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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[x]         Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended

September 30, 2012

 

 

or

 

[  ]         Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from

 

 to 

 

 

Commission File Number:

                                      000-51916

 

 

ICON Leasing Fund Eleven, LLC

(Exact name of registrant as specified in its charter)

 

Delaware

20-1979428

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

3 Park Avenue, 36th  Floor, New York, New York

10016

(Address of principal executive offices)

(Zip Code)

 

(212) 418-4700

(Registrant's telephone number, including area code)

 

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.

[x] Yes  [  ] 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).

[x] Yes  [  ]  No

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 o                                                                                                   Accelerated filer o  

 

Non-accelerated filer o (Do not check if a smaller reporting company)                                 Smaller reporting company þ 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

[  ] Yes [x] No

 

Number of outstanding shares of limited liability company interests of the registrant on November 12, 2012 is 362,656.

 

 


 

 

 

ICON Leasing Fund Eleven, LLC

Table of Contents

 

 

 

Page

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

Item 1. Consolidated Financial Statements

1

 

 

 

Consolidated Balance Sheets

1

 

 

 

Consolidated Statements of Operations and Comprehensive Income (Loss)

2

 

 

 

Consolidated Statements of Changes in Equity

3

 

 

 

Consolidated Statements of Cash Flows

4

 

 

 

Notes to Consolidated Financial Statements

6

 

 

 

Item 2. Manager’s Discussion and Analysis of Financial Condition and Results of Operations

16

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

25

 

 

 

Item 4. Controls and Procedures

25

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1. Legal Proceedings

 

26

 

 

 

Item 1A. Risk Factors

 

26

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

26

 

 

 

Item 3. Defaults Upon Senior Securities

26

 

 

 

Item 4. Mine Safety Disclosures

26

 

 

 

Item 5. Other Information

 

26

 

 

 

Item 6. Exhibits

 

27

 

 

 

Signatures

 

29

 

 


 

PART I – FINANCIAL INFORMATION 

  

Item 1.  Consolidated Financial Statements

 

ICON Leasing Fund Eleven, LLC

(A Delaware Limited Liability Company)

Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

 

 

 

 

2012 

 

2011 

 

 

 

 

 

 

 

(unaudited)

 

 

 

Assets

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

$

 6,574,498 

 

$

 6,824,356 

 

Current portion of net investment in notes receivable

 

 7,839,033 

 

 

 6,083,528 

 

Current portion of net investment in finance leases

 

 7,505,683 

 

 

 4,469,552 

 

Asset held for sale, net

 

 117,145 

 

 

 117,145 

 

Other current assets

 

 137,987 

 

 

 257,785 

 

 

 

 

 

Total current assets

 

 22,174,346 

 

 

 17,752,366 

Non-current assets:

 

 

 

 

 

 

Net investment in notes receivable, less current portion

 

 7,801,965 

 

 

 11,009,979 

 

Net investment in mortgage note receivable

 

 12,819,343 

 

 

 12,878,079 

 

Net investment in finance leases, less current portion

 

 3,625,084 

 

 

 8,985,464 

 

Leased equipment at cost (less accumulated depreciation of

 

 

 

 

 

 

 

$6,775,045 and $19,249,518, respectively)

 

 6,196,786 

 

 

 16,300,588 

 

Investments in joint ventures

 

 116,097 

 

 

 1,038,678 

 

Deferred tax asset, net

 

 1,249,606 

 

 

 894,439 

 

Other non-current assets

 

 4,004,002 

 

 

 3,372,774 

 

 

 

 

 

Total non-current assets

 

 35,812,883 

 

 

 54,480,001 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

 57,987,229 

 

$

 72,232,367 

 

 

 

 

 

 

 

Liabilities and Equity

Current liabilities:

 

 

 

 

 

 

Current portion of long-term debt

$

 - 

 

$

 3,544,240 

 

Derivative financial instrument

 

 - 

 

 

 176,956 

 

Due to Manager and affiliates

 

 - 

 

 

 79,794 

 

Accrued expenses and other liabilities

 

 1,333,216 

 

 

 1,394,684 

 

 

 

 

 

Total current liabilities

 

 1,333,216 

 

 

 5,195,674 

Non-current liabilities:

 

 

 

 

 

 

Long-term debt, less current portion

 

 - 

 

 

 7,311,110 

 

 

 

 

 

Total liabilities

 

 1,333,216 

 

 

 12,506,784 

 

 

 

 

 

 

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Members’ equity:

 

 

 

 

 

 

Additional members

 

 57,314,606 

 

 

 59,901,721 

 

Manager

 

 (2,649,029) 

 

 

 (2,622,895) 

 

Accumulated other comprehensive loss

 

 (543,888) 

 

 

 (656,141) 

 

 

 

 

 

Total members' equity

 

 54,121,689 

 

 

 56,622,685 

 Noncontrolling interests

 

 2,532,324 

 

 

 3,102,898 

 

 

 

 

 

Total equity

 

 56,654,013 

 

 

 59,725,583 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

$

 57,987,229 

 

$

 72,232,367 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

1

 


 

ICON Leasing Fund Eleven, LLC

(A Delaware Limited Liability Company)

Consolidated Statements of Operations and Comprehensive Income (Loss)

(unaudited)

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

 

 

September 30,

 

 

 September 30,

 

 

 

 

 

 

 

2012 

 

 

2011 

 

 

2012 

 

 

2011 

 Revenue and other income:

 

 

 

 

 

 

 

 

Finance income

$

 1,671,836 

 

$

 1,717,222 

 

$

 5,044,150 

 

$

 5,305,524 

 

Rental income

 

 743,232 

 

 

 3,845,336 

 

 

 3,491,428 

 

 

 13,153,081 

 

(Loss) income from investments in joint ventures

 

 (351,470) 

 

 

 7,636 

 

 

 (11,088) 

 

 

 (11,827) 

 

Net gain on sales of leased equipment

 

 - 

 

 

 - 

 

 

 - 

 

 

 11,411,941 

 

Gain on extinguishment of debt

 

 - 

 

 

 - 

 

 

 2,052,960 

 

 

 - 

 

Litigation settlement

 

 - 

 

 

 - 

 

 

 171,100 

 

 

 - 

 

 

 

 Total revenue and other income

 

 2,063,598 

 

 

 5,570,194 

 

 

 10,748,550 

 

 

 29,858,719 

 Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Administrative expense reimbursements

 

 - 

 

 

 165,281 

 

 

