10% of the fully diluted membership interests of LC Manufacturing at the time of exercise at an aggregate exercise price of $1,000.
On June 1, 2009, the LLC amended and restructured the master lease agreement with LC Manufacturing dated September 28, 2007 to reduce the assets under lease from $14,890,000 to approximately $12,420,000. Contemporaneously, the LLC entered into a new lease with Metavation, LLC, an affiliate of LC Manufacturing (“Metavation”), for the assets previously under lease with LC Manufacturing with a cost of approximately $2,470,000. The equipment is subject to a 43-month lease with Metavation that expires on December 31, 2012. The obligations of Metavation under the lease are guaranteed by its parent company, Cerion, LLC. In consideration for restructuring LC Manufacturing’s lease payment schedule, the LLC received a warrant, exercisable until March 31, 2015, to purchase 65% of the fully diluted membership interests of LC Manufacturing at the time of exercise at an aggregate exercise price of $1,000.
82
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(4)
|
Leased Equipment at Cost - continued
|
On January 13, 2010, the LLC further amended the lease with LC Manufacturing to reduce LC Manufacturing’s payment obligations under the lease and to provide the LLC with an excess cash flow sweep in the event that excess cash is available in the future. On May 31, 2010, MWU sold its equity interest in LC Manufacturing to an entity controlled by LC Manufacturing’s management and the personal guaranty of MWU’s principal was reduced to $6,500,000 with respect to LC Manufacturing.
On July 26, 2010, the LLC sold the machining and metal working equipment subject to lease with Metavation, an affiliate of LC Manufacturing, to Metavation for approximately $2,423,000, which represented all amounts due under the lease, and simultaneously terminated the lease. As a result, the LLC recognized a gain on sale of approximately $522,000.
On September 30, 2010, the LLC further amended the lease with LC Manufacturing to reduce LC Manufacturing’s monthly rental payments to $25,000 through December 31, 2011. In consideration for reducing the monthly rent, LC Manufacturing agreed to an increase in the amount of the end of lease purchase option to approximately $4,000,000.
On September 30, 2010, the Participating Funds terminated the credit support agreement (see Note 17). Simultaneously with the termination, the LLC and Fund Eleven formed ICON MW, LLC (“ICON MW”), with ownership interests of 93.67% and 6.33%, 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 Crow and LC Manufacturing) 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 net gain of approximately $1,057,000 during the three months ended September 30, 2010.
Mining Equipment
On May 5, 2008, the LLC’s wholly-owned subsidiary ICON Magnum, LLC (“ICON Magnum”) purchased the Bucyrus Erie model 1570 Dragline (the “Dragline”) from Magnum Coal Company for a purchase price of approximately $12,461,000. The Dragline was simultaneously leased back to Magnum Coal Company and its subsidiaries. The lease term commenced on June 1, 2008 and continues for a period of 60 months.
On February 18, 2009, the LLC’s wholly-owned subsidiary ICON Murray, LLC (“ICON Murray”) purchased mining equipment for approximately $3,348,000 that is subject to a lease with American Energy Corp. and Ohio American Energy, Incorporated (collectively, “American Energy”). The lease expires on March 31, 2011. The payment and performance obligations of American Energy Corp. are secured by a guarantee of its parent company, Murray Energy Corporation.
On September 10, 2010, American Energy notified the Manager of their intention to purchase the mining equipment on lease from ICON Murray. On March 4, 2011, the Manager negotiated an end of lease term purchase price on behalf of ICON Murray for the equipment on lease to American Energy in the amount of approximately $1,798,000.
83
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(4)
|
Leased Equipment at Cost - continued
|
On May 26, 2009, the LLC’s wholly-owned subsidiary ICON Murray II, LLC (“ICON Murray II”) purchased mining equipment subject to a lease between Varilease Finance, Inc. (“Varilease”), as lessor, and American Energy Corp. and The Ohio Valley Coal Company, as lessees. The equipment was purchased from Varilease for approximately $3,196,000 and is subject to a 30-month lease that expires on December 31, 2011.
Telecommunications Equipment
On March 11, 2008, ICON Global Crossing IV purchased additional telecommunications equipment for approximately $5,939,000 that is also subject to a lease with Global Crossing. The lease expires on March 31, 2011.
Motor Coaches
On April 1, 2009, the LLC’s wholly-owned subsidiary ICON Coach, LLC (“ICON Coach”) acquired title to certain motor coaches from CUSA PRTS, LLC (“CUSA”), an affiliate of Coach America Holdings, Inc. (“Coach America”), for approximately $5,314,000. The motor coaches are subject to a 60-month lease with CUSA that expires on March 31, 2014. The payment and performance obligations of CUSA are guaranteed by Coach America.
Gas Compressors
On June 26, 2009, the LLC and ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P., an entity managed by an affiliate of the Manager (“Fund Fourteen”), entered into a joint venture, ICON Atlas, LLC (“ICON Atlas”), for the purpose of investing in eight new Ariel natural gas compressors (the “Gas Compressors”) from AG Equipment Co. (“AG”). On June 26, 2009, ICON Atlas purchased four of the Gas Compressors from AG for approximately $4,270,000. Simultaneously with the purchase, ICON Atlas entered into a lease with Atlas Pipeline Mid-Continent, LLC (“APMC”), an affiliate of Atlas Pipeline Partners, L.P. (“APP”).
On August 17, 2009, ICON Atlas purchased the other four Gas Compressors from AG for approximately $7,028,000. Simultaneously with that purchase, ICON Atlas entered into a second schedule to the lease with APMC. Each schedule is for a period of 48 months and expires on August 31, 2013. The obligations of APMC are guaranteed by its parent company, APP. As of December 31, 2009, the LLC’s and Fund Fourteen’s ownership interests in ICON Atlas were 55% and 45%, respectively.
On April 1, 2010, the LLC sold to an unaffiliated third party, Hardwood Partners, LLC (“Hardwood Partners”), a 5.46% nonvoting, noncontrolling interest in ICON Atlas for the purchase price of $550,000. As a result, the LLC recorded a gain on sale in the amount of approximately $1,000, which was included in members’ equity, and the LLC’s economic interest in ICON Atlas was reduced to 49.54%, although the LLC’s controlling interest remained at 55%.
84
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(4)
|
Leased Equipment at Cost - continued
|
Aggregate annual minimum future rentals receivable from the LLC’s non-cancelable leases over the next five years consisted of the following at December 31, 2010:
|
Years Ending
|
||||
|
December 31,
|
||||
|
2011
|
$ | 52,128,099 | ||
|
2012
|
50,572,447 | |||
|
2013
|
37,677,673 | |||
|
2014
|
12,423,300 | |||
|
2015
|
7,300,000 | |||
|
Thereafter
|
13,960,000 | |||
| $ | 174,061,519 | |||
|
(5)
|
Notes Receivable
|
Notes Receivable Secured by Solar Panel Production Equipment
On August 13, 2007, the LLC, along with a consortium of other lenders, entered into an equipment financing facility with Solyndra, Inc. (“Solyndra”), a privately-held manufacturer of solar panels, for the building of a new production facility. The financing facility was set to mature on June 30, 2013 and was secured by the equipment as well as all other assets of Solyndra. In connection with the transaction, the LLC received a warrant for the purchase of up to 40,290 shares of Solyndra common stock at an exercise price of $4.96 per share. The warrant is set to expire on April 6, 2014. 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.
Note Receivable Secured by a Machine Paper Coating Manufacturing Line
On November 7, 2008, the LLC, through its then wholly-owned subsidiary, ICON Appleton, LLC (“ICON Appleton”), made a secured term loan to Appleton Papers, Inc. (“Appleton”) in the amount of $22,000,000. The loan is secured by a machine paper coating manufacturing line. Interest on the term note accrued at 12.5% per year and was payable monthly in arrears in accordance with the promissory note for a period of 60 months.
On March 26, 2009, the loan and security agreement and the secured term loan note issued by Appleton were amended due to a default on one of the covenants in Appleton’s credit facility. As a result of the cross-default provisions of the loan and security agreement, the interest on the term note was adjusted to accrue interest at 14.25% per year and is payable monthly in arrears. On February 26, 2010, the LLC amended certain financial covenants in the loan agreement with Appleton.
On April 1, 2010, the LLC sold to Hardwood Partners a 5.10% noncontrolling interest in ICON Appleton for the purchase price of $1,000,000. As a result, the LLC recorded a gain on sale in the amount of approximately $6,000, which was included in members’ equity, and the LLC’s controlling interest in ICON Appleton was reduced to 94.90%.
85
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(5)
|
Notes Receivable - continued
|
On July 20, 2010, the LLC amended the loan agreement to release two borrowers, American Plastics Company, Inc. and New England Extrusion, Inc., that were being sold by Appleton to a third party.
On November 1, 2010, Appleton satisfied in full its remaining obligations under the loan agreement by prepaying the aggregate outstanding principal and interest in the amount of approximately $17,730,000. In connection with the prepayment, ICON Appleton collected an additional prepayment fee in the amount of $1,210,000.
