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Table of Contents
PART I
Forward-Looking Statements
Certain statements within this Annual Report on Form 10-K may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). These statements are being made pursuant to the PSLRA, with the intention of obtaining the benefits of the “safe harbor” provisions of the PSLRA, and, other than as required by law, we assume no obligation to update or supplement such statements. Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. You can identify these statements by the use of words such as “may,” “would,” “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.
ICON Leasing Fund Twelve, LLC (the “LLC” or “Fund Twelve”) was formed on October 3, 2006 as a Delaware limited liability company. The LLC will continue until December 31, 2026, unless terminated sooner. When used in this Annual Report on Form 10-K, the terms “we,” “us,” “our” or similar terms refer to the LLC and its consolidated subsidiaries.
Our manager is ICON Capital, LLC, a Delaware limited liability company formerly known as ICON Capital Corp. (the “Manager”). Our Manager manages and controls our business affairs, including, but not limited to, our equipment leases and other financing transactions which we enter into pursuant to the terms of our limited liability company agreement (the “LLC Agreement”).
Our offering period commenced on May 7, 2007 and ended on April 30, 2009. Our operating period commenced on May 1, 2009 and ended on April 30, 2014. Our liquidation period commenced on May 1, 2014, during which we will sell our assets and/or let our investments mature in the ordinary course of business. If our Manager believes it would benefit our members to reinvest the proceeds received from investments in additional investments during the liquidation period, our Manager may do so. Our Manager is not paid acquisition fees or management fees for additional investments initiated during the liquidation period, although management fees continue to be paid for investments that were part of our portfolio prior to the commencement of the liquidation period.
We offered shares of limited liability company interests (“Shares”) on a “best efforts” basis with the intention of raising up to $410,800,000 of capital, consisting of 400,000 Shares at a purchase price of $1,000 per Share and an additional 12,000 Shares, which were reserved for issuance pursuant to our distribution reinvestment plan (the “Distribution Reinvestment Plan”). The Distribution Reinvestment Plan allowed investors to purchase additional Shares with distributions received from us and/or certain other funds managed by our Manager at a discounted price of $900 per Share. As of April 30, 2009, 11,393 Shares were issued pursuant to our Distribution Reinvestment Plan.
Our initial closing date was May 25, 2007 (the “Commencement of Operations”), the date on which we raised $1,200,000. Through the end of our offering period on April 30, 2009, we sold 348,826 Shares, representing $347,686,947 of capital contributions and admitted 6,503 additional members. In addition, pursuant to the terms of our offering, we established a cash reserve in the amount of 0.5% of the gross offering proceeds. As of December 31, 2014, the cash reserve was $1,738,435. Through December 31, 2014, we repurchased 491 Shares pursuant to our repurchase plan. Beginning with the Commencement of Operations through April 30, 2009, we paid $26,995,024 of sales commissions to third parties, $5,488,440 of organizational and offering expenses to our Manager and $6,748,756 of dealer-manager fees to ICON Securities, LLC, formerly known as ICON Securities Corp., our dealer-manager in the offering and an affiliate of our Manager.
Our Business
We operate as an equipment leasing and finance program in which the capital our members invested was pooled together to make investments, pay fees and establish a small reserve. We primarily acquire equipment subject to lease, purchase equipment and lease it to third-party end users or finance equipment for third parties and, to a lesser degree, acquire ownership
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rights to items of leased equipment at lease expiration. Some of our equipment leases are acquired for cash and are expected to provide current cash flow, which we refer to as “income” leases. For our other equipment leases, we finance the majority of the purchase price through borrowings from third parties. We refer to these leases as “growth” leases. These growth leases generate little or no current cash flow because substantially all of the rental payments we receive from the lessee are used to service the indebtedness associated with acquiring or financing the lease. For these leases, we anticipate that the future value of the leased equipment will exceed our cash portion of the purchase price.
We divide the life of the LLC into three distinct phases:
(1) Offering Period: We invested most of the net proceeds from the sale of Shares in equipment leases and other financing transactions.
(2) Operating Period: After the close of the offering period, we reinvested the cash generated from our investments to the extent that cash was not needed for our expenses, reserves and distributions to members. Effective April 30, 2014, we completed our operating period.
(3) Liquidation Period: On May 1, 2014, we commenced our liquidation period, during which we will sell our assets and/or let our investments mature in the ordinary course of business. If our Manager believes it would benefit our members to reinvest the proceeds received from investments in additional investments during the liquidation period, our Manager may do so.
At December 31, 2014 and 2013, we had total assets of $267,429,193 and $244,226,508, respectively. For the year ended December 31, 2014, we had two lessees that accounted for approximately 62.1% of our total rental and finance income of $82,137,543. Net income attributable to us for the year ended December 31, 2014 was $59,880,331. For the year ended December 31, 2013, we had four lessees that accounted for approximately 87.4% of our total rental and finance income of $49,596,609. Net loss attributable to us for the year ended December 31, 2013 was $9,377,469. For the year ended December 31, 2012, we had four lessees that accounted for approximately 80.4% of our total rental and finance income of $64,538,803. Net loss attributable to us for the year ended December 31, 2012 was $28,009,680.
At December 31, 2014, our portfolio, which we hold either directly or through joint ventures, consisted primarily of the following investments:
Marine Vessels
· Two containership vessels, the Aegean Express and the Arabian Express, each subject to time charters that expire in June and September 2015, respectively.
· A 51% ownership interest in a 300-man accommodation and work barge, the Swiber Chateau (f/k/a the Swiber Victorious), subject to a 96-month bareboat charter that expires in March 2017.
· A 25% ownership interest in two very large crude carriers (the “VLCCs”), the Eagle Vermont and the Eagle Virginia, each subject to a 10-year bareboat charter that expires in March 2021.
· A 75% ownership interest in two LPG tanker vessels, the SIVA Coral and the SIVA Pearl (collectively, the “SIVA Vessels”), each subject to an eight-year bareboat charter that expires in March and April 2022, respectively.
· A 75% ownership interest in an offshore supply vessel, the Crest Olympus, subject to a 10-year bareboat charter that expires in June 2024.
Mining Equipment
· A Bucyrus Erie model 1570 Dragline subject to six semi-annual lease payments that expire in August 2015.
· A 13.2% ownership interest in mining equipment subject to a 24-month lease that expires in September 2015.
· A 60% ownership interest in mining equipment subject to two 48-month leases that expire in February 2018.
· A 55.817% ownership interest in mining equipment subject to a 36-month lease that expires in September 2017.
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Notes Receivable
· A 25% ownership interest in a term loan to Jurong Aromatics Corporation Pte. Ltd. (“JAC”), secured by a second priority security interest in all equipment, plant and machinery associated with a condensate splitter and aromatics complex, that matures in January 2021.
· A 21% ownership interest in a portion of a subordinated credit facility for JAC from Standard Chartered Bank (“Standard Chartered”), secured by a second priority security interest in all equipment, plant and machinery associated with a condensate splitter and aromatics complex, that matures in January 2021.
· A term loan to VAS Aero Services, LLC (“VAS”), secured by a second priority security interest in all of VAS’s assets, that was due in full as of December 31, 2014.
· A term loan to Superior Tube Company, Inc. and Tubes Holdco Limited (collectively, “Superior”), secured by a first priority security interest in tube manufacturing and related equipment, that matures in October 2017.
· A term loan to Lubricating Specialties Company (“LSC”), secured by a second priority security interest in LSC’s liquid storage tanks, blending lines, packaging equipment, accounts receivable and inventory, that matures in August 2018.
· A term loan to Cenveo Corporation (“Cenveo”), secured by a first priority security interest in specific equipment used to produce, print, fold and package printed commercial envelopes, that matures in October 2018.
· A subordinated term loan to two affiliates of Técnicas Maritimas Avanzadas, S.A. de C.V. (collectively, “TMA”), secured by, among other things, a first priority security interest in and earnings from platform supply vessels, that matures in August 2019.
· A term loan to Premier Trailer Leasing, Inc. (“Premier Trailer”), secured by a second priority security interest in all of Premier Trailer’s assets, including, without limitation, its fleet of trailers, and the equity interests of Premier Trailer, that matures in September 2020.
· A term loan to NARL Marketing Inc. and certain of its affiliates (collectively, “NARL”), secured by a first priority security interest in all of NARL’s existing and thereafter acquired assets including, but not limited to, its retail and wholesale fuel equipment, including pumps and storage tanks, and a mortgage on certain real properties, that matures in November 2017.
Trucks and Trailers
· A 60% ownership interest in trucks, trailers and other equipment subject to a 57-month lease that expires in December 2018.
For a discussion of the significant transactions that we engaged in during the years ended December 31, 2014, 2013 and 2012, please refer to “Item 7. Manager’s Discussion and Analysis of Financial Condition and Results of Operations.”
Segment Information
We are engaged in one business segment, the business of purchasing equipment and leasing it to third parties, providing equipment and other financing, acquiring equipment subject to lease and, to a lesser degree, acquiring ownership rights to items of leased equipment at lease expiration.
Competition
The commercial leasing and financing industry is highly competitive and is characterized by competitive factors that vary based upon product and geographic region. Our competitors are varied and include other equipment leasing and finance funds, hedge funds, private equity funds, captive and independent finance companies, commercial and industrial banks, manufacturers and vendors. Such competitors may have been and/or may be in a position to offer equipment to prospective customers on financial terms that were or are more favorable than those that we could offer or that we can currently offer, which may have affected our ability to make our current investments and may affect our ability to make future investments, in each case, in a
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manner that would enable us to achieve our investment objectives. For additional information about our competition and other risks related to our operations, please see “Item 1A. Risk Factors.”
Employees
We have no direct employees. Our Manager has full and exclusive control over our management and operations.
Available Information
Our Annual Report on Form 10-K, our most recent Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K, and any amendments to those reports, are available free of charge on our Manager’s internet website at http://www.iconinvestments.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”). The information contained on our Manager’s website is not deemed part of this Annual Report on Form 10-K. Our reports are also available on the SEC’s website at http://www.sec.gov.
Financial Information Regarding Geographic Areas
Certain of our investments generate revenue in geographic areas outside of the United States. For additional information, see Note 14 to our consolidated financial statements.
We are subject to a number of risks. Careful consideration should be given to the following risk factors, in addition to the other information included in this Annual Report. The risks and uncertainties described below are not the only ones we may face. Each of these risk factors could adversely affect our business operating results and/or financial condition, as well as adversely affect the value of an investment in our Shares. In addition to the following disclosures, please refer to the other information contained in this Annual Report, including the consolidated financial statements and the related notes.
General Investment Risks
All or a substantial portion of your distributions may be a return of capital and not a return on capital, which will not necessarily be indicative of our performance.
The portion of total distributions that is a return of capital and the portion that is economic return will depend upon a number of factors that cannot be determined until all of our investments have been sold or otherwise mature. At that time, you will be able to compare the total amount of all distributions you receive to your total capital invested in order to determine your economic return.
The Internal Revenue Service (the “IRS”) may deem the majority of your distributions to be a return of capital for tax purposes during our early years. Distributions would be deemed to be a return of capital for tax purposes to the extent that we are distributing cash in an amount greater than our taxable income. The fact that the IRS deems distributions to be a return of capital in part and we report an adjusted tax basis to you on Schedule K-1 is not an indication that we are performing greater than or less than expectations and cannot be utilized to forecast what your final return might be.
Your ability to resell your Shares is limited by the absence of a public trading market and substantial transfer restrictions. Therefore, you should be prepared to hold your Shares for the life of the LLC.
A public market does not exist for our Shares and we do not anticipate that a public market will develop for our Shares. Our Shares are not currently and will not be listed on any national securities exchange at any time, and we will take steps to ensure that no public trading market develops for our Shares. In addition, our LLC Agreement imposes significant restrictions on your right to transfer your Shares. We have established these restrictions to comply with federal and state securities laws, as well as to ensure that we will not be considered a publicly traded partnership that is taxed as a corporation for federal income tax purposes. Your ability to sell or otherwise transfer your Shares is extremely limited and will depend on your ability to identify a buyer. Thus, you will probably not be able to sell or otherwise liquidate your Shares in the event of an emergency and, even if you were able to arrange a sale, the price you receive would likely be at a substantial discount to the price you paid for your Shares. As a result, you must view your investment in our Shares as a long-term, illiquid investment.
If you request that we repurchase your Shares, you may receive significantly less than you would receive if you held your Shares for the life of the LLC.
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You may request that we repurchase up to all of your Shares. We are under no obligation to do so, however, and will have only limited cash available for this purpose. If we repurchase your Shares, the formula for the repurchase price has been unilaterally set and, depending upon when you request repurchase, the repurchase price may be less than the unreturned amount of your investment. If your Shares are repurchased, the repurchase price may provide you a significantly lower value than the value you would realize by retaining your Shares for the duration of the LLC.
You may not receive distributions every month and, therefore, you should not rely on distributions from your Shares as a source of income.
You should not rely on distributions from your Shares as a source of income. While we paid monthly distributions through the end of our operating period on April 30, 2014, our Manager has and may determine again in the future that it is in our best interest to change the amount of distributions you receive or to not pay any distributions. Losses from our operations of the types described in these risk factors and unexpected liabilities could result in a reduced level of distributions to you. During the liquidation period, which commenced on May 1, 2014, although we expect that lump sums will be distributed from time to time if and when financially significant assets are sold, regularly scheduled distributions will decrease because there will be fewer investments available to generate cash flow.
Your Shares may be diluted.
Some investors, including our Manager and its officers, directors and other affiliates, may have purchased Shares at discounted prices and generally will share in our revenues and distributions based on the number of Shares that they purchase, rather than the discounted subscription price paid by them for their Shares. As a result, investors who paid discounted prices for their investments will receive higher returns on their investments in us as compared to investors who paid the entire $1,000 per Share.
Our assets may be plan assets for ERISA purposes, which could subject our Manager to additional restrictions on its ability to operate our business with respect to all members.
The Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and the Internal Revenue Code of 1986, as amended (the “Code”), may apply what is known as the look-through rule to an investment in our Shares. Under that rule, the assets of an entity in which a qualified plan or IRA has made an equity investment may constitute assets of the qualified plan or IRA. If you are a fiduciary of a qualified plan or IRA, you should consult with your advisors and carefully consider the effect of that treatment if the look-through rule is applied. If the look-through rule were to apply, our Manager may be viewed as an additional fiduciary with respect to the qualified plan or IRA to the extent of any decisions relating to the undivided interest in our assets represented by the Shares held by such qualified plan or IRA. This could result in some restriction on our Manager’s willingness to engage in transactions that might otherwise be in the best interest of all members due to the strict rules of ERISA regarding fiduciary actions.
The statements of value that we include in this and future Annual Reports on Form 10-K, and that we will send to fiduciaries of plans subject to ERISA and to certain other parties, are only estimates and may not reflect the actual value of our Shares.
The statements of estimated value are based on the estimated value of each Share (i) as of December 31 of each fiscal year, for the annual statements included in this and future Annual Reports on Form 10-K and (ii) as of September 30 of each fiscal year, for annual statements sent to fiduciaries of plans subject to ERISA and certain other parties. Management, in part, will rely upon third-party sources and advice in arriving at this estimated value. No independent appraisals on the particular value of our Shares will be obtained and the value will be based upon an estimated fair market value as of the referenced date for such value. Because this is only an estimate, we may subsequently revise any valuation that is provided. We cannot ensure that:
· this estimate of value could actually be realized by us or by you upon liquidation;
· you could realize this estimate of value if you were to attempt to sell your Shares;
· this estimate of value reflects the price or prices that our Shares would or could trade at if they were listed on a national stock exchange or included for quotation on a national market system, because no such market exists or is likely to develop; or
· the statement of value, or the method used to establish value, complies with any reporting and disclosure or valuation requirements under ERISA, the Code or other applicable law.
You have limited voting rights and are required to rely on our Manager to make all of our investment decisions and achieve our investment objectives.
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Our Manager will make all of our investment decisions, including determining the investments and the dispositions we make. Our success will depend upon the quality of the investment decisions our Manager makes, particularly relating to our investments in equipment and the realization of such investments. You are not permitted to take part in managing, establishing or changing our investment objectives or policies.
The decisions of our Manager may be subject to conflicts of interest.
The decisions of our Manager may be subject to various conflicts of interest arising out of its relationship to us and our affiliates. Our Manager could be confronted with decisions in which it will, directly or indirectly, have an economic incentive to place its interests or the interests of its affiliates above ours. As of December 31, 2014, our Manager manages or is the investment manager or managing trustee for six other public equipment leasing and finance funds. See “Item 13. Certain Relationships and Related Transactions, and Director Independence.” These conflicts may include, but are not limited to:
· our Manager may have received more fees for making investments in which we incurred indebtedness to fund these investments than if indebtedness was not incurred;
· our LLC Agreement does not prohibit our Manager or any of our affiliates from competing with us for investments or engaging in other types of business;
· our Manager may have had opportunities to earn fees for referring a prospective investment opportunity to others;
· the lack of separate legal representation for us and our Manager and lack of arm’s-length negotiations regarding compensation payable to our Manager;
· our Manager is our tax matters partner and is able to negotiate with the IRS to settle tax disputes that would bind us and you that might not be in your best interest given your individual tax situation; and
· our Manager can make decisions as to when and whether to sell a jointly-owned asset when the co-owner is another business it manages.
The investment committee of our Manager is not independent.
Any conflicts in determining and allocating investments between us and our Manager, or between us and another fund managed by our Manager, are resolved by our Manager’s investment committee, which also serves as our investment committee and the investment committee for other funds managed by our Manager and its affiliates. Since all of the members of our Manager’s investment committee are officers of our Manager and are not independent, matters determined by such investment committee, including conflicts of interest between us, our Manager and our affiliates involving investment opportunities, may not be as favorable to us as they would be if independent members were on the committee. Generally, if an investment is appropriate for more than one fund, our Manager’s investment committee will allocate the investment to a fund (which includes us) after taking into consideration at least the following factors:
· whether the fund has the cash required for the investment;
· whether the amount of debt to be incurred with respect to the investment is acceptable for the fund;
· the effect the investment would have on the fund’s cash flow;
· whether the investment would further diversify, or unduly concentrate, the fund’s investments in a particular lessee/borrower, class or type of equipment, location, industry, etc.;
· whether the term of the investment is within the term of the fund; and
· which fund has been seeking investments for the longest period of time.
Notwithstanding the foregoing, our Manager’s investment committee may make exceptions to these general policies when, in our Manager’s judgment, other circumstances make application of these policies inequitable or economically undesirable. In addition, our LLC Agreement permits our Manager and our affiliates to engage in equipment acquisitions, financing secured loans and refinancing, leasing and releasing opportunities on their own behalf or on behalf of other funds even if they compete with us.
Our Manager’s officers and employees manage other businesses and will not devote their time exclusively to managing us and our business and we may face additional competition for time and capital because neither our Manager nor its affiliates are prohibited from raising money for or managing other entities that pursue the same types of investments that we target.
We do not employ our own full-time officers, managers or employees. Instead, our Manager supervises and controls our business affairs. Our Manager’s officers and employees are also officers and employees of our Manager and its affiliates. In addition to sponsoring and managing us and other public equipment leasing and financing funds, our Manager and its affiliates
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currently sponsor, manage and/or distribute other investment products, including, but not limited to, a business development company.
As a result, the time and resources that our Manager’s and its affiliates’ officers and employees devote to us may be diverted and during times of intense activity in other investment products that our Manager and its affiliates manage, sponsor or distribute, such officers and employees may devote less time and resources to our business than would be the case if we had separate officers and employees. In addition, we may compete with any such investment entities for the same investors and investment opportunities.
Our Manager and its affiliates have received and will receive expense reimbursements and fees from us and those reimbursements and fees were and are likely to exceed the income portion of distributions paid to you during our early years.
Before paying any distributions to you, we have reimbursed and will reimburse our Manager and its affiliates for expenses incurred on our behalf, and paid or pay our Manager and its affiliates fees for acquiring, managing, and realizing our investments. Our Manager is not paid acquisition fees or management fees for additional investments initiated during the liquidation period, although management fees continue to be paid for investments that were part of our portfolio prior to the commencement of the liquidation period. The expense reimbursements and fees of our Manager and its affiliates were established by our Manager in compliance with the North American Securities Administrators Association guidelines for publicly offered, finite-life equipment leasing and finance funds (the “NASAA Guidelines”) in effect on May 7, 2007 and are not based on arm’s-length negotiations, but are subject to the limitations set forth in our LLC Agreement. Nevertheless, the amount of these expense reimbursements and fees was and is likely to exceed the income portion of distributions paid to you in our early years.
In general, expense reimbursements and fees were or are paid without regard to the amount of our distributions to our additional members, and regardless of the success or profitability of our operations. Some of those fees and expense reimbursements were or will be required to be paid as we acquired our portfolio and incurred or incur expenses, such as accounting and interest expenses, even though we may not yet have begun to receive revenues from all of our investments. This lag between the time when we paid or must pay fees and expenses and the time when we received or receive revenues may result in losses to us during our early years, which our Manager believes is typical for funds such as us.
Furthermore, we borrowed a significant portion of the purchase price of some of our investments. This use of indebtedness permitted us to make more investments than if borrowings were not utilized. As a consequence, we have paid and may continue to pay greater fees to our Manager than if no indebtedness were incurred because management and acquisition fees were or are based upon the gross payments earned or receivable from, or the purchase price (including any indebtedness incurred) of, our investments. Also, our Manager will determine the amount of cash reserves that we will maintain for future expenses, contingencies or investments. The reimbursement of expenses, payment of fees or creation of reserves could adversely affect our ability to pay distributions to our additional members.
Our Manager may have difficulty managing its growth, which may divert its resources and limit its ability to expand its operations successfully.
The amount of assets that our Manager manages has grown substantially since our Manager was formed in 1985. Our Manager and its affiliates intend to continue to sponsor and manage, as applicable, funds similar to and different from us that may be sponsored and managed concurrently with us and they expect to experience further growth in their respective assets under management. Our Manager’s future success will depend on the ability of its and its affiliates’ officers and key employees to implement and improve their operational, financial and managerial controls, reporting systems and procedures, and manage a growing number of assets and investment funds. However, they may not implement improvements to their managerial information and control systems in an efficient or timely manner and they may discover deficiencies in their existing systems and controls. Thus, our Manager’s anticipated growth may place a strain on its administrative and operations infrastructure, which could increase its costs and reduce its efficiency and could negatively impact our operations, business and financial condition.
Operational risks may disrupt our business and result in losses.
We may face operational risk from errors made in the execution, confirmation or settlement of transactions. We may also face operational risk from our transactions not being properly recorded, evaluated or accounted for. We rely heavily on our Manager’s financial, accounting, and other software systems. If any of these systems fail to operate properly or become disabled, we could suffer financial loss and a disruption of our business. In addition, we are highly dependent on our
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Manager’s information systems and technology. There can be no assurance that these information systems and technology will be able to accommodate our Manager’s growth or that the cost of maintaining such systems will not increase from its current level. A failure to accommodate growth, or an increase in costs related to such information systems, could also negatively affect our liquidity and cash flows, and could negatively affect our profitability. Furthermore, we depend on the headquarters of our Manager, which are located in New York City, for the operation of our business. A disaster or a disruption in the infrastructure that supports our business, including a disruption involving electronic communications or other services used by us or third parties with whom we conduct business, or directly affecting our headquarters, may have an adverse impact on our ability to continue to operate our business without interruption, which could have a material adverse effect on us. Although we have disaster recovery programs in place, there can be no assurance that these will be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for any losses. Finally, we rely on third-party service providers for certain aspects of our business, including certain accounting and financial services. Any interruption or deterioration in the performance of these third parties could impair the quality of our operations and could adversely affect our business and result in losses.
