Attached files
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.
Table of Contents
|
|
Page |
|
|
|
|
||
|
|
|
1 |
||
|
|
|
Consolidated Balance Sheets |
1 |
|
|
|
|
Consolidated Statements of Operations and Comprehensive Income (Loss) |
2 |
|
|
|
|
3 |
||
|
|
|
4 |
||
|
|
|
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 |
|
|
|
|
25 |
||
|
|
|
|
||
|
|
|
|
26 |
|
|
|
|
|
26 |
|
|
|
|
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
26 |
|
|
|
|
26 |
||
|
|
|
26 |
||
|
|
|
|
26 |
|
|
|
|
|
27 |
|
|
|
|
|
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
14
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.
15
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.
16
· 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.
19
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% |
|
Pliant Corporation |
|
Plastic processing and printing equipment |
|
|
64% |
|
|
17% |
|
|
|
|
|
|
100% |
|
|
88% |
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 rental 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.
Revenue and other income for the 2012 Period and the 2011 Period is summarized as follows:
20
|
|
Nine Months Ended September 30, |
|
|
|||||
|
|
2012 |
|
2011 |
|
Change |
|||
|
Finance income |
$ |
5,044,150 |
|
$ |
5,305,524 |
|
$ |
(261,374) |
|
Rental income |
|
3,491,428 |
|
|
13,153,081 |
|
|
(9,661,653) |
|
Income (loss) from investments in joint ventures |
|
(11,088) |
|
|
(11,827) |
|
|
739 |
|
Net gain on sales of leased equipment |
|
- |
|
|
11,411,941 |
|
|
(11,411,941) |
|
Gain on extinguishment of debt |
|
2,052,960 |
|
|
- |
|
|
2,052,960 |
|
Litigation settlement |
|
171,100 |
|
|
- |
|
|
171,100 |
|
Total revenue and other income |
$ |
10,748,550 |
|
$ |
29,858,719 |
|
$ |
(19,110,169) |
Total revenue and other income for the 2012 Period decreased $19,110,169, or 64.0%, as compared to the 2011 Period. The decrease in total revenue and other income was primarily due to the decrease in net gain on sales of leased equipment related to the sale of the ICON European Container II KS vessels during the 2011 Period, as well as the decrease in rental income as a result of the sale of the Senang Spirit during the 2012 Period and the Seborak Spirit during 2011. The decrease in total revenue and other income was partially offset by the gain on extinguishment of debt related to the Senang Spirit during the 2012 Period.
Expenses for the 2012 Period and the 2011 Period are summarized as follows:
|
|
Nine Months Ended September 30, |
|
|
|||||
|
|
2012 |
|
2011 |
|
Change |
|||
|
Administrative expense reimbursements |
$ |
403,145 |
|
$ |
836,376 |
|
$ |
(433,231) |
|
General and administrative |
|
1,766,781 |
|
|
1,952,824 |
|
|
(186,043) |
|
Vessel operating expense |
|
1,047,506 |
|
|
- |
|
|
1,047,506 |
|
Depreciation |
|
2,520,256 |
|
|
6,375,162 |
|
|
(3,854,906) |
|
Impairment loss |
|
697,715 |
|
|
43,770,477 |
|
|
(43,072,762) |
|
Interest |
|
293,218 |
|
|
1,825,245 |
|
|
(1,532,027) |
|
Gain on derivative financial instruments |
|
(75,922) |
|
|
(342,055) |
|
|
266,133 |
|
Total expenses |
$ |
6,652,699 |
|
$ |
54,418,029 |
|
$ |
(47,765,330) |
Total expenses for the 2012 Period decreased $47,765,330, or 87.8%, as compared to the 2011 Period. The decrease in total expenses was primarily due to decreases in impairment loss, depreciation expense and interest expense, all as a result of the sale of the Senang Spirit and the Seborak Spirit during the 2012 Period and 2011, respectively. The decrease in total expenses was partially offset by an increase in vessel operating expense relating to the Senang Spirit during the 2012 Period.