Notes Receivable Secured by Point-of-Sale Equipment
On November 25, 2008, ICON Northern Leasing, LLC (“ICON Northern Leasing”), a joint venture among the LLC, Fund Ten and Fund Eleven, purchased four promissory notes (the “Notes”) made by Northern Capital Associates XIV, L.P., as borrower, in favor of Merrill Lynch Commercial Finance Corp. and received an assignment of the underlying master loan and security agreement (the “MLSA”), dated July 28, 2006. The LLC, Fund Ten and Fund Eleven have ownership interests of 52.75%, 12.25% and 35%, respectively, in ICON Northern Leasing. The aggregate purchase price for the Notes was approximately $31,573,000, net of a discount of approximately $5,165,000. The Notes are secured by an underlying pool of leases for point-of-sale equipment. Northern Leasing Systems, Inc. (“Northern Leasing Systems”), the originator and servicer of the Notes, provided a limited guarantee of the MLSA for payment deficiencies up to approximately $6,355,000. The Notes accrue interest at rates ranging from 7.97% to 8.40% per year and require monthly payments ranging from approximately $183,000 to $422,000. The Notes 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. The LLC’s share of the purchase price of the Notes was approximately $16,655,000.
On December 23, 2010, ICON Northern Leasing restructured the Notes owned by it by extending each Note’s term and increasing each Note’s interest rate 1.50%. Interest on the Notes now accrues at rates ranging from 9.47% to 9.895% per year and the Notes are scheduled to mature at various dates between December 15, 2011 and February 15, 2013.
On March 31, 2009, ICON Northern Leasing II, LLC (“ICON Northern Leasing II”), a wholly-owned subsidiary of the LLC, provided a senior secured loan in the amount of approximately $7,870,000 (the “Northern Leasing II Loan”) to Northern Capital Associates XV, L.P. (“NCA XV”) and Northern Capital Associates XIV, L.P. (“NCA XIV”), pursuant to the MLSA dated March 31, 2009. The Northern Leasing II Loan accrues interest at a rate of 18% per year and is secured by a first priority security interest in an underlying pool of leases for point-of-sale equipment of NCA XV and a second priority security interest in an underlying pool of leases for point-of-sale equipment of NCA XIV (subject only to the first priority security interest of ICON Northern Leasing). Northern Leasing Systems, the originator and servicer of the Northern Leasing II Loan, provided a limited guarantee for payment deficiencies of up to 10% of the Northern Leasing II Loan, or approximately $787,000.
On December 23, 2010, ICON Northern Leasing II restructured the payment obligations under its loan with NCA XV and NCA XIV and extended the term of the loan through November 15, 2013.
86
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(5)
|
Notes Receivable - continued
|
Notes Receivable Secured by Analog Seismic System Equipment
On June 29, 2009, the LLC and Fund Fourteen entered into a joint venture, ICON ION, LLC (“ICON ION”), for the purpose of making secured term loans (the “ION Loans”) in the aggregate amount of $20,000,000 to ARAM Rentals Corporation, a Canadian bankruptcy remote Nova Scotia unlimited liability company (“ARC”) and ARAM Seismic Rentals Inc., a U.S. bankruptcy remote Texas corporation (“ASR,” together with ARC, collectively referred to as the “ARAM Borrowers”). On that date, ICON ION funded the first tranche of the ION Loans in the amounts of $8,825,000 and $3,675,000 to ARC and ASR, respectively. On July 20, 2009, ICON ION funded the second tranche of the ION Loans to ARC in the amount of $7,500,000.
The ARAM Borrowers are wholly-owned subsidiaries of ION Geophysical Corporation, a Delaware corporation (“ION”). The Ion loans are secured by (i) a first priority security interest in all of the ARAM analog seismic system equipment owned by the ARAM Borrowers and (ii) a pledge of all of the equity interests in the ARAM Borrowers. In addition, ION guaranteed all obligations of the ARAM borrowers under the ION Loans. Interest accrues at the rate of 15% per year and the ION Loans are payable monthly in arrears for a period of 60 months beginning on August 1, 2009. As of December 31, 2009, the LLC’s and Fund Fourteen’s ownership interests in ICON ION were 55% and 45%, respectively.
On April 1, 2010, the LLC sold to Hardwood Partners a 2.91% noncontrolling interest in ICON ION for the purchase price of $550,000. As a result, the LLC recorded a gain on sale in the amount of approximately $4,000, which was included in members’ equity, and the LLC’s controlling interest in ICON ION was reduced to 52.09%.
Note Receivable Secured by Rail Support Construction Equipment
On December 23, 2009, ICON Quattro, LLC (“ICON Quattro”), a joint venture owned 55% by the LLC and 45% by Fund Fourteen, participated in a £24,800,000 loan facility by making a second priority secured term loan to Quattro Plant Limited (“Quattro Plant”) in the amount of £5,800,000. Quattro Plant is a wholly-owned subsidiary of Quattro Group Limited (“Quattro Group”). The loan is secured by (i) all of Quattro Plant’s rail support construction equipment, which consists of railcars, attachments to railcars, bulldozers, excavators, tractors, lowboy trailers, street sweepers, service trucks, forklifts (collectively, the “Construction Equipment”) and any other existing or future asset owned by Quattro Plant, (ii) all of Quattro Plant’s accounts receivable, and (iii) a mortgage on certain real estate in London, England owned by the majority shareholder of Quattro Plant. In addition, ICON Quattro received a key man insurance policy insuring the life of the majority shareholder of Quattro Plant in the amount of £5,500,000. All of Quattro Plant’s obligations under the loan are guaranteed by Quattro Group and its subsidiaries, Quattro Hire Limited and Quattro Occupational Academy Limited (collectively, the “Quattro Companies”).
Interest on the secured term loan accrues at a rate of 20% per year and the loan will be amortized to a balloon payment of 15% of the principal at the end of term. The loan is payable monthly in arrears for a period of 33 months, which began on January 1, 2010. Quattro Plant has the option to prepay the entire outstanding amount of the loan beginning January 1, 2012 in consideration for a fee of 5% of the amount being prepaid.
87
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(5)
|
Notes Receivable - continued
|
Simultaneously with ICON Quattro's loan, KBC Bank N.V. (“KBC”) participated in the £24,800,000 loan facility by making a loan of £19,000,000 to Quattro Plant (the “KBC Loan”). The KBC Loan is secured by (i) a first priority security interest in all of Quattro Plant’s Construction Equipment and any other existing or future asset owned by Quattro Plant and (ii) a first priority security interest in all of Quattro Plant’s accounts receivable.
Simultaneously with the consummation of ICON Quattro’s loan and the KBC Loan, ICON Quattro, KBC, Quattro Plant, Quattro Group and the Quattro Companies entered into an intercreditor deed governing the relationship between ICON Quattro and KBC. In the event either ICON Quattro or KBC seeks to enforce its security interest under its respective loan, the proceeds from the enforcement of any security interest shall be applied (i) first, to pay all costs and expenses incurred by or on behalf of ICON Quattro or KBC, (ii) second, to KBC in an amount that would allow KBC to receive its return on its investment, and (iii) third, to ICON Quattro in an amount that would allow ICON Quattro to receive its return on its investment.
On April 1, 2010, the LLC sold to Hardwood Partners a 5.87% nonvoting, noncontrolling interest in ICON Quattro for the purchase price of $550,000. As a result, the LLC recorded a loss on sale in the amount of approximately $37,000, which was included in members’ equity, and the LLC’s economic interest in ICON Quattro was reduced to 49.13%, although the LLC’s controlling interest remained at 55%.
On September 20, 2010, ICON Quattro was notified that Quattro Plant was in default under its senior loan agreement with KBC. As a result of the default, Quattro Plant’s principal payment obligations to ICON Quattro were suspended. During the suspension period, ICON Quattro received interest only payments from Quattro Plant. Subsequent to September 30, 2010, Quattro Plant cured the default under its senior loan agreement and was permitted to resume payments of principal to ICON Quattro beginning November 1, 2010. As of December 31, 2010, Quattro Plant had made all required payments due under the loan agreement.
On February 25, 2011, ICON Quattro was notified that Quattro Plant was in default under its senior loan agreement with PNC Financial Services UK Ltd. (“PNC,” f/k/a KBC). As a result of the default, Quattro Plant’s principal payment obligations to ICON Quattro were suspended for a period of 28 days. On March 7, 2011, ICON Quattro notified Quattro Plant that it was in default under its loan agreement relating to, among other things, its default under the senior loan agreement with PNC. The Manager expects ICON Quattro to receive all past due principal amounts due under the loan agreement plus default interest.
Note Receivable Secured by Aframax Tankers
On June 30, 2010, the LLC’s wholly-owned subsidiary ICON Palmali 12, LLC (“ICON Palmali 12”) participated in a $96,000,000 loan facility by making a second priority secured term loan to Ocean Navigation 5 Co. Ltd. and Ocean Navigation 6 Co. Ltd. (collectively, “Ocean Navigation”) pursuant to a loan agreement (the “Palmali Loan Agreement”). The proceeds of the loan were used by Ocean Navigation to purchase two Aframax tanker vessels, the Shah Deniz and the Absheron (each a “Vessel”). On July 28, 2010 and September 14, 2010, ICON Palmali 12 funded the loan in the aggregate amount of $9,600,000 to Ocean Navigation. Interest on the secured term loan accrues at a rate of 15.25% per year and is payable quarterly in arrears for a period of 72 months from the delivery date of each Vessel.