We rely on our systems, certain affiliates' employees, and certain third-party vendors and service providers in conducting our operations, and certain failures, including internal or external fraud, operational errors, systems malfunctions, or cybersecurity incidents, could materially adversely affect our operations.
We are exposed to many types of operational risk, including the risk of fraud by certain affiliates' employees and outsiders, clerical and recordkeeping errors, and computer or telecommunications systems malfunctions. If any of our financial, accounting, or other data processing systems fail or have other significant shortcomings, we could be materially adversely affected. We are similarly dependent on the employees of certain of our affiliates. We could be materially adversely affected if one of such employees causes a significant operational break-down or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our operations or systems. Third parties with which we do business could also be sources of operational risk to us, including relating to break-downs or failures of such parties’ own systems or employees. Any of these occurrences could result in a diminished ability for us to operate one or more of our business, or cause financial loss, potential liability, inability to secure insurance, reputational damage and regulatory intervention, which could materially adversely affect us.
We may also be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control, which may include, for example, computer viruses or electrical or telecommunications outages, natural or man-made disasters, such as earthquakes, hurricanes, floods or tornados, disease pandemics, or events arising from local or regional politics, including terrorist acts. Such disruptions may give rise to loss or liability to us. In addition, there is the risk that our controls and procedures as well as business continuity and data security systems prove to be inadequate. The computer systems and network systems we use could be vulnerable to unforeseen problems. These problems may arise in both our internally developed systems and the systems of third-party service providers. In addition, our computer systems and network infrastructure present security risks, and could be susceptible to hacking or identity theft. Any such failure could affect our operations and could materially adversely affect our results of operations by requiring us to expend significant resources to correct the defect, as well as by exposing us to litigation or losses not covered by insurance. Although we have business continuity plans and other safeguards in place, our business operations may be adversely affected by significant and widespread disruption to our physical infrastructure or operating systems that support our business.
Information security risks for financial institutions have generally increased in recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financing transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties. Our business relies on our digital technologies, computer and email systems, software, and networks to conduct their operations. Although we believe we have robust information security procedures and controls, our technologies, systems and networks may become the target of cyber attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our confidential, proprietary and other information, or otherwise disrupt our business operations, which could materially adversely affect us.
Our internal controls over financial reporting may not be effective, which could have a significant and adverse effect on our business.
Our Manager is required to evaluate our internal controls over financial reporting in order to allow its management to report on our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002, as amended, and the rules and regulations of the SEC thereunder, which we refer to as “Section 404.” During the course of testing, our Manager may identify deficiencies that it may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, if we fail to achieve and maintain the
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adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404. We cannot be certain as to the timing of completion of our evaluation, testing and any remediation actions or the impact of the same on our operations. If we are not able to complete our annual evaluations required by Section 404 in a timely manner or with adequate compliance, we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. As a result, we may be required to incur costs in improving our internal controls system and the hiring of additional personnel. Any such action could negatively affect our results of operations and the achievement of our investment objectives.
We are subject to certain reporting requirements and are required to file certain periodic reports with the SEC.
We are subject to reporting requirements under the Securities Exchange Act of 1934, as amended, including, but not limited to, the filing of quarterly and annual reports. Prior public funds sponsored by our Manager have been and are subject to the same requirements. If we experience delays in the filing of our reports, our investors may not have access to timely information concerning us, our operations, and our financial results.
Your ability to institute a cause of action against our Manager and its affiliates is limited by our LLC Agreement.
Our LLC Agreement provides that neither our Manager nor any of its affiliates will have any liability to us for any loss we suffer arising out of any action or inaction of our Manager or an affiliate if our Manager or affiliate determined, in good faith, that the course of conduct was in our best interests and did not constitute negligence or misconduct. As a result of these provisions in our LLC Agreement, your right to institute a cause of action against our Manager may be more limited than it would be without these provisions.
Business Risks
Our business could be hurt by economic downturns.
Our business is affected by a number of economic factors, including, but not limited to, the level of economic activity in the markets in which we operate. A decline in economic activity in the United States or internationally could materially affect our financial condition and results of operations. The equipment leasing and financing industry is influenced by factors such as interest rates, inflation, employment rates and other macroeconomic factors over which we have no control. Any decline in economic activity as a result of these factors could result in a decrease in the number of transactions in which we participate and in our profitability.
Uncertainties associated with the equipment leasing and financing industry may have an adverse effect on our business and may adversely affect our ability to give you any economic return from our Shares or a complete return of your capital.
There are a number of uncertainties associated with the equipment leasing and financing industry that may have an adverse effect on our business and may adversely affect our ability to pay distributions to you that will, in total, be equal to a return of all of your capital, or provide for any economic return from our Shares. These include, but are not limited to:
· fluctuations in demand for equipment and fluctuations in interest rates and inflation rates;
· fluctuations in the availability and cost of credit for us to borrow to make and/or realize on some of our investments;
· the continuing economic life and value of equipment at the time our investments mature;
· the technological and economic obsolescence of equipment;
· potential defaults by lessees, borrowers or other counterparties;
· supervision and regulation by governmental authorities; and
· increases in our expenses, including taxes and insurance expenses.
The risks and uncertainties associated with the industries of our lessees, borrowers, and other counterparties may indirectly affect our business, operating results and financial condition.
We are indirectly subject to a number of uncertainties associated with the industries of our lessees, borrowers, and other counterparties. We invest in a pool of equipment by, among other things, acquiring equipment subject to lease, purchasing equipment and leasing equipment to third-party end users, financing equipment for third-party end users, acquiring ownership rights to items of leased equipment at lease expiration, and acquiring interests or options to purchase interests in the residual value of equipment. The lessees, borrowers, and other counterparties to these transactions operate in a variety of industries. As such, we are indirectly subject to the various risks and uncertainties that affect our lessees’, borrowers’, and other
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counterparties’ businesses and operations. If such risks or uncertainties were to affect our lessees, borrowers, or other counterparties, we may indirectly suffer a loss on our investment, lose future revenues or experience adverse consequences to our business, operating results and financial condition.
Instability in the credit markets could have a material adverse effect on our results of operations, financial condition and ability to meet our investment objectives.
We may not be able to obtain financing on acceptable terms and conditions for some of our investments. Recently, domestic and international financial markets have experienced unusual volatility and uncertainty. If this volatility and uncertainty persists, our ability to borrow to finance the acquisition of some of our investments could be significantly impacted. If we are unable to borrow on acceptable terms and conditions, we may have to reduce the number of and possibly limit the type of investments we will make, and the return on some of the investments we do make could be lower. All of these events could have a material adverse effect on our results of operations, financial condition and ability to meet our investment objectives.
Because we borrowed and may in the future borrow money to make our investments, losses as a result of lessee, borrower or other counterparty defaults may be greater than if such borrowings were not incurred.
Although we acquired some of our investments for cash, we borrowed and may in the future borrow a substantial portion of the purchase price of certain of our investments. While we believe the use of leverage will result in our ability to make more investments with less risk than if leverage is not utilized, there can be no assurance that the benefits of greater size and diversification of our investment portfolio will offset the heightened risk of loss in an individual investment using leverage. With respect to non-recourse borrowings, if we are unable to pay our debt service obligations because a lessee, borrower or other counterparty defaults, a lender could foreclose on the investment securing the non-recourse indebtedness. This could cause us to lose all or part of our investment or could force us to meet debt service payment obligations so as to protect our investment subject to such indebtedness and prevent it from being subject to repossession.
Guarantees made by the guarantors of some of our lessees, borrowers and other counterparties may be voided under certain circumstances and we may be required to return payments received from such guarantors.
Under federal bankruptcy law and comparable provisions of state fraudulent transfer laws, a guarantee could be voided, or claims in respect of a guarantee could be subordinated to all other debts of that guarantor if, among other things, the guarantor, at the time it incurred the indebtedness evidenced by its guarantee:
· received less than reasonably equivalent value or fair consideration for the incurrence of such guarantee; and
· was insolvent or rendered insolvent by reason of such incurrence; or
· was engaged in a business or transaction for which the guarantor’s remaining assets constituted unreasonably small capital; or
· intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature.
In addition, any payment by that guarantor pursuant to its guarantee could be voided and required to be returned to the guarantor, or to a court instituted fund for the benefit of the creditors of the guarantor.
The measures of insolvency for purposes of these fraudulent transfer laws will vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, a guarantor would be considered insolvent if:
· the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all of its assets;
· the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or
· it could not pay its debts as they become due.
We cannot assure you as to what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard. We also cannot make any assurances as to the standards that courts in foreign jurisdictions may use or that courts in foreign jurisdictions will take a position similar to that taken by courts in the United States.
If the value of our investments in certain types of leased equipment declines more rapidly than we anticipate, our financial performance may be adversely affected.
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A significant part of the value of some of the equipment that we invest in is expected to be the potential value of the equipment once the lease term expires (with respect to leased equipment). Generally, equipment is expected to decline in value over its useful life. In making these types of investments, we assume a residual value for the equipment at the end of the lease or other investment that, at maturity, is expected to be enough to return the cost of our investment in the equipment and provide a rate of return despite the expected decline in the value of the equipment over the term of the investment. However, the actual residual value of the equipment at maturity and whether that value meets our expectations will depend to a significant extent upon the following factors, many of which are beyond our control:
· our ability to acquire or enter into agreements that preserve or enhance the relative value of the equipment;
· our ability to maximize the value of the equipment at maturity of our investment;
· market conditions prevailing at maturity;
· the cost of new equipment at the time we are remarketing used equipment;
· the extent to which technological or regulatory developments reduce the market for such used equipment;
· the strength of the economy; and
· the condition of the equipment at maturity.
We cannot assure you that our assumptions with respect to value will be accurate or that the equipment will not lose value more rapidly than we anticipate.
If equipment is not properly maintained, its residual value may be less than expected.
If a lessee or other counterparty fails to maintain equipment in accordance with the terms of our financing agreements, we may have to make unanticipated expenditures to repair the equipment in order to protect our investment. In addition, some of the equipment we invest in is used equipment. While we plan to inspect most used equipment prior to making an investment, there is no assurance that an inspection of used equipment prior to purchasing it will reveal any or all defects and problems with the equipment that may occur after it is acquired by us.
We typically obtain representations from the sellers and lessees of used equipment that:
· the equipment has been maintained in compliance with the terms of applicable agreements;
· neither the seller nor the lessee is in violation of any material terms of such agreements; and
· the equipment is in good operating condition and repair and that, with respect to leases, the lessee has no defenses to the payment of rent for the equipment as a result of the condition of such equipment.
We would have rights against the seller of equipment for any losses arising from a breach of representations made to us and against the lessee for a default under the lease. However, we cannot assure you that these rights would make us whole with respect to our entire investment in the equipment or our expected returns on the equipment, including legal costs, costs of repair and lost revenue from the delay in being able to sell or re-lease the equipment due to undetected problems or issues. These costs and lost revenue could negatively affect our liquidity and cash flows, and could negatively affect our profitability if we are unable to recoup such costs from the seller, the lessee or other third parties.
If a lessee, borrower or other counterparty defaults on its obligations to us, we could incur losses.
We enter into transactions with parties that have senior debt rated below investment grade or no credit rating. We do not require such parties to have a minimum credit rating. Lessees, borrowers, and other counterparties with lower or no credit ratings may default on payments to us more frequently than lessees, borrowers or other counterparties with higher credit ratings. For example, if a lessee does not make lease payments to us or to a lender on our behalf or a borrower does not make loan payments to us when due, or such parties otherwise violate the terms of their contract in another way, we may be forced to terminate our agreements with such parties and attempt to recover the equipment. We may do this at a time when we may not be able to arrange for a new lease or to sell our investment right away, if at all. We would then lose the expected revenues and might not be able to recover the entire amount or any of our original investment. The costs of recovering equipment upon a lessee’s, borrower’s or other counterparty’s default, enforcing the obligations under the contract, and transporting, storing, repairing, and finding a new lessee or purchaser for the equipment may be high and may negatively affect the value of our investment in the equipment. These costs could also negatively affect our liquidity and cash flows, and could negatively affect our profitability.
If a lessee, borrower or other counterparty files for bankruptcy, we may have difficulty enforcing the terms of the contract and may incur losses.
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If a lessee, borrower or other counterparty files for protection under applicable bankruptcy laws, the remaining term of the lease, loan or other financing contract could be shortened or the contract could be rejected by the bankruptcy court, which could result in, among other things, any unpaid pre-bankruptcy lease, loan or other contractual payments being cancelled as part of the bankruptcy proceeding. We may also experience difficulties and delays in recovering equipment from a bankrupt lessee or borrower that is involved in a bankruptcy proceeding or has been declared bankrupt by a bankruptcy court. If a contract is rejected in a bankruptcy, we would bear the cost of retrieving and storing the equipment and then have to remarket such equipment. In addition, the bankruptcy court would treat us as an unsecured creditor for any amounts due under the lease, loan or other contract. These costs and lost revenues could also negatively affect our liquidity and cash flows and could negatively affect our profitability.
We may invest in options to purchase equipment that could become worthless if the option grantor files for bankruptcy.
We may acquire options to purchase equipment, usually for a fixed price at a future date. In the event of a bankruptcy by the party granting the option, we might be unable to enforce the option or recover the option price paid, which could negatively affect our profitability.
Investing in equipment in foreign countries may be riskier than domestic investments and may result in losses.
We made and may in the future make investments in equipment outside of the United States. We may have difficulty enforcing our rights under foreign transaction documents. In addition, we may have difficulty repossessing equipment if a foreign party defaults and enforcement of our rights outside the United States could be more expensive. Moreover, foreign jurisdictions may confiscate our equipment. Use of equipment in a foreign country will be subject to that country’s tax laws, which may impose unanticipated taxes. While we seek to require lessees, borrowers, and other counterparties to reimburse us for all taxes imposed on the use of the equipment and require them to maintain insurance covering the risks of confiscation of the equipment, we cannot assure you that we will be successful in doing so or that insurance reimbursements will be adequate to allow for recovery of and a return on foreign investments.
In addition, we invest in equipment that may travel to or between locations outside of the United States. Regulations in foreign countries may adversely affect our interest in equipment in those countries. Foreign courts may not recognize judgments obtained in U.S. courts and different accounting or financial reporting practices may make it difficult to judge the financial viability of a lessee, borrower or other counterparty, heightening the risk of default and the loss of our investment in such equipment, which could have a material adverse effect on our results of operations and financial condition.
In addition to business uncertainties, our investments may be affected by political, social, and economic uncertainty affecting a country or region. Many financial markets are not as developed or as efficient as those in the U.S. and, as a result, liquidity may be reduced and price volatility may be higher. The legal and regulatory environment may also be different, particularly with respect to bankruptcy and reorganization. Financial accounting standards and practices may also differ and there may be less publicly available information with respect to such companies. While our Manager considers these factors when making investment decisions, no assurance can be given that we will be able to fully avoid these risks or generate sufficient risk-adjusted returns.
We could incur losses as a result of foreign currency fluctuations.
We have the ability to invest in equipment where payments to us are not made in U.S. dollars. In these cases, we may then enter into a contract to protect these payments from fluctuations in the currency exchange rate. These contracts, known as hedge contracts, would allow us to receive a fixed number of U.S. dollars for any fixed, periodic payments due under the transactional documents even if the exchange rate between the U.S. dollar and the currency of the transaction changes over time. If the payments to us were disrupted due to default by the lessee, borrower or other counterparty, we would try to continue to meet our obligations under the hedge contract by acquiring the foreign currency equivalent of the missed payments, which may be available at unfavorable exchange rates. If a transaction is denominated in a major foreign currency such as the pound sterling, which historically has had a stable relationship with the U.S. dollar, we may consider hedging to be unnecessary to protect the value of the payments to us, but our assumptions concerning currency stability may turn out to be incorrect. Our investment returns could be reduced in the event of unfavorable currency fluctuation when payments to us are not made in U.S. dollars.
Furthermore, when we acquire an interest in foreign equipment, we may not be able to hedge our foreign currency exposure with respect to the value of such equipment because the terms and conditions of such hedge contracts might not be in our best interests. Even with transactions requiring payments in U.S. dollars, the equipment may be sold at maturity for an
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amount that cannot be pre-determined to a buyer paying in a foreign currency. This could positively or negatively affect our income from such a transaction when the proceeds are converted into U.S. dollars.
Sellers of leased equipment could use their knowledge of the lease terms for gain at our expense.
We may acquire equipment subject to lease from leasing companies that have an ongoing relationship with the lessees. A seller could use its knowledge of the terms of the lease, particularly the end of lease options and date the lease ends, to compete with us. In particular, a seller may approach a lessee with an offer to substitute similar equipment at lease end for lower rental amounts. This may adversely affect our opportunity to maximize the residual value of the equipment and potentially negatively affect our profitability.
Investment in joint ventures may subject us to risks relating to our co-investors that could adversely impact the financial results of such joint ventures.
We have and may continue to invest in joint ventures with other businesses our Manager and its affiliates manage, as well as with unrelated third parties. Investing in joint ventures involves additional risks not present when making investments in equipment that are wholly owned by us. These risks include the possibility that our co-investors might become bankrupt or otherwise fail to meet financial commitments, thereby obligating us to pay all of the debt associated with the joint venture, as each party to a joint venture may be required to guarantee all of the joint venture’s obligations. Alternatively, the co-investors may have economic or business interests or goals that are inconsistent with our investment objectives and want to manage the joint venture in ways that do not maximize our return. Among other things, actions by a co-investor might subject investments that are owned by the joint venture to liabilities greater than those contemplated by the joint venture agreement. Also, when none of the co-investors control a joint venture, there might be a stalemate on decisions, including when to sell the equipment or the prices or terms of a loan or lease. Finally, while we typically have the right to buy out the other co-investor’s interest in the equipment in the event of a sale, we may not have the resources available to do so. These risks could negatively affect our profitability and could result in legal and other costs, which would negatively affect our liquidity and cash flows.
We may not be able to obtain insurance for certain risks and would have to bear the cost of losses from non-insurable risks.
Equipment may be damaged or lost. Fire, weather, accidents, theft or other events can cause damage or loss of equipment. While our transaction documents generally require lessees and borrowers to have comprehensive insurance and assume the risk of loss, some losses, such as from acts of war, terrorism or earthquakes, may be either uninsurable or not economically feasible to insure. Furthermore, not all possible liability claims or contingencies affecting equipment can be anticipated or insured against, and, if insured, the insurance proceeds may not be sufficient to cover a loss. If such a disaster occurs to the equipment, we could suffer a total loss of any investment in the affected equipment. By investing in some types of equipment, we may have been exposed to environmental tort liability. Although we use our best efforts to minimize the possibility and exposure of such liability including by means of attempting to obtain insurance, we cannot assure you that our assets will be protected against any such claims. These risks could negatively affect our profitability and could result in legal and other costs, which would negatively affect our liquidity and cash flows.
We could suffer losses from failure to maintain our equipment registration and from unexpected regulatory compliance costs.
Many types of transportation assets are subject to registration requirements by U.S. governmental agencies, as well as foreign governments if such equipment is to be used outside of the United States. Failing to register the equipment, or losing such registration, could result in substantial penalties, forced liquidation of the equipment and/or the inability to operate and lease the equipment. Governmental agencies may also require changes or improvements to equipment and we may have to spend our own funds to comply if the lessee, borrower or other counterparty is not required to do so under the transaction documents. These changes could force the equipment to be removed from service for a period of time. The terms of the transaction documents may provide for payment reductions if the equipment must remain out of service for an extended period of time or is removed from service. We may then have reduced income from our investment for this equipment. If we do not have the funds to make a required change, we might be required to sell the affected equipment. If so, we could suffer a loss on our investment, lose future revenues and experience adverse tax consequences.
If any of our investments become subject to usury laws, we could have reduced revenues or possibly a loss on such investments.
In addition to credit risks, we may be subject to other risks in equipment financing transactions in which we are deemed to be a lender. For example, equipment leases have sometimes been held by U.S. courts to be loan transactions subject to state
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usury laws, which limit the interest rate that can be charged. Uncertainties in the application of some laws may result in inadvertent violations that could result in reduced investment returns or, possibly, losses on our investments in the affected transactions. Although part of our business strategy is to enter into or acquire leases that are structured so that they avoid being deemed loans and would therefore not be subject to usury laws, we cannot assure you that we will be successful in doing so. In addition, as part of our business strategy, we also make or acquire secured loans, which are also subject to usury laws and, while we attempt to structure these to avoid being deemed in violation of usury laws, we cannot assure you that we will be successful in doing so. Loans at usurious interest rates are subject to a reduction in the amount of interest due under such loans and, if an equipment lease or secured loan is held to be a loan with a usurious rate of interest, the amount of the lease or loan payment could be reduced, which would adversely affect our revenue.
State laws determine what rates of interest are deemed usurious, when the applicable rate of interest is determined, and how it is calculated. In addition, some U.S. courts have also held that certain lease and loan features, such as equity interests, constitute additional interest. Although we generally seek assurances and/or opinions to the effect that our transactions do not violate applicable usury laws, a finding that our transactions violate usury laws could result in the interest obligation to us being declared void and we could be liable for damages and penalties under applicable law. We cannot assure you as to what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard. We also cannot make any assurances as to the standards that courts in foreign jurisdictions may use or that courts in foreign jurisdictions will take a position similar to that taken by courts in the United States.
We compete with a variety of financing sources for our investments, which may affect our ability to achieve our investment objectives.
The commercial leasing and financing industry is highly competitive and is characterized by competitive factors that vary based upon product and geographic region. Our competitors are varied and include other equipment leasing and finance funds, hedge funds, private equity funds, captive and independent finance companies, commercial and industrial banks, manufacturers and vendors. Competition from both traditional competitors and new market entrants remains intense due to the recognition of the potential to achieve attractive returns by participating in the commercial leasing and finance industry. We compete primarily on the basis of pricing, terms and structure. To the extent that our competitors compete aggressively on any combination of those factors, we could fail to achieve our investment objectives.
Some of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than either we or our Manager and its affiliates have. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. A lower cost of funds could enable a competitor to offer financing at rates that are less than ours, potentially forcing us to lower our rates or lose potential lessees, borrowers or other counterparties. In addition, our competitors may have been and/or may be in a position to offer equipment to prospective customers on other terms that are more favorable than those that we can offer or that we will be able to offer as we liquidate our portfolio, which may affect our ability to make investments and may affect our ability to liquidate our portfolio, in each case, in a manner that would enable us to achieve our investment objectives.
General Tax Risks
If the IRS classifies us as a corporation rather than a partnership, your distributions would be reduced under current tax law.
We did not and will not apply for an IRS ruling that we will be classified as a partnership for federal income tax purposes. Although counsel rendered an opinion to us at the time of our offering that we will be taxed as a partnership and not as a corporation, that opinion is not binding on the IRS and the IRS has not ruled on any federal income tax issue relating to us. If the IRS successfully contends that we should be treated as a corporation for federal income tax purposes rather than as a partnership, then:
· our realized losses would not be passed through to you;
· our income would be taxed at tax rates applicable to corporations, thereby reducing our cash available to distribute to you; and
· your distributions would be taxed as dividend income to the extent of current and accumulated earnings and profits.
In addition, we could be taxed as a corporation if we are treated as a publicly traded partnership by the IRS. To minimize this possibility, our LLC Agreement places significant restrictions on your ability to transfer our Shares.
We could lose cost recovery or depreciation deductions if the IRS treats our leases as sales or financings.