 403,145 

 

 

836,376 

 

General and administrative

 

518,971 

 

 

 427,262 

 

 

 1,766,781 

 

 

1,952,824 

 

Vessel operating expense

 

 - 

 

 

 - 

 

 

 1,047,506 

 

 

 - 

 

Depreciation

 

398,271 

 

 

 1,876,277 

 

 

 2,520,256 

 

 

6,375,162 

 

Impairment loss

 

 - 

 

 

 43,752,697 

 

 

 697,715 

 

 

43,770,477 

 

Interest

 

21,441 

 

 

 537,541 

 

 

 293,218 

 

 

1,825,245 

 

Gain on derivative financial instruments

 

 - 

 

 

 (57,900) 

 

 

 (75,922) 

 

 

 (342,055) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Total expenses

 

 938,683 

 

 

 46,701,158 

 

 

 6,652,699 

 

 

 54,418,029 

Income (loss) before income taxes

 

 1,124,915 

 

 

 (41,130,964) 

 

 

 4,095,851 

 

 

 (24,559,310) 

 

Provision for income taxes

 

 (53,440) 

 

 

 (12,005) 

 

 

 (170,636) 

 

 

 (171,016) 

Net income (loss)

 

 1,071,475 

 

 

 (41,142,969) 

 

 

 3,925,215 

 

 

 (24,730,326) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: net income attributable to noncontrolling interests

 

 141,477 

 

 

 117,553 

 

 

 433,146 

 

 

 774,428 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to Fund Eleven

$

 929,998 

 

$

 (41,260,522) 

 

$

 3,492,069 

 

$

 (25,504,754) 

Net income (loss) attributable to Fund Eleven allocable to:

 

 

 

 

 

 

 

 

 

 

 

 

Additional members

$

 920,698 

 

$

 (40,847,917) 

 

$

 3,457,149 

 

$

 (25,249,706) 

 

Manager

 

 9,300 

 

 

 (412,605) 

 

 

 34,920 

 

 

 (255,048) 

 

 

 

 

 

 

$

 929,998 

 

$

 (41,260,522) 

 

$

 3,492,069 

 

$

 (25,504,754) 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

 1,071,475 

 

$

 (41,142,969) 

 

$

 3,925,215 

 

$

 (24,730,326) 

 

Change in fair value of derivative financial instruments

 

 - 

 

 

 1,131,292 

 

 

 144,331 

 

 

 1,721,351 

 

Currency translation adjustments

 

 74,174 

 

 

 (367,731) 

 

 

 (32,078) 

 

 

 7,631 

 

 

 

Total comprehensive income (loss)

 

 1,145,649 

 

 

 (40,379,408) 

 

 

 4,037,468 

 

 

 (23,001,344) 

 

Less: comprehensive income attributable to noncontrolling interests

 

 141,477 

 

 

 117,553 

 

 

 433,146 

 

 

 774,428 

Comprehensive income (loss) attributable to Fund Eleven

$

 1,004,172 

 

$

 (40,496,961) 

 

$

 3,604,322 

 

$

 (23,775,772) 

Weighted average number of additional shares of

 

 

 

 

 

 

 

 

 

 

 

 

limited liability company interests outstanding

 

 362,656 

 

 

 362,656 

 

 

 362,656 

 

 

 362,656 

Net income (loss) attributable to Fund Eleven per weighted average

 

 

 

 

 

 

 

 

 

 

 

 

additional share of limited liability company interests outstanding

$

 2.54 

 

$

 (112.64) 

 

$

 9.53 

 

$

 (69.62) 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

2

 


 

ICON Leasing Fund Eleven, LLC

(A Delaware Limited Liability Company)

Consolidated Statements of Changes in Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Members' Equity

 

 

 

 

 

 

 

Additional Shares of Limited Liability Company Interests

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Comprehensive

 

Members'

 

Noncontrolling

 

Total

 

 

 

 

 

 

Members

 

Manager

 

Loss

 

Equity

 

Interests

 

Equity

Balance, December 31, 2011

 362,656 

 

$

 59,901,721 

 

$

 (2,622,895) 

 

$

 (656,141) 

 

$

 56,622,685 

 

$

 3,102,898 

 

$

 59,725,583 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 - 

 

 

 150,997 

 

 

 1,525 

 

 

 - 

 

 

 152,522 

 

 

 147,214 

 

 

 299,736 

 

Change in fair value of derivative financial instrument

 - 

 

 

 - 

 

 

 - 

 

 

 120,246 

 

 

 120,246 

 

 

 - 

 

 

 120,246 

 

Currency translation adjustments

 - 

 

 

 - 

 

 

 - 

 

 

 185,166 

 

 

 185,166 

 

 

 - 

 

 

 185,166 

 

Cash distributions

 - 

 

 

 (3,626,558) 

 

 

 (36,633) 

 

 

 - 

 

 

 (3,663,191) 

 

 

 (334,572) 

 

 

 (3,997,763) 

Balance, March 31, 2012 (unaudited)

 362,656 

 

 

 56,426,160 

 

 

 (2,658,003) 

 

 

 (350,729) 

 

 

 53,417,428 

 

 

 2,915,540 

 

 

 56,332,968 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 - 

 

 

 2,385,454 

 

 

 24,095 

 

 

 - 

 

 

 2,409,549 

 

 

 144,455 

 

 

 2,554,004 

 

Change in fair value of derivative financial instrument

-

 

 

 - 

 

 

 - 

 

 

 24,085 

 

 

 24,085 

 

 

 - 

 

 

 24,085 

 

Currency translation adjustments

 - 

 

 

 - 

 

 

 - 

 

 

 (291,418) 

 

 

 (291,418) 

 

 

 - 

 

 

 (291,418) 

 

Cash distributions

 - 

 

 

 (2,417,706) 

 

 

 (24,421) 

 

 

 - 

 

 

 (2,442,127) 

 

 

 (334,575) 

 

 

 (2,776,702) 

Balance, June 30, 2012 (unaudited)

 362,656 

 

 

 56,393,908 

 

 

 (2,658,329) 

 

 

 (618,062) 

 

 

 53,117,517 

 

 

 2,725,420 

 

 

 55,842,937 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 - 

 

 

 920,698 

 

 

 9,300 

 

 

 - 

 

 

 929,998 

 

 

 141,477 

 

 

 1,071,475 

 

Currency translation adjustments

 - 

 

 

 - 

 

 

 - 

 

 

 74,174 

 

 