88
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(5)
|
Notes Receivable - continued
|
Note Receivable Secured by Metal Cladding and Production Equipment
On September 1, 2010, the LLC made a secured term loan to EMS Enterprise Holdings, LLC, EMS Holdings II, LLC, EMS Engineered Materials Solutions, LLC, EMS CUP, LLC and EMS EUROPE, LLC (collectively, “EMS”) in the amount of $3,200,000. Interest on the loan accrues at a rate of 13% per year and is payable monthly in arrears for a period of 48 months.
Note Receivable Secured by Lifting and Transportation Equipment
On September 24, 2010, the LLC participated in an approximately $150,000,000 loan facility by making a secured term loan to Northern Crane Services Inc. (“Northern Crane”) in the amount of $9,750,000. Interest on the loan accrues at a rate of 15.75% per year and is payable quarterly in arrears for a period of 54 months beginning on October 1, 2010. With the final payment, the LLC will receive a one time balloon payment in the aggregate amount of 32.50% of the outstanding loan amount.
Credit Quality of Notes Receivable and Allowance for Credit Losses
The LLC’s Manager 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 LLC’s 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. Such events are specifically disclosed in the discussion of each note held. As of December 31, 2010 and 2009, the Manager determined that no allowance for credit losses was required.
|
(6)
|
Assets Held for Sale
|
On December 11, 2007, the LLC and Fund Eleven formed ICON EAR, LLC (“ICON EAR”), with ownership interests of 55% and 45%, respectively. On December 28, 2007, ICON EAR purchased and simultaneously leased back semiconductor manufacturing equipment for a purchase price of $6,935,000, of which the LLC’s share was approximately $3,814,000. During June 2008, the LLC and Fund Eleven 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. The LLC and Fund Eleven retained ownership interests of 55% and 45%, respectively, subsequent to this transaction. The lease term commenced on July 1, 2008 and expires on June 30, 2013. As additional security for the purchase and lease, ICON EAR received mortgages on certain parcels of real property located in Jackson Hole, Wyoming.
89
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(6)
|
Assets Held for Sale - continued
|
In October 2009, certain facts came to light that led the Manager to believe that EAR was perpetrating a fraud against its lenders, including ICON EAR. 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. 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.
The Manager periodically reviews the significant assets in the LLC’s portfolio to determine whether events or changes in circumstances indicate that the net book value of an asset may not be recoverable. In light of the developments surrounding the semiconductor manufacturing equipment on lease to EAR, the Manager determined that the net book value of such equipment may not be recoverable. The following factors, among others, indicated that the net book value of the equipment may not be recoverable: (i) EAR’s failure to pay rental payments for the period from August 2009 through the date it filed for bankruptcy; and (ii) EAR’s petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Based on the Manager’s review, the net book value of the semiconductor manufacturing equipment exceeded the undiscounted cash flows and exceeded the fair value and, as a result, the LLC recognized a non-cash impairment charge of approximately $3,429,000 during the year ended December 31, 2009 relating to the write down in value of the semiconductor manufacturing equipment. No amount of this impairment charge represents a cash expenditure and our Manager does not expect that any amount of this impairment charge will result in any future cash expenditures. In addition, ICON EAR had a net accounts receivable balance outstanding of approximately $573,000, which was charged to bad debt expense during the year ended December 31, 2009 in accordance with the LLC’s accounting policies and the above mentioned factors.
On June 2, 2010, ICON EAR, in conjunction with ICON EAR II, LLC, a wholly-owned subsidiary of Fund Eleven, 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 recognized a loss on assets held for sale of approximately $298,000, which was recorded on the consolidated statements of operations. In addition, on June 7, 2010, ICON EAR received judgments in New York State Supreme Court against two principals of EAR who had guaranteed EAR’s lease obligations. ICON EAR 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 ICON EAR 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 investment in ICON EAR. 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 recognized a non-cash impairment charge of approximately $1,283,000 during the three months ended June 30, 2010.
90
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(6)
|
Assets Held for Sale - continued
|
Based on the 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, the LLC 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. No amount of this impairment charge represents a cash expenditure and the Manager does not expect that any amount of this impairment charge will result in any future cash expenditures.
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.
|
(7)
|
Investment in Joint Venture
|
The LLC and Fund Eleven formed the joint venture discussed below for the purpose of acquiring and managing certain assets. The LLC and Fund Eleven have substantially identical investment objectives and participate on the same terms and conditions.
ICON Pliant, LLC
On June 30, 2008, the LLC and Fund Eleven formed ICON Pliant, LLC (“ICON Pliant”), which entered into an agreement with Pliant Corporation (“Pliant”) to acquire manufacturing equipment for a purchase price of $12,115,000, of which the LLC paid approximately $5,452,000. On July 16, 2008, the LLC and Fund Eleven completed the acquisition of and simultaneously leased back manufacturing equipment to Pliant. The LLC and Fund Eleven have ownership interests in ICON Pliant of 45% and 55%, respectively. The lease expires on September 30, 2013.
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.
91
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(8)
|
Non-Recourse Long-Term Debt
|
The LLC had the following non-recourse long-term debt at December 31, 2010 and 2009:
|
2010
|
2009
|
|||||||
|
ICON Mayon, LLC
|
$ | 6,769,741 | $ | 12,341,338 | ||||
|
ICON Aegean Express, LLC
|
12,435,510 | 15,039,415 | ||||||
|
ICON Arabian Express, LLC
|
12,435,510 | 15,039,415 | ||||||
|
ICON Eagle Holdings, LLC
|
36,062,110 | 45,743,677 | ||||||
|
ICON Eagle Carina Holdings, LLC
|
17,363,526 | 22,229,602 | ||||||
|
ICON Eagle Corona Holdings, LLC
|
18,156,062 | 23,107,724 | ||||||
|
ICON Mynx, LLC
|
21,400,000 | 5,700,000 | ||||||
|
ICON Stealth, LLC
|
23,760,000 | 27,360,000 | ||||||
|
ICON Eclipse, LLC
|
38,359,375 | 45,000,000 | ||||||
|
ICON Ionian, LLC
|
4,400,000 | 5,500,000 | ||||||
|
ICON Coach, LLC
|
2,270,067 | 3,206,667 | ||||||
|
ICON Faulkner, LLC
|
11,225,805 | - | ||||||
|
ICON Global Crossing IV, LLC
|
7,873,599 | - | ||||||
|
Total non-recourse long-term debt
|
212,511,305 | 220,267,838 | ||||||
|
Less: Current portion of non-recourse long-term debt
|
56,271,731 | 43,305,938 | ||||||
|
Total non-recourse long-term debt, less current portion
|
$ | 156,239,574 | $ | 176,961,900 | ||||
On July 24, 2007, ICON Mayon borrowed approximately $24,938,000 in connection with the acquisition of the Mayon Spirit. The non-recourse long-term debt matures on July 25, 2011 and accrues interest at the London Interbank Offered Rate (“LIBOR”) plus 1.00% per year. The non-recourse long-term debt requires monthly payments ranging from $476,000 to $527,000. The lender has a security interest in the Mayon Spirit and an assignment of the charter hire. The LLC paid and capitalized approximately $187,000 in debt financing costs.
Along with the execution of the non-recourse long-term debt agreement mentioned above, the LLC entered into an interest rate swap contract with Paribas in order to hedge the variable interest rate on the non-recourse long-term debt and minimize the LLC’s risk of interest rate fluctuation. The interest rate swap contract, which was deemed effective as of June 19, 2008, fixed the interest rate at 6.35%. As of December 31, 2010 and 2009, ICON Mayon recorded in AOCI a cumulative decrease in the fair value of the interest rate swap of approximately $153,000 and approximately $571,000, of which the LLC’s share was approximately $78,000 and $291,000, respectively.
On April 24, 2008, ICON Aegean and ICON Arabian borrowed approximately $38,700,000 in connection with the acquisition of the Vroon Vessels. The non-recourse long-term debt obligations mature on April 24, 2014 and accrue interest at LIBOR plus 1.50% per year. The lender has a security interest in the Vroon Vessels and an assignment of the charter hire. The LLC paid and capitalized approximately $387,000 in debt financing costs.
Along with the execution of the non-recourse long-term debt agreements mentioned above, the LLC entered into interest rate swap contracts with Paribas in order to hedge the variable interest rates on the non-recourse long-term debt and minimize the LLC’s risk of interest rate fluctuation. The interest rate swap contracts, which were deemed effective as of June 19, 2008, fixed the interest rates of the debt of ICON Aegean and ICON Arabian at 3.93% per year. As of December 31, 2010 and 2009, ICON Aegean and ICON Arabian recorded in AOCI a cumulative decrease in the fair value of the interest rate swaps of approximately $1,564,000 and $1,544,000, respectively, in the aggregate.
92
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(8)
|
Non-Recourse Long-Term Debt - continued
|
On November 18, 2008, ICON Eagle Holdings borrowed $55,000,000 in connection with the acquisition of the Eagle Auriga and Eagle Centaurus. The non-recourse long-term debt obligations mature on November 13, 2013 and accrue interest at LIBOR plus a 1.75% per year margin. The lender has a security interest in the Eagle Auriga and the Eagle Centaurus and an assignment of the charter hire. The LLC paid and capitalized approximately $940,000 in debt financing costs.