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 Period, the provision for income taxes was comprised of a provision of $480,304 in current taxes and a benefit of $309,668 in deferred taxes. For the 2011 Period, the provision for income taxes was comprised of a provision of $41,765 in current taxes and a provision of $129,251 in deferred taxes.
Noncontrolling Interests
Net income attributable to noncontrolling interests for the 2012 Period decreased $341,282 as compared to the 2011 Period primarily due to the sale of our investment in ICON Global Crossing V, LLC during the 2011 Period.
21
Net Income (Loss) Attributable to Fund Eleven
As a result of the foregoing factors, net income (loss) attributable to us for the 2012 Period and the 2011 Period was $3,492,069 and $(25,504,754), respectively. Net income (loss) attributable to us per weighted average additional Share outstanding for the 2012 Period and the 2011 Period was $9.53 and $(69.62), respectively.
Financial Condition
This section discusses the major balance sheet variances at September 30, 2012 compared to December 31, 2011.
Total Assets
Total assets decreased $14,245,138, from $72,232,367 at December 31, 2011 to $57,987,229 at September 30, 2012. The decrease was primarily due to the cash distributions to our members, the continuing depreciation of our leased equipment at cost, the sale of the Senang Spirit and use of the proceeds from the sale of the Senang Spirit to settle the outstanding debt balance.
Current Assets
Current assets increased $4,421,980, from $17,752,366 at December 31, 2011 to $22,174,346 at September 30, 2012. The increase was primarily due to the increase in the current portion of the net investment in finance lease and in the current portion of the net investment in notes receivable resulting from the scheduled change in lease and note payments, respectively. The increase was partially offset by cash distributions made to our members in the 2012 Period.
Total Liabilities
Total liabilities decreased $11,173,568, from $12,506,784 at December 31, 2011 to $1,333,216 at September 30, 2012. The decrease was primarily due to scheduled repayments of our long-term debt during the 2012 Period, in addition to the extinguishment of debt related to the Senang Spirit.
Current Liabilities
Current liabilities decreased $3,862,458, from $5,195,674 at December 31, 2011 to $1,333,216 at September 30, 2012. The decrease was primarily due to the extinguishment of debt related to the Senang Spirit.
Equity
Equity decreased $3,071,570, from $59,725,583 at December 31, 2011 to $56,654,013 at September 30, 2012. The decrease was primarily due to distributions to our members. The decrease was partially offset by the net income recorded in the 2012 Period.
Liquidity and Capital Resources
Summary
At September 30, 2012 and December 31, 2011, we had cash and cash equivalents of $6,574,498 and $6,824,356, respectively. During the nine months ended September 30, 2012, our main sources of cash have been from (i) collections on finance leases, (ii) proceeds from sales of leased equipment and (iii) principal repayment on notes receivable and our main uses of cash have been from (i) repayment of long-term debt and (ii) distributions to our members and noncontrolling interests. Our liquidity will vary in the future, increasing to the extent cash flows from investments and proceeds from the sale of our investments exceed expenses and decreasing as we enter into new investments, pay distributions to our members and to the extent that expenses exceed cash flows from operations and the proceeds from the sale of our investments.
We currently have adequate cash balances and generate a sufficient amount of cash flow from operations to meet our short-term working capital requirements. We expect to generate sufficient cash flows from operations to sustain our
22
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 under our revolving line of credit. At September 30, 2012, we had $5,000,000 available under the Facility pursuant to the borrowing base, available to fund our short-term liquidity needs. For additional information, see Note 7 to our consolidated financial statements.
We anticipate that our liquidity requirements for the remaining life of the fund will be financed by the expected results of our operations, as well as cash received from our investments at maturity.
We anticipate being able to meet our liquidity requirements into the foreseeable future. However, our ability to generate cash in the future is subject to general economic, financial, competitive, regulatory and other factors that affect us and our lessees’ and borrowers’ businesses that are beyond our control.