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We expect that, for federal income tax purposes, we will be treated as the owner and lessor of the equipment that we lease. However, the IRS may challenge the leases and instead assert that they are sales or financings. If the IRS determines that we are not the owner of our leased equipment, we would not be entitled to cost recovery, depreciation or amortization deductions, and our leasing income might be deemed to be portfolio income instead of passive activity income. The denial of such cost recovery or amortization deductions could cause your tax liabilities to increase.
Our investments in secured loans will not give rise to depreciation or cost recovery deductions and may not be offset against our passive activity losses.
We expect that, for federal income tax purposes, we will not be treated as the owner and lessor of the equipment that we invest in through our lending activities. Based on our expected level of activity with respect to these types of financings, we expect that the IRS will treat us as being in the trade or business of lending. Generally, trade or business income can be considered passive activity income. However, because we expect that the source of funds we lend to others will be the capital contributed by our members and the funds generated from our operations (rather than money we borrow from others), you may not be able to offset your share of our passive activity losses from our leasing activities with your share of our interest income from our lending activities. Instead, your share of our interest income from our lending activities would be taxed as portfolio income.
You may incur tax liability in excess of the distributions you receive in a particular year.
In any particular year, your tax liability from owning our Shares may exceed the distributions you receive from us. While we expect that your net taxable income from owning our Shares for most years will be less than your distributions in those years, to the extent any of our debt is repaid with income or proceeds from equipment sales, taxable income could exceed the amount of distributions you receive in those years. Additionally, a sale of our investments may result in taxes in a given year that are greater than the amount of cash from the sale, resulting in a tax liability in excess of distributions. Further, due to the operation of the various loss disallowance rules, in a given tax year you may have taxable income when, on a net basis, we have a loss, or you may recognize a greater amount of taxable income than your share of our net income because, due to a loss disallowance, income from some of our activities cannot be offset by losses from some of our other activities.
You may be subject to greater income tax obligations than originally anticipated due to special depreciation rules.
We may acquire equipment subject to lease that the Code requires us to depreciate over a longer period than the standard depreciation period. Similarly, some of the equipment that we purchase may not be eligible for accelerated depreciation under the Modified Accelerated Cost Recovery System, which was established by the Tax Reform Act of 1986 to set forth the guidelines for accelerated depreciation under the Code. Further, if we acquire equipment that the Code deems to be tax-exempt use property and the leases do not satisfy certain requirements, losses attributable to such equipment are suspended and may be deducted only against income we receive from such equipment or when we dispose of such equipment. Depending on the equipment that we acquire and its eligibility for accelerated depreciation under the Code, we may have fewer depreciation deductions to offset gross lease revenue, thereby increasing our taxable income.
There are limitations on your ability to deduct our losses.
Your ability to deduct your share of our losses is limited to the amounts that you have at risk from owning our Shares. This is generally the amount of your investment, plus any profit allocations and minus any loss allocation and distributions. This determination is further limited by a tax rule that applies the at-risk rules on an activity-by-activity basis, further limiting losses from a specific activity to the amount at risk in that activity. Based on the tax rules, we expect that we will have multiple activities for purposes of the at-risk rules. Specifically, our lending activities must be analyzed separately from our leasing activities, and our leasing activities must be further divided into separate year-by-year groups according to the tax year the equipment is placed in service. As such, you cannot aggregate income and loss from our separate activities for purposes of determining your ability to deduct your share of our losses under the at-risk rules.
Additionally, your ability to deduct losses attributable to passive activities is restricted. Some of our operations will constitute passive activities and you can only use our losses from such activities to offset passive activity income in calculating tax liability. Furthermore, passive activity losses may not be used to offset portfolio income. As stated above, we expect our lending activities to generate portfolio income from the interest we receive, even though we expect the income to be attributable to a lending trade or business. However, we expect any gains or losses we recognize from those lending activities to be associated with a trade or business and generally allowable as either passive activity income or loss, as applicable.
The IRS may allocate more taxable income or less loss to you than our LLC Agreement provides.
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The IRS might successfully challenge our allocations of taxable income or losses. If so, the IRS would require reallocation of our taxable income and loss, resulting in an allocation of more taxable income or less loss to you than our LLC Agreement allocates.
If you are or invest through a tax-exempt entity or organization, you will have unrelated business taxable income from this investment.
Tax-exempt entities and organizations are subject to income tax on unrelated business taxable income (“UBTI”). Such entities and organizations are required to file federal income tax returns if they have UBTI from all sources in excess of $1,000 per year. Our leasing income will constitute UBTI. Furthermore, tax-exempt organizations in the form of charitable remainder trusts will be subject to an excise tax equal to 100% of their UBTI.
To the extent that we borrow money in order to finance our lending activities, a portion of our income from such activities will be treated as attributable to debt-financed property and, to the extent so attributable, will constitute UBTI. The debt-financed UBTI rules are broad and there is much uncertainty in determining when, and the extent to which, property should be considered debt-financed. Thus, the IRS might assert that a portion of the assets we acquire as part of our lending activities is debt-financed property generating UBTI, especially with regard to any indebtedness we incur to fund working capital at a time when we hold loans we have acquired or made to others. If the IRS were to successfully assert that debt we believed should have been attributed to our leasing activities should instead be attributed to our lending activities, the amount of our income that constitutes UBTI would be increased.
This investment may cause you to pay additional taxes.
You may be required to pay alternative minimum tax in connection with owning our Shares since you will be allocated a proportionate share of our tax preference items. Our Manager’s operation of our business affairs may lead to other adjustments that could also increase your alternative minimum tax. In addition, the IRS could take the position that all or a portion of our lending activities are not a trade or business, but rather an investment activity. If all or a portion of our lending activities are not considered to be a trade or business, then a portion of our management fees could be considered investment expenses rather than trade or business expenses. To the extent that a portion of our fees are considered investment expenses, that portion of such fees would not be deductible for alternative minimum tax purposes and would be subject to a limitation for regular tax purposes. Alternative minimum tax is treated in the same manner as the regular income tax for purposes of making estimated tax payments.
You may incur state and foreign tax liabilities and have an obligation to file state or foreign tax returns.
You may be required to file tax returns and pay foreign, state or local taxes, such as income, franchise or personal property taxes, as a result of an investment in our Shares, depending upon the laws of the jurisdictions in which the equipment that we own is located.
Any adjustment to our tax return as a result of an audit by the IRS may result in adjustment to your tax return.
If we adjust our tax return as a result of an IRS audit, such adjustment may result in an examination of other items in your returns unrelated to us, or an examination of your tax returns for prior years. You could incur substantial legal and accounting costs in contesting any challenge by the IRS, regardless of the outcome. Further, because you will be treated for federal income tax purposes as a partner in a partnership by investing in our Shares, an audit of our tax return could potentially lead to an audit of your individual tax return. Finally, under certain circumstances, the IRS may automatically adjust your personal return without the opportunity for a hearing if it adjusts our tax return.
Some of the distributions paid with respect to our Shares will be a return of capital, in whole or in part, which will complicate your tax reporting and could cause unexpected tax consequences at liquidation.
As we depreciate our investments in leased equipment over the term of our existence and/or borrowers repay the loans we make to them, it is very likely that a portion of each distribution paid by us will be considered a return of capital, rather than income. Therefore, the dollar amount of each distribution should not be considered as necessarily being all income to you. As your capital in our Shares is reduced for tax purposes over the life of your investment, you will not receive a lump sum distribution upon liquidation that equals the purchase price you paid for our Shares, such as you might expect if you had purchased a bond. Also, payments made upon our liquidation will be taxable to the extent that such payments are not a return of capital.
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As you receive distributions throughout the life of your investment, you will not know at the time of the distribution what portion of the distribution represents a return of capital and what portion represents income. The Schedule K-1 statement you have received and will continue to receive from us each year will specify the amounts of capital and income you received throughout the prior year.
Item 1B. Unresolved Staff Comments
We neither own nor lease office space or any other real property in our business at the present time.
In the ordinary course of conducting our business, we may be subject to certain claims, suits, and complaints filed against us. In our Manager’s opinion, the outcome of such matters, if any, will not have a material impact on our consolidated financial position or results of operations. We are not aware of any material legal proceedings that are currently pending against us or against any of our assets.
Item 4. Mine Safety Disclosures
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Item 5. Market for Registrant's Securities, Related Security Holder Matters and Issuer Purchases of Equity Securities
Our Shares are not publicly traded and there is no established public trading market for our Shares. It is unlikely that any such market will develop.
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Number of Members as of |
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Title of Class |
March 20, 2015 |
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Manager (as a member) |
1 |
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Additional members |
8,551 |
We, at our Manager’s discretion, paid monthly distributions to each of our additional members beginning the first month after each such member was admitted through the end of our operating period, which was on April 30, 2014. During our liquidation period, we have paid and will continue to pay distributions in accordance with the terms of our LLC Agreement. We expect that distributions paid during the liquidation period will vary, depending on the timing of the sale of our assets and/or the maturity of our investments, and our receipt of rental, finance and other income from our investments. We paid distributions to additional members totaling $25,257,603, $25,953,936 and $33,634,797 for the years ended December 31, 2014, 2013 and 2012, respectively. Additionally, we paid our Manager distributions of $255,127, $262,158 and $339,749 for the years ended December 31, 2014, 2013 and 2012, respectively.
In order for Financial Industry Regulatory Authority, Inc. (“FINRA”) members and their associated persons to have participated in the offering and sale of our Shares pursuant to the offering or to participate in any future offering of our Shares, we are required pursuant to FINRA Rule 2310(b)(5) to disclose in each annual report distributed to our members a per Share estimated value of our Shares, the method by which we developed the estimated value, and the date used to develop the estimated value. In addition, our Manager prepares statements of our estimated Share values to assist fiduciaries of retirement plans subject to the annual reporting requirements of ERISA in the preparation of their reports relating to an investment in our Shares. For these purposes, the estimated value of our Shares is deemed to be $460.81 per Share as of December 31, 2014. This estimated value is provided to assist plan fiduciaries in fulfilling their annual valuation and reporting responsibilities and should not be used for any other purpose. Because this is only an estimate, we may subsequently revise this valuation.
The estimated value of our Shares is based on the estimated amount that a holder of a Share would receive if all of our assets were sold in an orderly liquidation as of the close of our fiscal year and all proceeds from such sales, without reduction for transaction costs and expenses, together with any cash held by us, were distributed to the members upon liquidation. To estimate the amount that our members would receive upon such liquidation, we calculated the sum of: (i) the greater of the net book value or the fair market value of our notes receivables, finance leases and equipment held for lease as determined by the most recent third-party appraisals we have obtained for certain assets, as applicable; (ii) the fair market value of our equipment held for sale and other assets, as determined by the most recent third-party appraisals we have obtained for certain assets or our Manager’s estimated values of certain other assets, as applicable; and (iii) our cash on hand. From this amount, we then subtracted our total debt outstanding and other payables, and then divided that sum by the total number of Shares outstanding.
The foregoing valuation is an estimate only. The appraisals that we obtained and the methodology utilized by our Manager in estimating our per Share value are subject to various limitations and are based on a number of assumptions and estimates that may or may not be accurate or complete. No liquidity discounts or discounts relating to the fact that we are currently externally managed were applied to our estimated per Share valuation, and no attempt was made to value us as an enterprise.
As noted above, the foregoing valuation was performed solely for the ERISA and FINRA purposes described above and was based solely on our Manager’s perception of market conditions and the types and amounts of our assets as of the reference date for such valuation and should not be viewed as an accurate reflection of the value of our Shares or our assets. Except for independent third-party appraisals of certain assets, no independent valuation was sought. In addition, as stated above, as there is no significant public trading market for our Shares at this time and none is expected to develop, there can be no assurance that members could receive $460.81 per Share if such a market did exist and they sold their Shares or that they will be able to receive such amount for their Shares in the future. Furthermore, there can be no assurance:
· as to the amount members may actually receive as we seek to liquidate our assets or the amount of lease and note receivable payments and asset disposition proceeds we will actually receive over our remaining term; the total
18
amount of distributions our members may receive may be less than $1,000 per Share primarily due to the fact that the funds initially available for investment were reduced from the gross offering proceeds in order to pay selling commissions, dealer-manager fees, organizational and offering expenses, and acquisition fees;
· that the foregoing valuation, or the method used to establish value, will satisfy the technical requirements imposed on plan fiduciaries under ERISA; or
· that the foregoing valuation, or the method used to establish value, will not be subject to challenge by the IRS if used for any tax (income, estate, gift or otherwise) valuation purposes as an indicator of the current value of our Shares.
The repurchase price we offer in our repurchase plan utilizes a different methodology than that which we use to determine the current value of our Shares for the ERISA and FINRA purposes described above and, therefore, the $460.81 per Share does not reflect the amount that a member would currently receive under our repurchase plan. In addition, there can be no assurance that you will be able to redeem your Shares under our repurchase plan.
Item 6. Selected Financial Data
The selected financial data should be read in conjunction with “Item 7. Manager’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Consolidated Financial Statements and Supplementary Data” contained elsewhere in this Annual Report on Form 10-K.
|
|
|
|
|
Years Ended December 31, |
|||||||||||||
|
|
|
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2011 |
|
|
2010 |
|
Total revenue and other income |
|
$ |
91,260,207 |
|
$ |
55,789,444 |
|
$ |
67,532,393 |
|
$ |
75,781,907 |
|
$ |
88,393,613 |
||
|
Net income (loss) attributable to Fund Twelve |
|
$ |
59,880,331 |
|
$ |
(9,377,469) |
|
$ |
(28,009,680) |
|
$ |
2,953,773 |
|
$ |
11,875,465 |
||
|
Net income (loss) attributable to Fund Twelve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
allocable to additional members |
|
$ |
59,281,528 |
|
$ |
(9,283,695) |
|
$ |
(27,729,583) |
|
$ |
2,924,235 |
|
$ |
11,756,710 |
|
|
Net income (loss) attributable to Fund Twelve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
allocable to Manager |
|
$ |
598,803 |
|
$ |
(93,774) |
|
$ |
(280,097) |
|
$ |
29,538 |
|
$ |
118,755 |
|
|
|
|||||||||||||||||
|
Weighted average number of additional shares of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
limited liability company interests outstanding |
|
|
348,335 |
|
|
348,361 |
|
|
348,544 |
|
|
348,650 |
|
|
348,679 |
|
|
Net income (loss) attributable to Fund Twelve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
per weighted average additional share of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
limited liability company interests outstanding |
|
$ |
170.19 |
|
$ |
(26.65) |
|
$ |
(79.56) |
|
$ |
8.39 |
|
$ |
33.72 |
|
|
Distributions to additional members |
|
$ |
25,257,603 |
|
$ |
25,953,936 |
|
$ |
33,634,797 |
|
$ |
33,644,883 |
|
$ |
33,648,098 |
||
|
Distributions per weighted average additional share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
of limited liability company interests outstanding |
|
$ |
72.51 |
|
$ |
74.50 |
|
$ |
96.50 |
|
$ |
96.50 |
|
$ |
96.50 |
|
|
Distributions to Manager |
|
$ |
255,127 |
|
$ |
262,158 |
|
$ |
339,749 |
|
$ |
339,752 |
|
$ |
339,880 |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|||||||||||||
|
|
|
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2011 |
|
|
2010 |
|
Total assets |
|
$ |
267,429,193 |
|
$ |
244,226,508 |
|
$ |
365,787,022 |
|
$ |
482,661,127 |
|
$ |
593,494,687 |
||
|
Non-recourse long-term debt and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
seller's credit |
|
$ |
71,491,784 |
|
$ |
102,922,419 |
|
$ |
180,276,813 |
|
$ |
224,502,156 |
|
$ |
265,771,158 |
|
|
Members' equity |
|
$ |
161,494,839 |
|
$ |
126,497,651 |
|
$ |
158,539,531 |
|
$ |
218,571,273 |
|
$ |
247,928,256 |
||
19
Item 7. Manager's Discussion and Analysis of Financial Condition and Results of Operations
Our Manager’s Discussion and Analysis of Financial Condition and Results of Operations relates to our consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. Statements made in this section may be considered forward-looking. These statements are not guarantees of future performance and are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of these risks and assumptions, including, among other things, factors discussed in “Part I. Forward-Looking Statements” and “Item 1A. Risk Factors” located elsewhere in this Annual Report on Form 10-K.
Overview
We operate as an equipment leasing and finance program in which the capital our members invested was pooled together to make investments, pay fees and establish a small reserve. We primarily acquire equipment subject to lease, purchase equipment and lease it to third-party end users or finance equipment for third parties and, to a lesser degree, acquire ownership rights to items of leased equipment at lease expiration. Some of our equipment leases are acquired for cash and are expected to provide current cash flow, which we refer to as “income” leases. For our other equipment leases, we finance the majority of the purchase price through borrowings from third parties. We refer to these leases as “growth” leases. These growth leases generate little or no current cash flow because substantially all of the rental payments we receive from the lessee are used to service the indebtedness associated with acquiring or financing the lease. For these leases, we anticipate that the future value of the leased equipment will exceed our cash portion of the purchase price.
Our Manager manages and controls our business affairs, including, but not limited to, our equipment leases and other financing transactions, under the terms of our LLC Agreement.
Our offering period ended on April 30, 2009 and our operating period commenced on May 1, 2009. During our offering period, we raised total equity of $347,686,947. Our operating period ended on April 30, 2014 and our liquidation period commenced on May 1, 2014. During our liquidation period, we will sell our assets and/or let our investments mature in the ordinary course of business. If our Manager believes it would benefit our members to reinvest the proceeds received from investments in additional investments during the liquidation period, our Manager may do so. Our Manager is not paid acquisition fees or management fees for additional investments initiated during the liquidation period, although management fees continue to be paid for investments that were part of our portfolio prior to the commencement of the liquidation period.
Current Business Environment
Recent trends indicate that domestic and global equipment financing volume is correlated to overall business investments in equipment, which are typically impacted by general economic conditions. As the economy slows or builds momentum, the demand for productive equipment generally slows or builds and equipment financing volume generally decreases or increases, depending on a number of factors. These factors include the availability of liquidity to provide equipment financing and/or provide it on terms satisfactory to borrowers, lessees, and other counterparties, as well as the desire to upgrade equipment and/or expand operations during times of growth, but also in times of recession in order to, among other things, seize the opportunity to obtain competitive advantage over distressed competitors and/or increase business as the economy recovers.
Our Manager believes the U.S. economy is likely to continue its gradual recovery, with the pace of economic growth increasing through 2015 due to factors such as the rate of employment expansion, increased consumer spending and greater certainty with respect to U.S. budget policies. Although the recent decline in energy prices has reduced revenue of certain energy companies, at this time our Manager does not believe that such decline will have a material adverse effect on our results of operations and financial condition.
Significant Transactions
We engaged in the following significant transactions during the years ended December 31, 2014, 2013 and 2012:
Telecommunications Equipment
From July 15, 2010 through March 31, 2011, we purchased telecommunications equipment for approximately $5,029,000 and simultaneously leased the equipment to Broadview Networks Holdings, Inc. and Broadview Networks Inc. (collectively,
20
“Broadview”). The base term of the four leases was for a period of 36 months, which commenced between August 1, 2010 and April 1, 2011. On August 22, 2012, Broadview commenced a voluntary Chapter 11 proceeding in the Bankruptcy Court in the Southern District of New York. On November 14, 2012, Broadview completed a prepackaged restructuring, emerged from bankruptcy and affirmed all of our leases. During 2013, upon the expiration of three leases, Broadview purchased telecommunications equipment subject to the leases from us for an aggregate purchase price of $460,725. On March 31, 2014, upon the expiration of the fourth lease, Broadview purchased telecommunications equipment subject to the lease from us for $293,090. No gain or loss was recorded as a result of these sales.
Coal Drag Line
On July 9, 2012, Patriot Coal Corporation and substantially all of its subsidiaries, including Magnum Coal Company, LLC (“Magnum”), commenced a voluntary Chapter 11 proceeding in the Bankruptcy Court in the Southern District of New York. On March 11, 2013, we amended our lease with Magnum to expire on August 1, 2015. Upon our receipt of the final payment, title to the underlying equipment will be transferred to Magnum. The terms of the amendment resulted in the reclassification of the lease from an operating lease to a finance lease.
Marine Vessels and Equipment
During 2009, we purchased three barges, the Leighton Mynx, the Leighton Stealth and the Leighton Eclipse, and a pipelay barge, the Leighton Faulkner (collectively, the “Leighton Vessels”), and simultaneously leased the Leighton Vessels to an affiliate of Leighton Offshore Pte. Ltd. (“Leighton”) for a period of 96 months that were scheduled to expire between June 2017 and January 2018.
On May 16, 2013, Leighton provided notice to us that it was exercising its purchase options on the Leighton Vessels. On August 23, 2013, Leighton, in accordance with the terms of a bareboat charter scheduled to expire on June 25, 2017, exercised its option to purchase the Leighton Mynx from us for $25,832,445, including payment of swap-related expenses of $254,719. In addition, Leighton paid all break costs and legal fees incurred by us with respect to the sale of the Leighton Mynx. As a result of the termination of the lease and the sale of the vessel, we recognized additional finance income of approximately $562,000. A portion of the proceeds from the sale of the Leighton Mynx were used to repay Leighton’s seller’s credits of $7,335,000 related to our original purchase of the barge as well as to satisfy third-party non-recourse debts related to the barge by making a payment of approximately $13,291,000. As part of the repayment, the interest rate swaps related to the debts were terminated and a loss on derivative financial instruments of approximately $211,000 was recognized. On April 3, 2014, Leighton, in accordance with the terms of three bareboat charters scheduled to expire between 2017 and 2018, exercised its options and purchased the three remaining Leighton Vessels from us for an aggregate price of $155,220,900, including payment of swap-related expenses of $720,900. As a result of the termination of the leases and the sale of the three remaining Leighton Vessels, we recognized additional finance income of approximately $57,248,000. A portion of the aggregate purchase price due from the exercise of the purchase option was used to satisfy the Leighton seller’s credits of $47,421,000 related to our original purchase of the three Leighton Vessels as well as to satisfy our non-recourse debt obligations with Standard Chartered of approximately $38,426,000.
On June 25, 2009, we purchased marine diving equipment from Swiber Engineering Ltd. (“Swiber”) for $10,000,000. Simultaneously, we entered into a 60-month lease with Swiber, which commenced on July 1, 2009. Subsequent to the expiration of the lease, on November 14, 2014, we sold the diving equipment to a subsidiary of Swiber Holdings Limited (“Swiber Holdings”) for $4,000,000 net, after deducting the $2,000,000 seller’s credit owed to Swiber.
On March 29, 2011, we and ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P. (“Fund Fourteen”), an entity also managed by our Manager, entered into a joint venture owned 25% by us and 75% by Fund Fourteen for the purpose of acquiring two aframax tankers and two VLCCs. Our contribution to the joint venture was approximately $12,166,000. The aframax tankers were each acquired for $13,000,000 and simultaneously bareboat chartered to AET Inc. Limited (“AET”) for a period of three years. The VLCCs were each acquired for $72,000,000 and simultaneously bareboat chartered to AET for a period of 10 years. On April 14, 2014 and May 21, 2014, upon expiration of the leases with AET, the joint venture sold the aframax tankers, the Eagle Otome and the Eagle Subaru, to third-party purchasers for an aggregate price of approximately $14,822,000. As a result, the joint venture recognized an aggregate gain on sale of assets of approximately $2,200,000. Our share of such gain was approximately $550,000, which is included within income from investment in joint ventures on our consolidated statement of comprehensive income (loss).