Along with the execution of the non-recourse long-term debt agreements mentioned above, the LLC entered into interest rate swap contracts with Paribas and DVB for Eagle Auriga and Eagle Centaurus on November 18, 2008 and November 12, 2008, respectively, in order to hedge the variable interest rates on the non-recourse long-term debt and minimize the LLC’s risk of interest rate fluctuation. The interest rate swap contracts, which were deemed effective as of November 18, 2008, fixed the interest rates of the debt of ICON Eagle Holdings at 4.94% per year for ICON Eagle Auriga and 4.63% per year for ICON Eagle Centaurus. As of December 31, 2010 and 2009, ICON Eagle Holdings recorded in AOCI a cumulative decrease in the fair value of the interest rate swaps of approximately $1,266,000 and $1,116,000, respectively.
On December 18, 2008, ICON Carina Holdings borrowed $27,000,000 in connection with the acquisition of the Eagle Carina. The non-recourse long-term debt obligation matures on November 14, 2013 and accrues interest at LIBOR plus a 1.75% per year margin. The lender has a security interest in the Eagle Carina and an assignment of the charter hire. The LLC paid and capitalized approximately $405,000 in debt financing costs.
Along with the execution of the non-recourse long-term debt agreement mentioned above, the LLC entered into an interest rate swap contract with Paribas and DVB on December 4, 2008 in order to hedge the variable interest rate on the non-recourse long-term debt and minimize the LLC’s risk of interest rate fluctuation. The interest rate swap contract, which was deemed effective as of December 18, 2008, fixed the interest rates of the debt of ICON Carina Holdings at 3.85% per year. As of
December 31, 2010 and 2009, ICON Carina Holdings recorded in AOCI a cumulative decrease in the fair value of the interest rate swap of approximately $340,000 and $115,000, of which the LLC’s share was approximately $219,000 and $74,000, respectively.
On December 31, 2008, ICON Corona Holdings borrowed $28,000,000 in connection with the acquisition of the Eagle Corona. The non-recourse long-term debt obligation matures on November 14, 2013 and accrues interest at LIBOR plus a 1.75% per year margin. The lender has a security interest in the Eagle Corona and an assignment of the charter hire. The LLC paid and capitalized approximately $422,000 in debt financing costs.
Along with the execution of the non-recourse long-term debt agreement mentioned above, the LLC entered into an interest rate swap contract with Paribas and DVB on January 5, 2009 in order to hedge the variable interest rate on the non-recourse long-term debt and minimize the LLC’s risk of interest rate fluctuation. The interest rate swap contract, which was deemed effective as of January 5, 2009, fixed the interest rates of the debt of ICON Corona Holdings at 4.015% per year. As of December 31, 2010 and 2009, ICON Corona Holdings recorded in AOCI a cumulative decrease in the fair value of the interest rate swap of approximately $406,000 and $191,000, of which the LLC’s share was approximately $261,000 and $123,000, respectively.
93
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(8)
|
Non-Recourse Long-Term Debt - continued
|
On June 26, 2009, ICON Mynx, ICON Stealth, and ICON Eclipse entered into the Facility Agreement with Standard Chartered in connection with the acquisition of the Leighton Vessels. The non-recourse long-term debt obligations incurred in connection with the Leighton Vessels acquired by ICON Mynx and ICON Stealth mature on June 30, 2014 and accrued interest at 4.8475% during the Stub Period and, thereafter, accrue interest at LIBOR plus 4.25% per year. The LLC also entered into interest rate swap contracts effective June 26, 2009 to fix the interest rate on this debt at 7.05% per year. ICON Mynx, ICON Stealth and ICON Eclipse are jointly and severally liable for the obligations under the Facility Agreement and the Leighton Vessels are cross-collateralized. As of December 31, 2010 and 2009, ICON Mynx recorded in AOCI a cumulative decrease in fair value of the interest rate swaps of approximately $187,000 and 68,000, respectively. As of December 31, 2010 and 2009, ICON Stealth recorded in AOCI a cumulative decrease in the fair value of the interest rate swaps of approximately $898,000 and $328,000, respectively. The LLC paid and capitalized approximately $2,300,000 in debt financing costs.
On June 30, 2009, ICON Eclipse entered into an interest rate swap agreement with Standard Chartered with a start date of September 30, 2009 in order to fix the variable interest rate on the non-recourse long-term debt related to the remaining Leighton Vessel and to minimize the LLC’s risk of interest rate fluctuations. After giving effect to the swap agreement, the interest rate was fixed at 7.25% per year for the Eclipse Senior Tranche. As of December 31, 2010 and 2009, ICON Eclipse recorded in AOCI a cumulative decrease in the fair value of the interest rate swap of approximately $1,617,000 and $706,000, respectively.
On October 30, 2009, ICON Ionian borrowed $5,500,000 from Nordea in connection with the acquisition of the Ocean Princess. The non-recourse long-term debt obligation matures on October 30, 2014 and accrues interest at LIBOR plus a 3.5% per year margin. The LLC paid and capitalized approximately $96,000 in debt financing costs.
On October 30, 2009, ICON Ionian entered into an interest rate swap agreement with Nordea Bank Finland Plc. in order to fix the variable interest rate on the non-recourse debt obligation related to the Ocean Princess and to minimize the LLC’s risk for interest rate fluctuations. After giving effect to the swap agreement, the interest rate was fixed at 5.54% per year. The LLC accounts for this swap contract as a non-designated derivative instrument and will recognize any change in the fair value directly in earnings.
On December 11, 2009, ICON Coach borrowed approximately $3,207,000 from Wells Fargo Equipment Finance, Inc. (“Wells Fargo”). The terms of the loan require ICON Coach to make 38 monthly payments of approximately $95,000 each from January 1, 2010 through February 1, 2013. Interest is computed at a rate of 7.5% per year throughout the term of the loan. In consideration for making the loan, Wells Fargo received a first priority security interest in (i) the fourteen 2009 MCI Model D4505 passenger motor coaches owned by ICON Coach, (ii) the master lease agreement between ICON Coach and CUSA, and (iii) the guaranty of Coach America. ICON Coach has the option to prepay the loan (a) beginning January 1, 2011 through December 31, 2011 in consideration for a fee of 3% of the amount being prepaid or (b) beginning January 1, 2012 through the end of the term in consideration for a fee of 2% of the amount being prepaid.
On January 5, 2010, ICON Faulkner entered into a $12,000,000 senior facility agreement with Standard Chartered in connection with the acquisition of a pipelay barge, the Leighton Faulkner. The non-recourse long-term debt obligation matures on January 4, 2015 and accrues interest at LIBOR plus a 5.25% per year margin. The LLC paid and capitalized approximately $240,000 in debt financing costs.
94
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(8)
|
Non-Recourse Long-Term Debt - continued
|
On January 6, 2010, the LLC entered into an interest rate swap contract with Standard Chartered in order to fix the variable interest rate on the non-recourse debt obligation related to ICON Faulkner and to minimize the LLC’s risk for interest rate fluctuations. After giving effect to the swap agreement, the LLC has a fixed interest rate of 7.96% per year. The LLC accounts for this swap contract as a non-designated derivative instrument and will recognize any change in the fair value directly in earnings.
On March 31, 2010, ICON Mynx borrowed $14,000,000 of senior debt pursuant to an Amended Facility Agreement with Standard Chartered related to ICON Mynx’s first upgrade. The Amended Facility Agreement will be repaid in quarterly installments beginning on March 31, 2011. The non-recourse long-term debt obligation matures on June 25, 2017 and accrues interest at LIBOR plus a 4.50% margin through November 12, 2010. Interest accrues at LIBOR plus a 4.25% margin from January 1, 2011 through June 26, 2014. The rate is subject to be modified at the discretion of the lender after June 26, 2014. The LLC paid and capitalized approximately $280,000 in debt financing costs.
On April 13, 2010, the LLC entered into an interest rate swap contract with Standard Chartered in order to fix the variable interest rate on the non-recourse debt obligation related to ICON Mynx’s first upgrade and to minimize the LLC’s risk for interest rate fluctuations. After giving effect to the swap agreement, the LLC has a fixed interest rate of 6.91% through November 12, 2010 and a fixed interest rate of 6.66% per year through June 30, 2014. As of December 31, 2010, ICON Mynx, in connection to the first upgrade, recorded in AOCI a cumulative decrease in fair value of the interest rate swaps of approximately $392,000.
On August 20, 2010, ICON Mynx borrowed $2,450,000 of senior debt pursuant to an Amended Facility Agreement with Standard Chartered related to ICON Mynx’s second upgrade. The Amended Facility Agreement will be repaid in quarterly installments beginning on March 31, 2011. The non-recourse long-term debt obligation matures on June 25, 2017 and accrues interest at LIBOR plus 4.50% until December 26, 2010 and LIBOR plus a 4.25% margin from January 1, 2011 through June 26, 2014. The rate is subject to be modified at the discretion of the lender after June 26, 2014.
On August 31, 2010, the LLC entered into an interest rate swap contract with Standard Chartered in order to fix the variable interest rate on the non-recourse debt obligation related to ICON Mynx’s second upgrade and to minimize the LLC’s risk for interest rate fluctuations. After giving effect to the swap agreement, the LLC has a fixed interest rate of 6.09% through December 26, 2010 and a fixed interest rate of 5.59% per year thereafter. As of December 31, 2010, ICON Mynx, in connection to the second upgrade, recorded in AOCI a cumulative decrease in fair value of the interest rate swaps of approximately $2,000.