 74,174 

 

 

 - 

 

 

 74,174 

 

Cash distributions

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 (334,573) 

 

 

 (334,573) 

Balance, September 30, 2012 (unaudited)

 362,656 

 

$

 57,314,606 

 

$

 (2,649,029) 

 

$

 (543,888) 

 

$

 54,121,689 

 

$

 2,532,324 

 

$

 56,654,013 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

3

 


 

ICON Leasing Fund Eleven, LLC

(A Delaware Limited Liability Company)

Consolidated Statements of Cash Flows

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

2012 

 

2011 

Cash flows from operating activities:

 

 

 

 

Net income (loss)

$

 3,925,215 

 

$

 (24,730,326) 

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Finance income

 

 (693,587) 

 

 

 (970,168) 

 

 

 

Rental income paid directly to lenders by lessees

 

 (1,204,110) 

 

 

 (9,248,000) 

 

 

 

Loss from investments in joint ventures

 

 11,088 

 

 

 11,827 

 

 

 

Net gain on sales of leased equipment

 

 - 

 

 

 (11,411,941) 

 

 

 

Depreciation

 

 2,520,256 

 

 

 6,375,162 

 

 

 

Impairment loss

 

 697,715 

 

 

 43,770,477 

 

 

 

Interest expense paid directly to lenders by lessees

 

 219,296 

 

 

 1,586,457 

 

 

 

Interest expense from amortization of debt financing costs

 

 11,047 

 

 

 84,036 

 

 

 

Gain on extinguishment of debt

 

 (2,052,960) 

 

 

 - 

 

 

 

Gain on derivative financial instruments

 

 (75,922) 

 

 

 (342,055) 

 

 

 

Deferred tax (benefit) provision

 

 (355,167) 

 

 

 12,020 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Collection of finance leases

 

 3,039,461 

 

 

 3,771,559 

 

 

Other assets

 

 (525,529) 

 

 

 (1,014,334) 

 

 

Accrued expenses and other liabilities

 

 (9,820) 

 

 

 (1,300,663) 

 

 

Due to Manager and affiliates

 

 (79,794) 

 

 

 (209,820) 

 

 

Distributions from joint ventures

 

 (37,053) 

 

 

 22,475 

 

 

 

 

 

Net cash provided by operating activities

 

 5,390,136 

 

 

 6,406,706 

Cash flows from investing activities:

 

 

 

 

 

 

Investments in notes receivable

 

 (1,075,909) 

 

 

 - 

 

Proceeds from sales of leased equipment

 

 6,885,831 

 

 

 25,994,871 

 

Principal repayment on notes receivable

 

 2,540,211 

 

 

 2,036,131 

 

Distributions received from joint ventures in excess of profits

 

 948,546 

 

 

 696,871 

 

Other assets

 

 - 

 

 

 (3,414) 

 

 

 

 

 

Net cash provided by investing activities

 

 9,298,679 

 

 

 28,724,459 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from revolving line of credit, recourse

 

 5,000,000 

 

 

 - 

 

Repayment of revolving line of credit, recourse

 

 (5,000,000) 

 

 

 (1,450,000) 

 

Repayment of long-term debt

 

 (7,825,930) 

 

 

 (16,635,200) 

 

Cash distributions to members

 

 (6,105,318) 

 

 

 (10,989,569) 

 

Distributions to noncontrolling interests

 

 (1,003,720) 

 

 

 (1,935,223) 

 

 

 

 

 

Net cash used in financing activities

 

 (14,934,968) 

 

 

 (31,009,992) 

Effects of exchange rates on cash and cash equivalents

 

 (3,705) 

 

 

 6,648 

Net (decrease) increase in cash and cash equivalents

 

 (249,858) 

 

 

 4,127,821 

Cash and cash equivalents, beginning of period

 

 6,824,356 

 

 

 4,621,512 

Cash and cash equivalents, end of period

$

 6,574,498 

 

$

 8,749,333 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

4

 


 

ICON Leasing Fund Eleven, LLC

(A Delaware Limited Liability Company)

Consolidated Statements of Cash Flows

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

2012 

 

2011 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

Cash paid for interest

$

 9,278 

 

$

 159,468 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

Principal and interest on long-term debt paid directly to lenders by lessees

$

 1,204,110 

 

$

 9,248,000 

 

Exchange of noncontrolling interest in a joint venture for notes receivable

$

 - 

 

$

 3,588,928 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

5

 


 

ICON Leasing Fund Eleven, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements

September 30, 2012

(unaudited)

 

 

(1)  Basis of Presentation and Consolidation

The accompanying consolidated financial statements of ICON Leasing Fund Eleven, LLC (the “LLC”) have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission for Quarterly Reports on Form 10-Q.  In the opinion of the manager of the LLC, ICON Capital Corp., a Delaware corporation (the “Manager”), all adjustments, which are of a normal recurring nature, considered necessary for a fair presentation have been included.  These consolidated financial statements should be read together with the consolidated financial statements and notes included in the LLC’s Annual Report on Form 10-K for the year ended December 31, 2011.  The results for the interim period are not necessarily indicative of the results for the full year.

 

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

 

Credit Quality of Net Investment in Notes Receivable, Mortgage Note Receivable and Direct Finance Leases and Credit Loss Reserve

The Manager weighs all credit decisions based on a combination of external credit ratings as well as internal credit evaluations of all borrowers.  A borrower’s credit is analyzed using those credit ratings as well as the borrower’s financial statements and other financial data deemed relevant.

 

As the LLC’s net investment in notes receivable, mortgage note receivable and direct finance leases (each, a “Note” and, collectively, the “Notes”) are limited in number, the LLC is able to estimate the credit loss reserve based on a detailed analysis of each Note as opposed to using portfolio based metrics and credit loss reserve.  Notes are analyzed quarterly and categorized as either performing or non-performing 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 whether a credit loss reserve should be established or whether the Note should be restructured.  Material events would be specifically disclosed in the discussion of each Note held.

 

As of September 30, 2012 and December 31, 2011, the Manager determined that no credit loss reserve was required.

 

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which amends its guidance related to fair value measurements in order to align the definition of fair value measurements and the related disclosure requirements between US GAAP and International Financial Reporting Standards.  The new pronouncement also changes certain existing fair value measurement principles and disclosure requirements.  The adoption of ASU 2011-04 became effective for the LLC on January 1, 2012 and did not have a material impact on the LLC’s consolidated financial statements.