On May 22, 2013, we entered into a termination agreement with AET whereby AET returned the aframax tanker, the Eagle Centaurus, to us prior to the scheduled charter termination date of November 13, 2013. AET paid an early termination fee of
21
$1,400,000 and the balance of the charter hire through the end of the original charter term of approximately $1,487,000. On June 5, 2013, the Eagle Centaurus was sold to a third party for approximately $6,689,000. We recognized a net gain of approximately $197,000 from the transactions, comprised of a gain on lease termination of approximately $2,887,000 and a loss on sale of assets of approximately $2,690,000. Simultaneously with the sale, we used the proceeds from the sale of the Eagle Centaurus to satisfy the remaining third-party debt obligations of approximately $9,732,000 that were related to the Eagle Centaurus and the Eagle Auriga. As part of the repayment, the interest rate swaps related to the debt were terminated and a loss on derivative financial instruments of approximately $129,000 was recognized.
On July 2, 2013, Lily Shipping Ltd. (“Lily Shipping”), in accordance with the terms of a bareboat charter scheduled to expire on October 29, 2014, exercised its option to purchase the product tanker, the Ocean Princess, from us for $5,790,000. In addition, we collected the charter hire of $553,500 for the period July 1, 2013 through November 1, 2013. As a result of the termination of the lease and the sale of the product tanker, we recognized additional finance income of approximately $116,000, comprised of a gain on lease termination of approximately $554,000 and a loss on sale of assets of approximately $438,000. A portion of the proceeds from the sale of the vessel were used to repay Lily Shipping a seller’s credit of approximately $4,300,000 related to our original purchase of the vessel.
On August 6, 2013, we entered into a termination agreement with AET whereby AET returned the aframax tanker, the Eagle Auriga, to us prior to the scheduled charter termination date of November 14, 2013. AET paid an early termination fee of $1,400,000 and the balance of the charter hire through the end of the original charter term of approximately $1,505,000. On August 15, 2013, the Eagle Auriga was sold to a third party for approximately $5,579,000. We recognized a net gain of approximately $157,000 from the transactions, comprised of a gain on lease termination of approximately $2,905,000 and a loss on sale of assets of approximately $2,748,000.
On October 17, 2013, two joint ventures owned 64.3% by us and 35.7% by ICON Income Fund Ten Liquidating Trust (formerly known as ICON Income Fund Ten, LLC) (the “Fund Ten Liquidating Trust”), an entity in which our Manager acts as Managing Trustee, entered into two termination agreements with AET whereby AET returned two aframax tankers, the Eagle Carina and the Eagle Corona, to us prior to the scheduled charter termination date of November 14, 2013 and paid early termination fees of $2,800,000. On November 7, 2013, the Eagle Carina and the Eagle Corona were sold to third parties for approximately $12,569,000. The joint ventures recognized total net gains of approximately $1,777,000 from the transactions, comprised of gains on lease terminations of approximately $3,034,000 and losses on sale of assets of approximately $1,257,000.
In connection with our annual impairment review for the year ended December 31, 2012, our Manager concluded that the carrying value of the Eagle Carina, the Eagle Corona, the Eagle Auriga and the Eagle Centaurus (collectively, the “Eagle Vessels”) was not recoverable and determined that an impairment existed. That determination was based on a forecast of undiscounted contractual cash flows for the remaining term of the lease and non-contractual cash flows based on a weighted average probability of alternate opportunities of re-leasing or disposing of the Eagle Vessels. Projected future scrap rates were a critical component of that analysis as well as negotiated rates related to re-leasing the Eagle Vessels. Based on our Manager’s review of the Eagle Vessels, the net book value of the Eagle Vessels exceeded the estimated undiscounted cash flows and exceeded the fair value and, as a result, we recognized an impairment loss of approximately $35,296,000 for the year ended December 31, 2012.
During 2013, several potential counterparties with whom our Manager was discussing re-leasing opportunities for the Eagle Vessels terminated negotiations, which was an indicator that the Eagle Vessels’ carrying value may be further impaired. We updated the estimates of the forecasted future cash flows and performed impairment testing. As a result, we recognized an additional impairment loss of approximately $1,800,000 for the year ended December 31, 2013. Projected future scrap rates were a critical component of these analyses.
In connection with our annual impairment review for the year ended December 31, 2013, our Manager concluded that the carrying values of two containership vessels, the Aegean Express and the Arabian Express, were not recoverable and determined that an impairment existed. That determination was based on a forecast of undiscounted contractual cash flows for the remaining terms of the leases and non-contractual cash flows based on a weighted average probability of alternate opportunities of re-leasing or disposing of the two containership vessels. Projected future scrap rates were a critical component of those analyses as well as negotiated rates related to re-leasing the two vessels. Based on our Manager’s review, the net book values of the Aegean Express and the Arabian Express exceeded the estimated undiscounted cash flows and exceeded the fair values and, as a result, we recognized an aggregate impairment loss of approximately $13,020,000 for the year ended December 31, 2013.
22
On April 1, 2014, the Aegean Express and the Arabian Express were returned to us in accordance with the terms of the leases. Upon redelivery, the bareboat charters were terminated and we assumed the underlying time charters for the vessels. As we assumed operational responsibility of the vessels, we simultaneously contracted with Fleet Ship Management Inc. (“Fleet Ship”) to manage the vessels on our behalf. Accordingly, these vessels have been reclassified to Vessels on our consolidated balance sheets. As of December 31, 2014, the time charters for the Aegean Express and the Arabian Express are scheduled to expire on June 9, 2015 and September 12, 2015, respectively.
On March 21, 2014, a joint venture owned 75% by us, 12.5% by Fund Fourteen and 12.5% by ICON ECI Fund Fifteen, L.P. (“Fund Fifteen”), an entity also managed by our Manager, through two indirect subsidiaries, entered into memoranda of agreement to purchase the SIVA Vessels from Siva Global Ships Limited (“Siva Global”) for an aggregate purchase price of $41,600,000. The SIVA Coral and the SIVA Pearl were delivered on March 28, 2014 and April 8, 2014, respectively. The SIVA Vessels were bareboat chartered to an affiliate of Siva Global for a period of eight years upon the delivery of each respective vessel. The SIVA Vessels were each acquired for approximately $3,550,000 in cash, $12,400,000 of financing through a senior secured loan from DVB Group Merchant Bank (Asia) Ltd. (“DVB”) and $4,750,000 of financing through a subordinated, non-interest-bearing seller’s credit.
On June 12, 2014, a joint venture owned 75% by us, 12.5% by Fund Fourteen and 12.5% by Fund Fifteen purchased an offshore supply vessel from Pacific Crest Pte. Ltd. (“Pacific Crest”) for $40,000,000. Simultaneously, the vessel was bareboat chartered to Pacific Crest for ten years. The vessel was acquired for approximately $12,000,000 in cash, $26,000,000 of financing through a senior secured loan from DVB and $2,000,000 of financing through a subordinated, non-interest-bearing seller’s credit.
Manufacturing Equipment
On May 16, 2011, we entered into an agreement to sell auto parts manufacturing equipment subject to lease with Sealynx Automotive Transieres SAS (“Sealynx”) for €3,000,000. The purchase price was scheduled to be paid in three installments and bore interest at 5.5% per year. We would retain title to the equipment until the final payment was received, which was due on June 1, 2013. On April 25, 2012, Sealynx filed for Redressement Judiciaire, a proceeding under French law similar to a Chapter 11 reorganization under the U.S. Bankruptcy Code. On July 8, 2013, Sealynx satisfied the terms of its finance lease by making a final payment of approximately €1,190,000 (US $1,528,000) to us, at which time, we transferred title to the equipment subject to the finance lease to Sealynx.
During 2008, ICON EAR, LLC (“ICON EAR”), a joint venture owned 55% by us and 45% by ICON Leasing Fund Eleven, LLC (“Fund Eleven”), an entity also managed by our Manager, purchased and simultaneously leased semiconductor manufacturing equipment to Equipment Acquisition Resources, Inc. (“EAR”) for approximately $15,730,000, of which our share was approximately $8,651,000. The lease term commenced on July 1, 2008 and was scheduled to expire on June 30, 2013. As additional security for the lease, ICON EAR received mortgages on certain parcels of real property located in Jackson Hole, Wyoming.
In October 2009, certain facts came to light that led our Manager to believe that EAR was perpetrating a fraud against EAR’s lenders, including ICON EAR. On October 23, 2009, EAR filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code.
On June 7, 2010, ICON EAR received judgments in the New York State Supreme Court against two principals of EAR who had guaranteed EAR’s lease obligations. ICON EAR has had the New York State Supreme Court judgments recognized in Illinois, where the principals live, but does not currently anticipate being able to collect on such judgments.
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, which included
23
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 6, 2012, one of the creditors in the Illinois State Court proceeding won a summary judgment motion filed against ICON EAR, thereby dismissing ICON EAR’s claims to the proceeds resulting from the sale of the EAR equipment. ICON EAR appealed this decision. On September 16, 2013, the lower court’s ruling was affirmed by the Illinois Appellate Court. On October 21, 2013, ICON EAR filed a Petition for Leave to Appeal with the Supreme Court of Illinois appealing the decision of the Illinois Appellate Court, which petition was denied on January 29, 2014. The only remaining asset owned by ICON EAR at December 31, 2013 was real property with a carrying value of approximately $290,000, which was included in other non-current assets within our consolidated balance sheets. During the year ended December 31, 2014, we recognized an impairment charge of approximately $70,000 based on the estimated fair value less cost to sell the real property. On December 24, 2014, ICON EAR sold the real property for approximately $208,000. No material gain or loss was recorded as a result of this sale.
On January 4, 2012, MWU Universal, Inc. (“MWU”) and certain of its subsidiaries satisfied their obligations relating to two of the three lease schedules. On August 20, 2012, we sold the automotive manufacturing equipment subject to lease with LC Manufacturing, LLC, a wholly owned subsidiary of MWU (“LC Manufacturing”), and terminated warrants issued to us for aggregate proceeds of approximately $8,300,000. As a result, based on our 93.67% ownership interest in ICON MW, LLC (“ICON MW”), our joint venture with Fund Eleven, we received proceeds in the amount of approximately $7,775,000 and recognized a loss on the sale of approximately $89,000. 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 $5,068,000. In February 2013, we commenced an action against the guarantor, which is currently pending.
On October 7, 2013, a joint venture owned 45% by us and 55% by Fund Eleven, upon the expiration of the lease with Pliant Corporation (“Pliant”), sold the plastic processing and printing equipment to Pliant for $7,000,000. Our share of the gain on sale of assets was approximately $1,100,000.
Mining Equipment
On September 12, 2013, a joint venture owned by us, Fund Eleven and ICON ECI Fund Sixteen (“Fund Sixteen”), an entity also managed by our Manager, purchased mining equipment for approximately $15,107,000. The equipment is subject to a 24 month lease with Murray Energy Corporation and certain of its affiliates (collectively, “Murray”), which expires on September 30, 2015. On December 1, 2013 and February 1, 2014, Fund Sixteen contributed capital of approximately $934,000 and $1,726,000, respectively, to the joint venture, inclusive of acquisition fees. Subsequent to Fund Sixteen’s second capital contribution, the joint venture is owned 13.2% by us, 67% by Fund Eleven and 19.8% by Fund Sixteen. As a result, we received corresponding returns of capital.
On March 4, 2014, a joint venture owned 60% by us, 15% by Fund Fourteen, 15% by Fund Fifteen and 10% by Fund Sixteen purchased mining equipment from an affiliate of Spurlock Mining, LLC (f/k/a Blackhawk Mining, LLC) (“Spurlock”). Simultaneously, the mining equipment was leased to Spurlock and its affiliates for four years. The aggregate purchase price for the mining equipment of approximately $25,359,000 was funded by approximately $17,859,000 in cash and $7,500,000 of non-recourse long-term debt with People’s Capital and Leasing Corp. (“People’s Capital”). The loan bears interest at a rate of 6.5% per year and matures on February 1, 2018.
On September 18, 2014, a joint venture owned 55.817% by us and 44.183% by Hardwood Partners, LLC (“Hardwood”) purchased mining equipment for $6,789,928. The equipment is subject to a 36-month lease with Murray, which expires on September 30, 2017.
Trucks and Trailers
On March 28, 2014, a joint venture owned 60% by us, 27.5% by Fund Fifteen and 12.5% by Fund Sixteen purchased trucks, trailers and other equipment from subsidiaries of D&T Holdings, LLC (“D&T”) for $12,200,000. Simultaneously, the trucks, trailers and other equipment were leased to D&T and its subsidiaries for 57 months. On September 15, 2014, the lease agreement with D&T was amended to allow D&T to increase its capital expenditure limit. In consideration for agreeing to such increase, lease payments of approximately $1,500,000 that were scheduled to be paid in 2018 were paid by October 31, 2014.
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In addition, the joint venture received an amendment fee of $100,000, which will be recognized as finance income throughout the remaining lease term.
Motor Coaches
On January 3, 2012, CUSA PRTS, LLC (“CUSA”) and its parent company, Coach Am Group Holdings Corp., commenced a voluntary Chapter 11 proceeding in U.S. Bankruptcy Court. Subsequently, on January 20, 2012, we satisfied our non-recourse debt obligation, secured by certain motor coaches, with Wells Fargo Equipment Finance, Inc. (“Wells Fargo”) for approximately $1,192,000. On July 20, 2012, we sold all of the remaining motor coaches to CUSA for approximately $3,607,000 and recorded a gain on sale of approximately $881,000.
Gas Compressors
On July 15, 2011, a joint venture owned 49.54% by us, 40.53% by Fund Fourteen and 9.93% by Hardwood amended the master lease agreement with Atlas Pipeline Mid-Continent, LLC (“APMC”), an affiliate of Atlas Pipeline Partners, L.P., requiring APMC to purchase eight gas compressors it leased from the joint venture upon lease termination. The joint venture received an amendment fee of $500,000 and the leases were reclassified from operating leases to finance leases. On September 14, 2011, the joint venture financed future receivables related to the leases by entering into a non-recourse loan agreement with Wells Fargo in the amount of approximately $10,628,000. Wells Fargo received a first priority security interest in the gas compressors, among other collateral. The loan bore interest at 4.08% per year and was scheduled to mature on September 1, 2013. On May 30, 2013, the joint venture, in accordance with the terms of the lease, sold the eight gas compressors to APMC for $7,500,000. As a result, we recognized a gain on sale of approximately $384,000. Simultaneously with the sale, the joint venture prepaid and satisfied its non-recourse debt obligation with Wells Fargo for $7,500,000. As a result, we recognized a loss on extinguishment of debt of approximately $86,000, which is included in interest expense on the consolidated statements of comprehensive income (loss).
Notes Receivable
On June 29, 2009, we and Fund Fourteen entered into a joint venture for the purpose of making secured term loans in the aggregate amount of $20,000,000 to INOVA Rentals Corporation (f/k/a ARAM Rentals Corporation) and INOVA Seismic Rentals Inc. (f/k/a ARAM Seismic Rental Inc.) (collectively, the “INOVA Borrowers”), which were scheduled to mature on August 1, 2014. In 2011, we exchanged our 52.09% ownership interest in the joint venture for our proportionate share of the notes receivable owned by the joint venture, which was subsequently deconsolidated and then terminated. The loans bore interest at 15% per year and were secured by a first priority security interest in all analog seismic system equipment owned by the INOVA Borrowers, among other collateral. On January 31, 2014, the INOVA Borrowers satisfied their obligation in connection with these loans by making a prepayment of approximately $1,672,000. No material gain or loss was recorded as a result of this transaction.
On December 23, 2009, a joint venture owned by us and Fund Fourteen made a secured term loan to Quattro Plant Limited (“Quattro Plant”) in the amount of £5,800,000 (approximately $9,462,000) as part of a £24,800,000 secured term loan facility. In 2011, we exchanged our 49.13% ownership interest in the joint venture for an assignment of our proportionate share of the future cash flows of the note receivable owned by the joint venture. Upon completion of the exchange, the joint venture was deconsolidated and then terminated. The loan bore interest at 20% per year and was secured by a second priority security interest in all of Quattro Plant’s rail support construction equipment, among other collateral. On October 16, 2012, Quattro Plant extended the term of its loan facility to February 28, 2013. On November 14, 2012, Quattro Plant satisfied its obligation in connection with its loan by making a prepayment of approximately $872,000. No material gain or loss was recorded as a result of this transaction.
On June 30, 2010, we made two secured term loans in the aggregate amount of $9,600,000, one to Ocean Navigation 5 Co. Ltd. and one to Ocean Navigation 6 Co. Ltd. (collectively, “Ocean Navigation”), as part of a $96,000,000 term loan facility. The loans were funded between July 2010 and September 2010 and proceeds from the facility were used by Ocean Navigation to purchase two aframax tanker vessels, the Shah Deniz and the Absheron, which were valued in the aggregate at $115,700,000 on the date the transaction occurred. The loans bore interest at 15.25% per year and were for a period of six years maturing between July and September 2016. The loans were secured by a second priority security interest in the vessels. On April 15, 2014, we sold all our interest in the loans with Ocean Navigation to Garanti Bank International, N.V. for $9,600,000. As a result, we wrote off the remaining initial direct costs associated with the notes receivable of approximately $455,000 as a charge against finance income.
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On September 1, 2010, we made a secured term loan to EMS Enterprise Holdings, LLC, EMS Holdings II, LLC, EMS Engineered Materials Solutions, LLC, EMS CUP, LLC and EMS EUROPE, LLC (collectively, “EMS”) in the amount of $3,200,000. The loan bore interest at 13% per year and was scheduled to mature on September 1, 2014. The loan was secured by a first priority security interest in metal cladding and production equipment. On September 3, 2013, EMS satisfied their obligation in connection with the loan by making a prepayment of approximately $1,423,000, comprised of all outstanding principal, accrued and unpaid interest, and prepayment fees of $72,500. As a result, we recognized additional finance income of approximately $72,000.
On September 24, 2010, we made a secured term loan in the amount of $9,750,000 to Northern Crane Services, Inc. (“Northern Crane”) as part of a $150,000,000 term loan facility. The loan bore interest at 15.75% per year and was for a period of 54 months. The loan was secured by a first priority security interest in lifting and transportation equipment, which was valued at approximately $121,200,000 on the date the transaction occurred. On May 22, 2012, Northern Crane satisfied its obligations in connection with the loan by making a prepayment of approximately $7,955,000, which included a prepayment fee of approximately $227,000 that was recognized as additional finance income.
On December 23, 2010, a joint venture owned 52.75% by us, 12.25% by the Fund Ten Liquidating Trust and 35% by Fund Eleven restructured four promissory notes issued by affiliates of Northern Leasing Systems, Inc. (collectively, “Northern Leasing”) by extending each note’s term through February 15, 2013 and increasing each note’s interest rate by 1.50% to rates ranging from 9.47% to 9.90% per year. In 2011, we exchanged our ownership interest in the joint venture for our proportionate share of the notes receivable owned by the joint venture. Upon completion of the exchange, the joint venture was deconsolidated and then terminated. On May 2, 2012, Northern Leasing satisfied their obligations in connection with the promissory notes by making a prepayment of approximately $5,018,000.
On February 3, 2012, we made a secured term loan in the amount of $13,593,750 to subsidiaries of Revstone Transportation, LLC (collectively, “Revstone”) as part of a $37,000,000 term loan facility. The loan bore interest at 15% per year and was for a period of 60 months. The loan was secured by a first priority secured interest in all of Revstone’s assets, including a mortgage on real property, which were valued at approximately $69,282,000 on the date the transaction occurred. In addition, we agreed to make a secured capital expenditure loan (the “CapEx Loan”) to Revstone. Between April and October 2012, Revstone borrowed approximately $514,000 in connection with the CapEx Loan. The CapEx Loan bore interest at 17% per year and was scheduled to mature on March 1, 2017. The CapEx Loan was secured by a first priority security interest in automotive manufacturing equipment purchased with the proceeds from the CapEx Loan and a second priority security interest in the term loan collateral. On November 15, 2012, Revstone satisfied its obligations in connection with the term loan and the CapEx Loan by making a prepayment of approximately $13,993,000, which included a prepayment fee of approximately $660,000 that was recognized as additional finance income.
On February 29, 2012, we made a secured term loan in the amount of $2,000,000 to VAS as part of a $42,755,000 term loan facility. The loan bore interest at variable rates ranging between 12% and 14.5% per year and matured on October 6, 2014. The loan was secured by a second priority security interest in all of VAS’s assets, which were valued at approximately $165,881,000 on the date the transaction occurred. During 2014, VAS experienced financial hardship resulting in its failure to make the final monthly payment under the loan as well as the balloon payment due on the maturity date. Our Manager engaged in discussions with VAS, VAS’s owners, the senior creditor and other second lien creditors in order to put in place a viable restructuring or refinancing plan. In December 2014, this specific plan to restructure or refinance fell through. While discussions on other options are still ongoing, our Manager determined that we should record a credit loss reserve based on an estimated liquidation value of VAS’s inventory and accounts receivable. As a result, the loan was placed on non-accrual status and a credit loss reserve of approximately $632,000 was recorded during the year ended December 31, 2014 based on our pro-rata share of the liquidation value of the collateral. The value of the collateral was based on a third-party appraisal using a sales comparison approach. As of December 31, 2014, the remaining balance of the loan was approximately $966,000. Finance income recognized on the loan prior to recording the credit loss reserve was approximately $198,000 for the year ended December 31, 2014. No finance income was recognized since the date the loan was considered impaired.
On July 24, 2012, we made a secured term loan in the amount of $500,000 to affiliates of Frontier Oilfield Services, Inc. (collectively, “Frontier”) as part of a $5,000,000 term loan facility. The loan bore interest at 14% per year and was for a period of 66 months. The loan was secured by, among other things, a first priority security interest in Frontier’s saltwater disposal wells and related equipment and a second priority security interest in Frontier’s other assets, including real estate, machinery and accounts receivable, which were valued at approximately $38,925,000 on the date the transaction occurred. On October 11, 2013, Frontier made a partial prepayment of approximately $87,000, which included a prepayment fee of approximately $9,000 that was recognized as additional finance income. On December 30, 2014, we sold all of our interest in the loan to Frontier
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Expansion and Development, LLC for $375,000. As a result, we recognized a loss and wrote off the remaining initial direct costs associated with the notes receivable totaling approximately $62,000 as a charge against finance income.
On September 10, 2012, we made a secured term loan in the amount of $4,080,000 to Superior as part of a $17,000,000 term loan facility. The loan bore interest at 12% per year and was for a period of 60 months. The loan was secured by, among other things, a first priority security interest in Superior’s assets, including tube manufacturing and related equipment and a mortgage on real property, and a second priority security interest in Superior’s accounts receivable and inventory, which were valued at approximately $32,387,000 on the date the transaction occurred. On January 30, 2015, Superior satisfied its obligations in connection the loan by making a prepayment of approximately $4,191,000, comprised of all outstanding principal, accrued interest and a prepayment fee of approximately $122,000.
On November 28, 2012, we made a secured term loan in the amount of $4,050,000 to SAExploration, Inc., SAExploration Seismic Services (US), LLC and NES, LLC (collectively, “SAE”) as part of a $80,000,000 term loan facility. The loan bore interest at 13.5% per year and was for a period of 48 months. The loan was secured by, among other things, a first priority security interest in all existing and thereafter acquired assets, including seismic testing equipment, of SAE and its parent company, SAExploration Holdings, Inc. (“SAE Holdings”), and a pledge of all the equity interests in SAE and SAE Holdings. In addition, we acquired warrants, exercisable until December 5, 2022, to purchase 0.051% of the outstanding common stock of SAE Holdings. On October 31, 2013, we entered into an amendment to the loan agreement with SAE to amend certain provisions and covenant ratios. As a result of the amendment, we received an amendment fee of approximately $31,000. On July 2, 2014, SAE satisfied its obligation in connection with the loan by making a prepayment of approximately $4,592,000, comprised of all outstanding principal, accrued interest and prepayment fees of approximately $449,000. The prepayment fees were recognized as additional finance income.