On June 25, 2010, ICON Global Crossing IV borrowed approximately $12,449,000 from CapitalSource Bank (“CapitalSource”). In consideration for making the loan, CapitalSource received a first priority security interest in ICON Global Crossing IV's interest in certain schedules to ICON Global Crossing IV’s master lease agreement with Global Crossing. The loan is payable monthly in arrears beginning on July 1, 2010 through March 1, 2012. Interest is payable at a rate of 9% per year throughout the term of the loan.
As of December 31, 2010 and 2009, the LLC had capitalized net debt financing costs of $2,999,533 and $3,699,981, respectively. For the years ended December 31, 2010, 2009 and 2008, the LLC recognized amortization expense of $1,251,909, $959,712 and $142,199, respectively.
95
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(8)
|
Non-Recourse Long-Term Debt - continued
|
The aggregate maturities of non-recourse long-term debt over the next five years were as follows at December 31, 2010. There will be no additional maturities of non-recourse long-term debt after 2015.
|
Years Ending December 31,
|
||||
|
2011
|
$ | 56,271,731 | ||
|
2012
|
43,737,892 | |||
|
2013
|
51,420,432 | |||
|
2014
|
56,048,996 | |||
|
2015
|
5,032,254 | |||
| $ | 212,511,305 | |||
|
(9)
|
Revolving Line of Credit, Recourse
|
The LLC and certain entities managed by the Manager, ICON Income Fund Eight B L.P. (“Fund Eight B”), ICON Income Fund Nine, LLC, Fund Ten, Fund Eleven and Fund Fourteen (collectively, the “ICON Borrowers”), are parties to a Commercial Loan Agreement, as amended (the “Loan Agreement”), with California Bank & Trust (“CB&T”). The Loan Agreement provides for a revolving line of credit of up to $30,000,000 pursuant to a senior secured revolving loan facility (the “Facility”), which is secured by all assets of the ICON Borrowers not subject to a first priority lien, as defined in the Loan Agreement. Each of the ICON Borrowers is jointly and severally liable for all amounts borrowed under the Facility. At December 31, 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 ICON Borrowers have a beneficial interest.
The Facility expires on June 30, 2011 and the ICON Borrowers may request a one year extension to the revolving line of credit within 390 days of the then-current expiration date, but CB&T has no obligation to extend. The interest rate for general advances under the Facility is CB&T’s prime rate and the interest rate on up to five separate non-prime rate advances that are permitted to be made under the Facility is the rate at which U.S. dollar deposits can be acquired by CB&T in the London Interbank Eurocurrency Market plus 2.5% per year, provided that neither interest rate is permitted to be less than 4.0% per year. The interest rate at December 31, 2010 was 4.0%. In addition, the ICON Borrowers are obligated to pay a quarterly commitment fee of 0.50% on unused commitments under the Facility.
The ICON Borrowers are also parties to a Contribution Agreement (the “Contribution Agreement”) that provides that, in the event that an ICON Borrower pays an amount in excess of its share of total obligations under the Facility, the other ICON Borrowers will contribute to such ICON Borrower so that the aggregate amount paid by each ICON Borrower reflects its allocable share of the aggregate obligations under the Facility.
Aggregate borrowings by all Borrowers under the Facility amounted to $1,450,000 at December 31, 2010. The LLC had no borrowings outstanding under the facility as of such date. The balance of $1,450,000 was borrowed by Fund Eleven. Subsequent to December 31, 2010, Fund Eleven repaid $1,450,000, which reduced its outstanding loan balance to $0.
The ICON Borrowers were in compliance with all covenants under the Loan Agreement at December 31, 2010. As of such date, no amounts were due to or payable by the LLC under the Contribution Agreement.
96
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(10)
|
Transactions with Related Parties
|
The LLC entered into certain agreements with its Manager and ICON Securities, whereby the LLC paid certain fees and reimbursements to these parties. The Manager was entitled to receive an organizational and offering expense allowance of 3.5% of capital raised up to $50,000,000, 2.5% of capital raised between $50,000,001 and $100,000,000, 1.5% of capital raised between $100,000,001 and $200,000,000, 1.0% of capital raised between $200,000,001 and $250,000,000 and 0.5% of capital raised over $250,000,000. ICON Securities was entitled to receive a 2% underwriting fee from the gross proceeds from sales of Shares to additional members.
In accordance with the terms of the LLC Agreement, the LLC pays or paid the Manager (i) management fees ranging from 1% to 7% based on a percentage of the rentals and other contractual payments recognized either directly by the LLC or through its joint ventures, and (ii) acquisition fees, through the end of the operating period, of 3% of the purchase price of the LLC’s investments. In addition, the Manager is reimbursed for administrative expenses incurred in connection with the LLC’s operations. The Manager also has a 1% interest in the LLC’s profits, losses, cash distributions and liquidation proceeds.
The Manager performs certain services relating to the management of the LLC’s equipment leasing and other financing activities. Such services include, but are not limited to, the collection of lease payments from the lessees of the equipment or loan payments from borrowers, re-leasing services in connection with equipment which is off-lease, inspections of the equipment, liaising with and general supervision of lessees and borrowers to ensure that the equipment is being properly operated and maintained, monitoring performance by the lessees of their obligations under the leases and the payment of operating expenses.
Administrative expense reimbursements are costs incurred by the Manager or its affiliates on the LLC’s behalf 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.
The LLC paid distributions to the Manager of $339,880, $318,725 and $162,440 for the years ended December 31, 2010, 2009 and 2008, respectively. The Manager’s interest in the LLC’s net income for the years ended December 31, 2010, 2009 and 2008 was $118,755, $138,589 and $59,426, respectively.
97
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(10)
|
Transactions with Related Parties - continued
|
Fees and other expenses paid or accrued by the LLC to the Manager or its affiliates for the years ended December 31, 2010, 2009 and 2008 were as follows:
|
Years Ended December 31,
|
||||||||||||||||
|
Entity
|
Capacity |
|
Description
|
2010
|
2009
|
2008
|
||||||||||
|
ICON Capital Corp.
|
Manager |
|
Organizational and
|
|||||||||||||
|
offering expenses (1)
|
$ | - | $ | 372,809 | $ | 2,273,874 | ||||||||||
|
ICON Securities Corp.
|
Managing broker-dealer |
|
Underwriting fees (1)
|
- | 1,441,563 | 3,458,030 | ||||||||||
|
ICON Capital Corp.
|
Manager |
|
Acquisition fees (2)
|
3,849,400 | 7,669,642 | 7,905,969 | ||||||||||
|
ICON Capital Corp.
|
Manager |
|
Administrative expense
|
|||||||||||||
|
reimbursements (3)
|
3,184,449 | 3,594,400 | 2,705,118 | |||||||||||||
|
ICON Capital Corp.
|
Manager |
|
Management fees (3)
|
4,302,374 | 3,390,239 | 1,474,993 | ||||||||||
|
Total
|
$ | 11,336,223 | $ | 16,468,653 | $ | 17,817,984 | ||||||||||
|
(1) Amount charged directly to members' equity.
|
||||||||||||||||
|
(2) Amount capitalized and amortized to operations over the estimated service period in accordance with the LLC's accounting policies.
|
||||||||||||||||
|
(3) Amount charged directly to operations.
|
||||||||||||||||
At December 31, 2010 and 2009, the LLC had a payable due to the Manager of $319,479 and $482,301, respectively, primarily related to administrative expense reimbursements.
|
(11)
|
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.
98
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(11)
|
Derivative Financial Instruments - continued
|
The LLC accounts for derivative financial instruments in accordance with the accounting pronouncements that established accounting and reporting standards for derivative financial instruments. These accounting pronouncements require the LLC to recognize all derivatives as either assets or liabilities on the consolidated balance sheets and measure those instruments at fair value. The LLC recognizes the fair value of all derivatives as either assets or liabilities on the consolidated balance sheets and changes in the fair value of such instruments are recognized immediately in earnings unless certain accounting criteria established by the accounting pronouncements are met. These criteria demonstrate that the derivative is expected to be highly effective at offsetting changes in the fair value or expected cash flows of the underlying exposure at both the inception of the hedging relationship and on an ongoing basis and include an evaluation of the counterparty risk and the impact, if any, on the effectiveness of the derivative. If these criteria are met, which the LLC must document and assess at inception and on an ongoing basis, the LLC recognizes the changes in fair value of such instruments in AOCI, a component of equity on the consolidated balance sheets. Changes in the fair value of the ineffective portion of all derivatives are recognized immediately in earnings.
Interest Rate Risk
The LLC’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements on its variable non-recourse debt. The LLC’s hedging strategy to accomplish this objective is to match the projected future cash flows with the underlying debt service. Interest rate swaps designated as cash flow hedges involve the receipt of floating-rate interest payments from a counterparty in exchange for the LLC making fixed interest rate payments over the life of the agreements without exchange of the underlying notional amount.