Pursuant to the terms of our offering, we established a cash reserve in the amount of 0.5% of the gross offering proceeds. As of September 30, 2012, the cash reserve was $1,825,993.
Cash Flows
Operating Activities
Cash provided by operating activities decreased $1,016,570, from $6,406,706 in the 2011 Period to $5,390,136 in the 2012 Period. The decrease was primarily a result of the reduced collections on finance leases due to the sale of assets by ICON European Container I KS, ICON European Container II KS, ICON Global Crossing III and ICON Global Crossing V.
Investing Activities
Cash provided by investing activities decreased $19,425,780, from $28,724,459 in the 2011 Period to $9,298,679 in the 2012 Period. This decrease was primarily due to the decrease in proceeds we received from sales of leased equipment in the 2012 Period as compared to the 2011 Period, partially offset by investments in notes receivables.
Financing Activities
Cash used in financing activities decreased $16,075,024, from $31,009,992 in the 2011 Period to $14,934,968 in the 2012 Period. This decrease was primarily due to decreases in principal repayments of our long-term debt and cash distributions to our members and noncontrolling interests.
Financings and Borrowings
Long-Term Debt
On May 3, 2012, in connection with the sale of the Senang Spirit, we 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, we 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, the balance of our long-term debt was $0.
Distributions
We, at our Manager’s discretion, paid monthly distributions to our members and noncontrolling interests starting with the first month after each member’s admission and the commencement of our joint venture operations. We paid distributions to our Manager, additional members and noncontrolling interests of $61,054, $6,044,264 and $1,003,720, respectively, during the 2012 Period. We do not expect to make any distributions during our extended operating period until the end of such period.
23
Commitments and Contingencies and Off-Balance Sheet Transactions
Commitments and Contingencies
At the time we acquire or divest of our interest in an equipment lease or other financing transaction, we may, under very limited circumstances, agree to indemnify the seller or buyer for specific contingent liabilities. Our Manager believes that any liability of ours that may arise as a result of any such indemnification obligations will not have a material adverse effect on our consolidated financial condition or results of operations taken as a whole.
From November 2010 through March 2011, we, through our wholly-owned subsidiaries, sold four container vessels previously on bareboat charter to ZIM to unaffiliated third parties. During June 2011, we 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. Our 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, our 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, our Manager filed a defense and counterclaim. Our Manager believes that ZIM’s claims are frivolous and intends to vigorously contest these claims. At this time, we are unable to predict the outcome of the arbitration or loss therefrom, if any.
On June 20, 2011, ICON EAR filed a complaint in the Court of Common Pleas, Hamilton County, Ohio, against the auditors of EAR alleging malpractice and negligent misrepresentation. On May 3, 2012, the case was settled in ICON EAR’s favor for $590,000, of which our 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. Our Manager filed an answer to the complaint that included certain affirmative defenses. Our Manager believes these claims are frivolous and intends to vigorously defend this action. At this time, we are 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 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, we are unable to predict the outcome of this action.
Off-Balance Sheet Transactions
None.
24
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There are no material changes to the disclosures related to this item since the filing of our Annual Report on Form 10-K for the year ended December 31, 2011.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
In connection with the preparation of this Quarterly Report on Form 10-Q for the three months ended September 30, 2012, 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 Principal Financial and Accounting 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 Principal Financial and Accounting 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.
Evaluation of internal control over financial reporting
There have been no changes in our internal control over financial reporting during the three months ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
25
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, cash flows 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.
There have been no material changes from the risk factors disclosed in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2011.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We did not sell or repurchase any Shares during the three months ended September 30, 2012.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
26
27
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ICON Leasing Fund Eleven, LLC
(Registrant)
By: ICON Capital Corp.
(Manager of the Registrant)
November 13, 2012
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) |
By: /s/ Keith S. Franz |
Keith S. Franz |
Managing Director (Principal Financial and Accounting Officer) |
29