On February 12, 2013, we made a secured term loan in the amount of $2,700,000 to NTS Communications, Inc. and certain of its affiliates (collectively, “NTS”) as part of a $6,000,000 facility. On March 28, 2013, NTS borrowed $765,000 and on June 27, 2013, NTS drew down the remaining $1,935,000 from the facility. The loan bore interest at 12.75% per year and was scheduled to mature on July 1, 2017. The loan was secured by a first priority security interest in all equipment and assets of NTS. On June 6, 2014, NTS satisfied their obligations in connection with the loan by making a prepayment of approximately $2,701,000, comprised of all outstanding principal, accrued interest and a prepayment fee of approximately $103,000. The prepayment fee was recognized as additional finance income.
On April 5, 2013, we made a secured term loan in the amount of $3,870,000 to LSC as part of an $18,000,000 facility. The loan bears interest at 13.5% per year and matures on August 1, 2018. The loan is secured by, among other things, a second priority security interest in LSC’s liquid storage tanks, blending lines, packaging equipment, accounts receivable and inventory, which were valued in the aggregate at approximately $52,030,000 on the date the transaction occurred. On December 11, 2013, LSC made a partial prepayment of approximately $1,355,000, which included a prepayment fee of approximately $65,000 that was recognized as additional finance income.
On September 16, 2013, we made a secured term loan in the amount of $11,000,000 to Cenveo. The loan bears interest at the London Interbank Offered Rate (“LIBOR”), subject to a 1% floor, plus 11.0% per year and is for a period of 60 months. The loan is secured by a first priority security interest in specific equipment used to produce, print, fold, and package printed commercial envelopes, which was valued at $29,123,000 on the date the transaction occurred. On October 31, 2013, we borrowed $7,150,000 of non-recourse long-term debt from NXT Capital, LLC (“NXT”) secured by our interest in the loan to and collateral from Cenveo. The non-recourse long-term debt matures on October 1, 2018 and bears interest at LIBOR plus 6.5% per year. On July 7, 2014, Cenveo made a partial prepayment of approximately $1,112,000 in connection with the loan, which included a net prepayment fee of approximately $12,000. Simultaneously, we partially paid down our non-recourse long-term debt with NXT by making a payment of approximately $703,000.
On May 15, 2013, a joint venture owned 21% by us, 39% by Fund Eleven and 40% by Fund Fifteen purchased a portion of an approximately $208,000,000 subordinated credit facility for JAC from Standard Chartered. The aggregate purchase price for the joint venture’s portion of the subordinated facility was $28,462,500. The subordinated credit facility bears interest at rates ranging between 12.5% and 15.0% per year and matures in January 2021. The subordinated credit facility is secured by a second priority security interest in all of JAC’s assets, which include, among other things, all equipment, plant and machinery associated with a condensate splitter and aromatics complex. Our initial contribution to the joint venture was approximately $6,456,000.
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On November 26, 2013, we, Fund Fifteen and a third-party creditor made a superpriority, secured term loan in the amount of $30,000,000 to Green Field Energy Services, Inc. and its affiliates (collectively, “Green Field”), of which our share was $7,500,000. The loan bore interest at LIBOR plus 10% per year and was scheduled to mature on August 26, 2014. The loan was secured by a superpriority security interest in all of Green Field’s assets. On March 18, 2014, Green Field satisfied its obligation in connection with the loan by making a prepayment of approximately $7,458,000, comprised of all outstanding principal and accrued interest. No material gain or loss was recorded as a result of this transaction.
On June 17, 2014, we and Fund Fourteen entered into a secured term loan credit facility agreement with SeaChange Projects LLC (“SeaChange”) to provide a credit facility of up to $7,000,000, of which our commitment was $6,300,000. On June 20, 2014 and August 20, 2014, we funded $4,050,000 and $2,250,000, respectively. The facility was used to partially finance SeaChange’s acquisition and conversion of a containership vessel to meet certain time charter specifications of the Military Sealift Command of the Department of the United States Navy. The facility bore interest at 13.25% per year and was scheduled to mature on February 15, 2018. The facility was secured by, among other things, a first priority security interest in and earnings from the vessel and the equity interests of SeaChange. Due to SeaChange’s inability to meet certain requirements of the Department of the United States Navy, which resulted in the cancellation of the time charter, SeaChange was required to repay all outstanding principal and accrued interest under the facility in accordance with the loan agreement. On September 24, 2014, SeaChange satisfied its obligation by making a prepayment of approximately $6,476,000, comprised of all outstanding principal and accrued interest.
On July 14, 2014, we, Fund Fourteen and Fund Fifteen (collectively, “ICON”) entered into a secured term loan credit facility agreement with TMA to provide a credit facility of up to $29,000,000 (the “ICON Loan”), of which our commitment of $21,750,000 was funded on August 27, 2014 (the “TMA Initial Closing Date”). The facility was used by TMA to acquire and refinance two platform supply vessels. At inception, the loan bore interest at LIBOR, subject to a 1% floor, plus a margin of 17%. Upon the acceptance of both vessels by TMA’s sub-charterer on September 19, 2014, the margin was reduced to 13%. On November 24, 2014, ICON entered into an amended and restated senior secured term loan credit facility agreement with TMA pursuant to which an unaffiliated third party agreed to provide a senior secured term loan in the amount of up to $89,000,000 (the “Senior Loan”) in addition to the ICON Loan (collectively, the “TMA Facility”) to acquire two additional vessels. The TMA Facility has a term of five years from the TMA Initial Closing Date. As a result of the amendment, the margin for the ICON Loan increased to 15% and repayment of the ICON Loan became subordinated to the repayment of the Senior Loan. The TMA Facility is secured by, among other things, a first priority security interest in the four vessels and TMA’s right to the collection of hire with respect to earnings from the sub-charterer related to the four vessels. The amendment qualified as a new loan and therefore, we wrote off the initial direct costs and deferred revenue associated with the ICON Loan of approximately $674,000 as a charge against finance income.
On September 24, 2014, we, Fund Fourteen, Fund Fifteen and Fund Sixteen entered into a secured term loan credit facility agreement with Premier Trailer to provide a credit facility of up to $20,000,000, of which our commitment of $10,000,000 was funded on such date. The loan bears interest at LIBOR, subject to a 1% floor, plus 9% per year and is for a period of six years. The loan is secured by a second priority security interest in all of Premier Trailer’s assets, including, without limitation, its fleet of trailers, and the equity interests of Premier Trailer. Premier Trailer’s assets, including its fleet of trailers, were valued at approximately $64,088,000 on the date the transaction occurred.
On November 13, 2014, we and Fund Fourteen made secured term loans in the aggregate amount of $15,000,000 to NARL as a part of a $30,000,000 senior secured term loan credit facility, of which our commitment was $12,000,000. The loan bears interest at 10.75% per year and is for a period of three years. The loan is secured by a first priority security interest in all of NARL’s existing and thereafter acquired assets including, but not limited to, its retail and wholesale fuel equipment, including pumps and storage tanks, and a mortgage on certain real properties.
Acquisition Fees
In connection with the transactions that we entered into during the years ended December 31, 2014, 2013 and 2012, we paid acquisition fees to our Manager of $3,884,570, $1,975,062 and $1,366,728, respectively.
Recent Accounting Pronouncements
In March 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU 2013-05”), which clarifies guidance to
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the release of the cumulative translation adjustment when an entity sells all or part of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity. The adoption of ASU 2013-05 became effective for us on January 1, 2014 and did not have a material effect on our consolidated financial statements.
In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), requiring revenue to be recognized in an amount that reflects the consideration expected to be received in exchange for goods and services. The adoption of ASU 2014-09 becomes effective for us on January 1, 2017, including interim periods within that reporting period. Early adoption is not permitted. We are currently in the process of evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.
In August 2014, FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), which provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The adoption of ASU 2014-15 becomes effective for us on our fiscal year ending December 31, 2016, and all subsequent annual and interim periods. Early adoption is permitted. The adoption of ASU 2014-15 is not expected to have a material effect on our consolidated financial statements.
In January 2015, FASB issued ASU No. 2015-01, Income Statement – Extraordinary and Unusual Items (“ASU 2015-01”), which simplifies income statement presentation by eliminating the concept of extraordinary items. The adoption of ASU 2015-01 becomes effective for us on January 1, 2016, including interim periods within that reporting period. Early adoption is permitted. The adoption of ASU 2015-01 is not expected to have a material effect on our consolidated financial statements.
In February 2015, FASB issued ASU No. 2015-02, Consolidation – Amendments to the Consolidation Analysis (“ASU 2015-02”), which modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership, and affects the consolidation analysis by reducing the frequency of application of related party guidance and excluding certain fees in the primary beneficiary determination. The adoption of ASU 2015-02 becomes effective for us on January 1, 2016. Early adoption is permitted. We are currently in the process of evaluating the impact of the adoption of ASU 2015-02 on our consolidated financial statements.
Critical Accounting Policies
An understanding of our critical accounting policies is necessary to understand our financial results. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires our Manager to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates primarily include the determination of credit loss reserves, impairment losses, estimated useful lives and residual values. Actual results could differ from those estimates. We applied our critical accounting policies and estimation methods consistently in all periods presented. We consider the following accounting policies to be critical to our business:
· Lease classification and revenue recognition;
· Asset impairments;
· Depreciation;
· Notes receivable and revenue recognition;
· Credit quality of notes receivable and finance leases and credit loss reserve; and
· Derivative financial instruments.
Lease Classification and Revenue Recognition
Each equipment lease we enter into is classified as either a finance lease or an operating lease, based upon the terms of each lease. The estimated residual value is a critical component of and can directly influence the determination as to whether a lease is classified as an operating or a finance lease.
Our Manager has an investment committee that approves each new equipment lease and other financing transaction. As part of its process, the investment committee determines the estimated residual value, if any, to be used once the investment has been approved. The factors considered in determining the residual value include, but are not limited to, the creditworthiness of the potential lessee, the type of equipment considered, how the equipment is integrated into the potential lessee’s business, the
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length of the lease and the industry in which the potential lessee operates. Residual values are reviewed for impairment in accordance with our impairment review policy.
The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the marketplace are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. The residual value is calculated using information from various external sources, such as trade publications, auction data, equipment dealers, wholesalers and industry experts, as well as inspection of the physical asset and other economic indicators.
For finance leases, we capitalize, at lease inception, the total minimum lease payments receivable from the lessee, the estimated unguaranteed residual value of the equipment at lease termination and the initial direct costs related to the lease, less unearned income. Unearned income represents the difference between the sum of the minimum lease payments receivable, plus the estimated unguaranteed residual value, minus the cost of the leased equipment. Unearned income is recognized as finance income over the term of the lease using the effective interest rate method.
For operating leases, rental income is recognized on a straight-line basis over the lease term. Billed operating lease receivables are included in accounts receivable until collected or written off. We record a reserve if we deem any receivable not collectible. The difference between the timing of the cash received and the income recognized on a straight-line basis is recognized as either deferred revenue or other assets, as appropriate. Initial direct costs are capitalized as a component of the cost of the equipment and depreciated over the lease term.
For time charters, the vessels are stated at cost. Expenditures subsequent to the acquisition of such vessels for conversions and major improvements are capitalized when such expenditures appreciably extend the life, increase the earning capacity or improve the efficiency or safety of such vessels. We recognize revenue ratably over the period of such charters. Vessel operating expenses, repairs and maintenance are charged to expense as incurred and are included in vessel operating expenses in our consolidated statements of comprehensive income (loss).
Asset Impairments
The significant assets in our portfolio are periodically reviewed, no less frequently than annually or when indicators of impairment exist, to determine whether events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss will be recognized only if the carrying value of a long-lived asset is not recoverable and exceeds its fair market value. If there is an indication of impairment, we will estimate the future cash flows (undiscounted and without interest charges) expected from the use of the asset and its eventual disposition. Future cash flows are the future cash inflows expected to be generated by an asset less the future outflows expected to be necessary to obtain those inflows. If an impairment is determined to exist, the impairment loss will be measured as the amount by which the carrying value of a long-lived asset exceeds its fair value and recorded in the consolidated statements of comprehensive income (loss) in the period the determination is made.
The events or changes in circumstances that generally indicate that an asset may be impaired are (i) the estimated fair value of the underlying asset is less than its carrying value or (ii) the lessee is experiencing financial difficulties and it does not appear likely that the estimated proceeds from the disposition of the asset will be sufficient to satisfy the residual position in the asset and, if applicable, the remaining obligation to the non-recourse lender. Generally in the latter situation, the residual position relates to equipment subject to third-party non-recourse debt where the lessee remits its rental payments directly to the lender and we do not recover our residual position until the non-recourse debt is repaid in full. The preparation of the undiscounted cash flows requires the use of assumptions and estimates, including the level of future rents, the residual value expected to be realized upon disposition of the asset, estimated downtime between re-leasing events and the amount of re-leasing costs. Our Manager’s review for impairment includes a consideration of the existence of impairment indicators including third-party appraisals, published values for similar assets, recent transactions for similar assets, adverse changes in market conditions for specific asset types and the occurrence of significant adverse changes in general industry and market conditions that could affect the fair value of the asset.
Depreciation
We record depreciation expense on equipment when the lease is classified as an operating lease. In order to calculate depreciation, we first determine the depreciable base, which is the equipment cost less the estimated residual value at lease termination. Depreciation expense is recorded on a straight-line basis over the lease term.
Notes Receivable and Revenue Recognition
30
Notes receivable are reported in our consolidated balance sheets at the outstanding principal balance, plus costs incurred to originate the loans, net of any unamortized premiums or discounts on purchased loans. We use the effective interest rate method to recognize finance income, which produces a constant periodic rate of return on the investment. Unearned income, discounts and premiums are amortized to finance income in our consolidated statements of comprehensive income (loss) using the effective interest rate method. Interest receivable related to the unpaid principal is recorded separately from the outstanding balance in our consolidated balance sheets. Upon the prepayment of a note receivable, any prepayment penalties and unamortized loan origination, closing and commitment fees are recorded as part of finance income in our consolidated statements of comprehensive income (loss). Our notes receivable may contain a paid-in-kind (“PIK”) interest provision. Any PIK interest, if deemed collectible, will be added to the principal balance of the note receivable and is recorded as income.
Credit Quality of Notes Receivable and Finance Leases and Credit Loss Reserve
Our Manager monitors the ongoing credit quality of our financing receivables by (i) reviewing and analyzing a borrower’s financial performance on a regular basis, including review of financial statements received on a monthly, quarterly or annual basis as prescribed in the loan or lease agreement, (ii) tracking the relevant credit metrics of each financing receivable and a borrower’s compliance with financial and non-financial covenants, (iii) monitoring a borrower’s payment history and public credit rating, if available, and (iv) assessing our exposure based on the current investment mix. As part of the monitoring process, our Manager may physically inspect the collateral or a borrower’s facility and meet with a borrower’s management to better understand such borrower’s financial performance and its future plans on an as-needed basis.
As our financing receivables, generally notes receivable and finance leases, are limited in number, our Manager is able to estimate the credit loss reserve based on a detailed analysis of each financing receivable as opposed to using portfolio-based metrics. Our Manager does not use a system of assigning internal risk ratings to each of our financing receivables. Rather, each financing receivable is analyzed quarterly and categorized as either performing or non-performing based on certain factors including, but not limited to, financial results, satisfying scheduled payments and compliance with financial covenants. A financing receivable is usually categorized as non-performing only when a borrower experiences financial difficulties and has failed to make scheduled payments. Our Manager then analyzes whether the financing receivable should be placed on a non-accrual status, a credit loss reserve should be established or the financing receivable should be restructured. As part of the assessment, updated collateral value is usually considered and such collateral value can be based on a third party industry expert appraisal or, depending on the type of collateral and accessibility to relevant published guides or market sales data, internally derived fair value. Material events would be specifically disclosed in the discussion of each financing receivable held.
Financing receivables are generally placed in a non-accrual status when payments are more than 90 days past due. Additionally, our Manager periodically reviews the creditworthiness of companies with payments outstanding less than 90 days and based upon our Manager’s judgment, these accounts may be placed in a non-accrual status.
In accordance with the cost recovery method, payments received on non-accrual financing receivables are applied to principal if there is doubt regarding the ultimate collectability of principal. If collection of the principal of non-accrual financing receivables is not in doubt, interest income is recognized on a cash basis. Financing receivables in non-accrual status may not be restored to accrual status until all delinquent payments have been received, and we believe recovery of the remaining unpaid receivable is probable.
When our Manager deems it is probable that we will not be able to collect all contractual principal and interest on a non-performing financing receivable, we perform an analysis to determine if a credit loss reserve is necessary. This analysis considers the estimated cash flows from the financing receivable, and/or the collateral value of the asset underlying the financing receivable when financing receivable repayment is collateral dependent. If it is determined that the impaired value of the non-performing financing receivable is less than the net carrying value, we will recognize a credit loss reserve or adjust the existing credit loss reserve with a corresponding charge to earnings. We then charge off a financing receivable in the period that it is deemed uncollectible by reducing the credit loss reserve and the balance of the financing receivable.
Derivative Financial Instruments
We may enter into derivative transactions for purposes of hedging specific financial exposures, including movements in foreign currency exchange rates and changes in interest rates on our non-recourse long-term debt. We enter into these instruments only for hedging underlying exposures. We do not hold or issue derivative financial instruments for purposes other than hedging, except for warrants, which are not hedges. Certain derivatives may not meet the established criteria to be designated as qualifying accounting hedges, even though we believe that these are effective economic hedges.
31
We recognize all derivative financial instruments as either assets or liabilities on the consolidated balance sheets and measure 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 we must document and assess at inception and on an ongoing basis, we recognize the changes in fair value of such instruments in accumulated other comprehensive income (loss), a component of equity on the consolidated balance sheets. Changes in the fair value of the ineffective portion of all derivatives are recognized immediately in earnings.
Results of Operations for the Years Ended December 31, 2014 (“2014”) and 2013 (“2013”)
The following 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, finance income or 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.
Financing Transactions
The following tables set forth the types of assets securing the financing transactions in our portfolio:
32
|
|
|
December 31, |
|||||||||||
|
|
|
|
|
2014 |
|
|
2013 |
||||||
|
|
|
|
|
Net |
|
|
Percentage of |
|
|
Net |
|
|
Percentage of |
|
|
|
|
|
Carrying |
|
|
Total Net |
|
|
Carrying |
|
|
Total Net |
|
|
Asset Type |
|
|
Value |
|
|
Carrying Value |
|
|
Value |
|
|
Carrying Value |
|
|
Tanker vessels |
|
$ |
37,998,931 |
|
|
29% |
|
$ |
- |
|
|
- |
|
|
Mining equipment |
|
|
22,184,672 |
|
|
17% |
|
|
- |
|
|
- |
|
|
Platform supply vessels |
|
|
21,589,043 |
|
|
16% |
|
|
- |
|
|
- |
|
|
Energy equipment |
|
|
11,473,409 |
|
|
9% |
|
|
- |
|
|
- |
|
|
Trailers |
|
|
9,809,033 |
|
|
7% |
|
|
- |
|
|
- |
|
|
Transportation |
|
|
8,360,217 |
|
|
6% |
|
|
- |
|
|
- |
|
|
Printing equipment |
|
|
8,086,659 |
|
|
6% |
|
|
10,961,912 |
|
|
7% |
|
|
Coal drag line |
|
|
5,741,902 |
|
|
4% |
|
|
7,495,844 |
|
|
5% |
|
|
Tube manufacturing equipment |
|
|
4,092,215 |
|
|
3% |
|
|
4,152,432 |
|
|
3% |
|
|
Lubricant manufacturing equipment |
|
|
2,703,292 |
|
|
2% |
|
|
2,737,695 |
|
|
2% |
|
|
Aircraft engines |
|
|
966,359 |
|
|
1% |
|
|
1,687,232 |
|
|
1% |
|
|
Offshore oil field services equipment |
|
|
- |
|
|
- |
|
|
93,951,371 |
|
|
63% |
|
|
Marine - crude oil tanker |
|
|
- |
|
|
- |
|
|
10,102,586 |
|
|
7% |
|
|
On-shore oil field services equipment |
|
|
- |
|
|
- |
|
|
8,017,099 |
|
|
6% |
|
|
Seismic imaging equipment |
|
|
- |
|
|
- |
|
|
4,128,632 |
|
|
3% |
|
|
Telecommunications equipment |
|
|
- |
|
|
- |
|
|
3,168,851 |
|
|
2% |
|
|
Analog seismic system equipment |
|
|
- |
|
|
- |
|
|
1,878,037 |
|
|
1% |
|
|
|
|
$ |
133,005,732 |
|
|
100% |
|
$ |
148,281,691 |
|
|
100% |
The net carrying value of our financing transactions includes the balances of our net investment in notes receivable and our net investment in finance leases as of each reporting date.
During 2014 and 2013, one customer generated a significant portion (defined as 10% or more) of our total finance income as follows:
|
|
|
|
Percentage of Total Finance Income |
||||
|
|
Customer |
|
Asset Type |
|
2014 |
|
2013 |
|
|
Leighton Holdings Limited |
|
Offshore oil field services equipment |
|
85% |
|
63% |
Interest income from our net investment in notes receivable and finance income from our net investment in finance leases are included in finance income in our consolidated statements of comprehensive income (loss).
Non-performing Assets within Financing Transactions
As of December 31, 2014, the net carrying value of our impaired loan related to VAS was $966,359. No finance income was recognized since the date the loan was impaired during 2014. We recognized $197,741 and $256,209 of finance income related to VAS during the years ended December 31, 2014 and 2013, respectively, prior to the loan being impaired. As of December 31, 2013, the net carrying value of the loan related to VAS was $1,687,232.
Operating Lease Transactions
The following tables set forth the types of equipment subject to operating leases in our portfolio:
|
|
|
|
December 31, |
||||||||||
|
|
|
|
2014 |
|
2013 |
||||||||
|
|
|
|
|
Net |
|
|
Percentage of |
|
|
Net |
|
|
Percentage of |
|
|
|
|
|
Carrying |
|
|
Total Net |
|
|
Carrying |
|
|
Total Net |
|
|
Asset Type |
|
|
Value |
|
|
Carrying Value |
|
|
Value |
|
|
Carrying Value |
|
|
Offshore oil field services equipment |
|
$ |
66,356,257 |
|
|
91% |
|
$ |
35,135,234 |
|
|
64% |
|
|
Mining equipment |
|
|
6,395,518 |
|
|
9% |
|
|
- |
|
|
- |
|
|
|
|
$ |
72,751,775 |
|
|
100% |
|
$ |
55,206,565 |
|
|
100% |
33
Impaired Assets within Operating Lease Transactions
During 2013, we recognized an impairment charge of $14,790,755 on the leased equipment at cost, of which $13,020,226 was related to the Aegean Express and the Arabian Express. As of December 31, 2014 and 2013, the net carrying value of such vessels was $18,266,677 and $20,071,331, respectively. As of December 31, 2014 and 2013, these vessels were classified as vessels and leased equipment at cost, respectively, on our consolidated balance sheets. Time charter revenue/rental income of $5,816,081 and $6,735,168 was recognized with respect to these vessels during the years ended December 31, 2014 and 2013, respectively.
The net carrying value of our operating lease transactions represents the balance of our leased equipment at cost as of each reporting date.