As of December 31, 2010, the LLC had twelve floating-to-fixed interest rate swaps, one relating to each of ICON Stealth, ICON Eclipse, ICON Eagle Corona Holdings, ICON Eagle Carina Holdings, ICON Aegean Express, LLC, ICON Arabian Express, LLC and ICON Mayon, LLC, two relating to ICON Eagle Holdings, and three relating to ICON Mynx, that are designated and qualifying as cash flow hedges with an aggregate notional amount of $186,304,333. These interest rate swaps have maturity dates ranging from July 25, 2011 to September 30, 2014.
As of December 31, 2009, the LLC had ten floating-to-fixed interest rate swaps, one relating to each of ICON Mynx, ICON Stealth, ICON Eclipse, ICON Corona Holdings, ICON Carina Holdings, ICON Aegean, ICON Arabian and ICON Mayon and two relating to ICON Eagle Holdings, that are designated and qualifying as cash flow hedges with an aggregate notional amount of $210,108,046. These interest rate swaps have maturity dates ranging from July 25, 2011 to September 30, 2014.
99
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(11)
|
Derivative Financial Instruments - continued
|
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, the LLC recorded approximately $53,000 of hedge ineffectiveness in earnings. During the year ended December 31, 2009, the LLC recorded approximately $74,000 of hedge ineffectiveness in earnings. During the year ended 2008, the LLC recorded approximately $11,600 of hedge ineffectiveness in earnings. At December 31, 2010 and 2009, the total unrealized loss recorded to AOCI related to the change in fair value of these interest rate swaps was approximately $6,484,000 and $4,251,000, respectively.
During the twelve months ending December 31, 2011, the LLC estimates that approximately $3,915,000 will be reclassified from AOCI to interest expense.
Foreign Exchange Risk
The LLC is exposed to fluctuations in Euros and pounds sterling. The LLC, at times, uses foreign currency derivatives, including currency forward agreements, to manage its exposure to fluctuations in the USD-Euro and USD-pounds sterling exchange rate. Currency forward agreements involved fixing the foreign exchange rate for delivery of a specified amount of foreign currency on a specified date. The currency forward agreements were typically cash settled in U.S. dollars for their fair value at or close to their settlement date. The net gain (loss) recorded for the year ended December 31, 2009 and 2008 relating to Euro-to-USD forward contracts was comprised of an unrealized gain (loss) of $21,037 and $(15,833), respectively. As of June 30, 2009, the remaining outstanding foreign exchange Euro-to-USD forward contract matured.
The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges of foreign exchange risk was recorded in AOCI and subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivative, as well as amounts excluded from the assessment of hedge effectiveness, was recognized directly in earnings.
Non-designated Derivatives
As of December 31, 2010, the LLC had two interest rate swaps, one relating to each of ICON Faulkner and ICON Ionian, with an aggregate notional balance of $15,625,806 that are not speculative and are used to meet the LLC’s objectives in using interest rate derivatives to add stability to interest expense and to manage its exposure to interest rate movements. The LLC’s hedging strategy to accomplish this objective is to match the projected future cash flows with the underlying debt service. The interest rate swaps involve the receipt of floating-rate interest payments from a counterparty in exchange for the LLC making fixed interest rate payments over the life of the agreement without exchange of the underlying notional amount.
Additionally, the LLC holds warrants that are held for purposes other than hedging. All changes in the fair value of the interest rate swap not designated as a hedge and the warrants are recorded directly in earnings.
100
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(11)
|
Derivative Financial Instruments - continued
|
The table below presents the fair value of the LLC’s derivative financial instruments as well as their classification within the LLC’s consolidated balance sheet as of December 31, 2010 and 2009:
|
Asset Derivatives
|
Liability Derivatives
|
|||||||||||||||||
|
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
|
$ | 6,949,480 | $ | 4,766,243 | |||||||||
|
Derivatives not designated as hedging
|
||||||||||||||||||
|
instruments:
|
||||||||||||||||||
|
Interest rate swaps
|
$ | - | $ | - |
Derivative instruments
|
$ | 531,714 | $ | 13,309 | |||||||||
|
Warrants
|
Other non-current assets
|
$ | 340,324 | $ | 79,371 | $ | - | $ | - | |||||||||
101
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(11)
|
Derivative Financial Instruments - continued
|
The table below presents the effect of the LLC’s derivative financial instruments designated as cash flow hedging instruments on the consolidated statements of operations for the year ended December 31, 2010 and 2009:
|
Year Ended December 31, 2010
|
||||||||||||||
|
|
|
|
Location of Gain (Loss)
|
Gain (Loss) Recognized
|
||||||||||
|
Amount of Gain
(Loss) Recognized
|
Location of Gain (Loss)
|
Gain (Loss) Reclassified
|
Recognized in Income on
Derivative (Ineffective |
in Income on Derivative
(Ineffective Portion |
||||||||||
|
Derivatives
|
in AOCI on Derivative
(Effective Portion) |
Reclassified from AOCI into
Income (Effective Portion)
|
from AOCI into Income
(Effective Portion) |
Portion and Amounts Excluded
from Effectiveness Testing) |
and Amounts Excluded
from Effectiveness Testing) |
|||||||||
|
Interest rate swaps
|
$ | (7,240,920 | ) |
Interest expense
|
$ | (5,007,412 | ) |
Loss on financial instruments
|
$ | (52,724 | ) | |||
|
Year Ended December 31, 2009
|
||||||||||||||
|
Amount of Gain
|
|
|
Location of Gain (Loss)
|
Gain (Loss) Recognized
|
||||||||||
|
(Loss) Recognized AOCI in
|
Location of Gain (Loss)
Reclassified |
Gain (Loss)
Reclassified from |
Recognized in Income on
Derivative (Ineffective Portion
|
in Income on Derivative
(Ineffective Portion and |
||||||||||
|
Derivatives
|
on Derivative
(Effective Portion)
|
from AOCI into Income
(Effective Portion)
|
AOCI into Income
(Effective Portion)
|
and Amounts Excluded
from Effectiveness Testing) |
Amounts Excluded from Effectiveness Testing)
|
|||||||||
|
Foreign exchange contracts
|
$ | (44,960 | ) |
(Loss) gain on financial instruments
|
$ | 41,414 |
(Loss) gain on financial instruments
|
$ | - | |||||
|
Interest rate swaps
|
(3,203,150 | ) |
Interest expense
|
(3,844,651 | ) |
(Loss) gain on financial instruments
|
(59,267 | ) | ||||||
|
Total
|
$ | (3,248,110 | ) | $ | (3,803,237 | ) | $ | (59,267 | ) | |||||
The LLC’s derivative financial instruments not designated as hedging instruments generated a net gain (loss) on the statements of operations for the years ended December 31, 2010, 2009 and 2008 of $(195,048), $17,792 and $(28,062), respectively. The net loss recorded for the year ended December 31, 2010 was comprised of losses of $456,001 relating to interest rate swap contracts and a gain of $260,953 relating to warrants, which were recorded as a component of loss on financial instruments. The gain (loss) for the years ended December 31, 2009 and 2008 were comprised of unrealized gain (loss) relating to warrants, which were recorded as a component of loss on financial instruments.
102
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(11)
|
Derivative Financial Instruments - continued
|
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 $7,481,194 and $4,779,552, 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 $7,762,102.
|
(12)
|
Accumulated Other Comprehensive Income (Loss)
|
AOCI included accumulated unrealized losses on derivative financial instruments and accumulated unrealized losses on currency translation adjustments of $6,484,037 and $1,505,909, respectively, at December 31, 2010 and accumulated unrealized losses on derivative financial instruments and accumulated unrealized losses on currency translation adjustments of $4,250,529 and $773,580, respectively, at December 31, 2009.
|
(13)
|
Fair Value Measurements
|
The LLC accounts for the fair value of financial instruments in accordance with the accounting pronouncements, which require assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories:
|
·
|
Level 1: Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
|
|
·
|
Level 2: Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
|
|
·
|
Level 3: Pricing inputs that are generally unobservable and cannot be corroborated by market data.
|
Financial Assets and Liabilities Measured on a Recurring Basis
Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Manager’s assessment, on the LLC’s behalf, of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.
103
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(13)
|
Fair Value Measurements – continued
|
The following table summarizes the valuation of the LLC’s material financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2010:
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Warrants
|
$ | - | $ | - | $ | 340,324 | $ | 340,324 | ||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivative Instruments
|
$ | - | $ | 7,481,194 | $ | - | $ | 7,481,194 | ||||||||
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 Instruments
|
$ | - | $ | 4,779,552 | $ | - | $ | 4,779,552 | ||||||||
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 as of December 31, 2010:
|
December 31, 2010
|
Level 1
|
Level 2
|
Level 3
|
Total Impairment Loss
|
||||||||||||||||
|
Assets held for sale, net
|
$ | 2,496,163 | $ | - | $ | - | $ | 2,496,163 | $ | 5,648,959 | ||||||||||
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.
104
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(13)
|
Fair Value Measurements – continued
|
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
|
$ | 8,982,354 | $ | - | $ | - | $ | 9,233,109 | $ | 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.