 

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, which revises the manner in which companies present comprehensive income in their financial statements.  The new pronouncement removes the option to report other comprehensive income and its components in the statement of changes in equity and instead requires presentation in one continuous statement of comprehensive income or two separate but consecutive statements.  The adoption of ASU 2011-05 became effective for the LLC on January 1, 2012 and did not have a material impact on the LLC’s consolidated financial statements, as it only required a change in the format of presentation.

6

 


 

ICON Leasing Fund Eleven, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements

September 30, 2012

(unaudited)

 

 

(2)  Net Investment in Notes Receivable

Net investment in notes receivable consisted of the following:

 

 

 

September 30,

 

December 31,

 

 

2012 

 

2011 

 

Principal outstanding

$

15,689,943   

 

$

17,114,229   

 

Initial direct costs

 

 - 

 

 

4,180   

 

Deferred fees

 

(48,945)  

 

 

(24,902)  

 

Net investment in notes receivable

 

15,640,998   

 

 

17,093,507   

 

Less: current portion of net investment in notes receivable

 

7,839,033   

 

 

6,083,528   

 

Net investment in notes receivable, less current portion

$

7,801,965   

 

$

11,009,979   

 

On May 2, 2012, Northern Capital Associates XIV, L.P. satisfied its obligations in connection with certain notes receivable by making a prepayment of $1,015,000. No material gain or loss resulted from the prepayment.

 

On May 22, 2012 and July 30, 2012, the LLC made secured capital expenditure loans (collectively, the “CapEx Loan”) in the amounts of $493,774 and $634,138, respectively, to subsidiaries of Revstone Transportation, LLC (“Revstone”). The CapEx Loan bears interest at 17% per year and matures on March 1, 2017. The CapEx Loan is secured by a first priority security interest in the automotive manufacturing equipment purchased with the proceeds from the CapEx Loan and a second priority security interest in other Revstone assets, including automotive manufacturing equipment and real property.

 

(3)  Net Investment in Mortgage Note Receivable

Net investment in mortgage note receivable consisted of the following:

 

 

 

September 30,

 

December 31,

 

 

2012 

 

2011 

 

Principal outstanding

$

12,722,006   

 

$

12,722,006   

 

Initial direct costs

 

97,337   

 

 

156,073   

 

Net investment in mortgage note receivable

$

12,819,343   

 

$

12,878,079   

7

 


 

ICON Leasing Fund Eleven, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements

September 30, 2012

(unaudited)

 

 

(4)  Net Investment in Finance Leases

Net investment in finance leases consisted of the following:

 

 

 

September 30,

 

December 31,

 

 

2012 

 

2011 

 

Minimum rents receivable

$

9,286,529 

 

$

12,354,929 

 

Estimated residual values

 

3,057,547 

 

 

3,067,787 

 

Initial direct costs

 

44,296 

 

 

100,635 

 

Unearned income

 

 (1,257,605) 

 

 

 (2,068,335) 

 

Net investment in finance leases

 

11,130,767 

 

 

13,455,016 

 

Less: current portion of net investment in finance leases

 

7,505,683 

 

 

4,469,552 

 

Net investment in finance leases, less current portion

$

3,625,084 

 

$

8,985,464 

 

On July 17, 2012, the June 30, 2012 payment of €430,800 due under the finance lease between the LLC, Heuliez SA and Heuliez Investissements SNC was modified to become six payments totaling €430,800 to be made between July 20, 2012 and November 30, 2012.

 

(5)  Leased Equipment at Cost

Leased equipment at cost consisted of the following:

 

 

 

September 30,

 

December 31,

 

 

2012 

 

2011 

 

Manufacturing equipment

$

12,971,831   

 

$

12,971,831   

 

Marine - Product tankers

 

 - 

 

 

22,578,275   

 

Leased equipment at cost

 

12,971,831   

 

 

35,550,106   

 

 

 

 

 

 

 

 

Less: accumulated depreciation

 

6,775,045   

 

 

19,249,518   

 

 

 

 

 

 

 

 

Leased equipment at cost, less accumulated depreciation

$

6,196,786   

 

$

16,300,588   

 

Depreciation expense was $398,271 and $1,876,277 for the three months ended September 30, 2012 and 2011, respectively. Depreciation expense was $2,520,256 and $6,375,162 for the nine months ended September 30, 2012 and 2011, respectively.

 

On May 3, 2012, the LLC sold a vessel, the Senang Spirit, for gross proceeds of approximately $7,173,000. As a result, the LLC recorded an impairment charge of $697,715 for the three months ended March 31, 2012.

 

On August 20, 2012, ICON MW, LLC (“ICON MW”) sold the automotive manufacturing equipment subject to lease with LC Manufacturing, LLC and terminated warrants issued to it for aggregate proceeds of approximately $8,300,000.  As a result, based on the LLC’s 6.33% ownership interest in ICON MW, the LLC received proceeds in the amount of approximately $525,000 and recognized a loss on the sale of approximately $6,000. In addition, the Manager evaluated the collectability of the personal guaranty of a previous owner of LC Manufacturing and, based on its findings, ICON MW recorded a credit loss of approximately $5,411,000, of which the LLC’s portion was approximately $343,000.  The LLC’s portion of the loss on sale and credit loss is included in loss (income) from investments in joint ventures on the consolidated statements of operations and comprehensive income (loss).

8

 


 

ICON Leasing Fund Eleven, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements

September 30, 2012

(unaudited)

 

 

 

(6)  Long-Term Debt

On May 3, 2012, in connection with the sale of the Senang Spirit, the LLC used the proceeds from the sale to settle the outstanding debt balance of approximately $9,400,000 at an agreed upon amount of approximately $7,347,000. Accordingly, the LLC recorded a gain on extinguishment of debt of approximately $2,053,000 for the three months ended June 30, 2012. As of September 30, 2012 and December 31, 2011, the LLC had outstanding long-term debt of $0 and $10,855,350, respectively.

 

(7)  Revolving Line of Credit, Recourse

On May 10, 2011, the LLC entered into an agreement with California Bank & Trust (“CB&T”) for a revolving line of credit of up to $5,000,000 (the “Facility”), which is secured by all of the LLC’s assets not subject to a first priority lien. 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 loans and lease agreements in which the LLC has a beneficial interest. As of September 30, 2012, the LLC had $5,000,000 available under the Facility pursuant to the borrowing base.