During 2014 and 2013, 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 |
|
2014 |
|
2013 |
|
|
Swiber Holdings Limited |
|
|
Offshore oil field services equipment |
|
65% |
|
28% |
|
|
Pacific Crest Pte. Ltd. |
|
|
Offshore oil field services equipment |
|
19% |
|
- |
|
|
Vroon Group B.V. |
|
|
Marine - container vessels |
|
12% |
|
21% |
|
|
AET Inc. Limited |
|
|
Marine - crude oil tanker |
|
- |
|
51% |
|
|
|
|
|
|
|
96% |
|
100% |
Revenue and other income for 2014 and 2013 is summarized as follows:
|
|
|
|
Years Ended December 31, |
|
|
|
||||
|
|
|
|
|
2014 |
|
|
2013 |
|
|
Change |
|
|
Finance income |
$ |
68,225,836 |
|
$ |
16,811,076 |
|
$ |
51,414,760 |
|
|
|
Rental income |
|
13,911,707 |
|
|
32,785,533 |
|
|
(18,873,826) |
|
|
|
Time charter revenue |
|
4,132,289 |
|
|
- |
|
|
4,132,289 |
|
|
|
Income from investment in joint ventures |
|
3,271,192 |
|
|
4,061,317 |
|
|
(790,125) |
|
|
|
(Loss) gain on lease termination |
|
(18,800) |
|
|
8,827,010 |
|
|
(8,845,810) |
|
|
|
Gain (loss) on sale of assets, net |
|
1,737,983 |
|
|
(6,695,492) |
|
|
8,433,475 |
|
|
|
|
Total revenue and other income |
$ |
91,260,207 |
|
$ |
55,789,444 |
|
$ |
35,470,763 |
Total revenue and other income for 2014 increased $35,470,763, or 63.6%, as compared to 2013. The increase in finance income was primarily related to three of the Leighton Vessels, of which $57,248,440 was recognized as finance income, related to the gain on the exercise of a purchase option for such Leighton Vessels during 2014. This gain was offset by a reduction of $7,643,794 in finance income earned from the leases related to the Leighton Vessels in 2014 compared to 2013. The increase in time charter revenue was related to the Aegean Express and the Arabian Express as we commenced operating such vessels in April 2014. The increase was partially offset by a decrease in rental income, which was primarily due to the termination or expiration of the leases related to the Eagle Vessels during 2013. In 2013, we had a net gain of $2,131,518 on the lease termination and subsequent sale of the Eagle Vessels, comprised of a gain on lease termination of $8,827,010 and a net loss on sale of the vessels of $6,695,492, as compared to a smaller gain on sale of assets of $1,737,983 primarily from the sale of marine diving equipment in 2014.
Expenses for 2014 and 2013 are summarized as follows:
|
|
|
|
Years Ended December 31, |
|
|
|
||||
|
|
|
|
|
2014 |
|
|
2013 |
|
|
Change |
|
|
Management fees |
$ |
1,918,023 |
|
$ |
3,247,710 |
|
$ |
(1,329,687) |
|
|
|
Administrative expense reimbursements |
|
4,785,387 |
|
|
2,284,264 |
|
|
2,501,123 |
|
|
|
General and administrative |
|
3,066,828 |
|
|
3,169,333 |
|
|
(102,505) |
|
|
|
Interest |
|
5,289,185 |
|
|
8,677,154 |
|
|
(3,387,969) |
|
|
|
Depreciation |
|
7,127,975 |
|
|
29,824,603 |
|
|
(22,696,628) |
|
|
|
Credit loss, net |
|
634,803 |
|
|
- |
|
|
634,803 |
|
|
|
Impairment loss |
|
70,412 |
|
|
14,790,755 |
|
|
(14,720,343) |
|
|
|
Vessel operating |
|
4,334,167 |
|
|
- |
|
|
4,334,167 |
|
|
|
Loss on disposition of assets of foreign investment |
|
- |
|
|
1,447,361 |
|
|
(1,447,361) |
|
|
|
Loss on derivative financial instruments |
|
372,316 |
|
|
188,534 |
|
|
183,782 |
|
|
|
|
Total expenses |
$ |
27,599,096 |
|
$ |
63,629,714 |
|
$ |
(36,030,618) |
34
Total expenses for 2014 decreased $36,030,618, or 56.6%, as compared to 2013. The decrease in depreciation was primarily due to the sale of the Eagle Vessels during 2013. The decrease in impairment loss was due to the recognition of impairment losses in connection with the Eagle Vessels, the Aegean Express and the Arabian Express of $14,790,755 during 2013, compared to an impairment loss of $70,412 recognized on real property held by ICON EAR during 2014. The decrease in interest was primarily due to the repayment of our non-recourse long-term debt associated with the sale of multiple vessels and certain equipment during or subsequent to 2013, partially offset by three additional borrowings of non-recourse long-term debt during 2014. In addition, we incurred a loss on disposition of assets of foreign investment as a result of the reclassification of the accumulated loss on currency translation adjustment out of accumulated other comprehensive income (“AOCI”) due to the sale of a foreign investment during 2013, with no comparable loss incurred in 2014. These decreases were partially offset by vessel operating expenses incurred during 2014 related to the Aegean Express and the Arabian Express as we commenced operating such vessels in April 2014 and an increase in administrative expense reimbursements, primarily due to increased costs incurred on our behalf by our Manager in connection with a proposed sale of our assets during our liquidation period in 2014. Our Manager may continue to incur additional professional fees and costs on our behalf as it continues to pursue the sale of our assets in one or more strategic transactions.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests increased $2,243,581, from $1,537,199 in 2013 to $3,780,780 in 2014. The increase was primarily due to additional consolidated joint ventures that we entered into during 2014.
Other Comprehensive Income
Other comprehensive income decreased $3,005,965, from $3,635,552 in 2013 to $629,587 in 2014. The decrease was primarily due to the termination or expiration of derivative financial instruments related to the debt associated with three of the Leighton Vessels, the Aegean Express and the Arabian Express subsequent to 2013. In addition, we reclassified the accumulated loss on currency translation adjustment out of AOCI to a loss on disposition of assets of foreign investment due to the sale of a foreign investment during 2013, with no comparable reclassification in 2014.
Net Income (Loss) Attributable to Fund Twelve
As a result of the foregoing factors, net income (loss) attributable to us for 2014 and 2013 was $59,880,331 and $(9,377,469), respectively. Net income (loss) attributable to us per weighted average additional Share outstanding for 2014 and 2013 was $170.19 and $(26.65), respectively.
Results of Operations for the Years Ended December 31, 2013 (“2013”) and 2012 (“2012”)
The following 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, finance income or 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.
Financing Transactions
The following tables set forth the types of assets securing the financing transactions in our portfolio:
35
|
|
|
|
December 31, |
||||||||||
|
|
|
|
2013 |
|
2012 |
||||||||
|
|
|
|
|
Net |
|
|
Percentage of |
|
|
Net |
|
|
Percentage of |
|
|
|
|
|
Carrying |
|
|
Total Net |
|
|
Carrying |
|
|
Total Net |
|
|
Asset Type |
|
|
Value |
|
|
Carrying Value |
|
|
Value |
|
|
Carrying Value |
|
|
Offshore oil field services equipment |
|
$ |
93,951,371 |
|
|
63% |
|
$ |
129,432,754 |
|
|
74% |
|
|
Printing equipment |
|
|
10,961,912 |
|
|
7% |
|
|
- |
|
|
- |
|
|
Marine - crude oil tanker |
|
|
10,102,586 |
|
|
7% |
|
|
10,291,463 |
|
|
6% |
|
|
On-shore oil field services equipment |
|
|
8,017,099 |
|
|
6% |
|
|
562,405 |
|
|
1% |
|
|
Coal drag line |
|
|
7,495,844 |
|
|
5% |
|
|
- |
|
|
- |
|
|
Tube manufacturing equipment |
|
|
4,152,432 |
|
|
3% |
|
|
4,185,608 |
|
|
2% |
|
|
Seismic imaging equipment |
|
|
4,128,632 |
|
|
3% |
|
|
4,111,660 |
|
|
2% |
|
|
Telecommunications equipment |
|
|
3,168,851 |
|
|
2% |
|
|
2,374,753 |
|
|
1% |
|
|
Lubricant manufacturing equipment |
|
|
2,737,695 |
|
|
2% |
|
|
- |
|
|
- |
|
|
Analog seismic system equipment |
|
|
1,878,037 |
|
|
1% |
|
|
4,377,368 |
|
|
3% |
|
|
Aircraft engines |
|
|
1,687,232 |
|
|
1% |
|
|
1,937,546 |
|
|
1% |
|
|
Gas compressors |
|
|
- |
|
|
- |
|
|
7,093,864 |
|
|
4% |
|
|
Marine - product tankers |
|
|
- |
|
|
- |
|
|
6,493,303 |
|
|
4% |
|
|
Metal cladding & production equipment |
|
|
- |
|
|
- |
|
|
1,950,932 |
|
|
1% |
|
|
Automotive manufacturing equipment |
|
|
- |
|
|
- |
|
|
1,535,780 |
|
|
1% |
|
|
|
|
$ |
148,281,691 |
|
|
100% |
|
$ |
174,347,436 |
|
|
100% |
The net carrying value of our financing transactions includes the balances of our net investment in notes receivable and our net investment in finance leases as of each reporting date.
During 2013 and 2012, one customer generated a significant portion (defined as 10% or more) of our total finance income as follows:
|
|
|
|
Percentage of Total Finance Income |
||||
|
|
Customer |
|
Asset Type |
|
2013 |
|
2012 |
|
|
Leighton Holdings Limited |
|
Offshore oil field services equipment |
|
63% |
|
58% |
Interest income from our net investment in notes receivable and finance income from our net investment in finance leases are included in finance income in our consolidated statements of comprehensive income (loss).
Operating Lease Transactions
The following tables set forth the types of equipment subject to operating leases in our portfolio:
|
|
|
|
December 31, |
||||||||||
|
|
|
|
2013 |
|
|
2012 |
|||||||
|
|
|
|
|
Net |
|
|
Percentage of |
|
|
Net |
|
|
Percentage of |
|
|
|
|
|
Carrying |
|
|
Total Net |
|
|
Carrying |
|
|
Total Net |
|
|
Asset Type |
|
|
Value |
|
|
Carrying Value |
|
|
Value |
|
|
Carrying Value |
|
|
Offshore oil field services equipment |
|
$ |
35,135,234 |
|
|
64% |
|
$ |
39,234,370 |
|
|
28% |
|
|
Marine - container vessels |
|
|
20,071,331 |
|
|
36% |
|
|
36,538,579 |
|
|
26% |
|
|
Marine - crude oil tanker |
|
|
- |
|
|
- |
|
|
56,059,700 |
|
|
39% |
|
|
Coal drag line |
|
|
- |
|
|
- |
|
|
9,436,912 |
|
|
7% |
|
|
|
|
$ |
55,206,565 |
|
|
100% |
|
$ |
141,269,561 |
|
|
100% |
Impaired Assets within Operating Lease Transactions
During 2013, we recognized an impairment charge of $14,790,755 on the leased equipment at cost, of which $13,020,226 was related to the Aegean Express and the Arabian Express. As of December 31, 2013 and 2012, the net carrying value of such vessels was $20,071,331 and $36,538,580, respectively. Rental income of $6,735,168 and $6,735,168 was recognized with respect to these vessels during the years ended December 31, 2013 and 2012, respectively.
36
The net carrying value of our operating lease transactions represents the balance of our leased equipment at cost as of each reporting date.
During 2013 and 2012, 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 |
|
2013 |
|
2012 |
|
|
AET Inc. Limited |
|
Marine - crude oil tanker |
|
51% |
|
54% |
|
|
Swiber Holdings Limited |
|
Offshore oil field services equipment |
|
28% |
|
21% |
|
|
Vroon Group B.V. |
|
Marine - container vessels |
|
21% |
|
15% |
|
|
|
|
|
|
100% |
|
90% |
Revenue and other income for 2013 and 2012 is summarized as follows:
|
|
|
|
Years Ended December 31, |
|
|
|||||
|
|
|
|
|
2013 |
|
|
2012 |
|
|
Change |
|
|
Finance income |
$ |
16,811,076 |
|
$ |
20,244,446 |
|
$ |
(3,433,370) |
|
|
|
Rental income |
|
32,785,533 |
|
|
44,294,357 |
|
|
(11,508,824) |
|
|
|
Income from investment in joint ventures |
|
4,061,317 |
|
|
1,498,912 |
|
|
2,562,405 |
|
|
|
Gain on lease termination |
|
8,827,010 |
|
|
- |
|
|
8,827,010 |
|
|
|
(Loss) gain on sale of assets, net |
|
(6,695,492) |
|
|
1,075,778 |
|
|
(7,771,270) |
|
|
|
Litigation settlement |
|
- |
|
|
418,900 |
|
|
(418,900) |
|
|
|
|
Total revenue and other income |
$ |
55,789,444 |
|
$ |
67,532,393 |
|
$ |
(11,742,949) |
Total revenue and other income for 2013 decreased $11,742,949, or 17.4%, as compared to 2012. The decrease in rental income was primarily due to the termination of seven operating leases and the reclassification of one lease from an operating lease to a finance lease during and after 2012. The decrease in finance income was primarily due to repayments of six notes receivable and the termination or expiration of six finance leases during and after 2012. The decrease in litigation settlement was due to proceeds received from a favorable court settlement against EAR’s auditors during 2012. These decreases were partially offset by our investment in nine new notes receivable during and after 2012. The increase in income from investment in joint ventures was primarily due to our investments in two new joint ventures during 2013, and our share of the gain on sale of assets of a joint venture owned 45% by us and 55% by Fund Eleven. In addition, during 2013, we had a net gain of $2,131,518 on the lease termination and subsequent sales of the Eagle Vessels, comprised of a gain on lease termination of $8,827,010 and a net loss on sale of assets of $6,695,492, as compared to a net gain of $1,075,778 in 2012.
Expenses for 2013 and 2012 are summarized as follows:
|
|
|
|
Years Ended December 31, |
|
|
|||||
|
|
|
|
|
2013 |
|
|
2012 |
|
|
Change |
|
|
Management fees |
$ |
3,247,710 |
|
$ |
4,569,168 |
|
$ |
(1,321,458) |
|
|
|
Administrative expense reimbursements |
|
2,284,264 |
|
|
2,857,713 |
|
|
(573,449) |
|
|
|
General and administrative |
|
3,169,333 |
|
|
2,689,890 |
|
|
479,443 |
|
|
|
Interest |
|
8,677,154 |
|
|
12,252,988 |
|
|
(3,575,834) |
|
|
|
Depreciation |
|
29,824,603 |
|
|
40,560,520 |
|
|
(10,735,917) |
|
|
|
Credit loss, net |
|
- |
|
|
5,066,484 |
|
|
(5,066,484) |
|
|
|
Impairment loss |
|
14,790,755 |
|
|
35,295,894 |
|
|
(20,505,139) |
|
|
|
Loss on disposition of assets of foreign investment |
|
1,447,361 |
|
|
- |
|
|
1,447,361 |
|
|
|
Loss (gain) on derivative financial instruments |
|
188,534 |
|
|
(2,780,814) |
|
|
2,969,348 |
|
|
|
|
Total expenses |
$ |
63,629,714 |
|
$ |
100,511,843 |
|
$ |
(36,882,129) |
37
Total expenses for 2013 decreased $36,882,129, or 36.7%, as compared to 2012. The decrease in impairment loss was primarily due to a larger impairment loss during 2012 in connection with the Eagle Vessels as compared to 2013 in connection with the Aegean Express and the Arabian Express. The decrease in depreciation was primarily due to the sale of four vessels previously subject to operating leases in 2013, and the reclassification of one lease from an operating lease to a finance lease during 2013. During 2012, we recognized a credit loss on a personal guaranty relating to the lease with LC Manufacturing with no comparable charge during 2013. The decrease in interest was primarily due to the repayment of debts in 2013 associated with the sale of six vessels and eight gas compressors. Management fees and administrative expense reimbursements have decreased due to the decrease in size of our investment portfolio since 2012. The decreases were partially offset by the increase in the valuation of our warrants during 2012, without any comparable increase in 2013, and the loss on disposition of foreign investment recognized in 2013 as a result of the reclassification of the accumulated loss on currency translation adjustment out of AOCI due to the sale of the associated foreign investment.
Net Income (Loss) Attributable to Noncontrolling Interests
Net income (loss) attributable to noncontrolling interests increased $6,506,969, from a loss of $4,969,770 in 2012 to income of $1,537,199 in 2013. The increase was primarily due to a larger impairment and operating loss recorded during 2012, as compared to 2013, in connection with the Eagle Vessels.
Other Comprehensive Income
Other comprehensive income for 2013 increased $1,440,736, or 65.6%, from $2,194,816 in 2012 to $3,635,552 in 2013. The increase was primarily due to the release of the accumulation of currency translation adjustments in connection with the repayment by Sealynx during 2013.
Net Loss Attributable to Fund Twelve
As a result of the foregoing factors, net loss attributable to us for 2013 and 2012 was $9,377,469 and $28,009,680, respectively. Net loss attributable to us per weighted average additional Share outstanding for 2013 and 2012 was $26.65 and $79.56, respectively.
Financial Condition
This section discusses the major balance sheet variances at December 31, 2014 compared to December 31, 2013.
Total Assets
Total assets increased $23,202,685, from $244,226,508 at December 31, 2013 to $267,429,193 at December 31, 2014. The increase in total assets was primarily due to (i) the gain recognized as finance income upon the exercise of a purchase option for three of the Leighton Vessels during 2014, (ii) the gain on sale of marine diving equipment in 2014 and (iii) increased financing for new investments made during 2014. These increases were partially offset by the repayment of non-recourse long-term debt and distributions made to our members and noncontrolling interests during 2014.
Current Assets
Current assets decreased $5,233,018, from $39,888,607 at December 31, 2013 to $34,655,589 at December 31, 2014. The decrease was primarily due to a decrease in current portion of net investment in notes receivable of $6,663,318, primarily due to prepayments on and the maturity of seven notes receivable. The decrease was partially offset by investments in three new notes receivables during 2014, partially offset by an increase in cash on hand of $1,425,256.
Total Liabilities
Total liabilities decreased $28,983,946, from $105,533,203 at December 31, 2013 to $76,549,257 at December 31, 2014. The decrease was primarily due to repayments on and the satisfaction of certain non-recourse long-term debt and seller’s credits totaling $97,371,471, of which $80,304,848 was associated with three of the Leighton Vessels. These decreases were partially offset by $65,109,787 of liabilities comprised of three additional borrowings of non-recourse long-term debt and additional seller’s credits primarily related to the SIVA Vessels during 2014.
38
Current Liabilities
Current liabilities decreased $39,794,358, from $52,034,596 at December 31, 2013 to $12,240,238 at December 31, 2014. The decrease was due to a decrease in current portion of non-recourse long-term debt and seller’s credits totaling $42,091,047 primarily due to the repayment of such liabilities associated with three of the Leighton Vessels during 2014. This decrease was partially offset by an increase of approximately $2,100,000 in liabilities due to our Manager for expenses incurred in connection with a proposed sale of our assets during our liquidation period in 2014. Our Manager may continue to incur additional professional fees and costs on our behalf as it continues to pursue the sale of our assets in one or more strategic transactions.
Equity
Equity increased $52,186,631, from $138,693,305 at December 31, 2013 to $190,879,936 at December 31, 2014. The increase was primarily due to net income during 2014 and contributions received from noncontrolling interests, partially offset by distributions to our members and noncontrolling interests during 2014.
Liquidity and Capital Resources
Summary
At December 31, 2014 and 2013, we had cash and cash equivalents of $15,410,563 and $13,985,307, respectively. 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 December 31, 2014, the cash reserve was $1,738,435. During our operating period, our main source of cash was typically from operating activities and our main use of cash was in investing and financing activities. During our liquidation period, which commenced on May 1, 2014, we expect our main sources of cash will be from the collection of income and principal on our notes receivable and finance leases, proceeds from the sale of assets held directly by us or indirectly by our joint ventures and our main use of cash will be for distributions to our members. 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, meet our debt obligations, pay distributions to our members and to the extent that expenses exceed cash flows from operations and proceeds from the sale of our investments.
We anticipate being able to meet our liquidity requirements into the foreseeable future through the expected results of our operating and financing activities, as well as cash received from our investments at maturity. However, our ability to generate cash in the future is subject to general economic, financial, competitive, regulatory and other factors that affect us and our lessees’ and borrowers’ businesses that are beyond our control. See “Item 1A. Risk Factors.”
Cash Flows
The following table sets forth summary cash flow data:
|
|
|
Years Ended December 31, |
||||||||
|
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
|
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
$ |
26,783,311 |
|
$ |
31,200,193 |
|
$ |
38,132,076 |
|
|
|
Investing activities |
|
34,192,057 |
|
|
16,677,549 |
|
|
22,294,745 |
|
|
|
Financing activities |
|
(59,550,112) |
|
|
(64,873,321) |
|
|
(55,773,168) |
|
|
|
Effects of exchange rates on cash and cash equivalents |
|
- |
|
|
110 |
|
|
9,688 |
|
|
Net increase (decrease) in cash and cash equivalents |
$ |
1,425,256 |
|
$ |
(16,995,469) |
|
$ |
4,663,341 |
|
Note: See the Consolidated Statements of Cash Flows included in “Item 8. Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for additional information.
Operating Activities
Cash provided by operating activities decreased $4,416,882, from $31,200,193 in 2013 to $26,783,311 in 2014. The decrease was primarily due to a decrease in the collection of finance income as a result of the termination of leases related to three of the Leighton Vessels and a decrease in the collection of rental income as a result of the sale of the Eagle Vessels. The decreases were partially offset by entering into new leases during 2014.
39
Investing Activities
Cash provided by investing activities increased $17,514,508, from $16,677,549 in 2013 to $34,192,057 in 2014. The increase was primarily due to (i) an increase in net proceeds received from the sale of assets and exercise of purchase options of $67,506,642 primarily related to the sale of three of the Leighton Vessels, which resulted in proceeds of $106,671,426, (ii) an increase in principal received on our notes receivable and (iii) a decrease in investment in joint ventures. The increase was partially offset by the purchase of equipment in 2014 for $65,584,650 with no comparable purchase in 2013 and an increase in investment in notes receivable.
Financing Activities
Cash used in financing activities decreased $5,323,209, from $64,873,321 in 2013 to $59,550,112 in 2014. The decrease was primarily due to contributions from noncontrolling interests during 2014, partially offset by an increase in repayments on our non-recourse long-term debt.
Financings and Borrowings
Non-Recourse Long-Term Debt
We had non-recourse long-term debt obligations at December 31, 2014 and December 31, 2013 of $59,195,786 and $55,370,983, respectively. All of our non-recourse long-term debt obligations consist of notes payable in which the lender has a security interest in the underlying assets. If the borrower were to default on the underlying loan or lease, resulting in our default on the non-recourse long-term debt, the assets could be foreclosed upon and the proceeds would be remitted to the lender in extinguishment of that debt. As of December 31, 2014, the total carrying value of assets subject to non-recourse long-term debt was $107,226,456.
At December 31, 2014, we were in compliance with all covenants related to our non-recourse long-term debt.
Revolving Line of Credit, Recourse
We entered into an agreement with California Bank & Trust (“CB&T”) for a revolving line of credit through March 31, 2015 of up to $10,000,000 (the “Facility”), which was secured by all of our assets not subject to a first priority lien. Amounts available under the Facility were subject to a borrowing base that was determined, subject to certain limitations, by the present value of future receivables under certain loans and lease agreements in which we had a beneficial interest.