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 other non-current liabilities and notes receivable was based on the discounted value of future cash flows expected to be received from the loans based on terms consistent with the range of the LLC’s internal pricing strategies for transactions of this type.
|
December 31, 2010
|
||||||||
|
Carrying Amount
|
Fair Value
|
|||||||
|
Fixed rate notes receivable
|
$ | 61,572,169 | $ | 62,807,802 | ||||
|
Other non-current liabilities
|
$ | 53,259,853 | $ | 56,197,754 | ||||
|
(14)
|
Concentrations of Risk
|
For the years ended December 31, 2010, 2009 and 2008, the LLC had three lessees that accounted for approximately 59.4%, 56.0% and 55.0% of rental and finance income, respectively.
For the years ended December 31, 2010, 2009 and 2008, the LLC had four, three and two borrowers that accounted for approximately 88.7%, 98.4% and 51.7% of interest and other income, respectively.
As of December 31, 2010 and 2009, the LLC had two lessees that accounted for approximately 48.7% and 43.9% of total assets, respectively.
As of December 31, 2010 and 2009, the LLC had two and three lenders that accounted for 77.3% and 71.3% of total liabilities, respectively.
105
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(15)
|
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, investment in joint venture and notes receivable were as follows:
|
Year Ended December 31, 2010
|
||||||||||||||||
|
United
|
Vessels and Equipment (a)
|
|||||||||||||||
|
States
|
Europe
|
Total
|
||||||||||||||
|
Revenue:
|
||||||||||||||||
|
Rental income
|
$ | 20,903,382 | $ | - | $ | 40,182,654 | $ | 61,086,036 | ||||||||
|
Finance income
|
$ | 1,618,140 | $ | 1,023,269 | $ | 12,326,081 | $ | 14,967,490 | ||||||||
|
Income from investment in joint venture
|
$ | 626,726 | $ | - | $ | - | $ | 626,726 | ||||||||
|
Interest and other income
|
$ | 9,176,273 | $ | 2,849,944 | $ | - | $ | 12,026,217 | ||||||||
|
As of December 31, 2010
|
||||||||||||||||
|
United
|
Vessels and Equipment (a)
|
|||||||||||||||
|
States
|
Europe
|
Total
|
||||||||||||||
|
Long-lived assets:
|
||||||||||||||||
|
Net investment in finance leases
|
$ | 12,234,879 | $ | 4,869,872 | $ | 161,441,860 | $ | 178,546,611 | ||||||||
|
Leased equipment at cost, net
|
$ | 42,395,578 | $ | - | $ | 259,320,346 | $ | 301,715,924 | ||||||||
|
Notes receivable
|
$ | 44,152,701 | $ | 17,419,468 | $ | - | $ | 61,572,169 | ||||||||
|
Investment in joint venture
|
$ | 3,864,617 | $ | - | $ | - | $ | 3,864,617 | ||||||||
| (a) |
The LLC's vessels and equipment are chartered to six separate companies: one vessel to Teekay, two vessels to Vroon, four vessels to AET, one vessel and equipment to Swiber, four vessels to Leighton and one vessel to Lily Shipping. When the LLC charters a vessel to a charterer, the charterer is free to trade the vessel worldwide.
|
|
Year Ended December 31, 2009
|
||||||||||||||||
|
United
|
Vessels and Equipment (a)
|
|||||||||||||||
|
States
|
Europe
|
Total
|
||||||||||||||
|
Revenue:
|
||||||||||||||||
|
Rental income
|
$ | 22,160,133 | $ | - | $ | 37,444,339 | $ | 59,604,472 | ||||||||
|
Finance income
|
$ | 2,154,751 | $ | 1,602,342 | $ | 3,489,833 | $ | 7,246,926 | ||||||||
|
Income from investment in joint venture
|
$ | 573,040 | $ | - | $ | - | $ | 573,040 | ||||||||
|
Interest and other income
|
$ | 10,985,470 | $ | 48,512 | $ | 32,798 | $ | 11,066,780 | ||||||||
|
As of December 31, 2009
|
||||||||||||||||
|
United
|
Vessels and Equipment (a)
|
|||||||||||||||
|
States
|
Europe
|
Total
|
||||||||||||||
|
Long-lived assets:
|
||||||||||||||||
|
Net investment in finance leases
|
$ | 15,720,979 | $ | 10,229,027 | $ | 130,630,214 | $ | 156,580,220 | ||||||||
|
Leased equipment at cost, net
|
$ | 50,681,620 | $ | - | $ | 284,798,533 | $ | 335,480,153 | ||||||||
|
Notes receivable
|
$ | 64,615,265 | $ | 9,293,340 | $ | - | $ | 73,908,605 | ||||||||
|
Investment in joint venture
|
$ | 4,609,644 | $ | - | $ | - | $ | 4,609,644 | ||||||||
| (a) |
The LLC's vessels and equipment are chartered to six separate companies: one vessel to Teekay, two vessels to Vroon, four vessels to AET, one vessel and equipment to Swiber, three vessels to Leighton and one vessel to Lily Shipping. When the LLC charters a vessel to a charterer, the charterer is free to trade the vessel worldwide.
|
106
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(16)
|
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
|
$ | 22,995,739 | $ | 24,063,077 | $ | 21,126,678 | $ | 22,883,832 | $ | 91,069,326 | ||||||||||
|
Net income (loss) attributable to Fund Twelve
|
||||||||||||||||||||
|
allocable to additional members
|
$ | 4,508,129 | $ | 5,112,429 | $ | 3,335,103 | $ | (1,198,951 | ) | $ | 11,756,710 | |||||||||
|
Weighted average number of additional shares of
|
||||||||||||||||||||
|
limited liability company interests outstanding
|
348,709 | 348,709 | 348,650 | $ | 348,650 | 348,679 | ||||||||||||||
|
Net income (loss) attributable to Fund Twelve per
|
||||||||||||||||||||
|
weighted average additional share of limited
|
||||||||||||||||||||
|
liability company interests outstanding
|
$ | 12.93 | $ | 14.66 | $ | 9.57 | $ | (3.44 | ) | $ | 33.72 | |||||||||
|
(unaudited)
|
Year ended
|
||||||||||||||||||||
|
Quarters Ended in 2009
|
December 31,
|
||||||||||||||||||||
|
March 31,
|
June 30,
|
September 30,
|
December 31,
|
2009
|
|||||||||||||||||
|
Total revenue
|
$ | 16,289,020 | $ | 18,495,174 | $ | 20,783,152 | $ | 22,923,872 |
(a)
|
$ | 78,491,218 | ||||||||||
|
Net income attributable to Fund Twelve
|
|||||||||||||||||||||
|
allocable to additional members
|
$ | 3,040,961 | $ | 3,675,766 | $ | 2,665,557 | $ | 4,338,043 |
(a)
|
$ | 13,720,327 | ||||||||||
|
Weighted average number of additional shares of
|
|||||||||||||||||||||
|
limited liability company interests outstanding
|
295,095 | 342,374 | 348,749 | 348,716 | 333,979 | ||||||||||||||||
|
Net income attributable to Fund Twelve per
|
|||||||||||||||||||||
|
weighted average additional share of limited
|
|||||||||||||||||||||
|
liability company interests outstanding
|
$ | 10.31 | $ | 10.74 | $ | 7.64 | $ | 12.44 | $ | 41.08 | |||||||||||
| (a) |
The LLC subsequently determined that a cumulative adjustment of $848,000 to increase revenue and a cumulative adjustment of $766,000 to decrease net income attributable to Fund Twelve was required to account for an operating lease previously accounted for as a finance lease during the quarter ended June 30, 2009. Management has determined that the impact on each of the fiscal quarters in 2009 is not material.
|
107
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(17)
|
Commitments and Contingencies and Off-Balance Sheet Transactions
|
At the time the LLC acquires or divests of its interest in an equipment lease or other financing transaction, the LLC may, under very limited circumstances, agree to indemnify the seller or buyer for specific contingent liabilities. The Manager believes that any liability of the LLC that may arise as a result of any such indemnification obligations will not have a material adverse effect on the consolidated financial condition of the LLC taken as a whole.
The Participating Funds entered into a credit support agreement, pursuant to which losses incurred by a Participating Fund with respect to any MWU subsidiary were to 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 4).
The LLC has entered into certain residual sharing and remarketing agreements with various third parties. In connection with these agreements, residual proceeds received in excess of specific amounts will be shared with these third parties based on specific formulas. The obligations related to these agreements are recorded at fair value. As of December 31, 2010 and 2009, amounts recorded in aggregate for such obligations were approximately $835,000 and 879,000, respectively.
In connection with the acquisitions of the Eagle Auriga, the Eagle Centaurus, the Eagle Carina and the Eagle Corona, the LLC, through ICON Eagle Holdings, ICON Carina Holdings and ICON Corona Holdings, maintains four restricted cash accounts with Paribas. These restricted cash accounts consist of the free cash balances that result from the difference between the bareboat charter payments from AET and the repayments on the non-recourse long-term debt to Paribas and DVB. The account of ICON Eagle Holdings is cross-collateralized and the free cash remains in the restricted cash account until an aggregate amount of $500,000 is funded into the account. Thereafter, all free cash in excess of $500,000 can be distributed. The cash for ICON Carina Holdings and ICON Corona Holdings remain in their restricted cash accounts until $500,000 is funded into each account. Thereafter, all free cash in excess of $500,000 can be distributed from the respective accounts.