 

The Facility expires on March 31, 2013 and the LLC 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 90-day 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 all interest rates on advances under the Facility are subject to an interest rate floor of 4.0% per year.  In addition, the LLC is obligated to pay a commitment fee based on an annual rate of 0.50% on unused commitments under the Facility. At September 30, 2012, there were no obligations outstanding under the Facility.

 

At September 30, 2012, the LLC was in compliance with all covenants related to the Facility.

 

(8)  Foreign Income Taxes

Certain of the LLC’s direct and indirect wholly-owned subsidiaries are unlimited liability companies and are taxed as corporations under the laws of Canada. Other indirect wholly-owned subsidiaries are taxed as corporations in Barbados.  For the three and nine months ended September 30, 2012, the provision for income taxes was comprised of $157,991 and $480,304 in current taxes and a benefit of $104,551 and $309,668 in deferred taxes, respectively.  The LLC’s Canadian subsidiaries, under the laws of Canada, are subject to income tax examination for the 2007 through 2011 periods.  The LLC had not identified any material uncertain tax positions as of September 30, 2012.

 

As of September 30, 2012, the LLC had a net deferred tax asset of approximately $1,250,000 relating to (i) net operating losses that are currently expected to expire starting in 2027 through 2028, (ii) a net unrealized capital loss on foreign currency for a note receivable and (iii) the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. The deferred tax asset relating to the net operating losses has a full valuation allowance.

9

 


 

ICON Leasing Fund Eleven, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements

September 30, 2012

(unaudited)

 

 

(9)  Transactions with Related Parties

Fees and other expenses paid or accrued by the LLC to the Manager or its affiliates were as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 Entity

 

 Capacity

 

 Description

2012 

 

2011 

 

2012 

 

2011 

 

 ICON Capital Corp.

 

Manager

 

 Administrative expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

reimbursements (1)

$

 - 

 

$

165,281 

 

$

403,145 

 

$

836,376 

 

 (1)  Amount charged directly to operations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During the three and nine months ended September 30, 2012, the Manager suspended the collection of management fees in the amounts of approximately  $152,000 and $511,000, respectively.  During the three and nine months ended September 30, 2011, the Manager suspended the collection of management fees in the amounts of approximately  $306,000 and $952,000, respectively.

 

During the three and nine months ended September 30, 2012, the Manager suspended the collection of administrative expense reimbursements of approximately $157,000 and $258,000, respectively.

 

At September 30, 2012, the LLC had a net receivable of $37,454 with the Manager and its affiliates primarily relating to certain proceeds collected by the Manager on the LLC’s behalf.  At December 31, 2011, the LLC had a net payable of $79,794 with the Manager and its affiliates primarily relating to administrative expense reimbursements.

 

(10)  Derivative Financial Instruments

The LLC may enter into derivative transactions for purposes of hedging specific financial exposures, including movements in foreign currency exchange rates and changes in interest rates on its 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. 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 recognizes all derivatives as either assets or liabilities on the consolidated balance sheets and measures those instruments at fair value. Changes in the fair value of such instruments are recognized immediately in earnings unless certain criteria are met. These criteria demonstrate that the derivative is expected to be highly effective at offsetting changes in the fair value or expected cash flows of the underlying exposure at both the inception of the hedging relationship and on an ongoing basis and include an evaluation of the counterparty risk and the impact, if any, on the effectiveness of the derivative. If these criteria are met, which the LLC must document and assess at inception and on an ongoing basis, the LLC recognizes the changes in fair value of such instruments in accumulated other comprehensive income (loss) (“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 long-term debt. The LLC’s strategy to accomplish these objectives 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-rate interest payments over the life of the agreements without exchange of the underlying notional amount.

10

 


 

ICON Leasing Fund Eleven, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements

September 30, 2012

(unaudited)

 

 

The LLC had one floating-to-fixed interest rate swap that was designated and qualified as a cash flow hedge, which expired on April 11, 2012.

Designated Derivatives

For the derivative, the LLC recorded the gain or loss from the effective portion of changes in the fair value of the derivative designated and qualifying as a cash flow hedge in AOCI and such gain or loss was subsequently reclassified into earnings in the period that the hedged forecasted transaction affected earnings and within the same line item on the consolidated statements of operations and comprehensive income (loss) as the impact of the hedged transaction. During the three and nine months ended September 30, 2012, the LLC recorded $0 and $75,922 of hedge ineffectiveness in earnings, respectively, which is included in gain on derivative financial instruments. During the three and nine months ended September 30, 2011, the LLC recorded $122,163 and $412,724 of hedge ineffectiveness in earnings, respectively, which is included in gain on derivative financial instruments.

The table below presents the fair value of the LLC’s derivative financial instrument as well as its classification within the LLC’s consolidated balance sheets as of September 30, 2012 and December 31, 2011:

 

 

Liability Derivative

 

 

 

 

September 30,

 

December 31,

 

 

 

 

2012 

 

2011 

 

 

 Balance Sheet Location

 

Fair Value

 

Fair Value

 Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

Interest rate swap

Derivative financial instrument

 

$

 - 

 

$

 176,956 

 

The table below presents the effect of the LLC’s derivative financial instruments designated as a cash flow hedging instrument on the consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2012 and 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

Location of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss)

 

Gain (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

Recognized in

 

Recognized in

 

 

 

 

 

 

 

 

 

 

 

 

Income

 

Income

 

 

 

 

Amount of

 

Location of

 

 

 

 

on Derivatives

 

on Derivatives

 

 

 

 

Gain (Loss)

 

Gain (Loss)

 

Gain (Loss)

 

(Ineffective

 

(Ineffective

 

 

 

 

Recognized

 

Reclassified

 

Reclassified from

 

Portion and

 

Portion and

 

 

Derivatives

 

in AOCI on

 

from AOCI

 

AOCI into

 

Amounts

 

Amounts

 

 

Designated as

 

Derivatives

 

into Income

 

Income

 

Excluded from

 

Excluded from

 

 

Hedging

 

(Effective

 

(Effective

 

(Effective

 

Effectiveness

 

Effectiveness

Period Ended

 

Instruments

 

Portion)

 

Portion)

 

Portion)

 

Testing)

 

Testing)

Three Months Ended September 30, 2012

 

Interest rate swap

 

$

 - 

 

Interest expense

 

$

 - 

 

Gain on derivative financial instrument

 

$

 - 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2012

 

Interest rate swap

 

$

 (4,297) 

 

Interest expense

 

$

 (148,628) 

 

Gain on derivative financial instrument

 

$

 75,922 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2011

 

Interest rate swaps

 

$

 (5,668) 

 

Interest expense

 

$

 (295,429) 

 

Gain on derivative financial instruments

 

$

 122,163 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2011

 

Interest rate swaps

 

$

 (75,338) 

 

Interest expense

 

$

 (955,158) 

 

Gain on derivative financial instruments

 

$

 412,724 

11

 


 

ICON Leasing Fund Eleven, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements

September 30, 2012

(unaudited)

 

 

 

The LLC did not have any non-designated derivative financial instruments for the three and nine months ended September 30, 2012. The LLC’s derivative financial instruments not designated as hedging instruments generated a loss on derivative financial instruments on the consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2011 of approximately $64,000 and $71,000, respectively.