The interest rate for general advances under the Facility was CB&T’s prime rate. We could have elected to designate up to five advances on the outstanding principal balance of the Facility to bear interest at LIBOR plus 2.5% per year. In all instances, borrowings under the Facility were subject to an interest rate floor of 4.0% per year. In addition, we were obligated to pay an annualized 0.50% fee on unused commitments under the Facility. On February 28, 2014 and March 31, 2014, we drew down $3,000,000 and $7,000,000, respectively, under the Facility. On November 6, 2014, we repaid the $10,000,000.
On December 22, 2014, the Facility with CB&T was terminated. There were no obligations outstanding as of the date of termination.
Distributions
We, at our Manager’s discretion, paid monthly distributions to each of our additional members beginning with the first month after each such member’s admission through the end of our operating period, which was April 30, 2014. We paid distributions to our additional members of $25,257,603, $25,953,936 and $33,634,797 for the years ended December 31, 2014, 2013 and 2012, respectively. We paid distributions to our Manager of $255,127, $262,158 and $339,749 for the years ended December 31, 2014, 2013 and 2012, respectively. We paid distributions to our noncontrolling interests of $7,079,452, $7,182,576 and $4,364,926 for the years ended December 31, 2014, 2013 and 2012, respectively. During our liquidation period, we have paid and will continue to pay distributions in accordance with the terms of our LLC Agreement. We expect that distributions paid during the liquidation period will vary, depending on the timing of the sale of our assets and/or the maturity of our investments, and our receipt of rental, finance and other income from our investments.
Commitments and Contingencies and Off-Balance Sheet Transactions
Commitments and Contingencies
40
At December 31, 2014, we had non-recourse long-term debt and seller’s credit. Each lender has a security interest in the majority of the assets collateralizing each non-recourse debt instrument and an assignment of the rental payments under the lease associated with the assets. In such cases, the lender is being paid directly by the lessee. In other cases, we receive the rental payments and pay the lender. If the lessee defaults on the lease, the assets could be foreclosed upon and the proceeds would be remitted to the lender in extinguishment of the non-recourse debt. At December 31, 2014, our outstanding non-recourse long-term indebtedness and seller’s credit totaled $71,491,784.
Principal and interest maturities of our debt, seller’s credit and related interest consisted of the following at December 31, 2014:
|
|
|
|
Payments Due by Period |
||||||||||||
|
|
|
|
|
|
|
Less Than 1 |
|
|
1 - 3 |
|
|
4 - 5 |
|
|
|
|
|
|
|
Total |
|
|
Year |
|
|
Years |
|
|
Years |
|
|
Thereafter |
|
|
Non-recourse debt |
$ |
59,195,786 |
|
$ |
7,332,765 |
|
$ |
15,114,567 |
|
$ |
11,133,454 |
|
$ |
25,615,000 |
|
|
Seller's credit |
|
16,500,000 |
|
|
- |
|
|
5,000,000 |
|
|
- |
|
|
11,500,000 |
|
|
Non-recourse debt interest* |
|
14,355,781 |
|
|
3,275,329 |
|
|
5,215,402 |
|
|
3,531,597 |
|
|
2,333,453 |
|
|
|
$ |
90,051,567 |
|
$ |
10,608,094 |
|
$ |
25,329,969 |
|
$ |
14,665,051 |
|
$ |
39,448,453 |
|
|
|
||||||||||||||
|
|
*Based on fixed or variable rates in effect at December 31, 2014. |
||||||||||||||
In connection with certain investments, we are required to maintain restricted cash accounts with certain banks. Restricted cash of approximately $1,351,000 is presented within other non-current assets in our consolidated balance sheets at December 31, 2014.
During 2008, a joint venture owned 55% by us and 45% by Fund Eleven purchased and simultaneously leased semiconductor manufacturing equipment to EAR for approximately $15,730,000. On October 23, 2009, EAR filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. 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, which 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 6, 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 appealed this decision. On September 16, 2013, the lower court’s ruling was affirmed by the Illinois Appellate Court. On October 21, 2013, ICON EAR filed a Petition for Leave to Appeal with the Supreme Court of Illinois appealing the decision of the Illinois Appellate Court, which petition was denied on January 29, 2014. The only remaining asset owned by ICON EAR at December 31, 2013 was real property with a carrying value of approximately $290,000, which was included in other non-current assets within our consolidated balance sheets. On December 24, 2014, ICON EAR sold the real property for approximately $208,000.
We have entered into remarketing agreements with third parties. Residual proceeds received in excess of specific amounts will be shared with these third parties in accordance with the terms of the remarketing agreements. The present value of the obligations related to these agreements was approximately $70,000 at December 31, 2014.
Off-Balance Sheet Transactions
None.
41
Inflation and Interest Rates
The potential effects of inflation on us are difficult to predict. If the general economy experiences significant rates of inflation, however, it could affect us in a number of ways. We do not currently have or expect to have rent escalation clauses tied to inflation in our leases and most of our notes receivable contain fixed interest rates. The anticipated residual values to be realized upon the sale or re-lease of equipment upon lease termination (and thus the overall cash flow from our leases) may increase with inflation as the cost of similar new and used equipment increases.
If interest rates increase or decrease significantly, leases and notes receivable already in place would generally not be affected.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We, like most other companies, are exposed to certain market risks, which include changes in interest rates and the demand for equipment owned by us. We believe that our exposure to other market risks, including foreign currency exchange rate risk, commodity risk and equity price risk, are insignificant at this time to both our financial position and our results of operations.
Our exposure to market risk relates primarily to our fixed-rate notes receivable, fixed-rate non-recourse long-term debt and seller’s credit. As of December 31, 2014, the principal balance on our fixed-rate notes receivable was $59,474,788. As of December 31, 2014, the principal balance on our fixed-rate non-recourse long-term debt was $59,195,786. As of December 31, 2014, the principal balance on our seller’s credit was $12,295,998.
For certain of our financial instruments, fair values are not readily available since there are no active trading markets. Accordingly, we derive or estimate fair values using various valuation techniques, such as computing the present value of estimated future cash flows using discount rates commensurate with the risks involved. However, the determination of cash flows may be subjective and based on estimates. Changes in assumptions or estimates can have a material effect on these estimated fair values. The following fair values were determined using the interest rates that we believe our outstanding fixed-rate notes receivable, fixed-rate non-recourse long-term debt and seller’s credit would warrant as of December 31, 2014 and are indicative of the interest rate environment as of December 31, 2014, and do not take into consideration the effects of subsequent interest rate fluctuations. Accordingly, we estimate that the fair value of the principal balance on our fixed-rate notes receivable, fixed-rate non-recourse long-term debt and seller’s credit was $59,006,275, $59,632,525 and $12,781,678, respectively, as of December 31, 2014.
We currently have four outstanding notes payable, which constitute our non-recourse long-term debt obligations. Three of such notes pay interest at a fixed rate and the fourth pays interest at LIBOR, subject to a 1% floor, plus a fixed rate. To the extent LIBOR fluctuates significantly, our interest expense will fluctuate accordingly. Our Manager has evaluated the impact of the condition of the credit markets on our future results of operations and cash flows and we do not expect any adverse impact should credit conditions in general remain the same or deteriorate further.
We manage our exposure to equipment and residual risk by monitoring the markets in which our equipment is located and maximizing remarketing proceeds through the re-lease or sale of equipment.
42
Item 8. Consolidated Financial Statements and Supplementary Data
43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Members
ICON Leasing Fund Twelve, LLC
We have audited the accompanying consolidated balance sheets of ICON Leasing Fund Twelve, LLC (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of comprehensive income (loss), changes in equity and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ICON Leasing Fund Twelve, LLC at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
New York, New York
March 23, 2015
44
ICON Leasing Fund Twelve, LLC
(A Delaware Limited Liability Company)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|||
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
Assets |
|||||||||
|
Current assets: |
|
|
|
|
|
||||
|
|
Cash and cash equivalents |
$ |
15,410,563 |
|
$ |
13,985,307 |
|||
|
|
Current portion of net investment in notes receivable |
|
6,482,004 |
|
|
13,145,322 |
|||
|
|
Current portion of net investment in finance leases |
|
12,142,423 |
|
|
11,876,248 |
|||
|
|
Other current assets |
|
620,599 |
|
|
881,730 |
|||
|
|
|
|
Total current assets |
|
34,655,589 |
|
|
39,888,607 |
|
|
Non-current assets: |
|
|
|
|
|
||||
|
|
Net investment in notes receivable, less current portion |
|
52,238,006 |
|
|
33,223,894 |
|||
|
|
Net investment in finance leases, less current portion |
|
62,143,299 |
|
|
90,036,227 |
|||
|
|
Leased equipment at cost (less accumulated depreciation of |
|
|
|
|
|
|||
|
|
|
$18,430,584 and $38,848,729, respectively) |
|
72,751,775 |
|
|
55,206,565 |
||
|
|
Vessels (less accumulated depreciation of $1,286,547) |
|
18,266,677 |
|
|
- |
|||
|
|
Investment in joint ventures |
|
25,235,827 |
|
|
24,831,928 |
|||
|
|
Other non-current assets |
|
2,138,020 |
|
|
1,039,287 |
|||
|
|
|
|
Total non-current assets |
|
232,773,604 |
|
|
204,337,901 |
|
|
Total assets |
$ |
267,429,193 |
|
$ |
244,226,508 |
||||
|
Liabilities and Equity |
|||||||||
|
Current liabilities: |
|
|
|
|
|
||||
|
|
Current portion of non-recourse long-term debt |
$ |
7,332,765 |
|
$ |
44,606,812 |
|||
|
|
Derivative financial instruments |
|
- |
|
|
809,705 |
|||
|
|
Deferred revenue |
|
167,813 |
|
|
655,206 |
|||
|
|
Due to Manager and affiliates, net |
|
2,798,414 |
|
|
374,363 |
|||
|
|
Accrued expenses and other current liabilities |
|
1,941,246 |
|
|
771,510 |
|||
|
|
Current portion of seller's credits |
|
- |
|
|
4,817,000 |
|||
|
|
|
|
Total current liabilities |
|
12,240,238 |
|
|
52,034,596 |
|
|
Non-current liabilities: |
|
|
|
|
|
||||
|
|
Non-recourse long-term debt, less current portion |
|
51,863,021 |
|
|
10,764,171 |
|||
|
|
Seller's credits, less current portion |
|
12,295,998 |
|
|
42,734,436 |
|||
|
|
Other non-current liabilities |
|
150,000 |
|
|
- |
|||
|
|
|
|
Total non-current liabilities |
|
64,309,019 |
|
|
53,498,607 |
|
|
|
|
|
Total liabilities |
|
76,549,257 |
|
|
105,533,203 |
|
|
Commitments and contingencies (Note 15) |
|
|
|
|
|
||||
|
Equity: |
|||||||||
|
|
Members’ equity: |
|
|
|
|
|
|||
|
|
|
Additional members |
|
162,960,082 |
|
|
128,936,157 |
||
|
|
|
Manager |
|
(1,465,243) |
|
|
(1,808,919) |
||
|
|
|
Accumulated other comprehensive income (loss) |
|
- |
|
|
(629,587) |
||
|
|
|
|
Total members' equity |
|
161,494,839 |
|
|
126,497,651 |
|
|
|
Noncontrolling interests |
|
29,385,097 |
|
|
12,195,654 |
|||
|
|
|
|
Total equity |
|
190,879,936 |
|
|
138,693,305 |
|
|
Total liabilities and equity |
$ |
267,429,193 |
|
$ |
244,226,508 |
||||
|
See accompanying notes to consolidated financial statements. |
|||||||||
45
|
ICON Leasing Fund Twelve, LLC |
|
(A Delaware Limited Liability Company) |
|
Consolidated Statements of Comprehensive Income (Loss) |
|
|
|
|
Years Ended December 31, |
|||||||
|
|
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
Revenue and other income: |
|
|
|
|
|
|||||
|
|
Finance income |
$ |
68,225,836 |
|
$ |
16,811,076 |
|
$ |
20,244,446 |
|
|
|
Rental income |
|
13,911,707 |
|
|
32,785,533 |
|
|
44,294,357 |
|
|
|
Time charter revenue |
|
4,132,289 |
|
|
- |
|
|
- |
|
|
|
Income from investment in joint ventures |
|
3,271,192 |
|
|
4,061,317 |
|
|
1,498,912 |
|
|
|
(Loss) gain on lease termination |
|
(18,800) |
|
|
8,827,010 |
|
|
- |
|
|
|
Gain (loss) on sale of assets, net |
|
1,737,983 |
|
|
(6,695,492) |
|
|
1,075,778 |
|
|
|
Litigation settlement |
|
- |
|
|
- |
|
|
418,900 |
|
|
|
|
Total revenue and other income |
|
91,260,207 |
|
|
55,789,444 |
|
|
67,532,393 |
|
Expenses: |
|
|
|
|
|
|
|
|
||
|
|
Management fees |
|
1,918,023 |
|
|
3,247,710 |
|
|
4,569,168 |
|
|
|
Administrative expense reimbursements |
|
4,785,387 |
|
|
2,284,264 |
|
|
2,857,713 |
|
|
|
General and administrative |
|
3,066,828 |
|
|
3,169,333 |
|
|
2,689,890 |
|
|
|
Interest |
|
5,289,185 |
|
|
8,677,154 |
|
|
12,252,988 |
|
|
|
Depreciation |
|
7,127,975 |
|
|
29,824,603 |
|
|
40,560,520 |
|
|
|
Credit loss, net |
|
634,803 |
|
|
- |
|
|
5,066,484 |
|
|
|
Impairment loss |
|
70,412 |
|
|
14,790,755 |
|
|
35,295,894 |
|
|
|
Vessel operating |
|
4,334,167 |
|
|
- |
|
|
- |
|
|
|
Loss on disposition of assets of foreign investment |
|
- |
|
|
1,447,361 |
|
|
- |
|
|
|
Loss (gain) on derivative financial instruments |
|
372,316 |
|
|
188,534 |
|
|
(2,780,814) |
|
|
|
|
Total expenses |
|
27,599,096 |
|
|
63,629,714 |
|
|
100,511,843 |
|
Net income (loss) |
|
63,661,111 |
|
|
(7,840,270) |
|
|
(32,979,450) |
||
|
|
Less: net income (loss) attributable to noncontrolling interests |
|
3,780,780 |
|
|
1,537,199 |
|
|
(4,969,770) |
|
|
Net income (loss) attributable to Fund Twelve |
|
59,880,331 |
|
|
(9,377,469) |
|
|
(28,009,680) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
||
|
|
Change in fair value of derivative financial instruments |
|
282,919 |
|
|
2,180,188 |
|
|
2,166,933 |
|
|
|
Reclassification adjustment for losses on derivative financial |
|
|
|
|
|
|
|
|
|
|
|
|
instruments due to early termination |
|
346,668 |
|
|
- |
|
|
- |
|
|
Currency translation adjustment during the year |
|
- |
|
|
8,003 |
|
|
27,883 |
|
|
|
Currency translation adjustment reclassified to net income |
|
- |
|
|
1,447,361 |
|
|
- |
|
|
|
|
Total other comprehensive income |
|
629,587 |
|
|
3,635,552 |
|
|
2,194,816 |
|
Comprehensive income (loss) |
|
64,290,698 |
|
|
(4,204,718) |
|
|
(30,784,634) |
||
|
|
Less: comprehensive income (loss) attributable to noncontrolling interests |
|
3,780,780 |
|
|
1,589,252 |
|
|
(4,877,935) |
|
|
Comprehensive income (loss) attributable to Fund Twelve |
$ |
60,509,918 |
|
$ |
(5,793,970) |
|
$ |
(25,906,699) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Fund Twelve allocable to: |
|
|
|
|
|
|
|
|
||
|
|
Additional members |
$ |
59,281,528 |
|
$ |
(9,283,695) |
|
$ |
(27,729,583) |
|
|
|
Manager |
|
598,803 |
|
|
(93,774) |
|
|
(280,097) |
|
|
|
|
|
$ |
59,880,331 |
|
$ |
(9,377,469) |
|
$ |
(28,009,680) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of additional shares of limited liability |
|
|
|
|
|
|
|
|
||
|
|
company interests outstanding |
|
348,335 |
|
|
348,361 |
|
|
348,544 |
|
|
Net income (loss) attributable to Fund Twelve per weighted average additional |
|
|
|
|
|
|
|
|
||
|
|
share of limited liability company interests outstanding |
$ |
170.19 |
|
$ |
(26.65) |
|
$ |
(79.56) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements. |
||||||||||
46
|
ICON Leasing Fund Twelve, LLC |
|
(A Delaware Limited Liability Company) |
|
Consolidated Statements of Changes in Equity |
|
|
|
|
Members' Equity |
|
|
||||||||||||||||
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of |
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited Liability |
|
|
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
Company |
|
|
Additional |
|
|
|
|
|
Comprehensive |
|
|
Members' |
|
|
Noncontrolling |
|
|
Total |
|
|
|
|
Interests |
|
|
Members |
|
|
Manager |
|
|
Loss |
|
|
Equity |
|
|
Interests |
|
|
Equity |
|
Balance, December 31, 2011 |
348,650 |
|
$ |
225,720,481 |
|
$ |
(833,141) |
|
$ |
(6,316,067) |
|
$ |
218,571,273 |
|
$ |
27,031,839 |
|
$ |
245,603,112 |
||
|
|
Net loss |
- |
|
|
(27,729,583) |
|
|
(280,097) |
|
|
- |
|
|
(28,009,680) |
|
|
(4,969,770) |
|
|
(32,979,450) |
|
|
|
Change in fair value of derivative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financial instruments |
- |
|
|
- |
|
|
- |
|
|
2,075,098 |
|
|
2,075,098 |
|
|
91,835 |
|
|
2,166,933 |
|
|
Currency translation adjustments |
- |
|
|
- |
|
|
- |
|
|
27,883 |
|
|
27,883 |
|
|
- |
|
|
27,883 |
|
|
|
Distributions |
- |
|
|
(33,634,797) |
|
|
(339,749) |
|
|
- |
|
|
(33,974,546) |
|
|
(4,364,926) |
|
|
(38,339,472) |
|
|
|
Shares of limited liability company interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
repurchased |
(221) |
|
|
(150,497) |
|
|
- |
|
|
- |
|
|
(150,497) |
|
|
- |
|
|
(150,497) |
|
Balance, December 31, 2012 |
348,429 |
|
|
164,205,604 |
|
|
(1,452,987) |
|
|
(4,213,086) |
|
|
158,539,531 |
|
|
17,788,978 |
|
|
176,328,509 |
||
|
|
Net (loss) income |
- |
|
|
(9,283,695) |
|
|
(93,774) |
|
|
- |
|
|
(9,377,469) |
|
|
1,537,199 |
|
|
(7,840,270) |
|
|
|
Change in fair value of derivative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financial instruments |
- |
|
|
- |
|
|
- |
|
|
2,128,135 |
|
|
2,128,135 |
|
|
52,053 |
|
|
2,180,188 |
|
|
Disposition of asset of foreign investment |
- |
|
|
- |
|
|
- |
|
|
1,447,361 |
|
|
1,447,361 |
|
|
- |
|
|
1,447,361 |
|
|
|
Currency translation adjustments |
- |
|
|
- |
|
|
- |
|
|
8,003 |
|
|
8,003 |
|
|
- |
|
|
8,003 |
|
|
|
Distributions |
- |
|
|
(25,953,936) |
|
|
(262,158) |
|
|
- |
|
|
(26,216,094) |
|
|
(7,182,576) |
|
|
(33,398,670) |
|
|
|
Shares of limited liability company interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
repurchased |
(94) |
|
|
(31,816) |
|
|
- |
|
|
- |
|
|
(31,816) |
|
|
- |
|
|
(31,816) |
|
Balance, December 31, 2013 |
348,335 |
|
|
128,936,157 |
|
|
(1,808,919) |
|
|
(629,587) |
|
|
126,497,651 |
|
|
12,195,654 |
|
|
138,693,305 |
||
|
|
Net income |
- |
|
|
59,281,528 |
|
|
598,803 |
|
|
- |
|
|
59,880,331 |
|
|
3,780,780 |
|
|
63,661,111 |
|
|
|
Change in fair value of derivative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financial instruments |
- |
|
|
- |
|
|
- |
|
|
282,919 |
|
|
282,919 |
|
|
- |
|
|
282,919 |
|
|
Reclassification adjustment for losses on derivative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financial instruments due to early termination |
- |
|
|
- |
|
|
- |
|
|
346,668 |
|
|
346,668 |
|
|
- |
|
|
346,668 |
|
|
Distributions |
- |
|
|
(25,257,603) |
|
|
(255,127) |
|
|
- |
|
|
(25,512,730) |
|
|
(7,079,452) |
|
|
(32,592,182) |
|
|
|
Investment by noncontrolling interests |
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
20,488,115 |
|
|
20,488,115 |
|
|
Balance, December 31, 2014 |
348,335 |
|
$ |
162,960,082 |
|
$ |
(1,465,243) |
|
$ |
- |
|
$ |
161,494,839 |
|
$ |
29,385,097 |
|
$ |
190,879,936 |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements. |
|||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
ICON Leasing Fund Twelve, LLC |
|
(A Delaware Limited Liability Company) |
|
Consolidated Statements of Cash Flows |
|
|
Years Ended December 31, |
||||||||||
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
||||
|
|
Net income (loss) |
$ |
63,661,111 |
|
$ |
(7,840,270) |
|
$ |
(32,979,450) |
||
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
||
|
|
|
Finance income |
|
(62,511,037) |
|
|
(11,934,182) |
|
|
(13,220,549) |
|
|
|
|
Rental income paid directly to lenders by lessees |
|
(1,088,550) |
|
|
(21,243,166) |
|
|
(30,192,648) |
|
|
|
|
Income from investment in joint ventures |
|
(3,271,192) |
|
|
(4,061,317) |
|
|
(1,498,912) |
|
|
|
|
Depreciation |
|
7,127,975 |
|
|
29,824,603 |
|
|
40,560,520 |
|
|
|
|
Interest expense on non-recourse financing paid directly to lenders by lessees |
|
63,644 |
|
|
1,577,271 |
|
|
3,168,897 |
|
|
|
|
Interest expense from amortization of debt financing costs |
|
617,069 |
|
|
691,194 |
|
|
895,309 |
|
|
|
|
Net accretion of seller's credit and other |
|
833,335 |
|
|
2,301,984 |
|
|
1,874,319 |
|
|
|
|
Impairment loss |
|
70,412 |
|
|
14,790,755 |
|
|
35,295,894 |
|
|
|
|
Credit loss, net |
|
634,803 |
|
|
- |
|
|
5,066,484 |
|
|
|
|
Net loss (gain) on lease termination |
|
18,800 |
|
|
(8,827,010) |
|
|
- |
|
|
|
|
Net (gain) loss on sale of assets |
|
(1,737,983) |
|
|
6,695,492 |
|
|
(1,075,778) |
|
|
|
|
Loss (gain) on derivative financial instruments |
|
562,577 |
|
|
188,534 |
|
|
(2,780,814) |
|
|
|
|
Loss on disposition of assets of foreign investment |
|
- |
|
|
1,447,361 |
|
|
- |
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Collection of finance leases |
|
20,832,230 |
|
|
27,353,307 |
|
|
31,057,337 |
|
|
|
|
Other assets |
|
(1,207,414) |
|
|
2,307,702 |
|
|
1,208,639 |
|
|
|
|
Accrued expenses and other current liabilities |
|
683,478 |
|
|
(1,612,354) |
|
|
(265,405) |
|
|
|
|
Deferred revenue |
|
(487,393) |
|
|
(1,767,545) |
|
|
(25,936) |
|
|
|
|
Interest rate swaps |
|
(693,647) |
|
|
- |
|
|
- |
|
|
|
|
Due to Manager and affiliates, net |
|
2,424,051 |
|
|
95,733 |
|
|
169,274 |
|
|
|
|
Distributions from joint ventures |
|
251,042 |
|
|
1,212,101 |
|
|
874,895 |
|
Net cash provided by operating activities |
|
26,783,311 |
|
|
31,200,193 |
|
|
38,132,076 |
|||
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|||
|
|
Purchase of equipment |
|
(65,584,650) |
|
|
- |
|
|
- |
||
|
|
Proceeds from exercise of purchase options |
|
110,964,516 |
|
|
21,001,670 |
|
|
3,614,240 |
||
|
|
Proceeds from sale of leased assets |
|
207,937 |
|
|
22,664,141 |
|
|
9,763,426 |
||
|
|
Restricted cash |
|
603,546 |
|
|
- |
|
|
- |
||
|
|
Investment in joint ventures |
|
(31,275) |
|
|
(11,593,286) |
|
|
(137,500) |
||
|
|
Distributions received from joint ventures in excess of profits |
|
2,647,526 |
|
|
3,897,420 |
|
|
756,792 |
||
|
|
Investment in notes receivable, net |
|
(50,207,586) |
|
|
(25,703,358) |
|
|
(25,556,362) |
||
|
|
Principal received on notes receivable |
|
35,592,043 |
|
|
6,410,962 |
|
|
33,854,149 |
||
|
Net cash provided by investing activities |
|
34,192,057 |
|
|
16,677,549 |
|
|
22,294,745 |
|||
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|||
|
|
Proceeds from non-recourse long-term debt |
|
7,500,000 |
|
|
7,150,000 |
|
|
- |
||
|
|
Repayment of non-recourse long-term debt |
|
(53,450,452) |
|
|
(37,111,835) |
|
|
(16,742,199) |
||
|
|
Proceeds from revolving line of credit, recourse |
|
10,000,000 |
|
|
10,500,000 |
|
|
1,200,000 |
||
|
|
Repayment of revolving line of credit, recourse |
|
(10,000,000) |
|
|
(10,500,000) |
|
|
(1,200,000) |
||
|
|
Repurchase of shares of limited liability company interests |
|
- |
|
|
(31,816) |
|
|
(150,497) |
||
|
|
Payment of debt financing costs |
|
(400,000) |
|
|
- |
|
|
- |
||
|
|
Repayment of seller's credit |
|
(210,000) |
|
|
(1,481,000) |
|
|
(541,000) |
||
|
|
Investment by noncontrolling interests |
|
19,602,522 |
|
|
- |
|
|
- |
||
|
|
Distributions to noncontrolling interests |
|
(7,079,452) |
|
|
(7,182,576) |
|
|
(4,364,926) |
||
|
|
Distributions to members |
|
(25,512,730) |
|
|
(26,216,094) |
|
|
(33,974,546) |
||
|
Net cash used in financing activities |
|
(59,550,112) |
|
|
(64,873,321) |
|
|
(55,773,168) |
|||
|
Effects of exchange rates on cash and cash equivalents |
|
- |
|
|
110 |
|
|
9,688 |
|||
|
Net increase (decrease) in cash and cash equivalents |
|
1,425,256 |
|
|
(16,995,469) |
|
|
4,663,341 |
|||
|
Cash and cash equivalents, beginning of year |
|
13,985,307 |
|
|
30,980,776 |
|
|
26,317,435 |
|||
|
Cash and cash equivalents, end of year |
$ |
15,410,563 |
|
$ |
13,985,307 |
|
$ |
30,980,776 |
|||
|
|
|||||||||||
|
See accompanying notes to consolidated financial statements. |
|||||||||||
48
|
ICON Leasing Fund Twelve, LLC |
|
(A Delaware Limited Liability Company) |
|
Consolidated Statements of Cash Flows |
|
|
Years Ended December 31, |
|||||||||
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
||
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
||
|
|
Cash paid for interest |
$ |
5,373,488 |
|
$ |
5,350,859 |
|
$ |
5,553,124 |
|
|
Supplemental disclosure of non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
||
|
|
Principal and interest on non-recourse long-term debt paid directly to lenders by lessees |
$ |
1,088,550 |
|
$ |
32,258,668 |
|
$ |
32,619,459 |
|
|
|
Reclassification of net assets from leased equipment at cost to net |
|
|
|
|
|
|
|
|
|
|
|
|
investment in finance lease |
$ |
- |
|
$ |
9,376,510 |
|
$ |
- |
|
|
Principal on non-recourse long-term debt paid directly to lenders by buyers of equipment |
$ |
- |
|
$ |
4,481,600 |
|
$ |
- |
|
|
|
Vessels purchased with non-recourse long-term debt paid directly to seller |
$ |
50,800,000 |
|
$ |
- |
|
$ |
- |
|
|
|
Vessels purchased with subordinated non-recourse financing provided by seller |
$ |
6,986,691 |
|
$ |
- |
|
$ |
- |
|
|
|
Satisfaction of seller's credit netted at sale |
$ |
42,863,178 |
|
$ |
10,204,522 |
|
$ |
- |
|
|
|
Reclassification of leased equipment to Vessels |
$ |
19,190,776 |
|
$ |
- |
|
$ |
- |
|
|
|
Debt financing costs netted at funding |
$ |
520,800 |
|
$ |
- |
|
$ |
- |
|
|
|
Investment by noncontrolling interests |
$ |
885,593 |
|
$ |
- |
|
$ |
- |
|
|
|
Equipment purchased with remarketing liability |
$ |
68,147 |
|
$ |
- |
|
$ |
- |
|
|
|
Interest reserve net against principal repayment of note receivable |
$ |
206,250 |
|
$ |
- |
|
$ |
- |
|
|
|
Termination fee paid directly to lender by lessee to settle debt obligation |
$ |
- |
|
$ |
2,800,000 |
|
$ |
- |
|
|
|
||||||||||
|
See accompanying notes to consolidated financial statements. |
||||||||||
49
(1) Organization
ICON Leasing Fund Twelve, LLC (the “LLC”) was formed on October 3, 2006 as a Delaware limited liability company. When used in these notes to consolidated financial statements, the terms “we,” “us,” “our” or similar terms refer to the LLC and its consolidated subsidiaries.