In connection with the acquistions of the Leighton Vessels, the LLC, through ICON Mynx, ICON Stealth and ICON Eclipse, is required to maintain a minimum aggregate cash balance of $550,000 among the respective bank accounts of ICON Mynx, ICON Stealth and ICON Eclipse.
In connection with the acquisition of the Ocean Princess, the LLC, through ICON Ionian, is required to maintain a minimum cash balance of $300,000 with Nordea at all times.
In connection with the acquisition of the Leighton Faulkner, the LLC, through ICON Faulkner, is required to maintain a minimum aggregate cash balance of $75,000 with ICON Faulkner’s bank account.
The aforementioned cash amounts are presented within other non-current assets in the LLC’s consolidated balance sheets as of December 31, 2010 and 2009.
108
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2010
|
(18)
|
Income Tax Reconciliation (unaudited)
|
No provision for income taxes has been recorded by the LLC since the liability for such taxes is the responsibility of each of the individual members rather than the LLC. The LLC’s income tax returns are subject to examination by federal and State taxing authorities, and changes, if any, could adjust the individual income taxes of the members.
At December 31, 2010 and 2009, the members’ capital accounts included in the consolidated financial statements totaled $247,928,256 and $273,079,715, respectively. The members’ capital for federal income tax purposes at December 31, 2010 and 2009 totaled $258,113,764 and $261,185,416, respectively. The difference arises primarily from sales and offering expenses reported as a reduction in the additional members’ capital accounts for financial reporting purposes, but not for federal income tax reporting purposes, and differences in depreciation and amortization between financial reporting purposes and federal income tax purposes.
The following table reconciles net income attributable to Fund Twelve for financial statement reporting purposes to the net income (loss) attributable to Fund Twelve for federal income tax purposes for the years ended December 31, 2010, 2009 and 2008:
|
2010
|
2009
|
2008
|
||||||||||
|
Net income attributable to Fund Twelve per
|
$ | 11,875,465 | $ | 13,858,916 | $ | 5,942,580 | ||||||
|
consolidated financial statements
|
||||||||||||
|
Rental income
|
19,840,283 | 1,978,218 | 1,791,376 | |||||||||
|
Finance income
|
(7,279,048 | ) | - | - | ||||||||
|
Depreciation and amortization
|
(4,207,455 | ) | (7,413,456 | ) | (20,199,124 | ) | ||||||
|
Tax gain (loss) from consolidated joint venture
|
12,051,195 | 1,952,754 | (2,047,725 | ) | ||||||||
|
Other
|
592,325 | (155,169 | ) | 1,691,381 | ||||||||
|
Net income (loss) attributable to Fund Twelve for
|
||||||||||||
|
federal income tax purposes
|
$ | 32,872,765 | $ | 10,221,263 | $ | (12,821,512 | ) | |||||
|
(19)
|
Subsequent Events
|
On March 29, 2011, the LLC and Fund Fourteen entered into a joint venture, ICON AET Holdings, LLC (“ICON AET”), owned 25% by the LLC and 75% by Fund Fourteen, for the purpose of acquiring two Aframax tankers and two Very Large Crude Carriers (the “VLCCs”). The Aframax tankers were each acquired for a purchase price of $13,000,000, of which $9,000,000 of non-recourse debt was borrowed from DVB, and were simultaneously bareboat chartered to AET for a period of three years. The VLCCs were each acquired for a purchase price of $72,000,000, of which $55,000,000 of non-recourse debt was borrowed from DVB, and were simultaneously bareboat chartered to AET for a period of 10 years.
To acquire the vessels, wholly-owned subsidiaries of ICON AET borrowed an aggregate amount of $128,000,000 in non-recourse debt (the "Loan") from DVB pursuant to the terms of a loan agreement. The proceeds of the Loan used to purchase the Aframax tankers have a three year term and the proceeds of the Loan used to purchase the VLCCs have a 10 year term. The Loan is secured by, among other things, a first priority security interest in each of the vessels, the earnings from each of the vessels, and the equity interests of each of ICON AET’s subsidiaries that directly owns a vessel. The obligations of AET under each of the bareboat charters are guaranteed by AET’s parent, AET Tanker Holdings Sdn. Bhd.
109
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:
|
Years Ended December 31,
|
||||||||||||||||
|
Entity
|
Capacity |
|
Description
|
2010
|
2009
|
2008
|
||||||||||
|
ICON Capital Corp.
|
Manager |
|
Organizational and
|
|||||||||||||
|
offering expenses (1)
|
$ | - | $ | 372,809 | $ | 2,273,874 | ||||||||||
|
ICON Securities Corp.
|
Managing broker-dealer |
|
Underwriting fees (1)
|
- | 1,441,563 | 3,458,030 | ||||||||||
|
ICON Capital Corp.
|
Manager |
|
Acquisition fees (2)
|
3,849,400 | 7,669,642 | 7,905,969 | ||||||||||
|
ICON Capital Corp.
|
Manager |
|
Administrative expense
|
|||||||||||||
|
reimbursements (3)
|
3,184,449 | 3,594,400 | 2,705,118 | |||||||||||||
|
ICON Capital Corp.
|
Manager |
|
Management fees (3)
|
4,302,374 | 3,390,239 | 1,474,993 | ||||||||||
|
Total
|
$ | 11,336,223 | $ | 16,468,653 | $ | 17,817,984 | ||||||||||
|
(1) Amount charged directly to members' equity.
|
||||||||||||||||
|
(2) Amount capitalized and amortized to operations over the estimated service period in accordance with the LLC's accounting policies.
|
||||||||||||||||
|
(3) Amount charged directly to operations.
|
||||||||||||||||
Our Manager also has a 1% interest in our profits, losses, cash distributions and liquidation proceeds. We paid and accrued distributions to our Manager of $339,880, $318,725 and $162,440 for the years ended December 31, 2010, 2009 and 2008, respectively. Our Manager’s interest in our net income was $118,755, $138,589 and $59,426 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 7 and 10 to our consolidated financial statements for a discussion of our investment in joint venture and transactions with related parties, respectively.
Because we are not listed on any national securities exchange or inter-dealer quotation system, we have elected to use the Nasdaq Stock Market’s definition of “independent director” in evaluating whether any of our Manager’s directors are independent. Under this definition, the board of directors of our Manager has determined that our Manager does not have any independent directors, nor are we required to have any.
During the years ended December 31, 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:
|
Principal Audit Firm - Ernst & Young LLP
|
||||||||
|
2010
|
2009
|
|||||||
|
Audit fees
|
$ | 431,733 | $ | 482,500 | ||||
|
Tax fees
|
97,175 | 61,000 | ||||||
| $ | 528,908 | $ | 543,500 | |||||
|
(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
|
|
|
|
|
|
Schedules not listed above have been omitted because they are not applicable or the information required to be set forth therein is included in the financial statements or notes thereto.
|
|
|
3. Exhibits:
|
|
|
3.1 Certificate of Formation of Registrant (Incorporated by reference to Exhibit 3.1 to Registrant’s Registration Statement on Form S-1 filed with the SEC on November 13, 2006 (File No. 333-138661)).
|
|
|
4.1 Limited Liability Company Agreement of Registrant (Incorporated by reference to Exhibit A to Registrant’s Prospectus filed with the SEC on May 8, 2007 (File No. 333-138661)).
|
|
|
10.1 Commercial Loan Agreement, dated as of August 31, 2005, by and between California Bank & Trust and ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON Income Fund Ten, LLC and ICON Leasing Fund Eleven, LLC (Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated June 20, 2007).
|
|
|
10.2 Loan Modification Agreement, dated as of December 26, 2006, by and between California Bank & Trust and ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON Income Fund Ten, LLC and ICON Leasing Fund Eleven, LLC (Incorporated by reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K dated June 20, 2007).
|
|
|
10.3 Loan Modification Agreement, dated as of June 20, 2007, by and between California Bank & Trust and ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON Income Fund Ten, LLC, ICON Leasing Fund Eleven, LLC and ICON Leasing Fund Twelve, LLC (Incorporated by reference to Exhibit 10.3 to Registrant’s Current Report on Form 8-K dated June 20, 2007).
|
|
|
10.4 Third Loan Modification Agreement, dated as of May 1, 2008, by and between California Bank & Trust and ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON Income Fund Ten, LLC, ICON Leasing Fund Eleven, LLC and ICON Leasing Fund Twelve, LLC (Incorporated by reference to Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008, filed May 15, 2008).
|
|
|
10.5 Fourth Loan Modification Agreement, dated as of August 12, 2009, by and between California Bank & Trust and ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON Income Fund Ten, LLC, ICON Leasing Fund Eleven, LLC, ICON Leasing Fund Twelve, LLC and ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P. (Incorporated by reference to Exhibit 10.5 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009, filed August 14, 2009).
|
|
|
31.1 Rule 13a-14(a)/15d-14(a) Certification of Co-Chief Executive Officer.
|
|
|
31.2 Rule 13a-14(a)/15d-14(a) Certification of Co-Chief Executive Officer.
|
|
|
31.3 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
|
|
|
32.1 Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.2 Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.3 Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ICON Leasing Fund Twelve, LLC
(Registrant)
By: ICON Capital Corp.
(Manager of the Registrant)
March 29, 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 Twelve, LLC
(Registrant)
By: ICON Capital Corp.
(Manager of the Registrant)
March 29, 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)
|
|
116
|