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 only with banks of internationally acknowledged standing, the LLC considers the counterparty risk to be remote.

As of September 30, 2012 and December 31, 2011, the fair value of the derivative financial instrument in a liability position was $0 and $176,956, respectively.

(11)  Accumulated Other Comprehensive Loss

AOCI includes accumulated unrealized losses on currency translation adjustments of $543,888 at September 30, 2012 and accumulated unrealized losses on a derivative financial instrument and accumulated unrealized losses on currency translation adjustments of $144,331 and $511,810, respectively, at December 31, 2011.

12

 


 

ICON Leasing Fund Eleven, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements

September 30, 2012

(unaudited)

 

 

(12)  Fair Value Measurements

Assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

·      Level 1: Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.

·      Level 2: Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.

·      Level 3: Pricing inputs that are generally unobservable and cannot be corroborated by market data.

 

Financial Assets and Liabilities Measured on a Recurring Basis

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

 

The LLC had no financial assets or liabilities measured at fair value on a recurring basis as of September 30, 2012.  The valuation of the LLC’s material financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 was a derivative financial instrument classified as Level 2 in the amount of $176,956.  The LLC’s derivative financial instrument as of December 31, 2011 included an interest rate swap that was valued using models based on direct or indirect observable market inputs for all substantial terms of the LLC’s derivative contract and therefore was classified within Level 2.  As permitted by the accounting pronouncements, the LLC uses market prices and pricing models for fair value measurements of its derivative financial instrument.  The fair value of the interest rate swap was recorded in derivative financial instrument 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, of which the fair value information presented is not current but rather as of the date the impairment was recorded, and the carrying value of the asset at September 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss for the

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months

 

 

Carrying Value at

 

 

Fair Value at Impairment Date

 

Ended

 

 

September 30, 2012

 

Level 1

 

Level 2

 

Level 3

 

September 30, 2012

 

Vessel - Senang Spirit

$

 - 

 

$

 - 

 

$

 6,885,829 

 

$

 - 

 

$

697,715   

 

The LLC’s non-financial asset, the Senang Spirit, was valued using the agreed upon sale price.  The sale price was a quoted price in an inactive market that was directly observable and therefore classified as Level 2.

 

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

13

 


 

ICON Leasing Fund Eleven, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements

September 30, 2012

(unaudited)

 

 

of financial assets, other than lease-related investments, and the recorded value of recourse debt approximate fair value due to their short-term maturities and variable interest rates.  The estimated fair value of the LLC’s net investment in mortgage note receivable and fixed-rate notes receivable was based on the discounted value of future cash flows related to the loans based on recent transactions of this type.  Principal and accrued interest outstanding on the mortgage note receivable was discounted at the rate of 13.6% per year.  Principal outstanding on the fixed-rate notes receivable was discounted at rates ranging between 15% and 17% per year.

 

 

 

September 30, 2012

 

 

 

 

Fair Value

 

 

Carrying Value

 

(Level 3)

 

 Principal and accrued interest outstanding on mortgage note receivable

$

16,785,882   

 

$

17,763,658   

 

 Principal outstanding on fixed-rate notes receivable

$

15,640,998   

 

$

15,640,998   

 

(13)  Commitments and Contingencies

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 or results of operations of the LLC taken as a whole.

 

From November 2010 through March 2011, the LLC, through its wholly-owned subsidiaries, sold four container vessels previously on bareboat charter to ZIM Integrated Shipping Services, Ltd. (“ZIM”) to unaffiliated third parties. During June 2011, the LLC received notices from ZIM claiming it was allegedly owed various amounts for unpaid seller’s credits in the aggregate amount of approximately $7,300,000.  The Manager believes any obligation to repay the seller’s credits was extinguished when ZIM defaulted by failing to fulfill certain of its obligations under the bareboat charters.  On August 8, 2011, the Manager agreed to a three party arbitration panel to hear such claims.  On April 19, 2012, ZIM filed arbitration claim submissions.  On April 23, 2012, the Manager filed a defense and counterclaim. The Manager believes that ZIM’s claims are frivolous and intends to vigorously contest these claims.  At this time, the LLC is unable to predict the outcome of the arbitration or loss therefrom, if any.

 

On June 20, 2011, ICON EAR, LLC (“ICON EAR”) filed a complaint in the Court of Common Pleas, Hamilton County, Ohio, against the auditors of Equipment Acquisition Resources, Inc. (“EAR”) alleging malpractice and negligent misrepresentation.  On May 3, 2012, the case was settled in ICON EAR’s favor for $590,000, of which the LLC’s portion was approximately $360,000.

 

On October 21, 2011, the Chapter 11 bankruptcy trustee for EAR filed an adversary complaint against ICON EAR seeking the recovery of the lease payments that the trustee alleges were fraudulently transferred from EAR to ICON EAR. The complaint also sought the recovery of payments made by EAR to ICON EAR during the 90-day period preceding EAR’s bankruptcy filing, alleging that those payments constituted a preference under the U.S. Bankruptcy Code. Additionally, the complaint sought the imposition of a constructive trust over certain real property and the proceeds from the sale that ICON EAR received as security in connection with its investment.  The Manager filed an answer to the complaint that included certain affirmative defenses.  The Manager believes these claims are frivolous and intends to vigorously defend this action.  At this time, the LLC is unable to predict the outcome of this action or loss therefrom, if any.

 

Subsequent to the filing of the bankruptcy petition, EAR disclaimed any right to its equipment and such equipment became the subject of an Illinois State Court proceeding.  The equipment was subsequently sold as part of the Illinois

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ICON Leasing Fund Eleven, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements

September 30, 2012

(unaudited)

 

 

State Court proceeding. On March 7, 2012, one of the creditors in the Illinois State Court proceeding won a summary judgment motion filed against ICON EAR that granted dismissal of ICON EAR’s claims to the proceeds resulting from the sale of certain EAR equipment. ICON EAR is appealing this decision.  At this time, the LLC is unable to predict the outcome of this action.

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Item 2. Manager’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion of our current financial position and results of operations.  This discussion should be read together with our unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2011.  This discussion should also be read in conjunction with the disclosures below regarding “Forward-Looking Statements” and the “Risk Factors” set forth in Item 1A of Part II of this Quarterly Report on Form 10-Q.

 

As used in this Quarterly Report on Form 10-Q, references to “we,” “us,” “our” or similar terms include ICON Leasing Fund Eleven, LLC and its consolidated subsidiaries.

 

Forward-Looking Statements

Certain statements within this Quarterly Report on Form 10-Q 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.  They 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.

 

Overview

We operate as an equipment leasing and finance program in which the capital our members invested was pooled together to make investments, pay fees and establish a small reserve.  We primarily acquire equipment subject to lease, purchase equipment and lease it to third parties, provide equipment and other financing and, to a lesser degree, acquire ownership rights to items of leased equipment at lease expiration.

 

We are currently in our operating period.  During our operating period, additional investments were made and continue to be made with the cash generated from our investments to the extent that the cash is not used for expenses, reserves and distributions to members.  The investment in additional equipment leases and other financing transactions in this manner is called “reinvestment.”  We anticipate investing in equipment leases and other financing transactions from time to time until April 2015.  The operating period has been extended for three years, with the intention of having a very limited liquidation period thereafter, if any.

 

Recent Significant Transactions

We engaged in the following significant transactions since December 31, 2011:

 

Dispositions and Impairment

·      On May 2, 2012, Northern Capital Associates XIV, L.P. satisfied its obligations in connection with certain notes receivable by making a prepayment of $1,015,000.  No material gain or loss resulted from the prepayment.

 

·      On May 3, 2012, we sold the Senang Spirit for gross proceeds of approximately $7,173,000.  As a result, we recorded an impairment charge of $697,715 for the three months ended March 31, 2012.

 

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·      On May 3, 2012, in connection with the sale of the Senang Spirit, we settled the outstanding debt balance of approximately $9,400,000 at an agreed upon amount of approximately $7,347,000.  Accordingly, we recorded a gain on extinguishment of debt of approximately $2,053,000 for the three months ended June 30, 2012.

 

·      On August 20, 2012, ICON MW sold the automotive manufacturing equipment subject to lease with LC Manufacturing, LLC and terminated warrants issued to it for aggregate proceeds of approximately $8,300,000.  As a result, based on our 6.33% ownership interest in ICON MW, we received proceeds in the amount of approximately $525,000 and recognized a loss on the sale of approximately $6,000. In addition, our Manager evaluated the collectability of the personal guaranty of a previous owner of LC Manufacturing and, based on the findings, ICON MW recorded a credit loss of approximately $5,411,000, of which our portion was approximately $343,000.

 

New Investments

On May 22, 2012 and July 30, 2012, we made secured capital expenditure loans in the amounts of $493,774 and $634,138, respectively, to subsidiaries of Revstone. The CapEx Loan bears interest at 17% per year and matures on March 1, 2017. The CapEx Loan is secured by a first priority security interest in the automotive manufacturing equipment purchased with the proceeds from the CapEx Loan and a second priority security interest in other Revstone assets, including automotive manufacturing equipment and real property.

 

Restructuring

On July 17, 2012, the June 30, 2012 payment of €430,800 due under the finance lease between us, Heuliez SA and Heuliez Investissements SNC was modified to become six payments totaling €430,800 to be made between July 20, 2012 and November 30, 2012.

 

Recent Accounting Pronouncements

We do not believe any recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on our consolidated financial statements.

 

Results of Operations for the Three Months Ended September 30, 2012 (the “2012 Quarter”) and 2011 (the “2011 Quarter”)

Financing Transactions

The following tables set forth the types of assets securing the financing transactions in our portfolio at September 30, 2012 and December 31, 2011:

 

 

 

September 30, 2012

 

December 31, 2011

 

 

Net

 

Percentage of

 

Net

 

Percentage of

 

 

Carrying

Total Net

 

Carrying

Total Net

 

Asset Type

Value

Carrying Value

 

Value

Carrying Value

 

Lumber processing equipment and land

$

19,860,309   

 

 

50%

 

$

22,000,334   

 

 

51%

 

Marine - Container vessels(1)

 

14,562,031   

 

 

37%

 

 

15,824,443   

 

 

36%

 

Automotive manufacturing equipment

 

5,168,768   

 

 

13%

 

 

4,332,761   

 

 

10%

 

Point of sale equipment

 

-

 

 

-

 

 

1,269,064   

 

 

3%

 

 

$

39,591,108   

 

 

100%

 

$

43,426,602   

 

 

100%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Subsequent to the sale of the Marine - Container vessels in 2011, the remaining note receivable is unsecured.

 

The net carrying value of our financing transactions includes the balances of our net investments in notes receivable, finance leases and mortgage note receivable, which are included in our consolidated balance sheets.

17

 


 

 

 

 

During the 2012 Quarter and the 2011 Quarter, certain customers generated significant portions (defined as 10% or more) of our total finance income as follows:

 

 

 

 

Percentage of Total Finance Income

 

Customer

 

Asset Type

 

2012 Quarter

 

2011 Quarter

 

Teal Jones Group

 

Lumber processing equipment and land

 

 

54%

 

 

53%

 

ZIM Integrated Shipping Services Ltd.

 

Marine - Container vessels

 

 

34%

 

 

34%

 

 

 

 

 

 

88%

 

 

87%

 

Finance income from our net investment in notes receivable, net investment in finance leases and net investment in mortgage note receivable are included in finance income in our consolidated statements of operations and comprehensive income (loss).

 

The foregoing percentages are only as of a stated period and are not expected to be comparable in future periods. Further, these percentages are only representative of the percentage of the carrying value of such assets or finance income as of each stated period, and as such are not indicative of the concentration of any asset type or customer by the amount of equity invested or our investment portfolio as a whole.

 

Operating Lease Transactions

The following tables set forth the types of equipment subject to operating leases in our portfolio at September 30, 2012 and December 31, 2011:

 

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Net

 

Percentage of

 

Net

 

Percentage of

 

 

 

Carrying

Total Net

 

Carrying

Total Net

 

Asset Type

 

Value

Carrying Value

 

Value

Carrying Value

 

Plastic processing and printing equipment

 

$

6,196,786   

 

 

100%

 

$

7,391,602   

 

 

45%

 

Marine - Product tanker

 

 

 - 

 

 

 - 

 

 

8,908,986   

 

 

55%

 

 

 

$

6,196,786   

 

 

100%

 

$

16,300,588   

 

 

100%

 

The net carrying value of our operating lease transactions includes the balance of our leased equipment at cost, which is included in our consolidated balance sheets.

 

During the 2012 Quarter and the 2011 Quarter, certain customers generated significant portions (defined as 10% or more) of our total rental income as follows:

 

 

 

 

Percentage of Total Rental Income

 

Customer

 

Asset Type

 

2012 Quarter

 

2011 Quarter

 

Pliant Corporation

 

Plastic processing and printing equipment

 

 

100%

 

 

19%

 

Teekay Corporation

 

Marine - Product tankers

 

 

-

 

 

81%

 

 

 

 

 

 

100%

 

 

100%

 

Rental income from our operating leases is included in rental income in the consolidated statements of operations and comprehensive income (loss).

 

The foregoing percentages are only as of a stated period and are not expected to be comparable in future periods. Further, these percentages are only representative of the percentage of the carrying value of such assets or rental income

18

 


 

 

 

as of each stated period, and as such are not indicative of the concentration of any asset type or customer by the amount of equity invested or our investment portfolio as a whole.

 

Revenue and other income for the 2012 Quarter and the 2011 Quarter is summarized as follows:

 

 

 

Three Months Ended September 30,

 

 

 

 

2012 

 

2011 

 

Change

 

Finance income

$

1,671,836 

 

$

1,717,222 

 

$

 (45,386) 

 

Rental income

 

743,232 

 

 

3,845,336 

 

 

 (3,102,104) 

 

(Loss) income from investments in joint ventures

 

 (351,470) 

 

 

 7,636 

 

 

 (359,106) 

 

Total revenue and other income

$

 2,063,598 

 

$

5,570,194 

 

$

 (3,506,596) 

 

Total revenue and other income for the 2012 Quarter decreased $3,506,596, or 63.0%, as compared to the 2011 Quarter. The decrease in total revenue and other income was primarily due to the impact of the sale of the two marine product tankers, the Senang Spirit and the Seborak Spirit, during the second quarter of 2012 and during the fourth quarter of 2011, respectively, which resulted in a significant decrease in rental income.

 

Expenses for the 2012 Quarter and the 2011 Quarter are summarized as follows:

 

 

 

Three Months Ended September 30,

 

 

 

 

2012 

 

2011 

 

Change

 

Administrative expense reimbursements - Manager

$

 - 

 

$

 165,281 

 

$

 (165,281) 

 

General and administrative

 

 518,971 

 

 

 427,262 

 

 

 91,709 

 

Depreciation

 

 398,271 

 

 

 1,876,277 

 

 

 (1,478,006) 

 

Impairment loss

 

 - 

 

 

 43,752,697 

 

 

 (43,752,697) 

 

Interest

 

 21,441 

 

 

 537,541 

 

 

 (516,100) 

 

Gain on derivative financial instruments

 

 - 

 

 

 (57,900) 

 

 

 57,900 

 

Total expenses

$

 938,683 

 

$

 46,701,158 

 

$

 (45,762,475) 

 

Total expenses for the 2012 Quarter decreased $45,762,475, or 98.0%, as compared to the 2011 Quarter. The decrease in total expenses was primarily due to decreases in impairment loss, depreciation expense and interest expense, all of which were a result of the sale of the Senang Spirit and the Seborak Spirit during the second quarter of 2012 and during the fourth quarter of 2011, respectively.

 

Provision for Income Taxes

Certain of our direct and indirect wholly-owned subsidiaries are unlimited liability companies and are taxed as corporations under the laws of Canada. Other indirect wholly-owned subsidiaries are taxed as corporations in Barbados. For the 2012  Quarter, the provision for income taxes was comprised of a provision of $157,991 in current taxes and a benefit of $104,551 in deferred taxes. For the 2011  Quarter, the provision for income taxes was comprised of a benefit of $107,207 in current taxes and a provision of $119,212 in deferred taxes.

 

Noncontrolling Interests

Net income attributable to noncontrolling interests for the 2012  Quarter remained consistent as compared to the 2011 Quarter.

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Net Income (Loss) Attributable to Fund Eleven

As a result of the foregoing factors, net income (loss) attributable to us for the 2012  Quarter and the 2011  Quarter was $929,998, and $(41,260,522), respectively. Net income (loss) attributable to us per weighted average additional share of limited liability company interests (“Share”) outstanding for the 2012  Quarter and the 2011  Quarter was $2.54 and $(112.64), respectively.

 

Results of Operations for the Nine Months Ended September 30, 2012 (the “2012 Period”) and 2011 (the “2011 Period”)

Financing Transactions

During the 2012 Period and the 2011 Period, certain customers generated significant portions (defined as 10% or more) of our total finance income as follows:

 

 

 

 

Percentage of Total Finance Income

 

Customer

 

Asset Type

 

2012 Period

 

2011 Period

 

Teal Jones Group

 

Lumber processing equipment and land

 

 

55%

 

 

52%

 

ZIM Integrated Shipping Services Ltd.

 

Marine - Container vessels

 

 

35%

 

 

32%

 

Heuliez S. A.

 

Auto parts manufacturing equipment

 

 

9%

 

 

10%

 

 

 

 

 

 

99%

 

 

94%

 

Finance income from our net investment in notes receivable, net investment in finance leases and net investment in mortgage note receivable are included in finance income in our consolidated statements of operations and comprehensive income (loss).

 

The foregoing percentages are only as of a stated period and are not expected to be comparable in future periods. Further, these percentages are only representative of the percentage of finance income as of each stated period, and as such are not indicative of the concentration of any asset type or customer by the amount of equity invested or our investment portfolio as a whole.

Operating Lease Transactions

 

During the 2012 Period and the 2011 Period, certain customers generated significant portions (defined as 10% or more) of our total rental income as follows:

 

 

 

 

Percentage of Total Rental Income

 

Customer

 

Asset Type

 

2012 Period

 

2011 Period

 

Teekay Corporation

 

Marine - Product tankers

 

 

36%

 

 

71%