We are engaged in one business segment, the business of purchasing equipment and leasing it to third parties, providing equipment and other financing, acquiring equipment subject to lease and, to a lesser degree, acquiring ownership rights to items of leased equipment at lease expiration.
Our principal investment objective is to obtain the maximum economic return from our investments for the benefit of our members. To achieve this objective, we: (i) acquired a diversified portfolio by making investments in leases, notes receivable and other financing transactions; (ii) paid monthly distributions, at our Manager’s (as defined below) discretion, to our members commencing the month after each member’s admission to the LLC; (iii) reinvested substantially all undistributed cash from operations and cash from sales of equipment and other financing transactions during the operating period; and (iv) will dispose of our remaining investments and distribute the excess cash from such dispositions to our members during the liquidation period.
Our Manager is ICON Capital, LLC, a Delaware limited liability company formerly known as ICON Capital Corp. (the “Manager”). Our Manager manages and controls our business affairs, including, but not limited to, the equipment leases and other financing transactions we enter into. Additionally, our Manager has a 1% interest in our profits, losses, distributions and liquidation proceeds.
Our offering period began on May 7, 2007 and ended on April 30, 2009. We offered shares of limited liability company interests (the “Shares”) with the intention of raising up to $410,800,000 of capital, consisting of 400,000 Shares at a purchase price of $1,000 per Share and an additional 12,000 Shares, which were reserved for issuance pursuant to our distribution reinvestment plan. The distribution reinvestment plan allowed investors to purchase additional Shares with distributions received from us and/or certain other funds managed by our Manager at a discounted share price of $900. We had our initial closing on May 25, 2007, the date on which we raised $1,200,000 and admitted investors that purchased Shares. Through April 30, 2009, we sold approximately 348,826 Shares, including approximately 11,393 Shares issued in connection with our distribution reinvestment plan, representing $347,686,947 of capital contributions. Through December 31, 2014, 491 Shares have been repurchased pursuant to our repurchase plan.
Our operating period began on May 1, 2009 and ended on April 30, 2014. Effective May 1, 2014, we commenced our liquidation period. During our liquidation period, we have paid and will continue to pay distributions in accordance with the terms of our limited liability company agreement (the “LLC Agreement”). We expect that distributions paid during the liquidation period will vary, depending on the timing of the sale of our assets and/or the maturity of our investments, and our receipt of rental, finance and other income from our investments.
Members’ capital accounts are increased for their initial capital contribution plus their proportionate share of earnings and decreased by their proportionate share of losses and distributions. Profits, losses, distributions and liquidation proceeds are allocated 99% to the additional members and 1% to our Manager until each additional member has (a) received distributions and liquidation proceeds sufficient to reduce its adjusted capital account to zero and (b) received, in addition, other distributions and allocations that would provide an 8% per year cumulative return, compounded daily, on its outstanding adjusted capital account. After such time, distributions will be allocated 90% to the additional members and 10% to our Manager.
(2) Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
Our accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). In the opinion of our Manager, all adjustments, which are of a normal recurring nature, considered necessary for a fair presentation have been included.
50
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
The consolidated financial statements include our accounts and the accounts of our majority-owned subsidiaries and other controlled entities. All intercompany accounts and transactions have been eliminated in consolidation. In joint ventures where we have a controlling financial interest, the financial condition and results of operations of the joint venture are consolidated. Noncontrolling interest represents the minority owner’s proportionate share of its equity in the joint venture. The noncontrolling interest is adjusted for the minority owner’s share of the earnings, losses, investments and distributions of the joint venture.
We account for our noncontrolling interests in joint ventures where we have influence over financial and operational matters, generally 50% or less ownership interest, under the equity method of accounting. In such cases, our original investments are recorded at cost and adjusted for our share of earnings, losses, and distributions. We account for investments in joint ventures where we have virtually no influence over financial and operational matters using the cost method of accounting. In such cases, our original investments are recorded at cost and any distributions received are recorded as revenue. All of our investments in joint ventures are subject to our impairment review policy.
We report noncontrolling interests as a separate component of consolidated equity and net income (loss) attributable to noncontrolling interest is included in consolidated net income (loss). The attribution of net income (loss) and comprehensive income (loss) between controlling and noncontrolling interests is disclosed on the accompanying consolidated statements of comprehensive income (loss).
Net income (loss) attributable to us per weighted average additional Share outstanding is based upon the weighted average number of additional Shares outstanding during the year.
Certain reclassifications have been made to the accompanying consolidated financial statements in prior years to conform to the current presentation.
Cash and cash equivalents include cash in banks and highly liquid investments with original maturity dates of three months or less.
Our cash and cash equivalents are held principally at two financial institutions and at times may exceed insured limits. We have placed these funds in high quality institutions in order to minimize risk relating to exceeding insured limits.
Cash that is restricted from use in operations is generally classified as restricted cash. Classification of changes in restricted cash within the consolidated statements of cash flows depends on the predominant source of the related cash flows. For the year ended December 31, 2014, the predominant cash inflows into restricted cash were related to cash contributions restricted for the purpose of maintaining certain minimum cash reserves pursuant to a provision in the non-recourse long-term debt agreement. For the year ended December 31, 2013, the predominant cash outflow from restricted cash was related to the release of previously restricted cash derived from interest income receipts to pay down certain non-recourse long-term debt. Restricted cash is presented within other non-current assets in our consolidated balance sheets. As a result, changes in restricted cash were classified within net cash provided by investing activities and operating activities for the year ended December 31, 2014 and 2013, respectively.
Expenses associated with the incurrence of debt are capitalized and amortized to interest expense over the term of the debt instrument using the effective interest rate method. These costs are included in other current and other non-current assets.
Investments in leased equipment are stated at cost less accumulated depreciation. Leased equipment is depreciated on a straight-line basis over the lease term, which typically ranges from 2 to 9 years, to the asset’s residual value.
Our Manager has an investment committee that approves each new equipment lease and other financing transaction. As part of its process, the investment committee determines the estimated residual value, if any, to be used once the investment has
51
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
been approved. The factors considered in determining the estimated residual value include, but are not limited to, the creditworthiness of the potential lessee, the type of equipment considered, how the equipment is integrated into the potential lessee’s business, the length of the lease and the industry in which the potential lessee operates. Residual values are reviewed for impairment in accordance with our impairment review policy.
The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the marketplace are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. The residual value is calculated using information from various external sources, such as trade publications, auction data, equipment dealers, wholesalers and industry experts, as well as inspection of the physical asset and other economic indicators.
We record depreciation expense on equipment when the lease is classified as an operating lease and vessel. In order to calculate depreciation, we first determine the depreciable base, which is the equipment cost less the estimated residual value at lease termination. Depreciation expense is recorded on a straight-line basis over the lease term.
The significant assets in our portfolio are periodically reviewed, no less frequently than annually or when indicators of impairment exist, to determine whether events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss will be recognized only if the carrying value of a long-lived asset is not recoverable and exceeds its fair market value. If there is an indication of impairment, we will estimate the future cash flows (undiscounted and without interest charges) expected from the use of the asset and its eventual disposition. Future cash flows are the future cash inflows expected to be generated by an asset less the future outflows expected to be necessary to obtain those inflows. If an impairment is determined to exist, the impairment loss will be measured as the amount by which the carrying value of a long-lived asset exceeds its fair value and recorded in our consolidated statements of comprehensive income (loss) in the period the determination is made.
The events or changes in circumstances that generally indicate that an asset may be impaired are (i) the estimated fair value of the underlying asset is less than its carrying value or (ii) the lessee is experiencing financial difficulties and it does not appear likely that the estimated proceeds from the disposition of the asset will be sufficient to satisfy the residual position in the asset and, if applicable, the remaining obligation to the non-recourse lender. Generally in the latter situation, the residual position relates to equipment subject to third-party non-recourse debt where the lessee remits its rental payments directly to the lender and we do not recover our residual position until the non-recourse debt is repaid in full. The preparation of the undiscounted cash flows requires the use of assumptions and estimates, including the level of future rents, the residual value expected to be realized upon disposition of the asset, estimated downtime between re-leasing events and the amount of re-leasing costs. Our Manager’s review for impairment includes a consideration of the existence of impairment indicators including third-party appraisals, published values for similar assets, recent transactions for similar assets, adverse changes in market conditions for specific asset types and the occurrence of significant adverse changes in general industry and market conditions that could affect the fair value of the asset.
Lease Classification and Revenue Recognition
Each equipment lease we enter into is classified as either a finance lease or an operating lease, based upon the terms of each lease. The estimated residual value is a critical component and can directly influence the determination of whether a lease is classified as an operating or a finance lease.
For finance leases, we capitalize, at lease inception, the total minimum lease payments receivable from the lessee, the estimated unguaranteed residual value of the equipment at lease termination and the initial direct costs related to the lease, less unearned income. Unearned income represents the difference between the sum of the minimum lease payments receivable, plus the estimated unguaranteed residual value, minus the cost of the leased equipment. Unearned income is recognized as finance income over the term of the lease using the effective interest rate method.
52
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
For operating leases, rental income is recognized on a straight-line basis over the lease term. Billed operating lease receivables are included in accounts receivable until collected or written off. We record a reserve if we deem any receivables not collectible. The difference between the timing of the cash received and the income recognized on a straight-line basis is recognized as either deferred revenue or other assets, as appropriate. Initial direct costs are capitalized as a component of the cost of the equipment and depreciated over the lease term.
For time charters, the vessels are stated at cost less accumulated depreciation. Expenditures subsequent to the acquisition of such vessels for conversions and major improvements are capitalized when such expenditures appreciably extend the life, increase the earning capacity or improve the efficiency or safety of such vessels. We recognize revenue ratably over the period of such charters. Vessel operating expenses, repairs and maintenance are charged to expense as incurred and are included in vessel operating expenses in our consolidated statements of comprehensive income (loss).
Notes Receivable and Revenue Recognition
Notes receivable are reported in our consolidated balance sheets at the outstanding principal balance, plus costs incurred to originate the loans, net of any unamortized premiums or discounts on purchased loans. We use the effective interest rate method to recognize finance income, which produces a constant periodic rate of return on the investment. Unearned income, discounts and premiums are amortized to finance income in our consolidated statements of comprehensive income (loss) using the effective interest rate method. Interest receivable related to the unpaid principal is recorded separately from the outstanding balance in our consolidated balance sheets. Upon the prepayment of a note receivable, any prepayment penalties and unamortized loan origination, closing and commitment fees are recorded as part of finance income in our consolidated statements of comprehensive income (loss). Our notes receivable may contain a paid-in-kind (“PIK”) interest provision. Any PIK interest, if deemed collectible, will be added to the principal balance of the note receivable and is recorded as finance income.
Credit Quality of Notes Receivable and Finance Leases and Credit Loss Reserve
Our Manager monitors the ongoing credit quality of our financing receivables by (i) reviewing and analyzing a borrower’s financial performance on a regular basis, including review of financial statements received on a monthly, quarterly or annual basis as prescribed in the loan or lease agreement, (ii) tracking the relevant credit metrics of each financing receivable and a borrower’s compliance with financial and non-financial covenants, (iii) monitoring a borrower’s payment history and public credit rating, if available, and (iv) assessing our exposure based on the current investment mix. As part of the monitoring process, our Manager may physically inspect the collateral or a borrower’s facility and meet with a borrower’s management to better understand such borrower’s financial performance and its future plans on an as-needed basis.
As our financing receivables, generally notes receivable and finance leases, are limited in number, our Manager is able to estimate the credit loss reserve based on a detailed analysis of each financing receivable as opposed to using portfolio-based metrics. Our Manager does not use a system of assigning internal risk ratings to each of our financing receivables. Rather, each financing receivable is analyzed quarterly and categorized as either performing or non-performing based on certain factors including, but not limited to, financial results, satisfying scheduled payments and compliance with financial covenants. A financing receivable is usually categorized as non-performing only when a borrower experiences financial difficulties and has failed to make scheduled payments. Our Manager then analyzes whether the financing receivable should be placed on a non-accrual status, a credit loss reserve should be established or the financing receivable should be restructured. As part of the assessment, updated collateral value is usually considered and such collateral value can be based on a third party industry expert appraisal or, depending on the type of collateral and accessibility to relevant published guides or market sales data, internally derived fair value. Material events would be specifically disclosed in the discussion of each financing receivable held.
Financing receivables are generally placed in a non-accrual status when payments are more than 90 days past due. Additionally, our Manager periodically reviews the creditworthiness of companies with payments outstanding less than 90 days and based upon our Manager’s judgment, these accounts may be placed in a non-accrual status.
In accordance with the cost recovery method, payments received on non-accrual financing receivables are applied to principal if there is doubt regarding the ultimate collectability of principal. If collection of the principal of non-accrual
53
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
financing receivables is not in doubt, interest income is recognized on a cash basis. Financing receivables in non-accrual status may not be restored to accrual status until all delinquent payments have been received, and we believe recovery of the remaining unpaid receivable is probable.
When our Manager deems it is probable that we will not be able to collect all contractual principal and interest on a non-performing financing receivable, we perform an analysis to determine if a credit loss reserve is necessary. This analysis considers the estimated cash flows from the financing receivable, and/or the collateral value of the asset underlying the financing receivable when financing receivable repayment is collateral dependent. If it is determined that the impaired value of the non-performing financing receivable is less than the net carrying value, we will recognize a credit loss reserve or adjust the existing credit loss reserve with a corresponding charge to earnings. We then charge off a financing receivable in the period that it is deemed uncollectible by reducing the credit loss reserve and the balance of the financing receivable.
We capitalize initial direct costs, including acquisition fees, associated with the origination and funding of leased assets and other financing transactions. We paid acquisition fees through the end of our operating period to our Manager of 3% of the purchase price of the investment made by or on our behalf, including, but not limited to, the cash paid, indebtedness incurred or assumed, and the excess of the collateral value of the long-lived asset over the amount of the investment, if any. The costs of each transaction are amortized over the transaction term using the straight-line method for operating leases and the effective interest rate method for finance leases and notes receivable in our consolidated statements of comprehensive income (loss). Costs related to leases or other financing transactions that are not consummated are expensed.
Assets and liabilities having non-U.S. dollar functional currencies are translated at month-end exchange rates. Contributed capital accounts are translated at the historical rate of exchange when the capital was contributed or distributed. Revenues, expenses and cash flow items are translated at the weighted average exchange rate for the period. Resulting translation adjustments are recorded as a separate component of accumulated other comprehensive income (loss) (“AOCI”) in our consolidated balance sheets.
Warrants held by us are not registered for public sale and are revalued on a quarterly basis. The revaluation of warrants is calculated using the Black-Scholes-Merton option pricing model. The assumptions utilized in the Black-Scholes-Merton option pricing model include share price, strike price, expiration date, risk-free rate and the volatility percentage. The change in the fair value of warrants is recognized as a component of loss (gain) on derivative financial instruments in the consolidated statements of comprehensive income (loss).
Derivative Financial Instruments
We may enter into derivative transactions for purposes of hedging specific financial exposures, including movements in foreign currency exchange rates and changes in interest rates on our non-recourse long-term debt. We enter into these instruments only for hedging underlying exposures. We do not hold or issue derivative financial instruments for purposes other than hedging, except for warrants, which are not hedges. Certain derivatives may not meet the established criteria to be designated as qualifying accounting hedges, even though we believe that these are effective economic hedges.
We recognize all derivative financial instruments as either assets or liabilities on the consolidated balance sheets and measure 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 we must document and assess at inception and on an ongoing basis, we recognize the changes in fair value of such instruments in AOCI, a component of equity on the consolidated balance sheets. Changes in the fair value of the ineffective portion of all derivatives are recognized immediately in earnings.
54
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
Income Taxes
We are taxed as a partnership for federal and state income tax purposes. Therefore, no provision for federal and state income taxes has been recorded since the liability for such taxes is the responsibility of each of the individual members rather than our business as a whole. We are potentially subject to New York City unincorporated business tax (“UBT”), which is imposed on the taxable income of any active trade or business carried on in New York City. The UBT is imposed for each taxable year at a rate of approximately 4% of taxable income that is allocable to New York City. Our federal, state and local income tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the applicable taxing authorities. All penalties and interest associated with income taxes are included in general and administrative expense on the consolidated statements of comprehensive income (loss). Conclusions regarding tax positions are subject to review and may be adjusted at a later date based on factors including, but not limited to, on-going analyses of tax laws, regulations and interpretations thereof. We did not have any material liabilities recorded related to uncertain tax positions nor did we have any unrecognized tax benefits as of the periods presented herein.
The preparation of financial statements in conformity with U.S. GAAP requires our Manager to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates primarily include the determination of credit loss reserves, impairment losses, estimated useful lives and residual values. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In March 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU 2013-05”), which clarifies guidance to the release of the cumulative translation adjustment when an entity sells all or part of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity. The adoption of ASU 2013-05 became effective for us on January 1, 2014 and did not have a material effect on our consolidated financial statements.
In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), requiring revenue to be recognized in an amount that reflects the consideration expected to be received in exchange for goods and services. The adoption of ASU 2014-09 becomes effective for us on January 1, 2017, including interim periods within that reporting period. Early adoption is not permitted. We are currently in the process of evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.
In August 2014, FASB issued ASU No. 2014-15, Preparation of Financial Statements – Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), which provides guidance about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The adoption of ASU 2014-15 becomes effective for us on our fiscal year ending December 31, 2016, and all subsequent annual and interim periods. Early adoption is permitted. The adoption of ASU 2014-15 is not expected to have a material effect on our consolidated financial statements.
In January 2015, FASB issued ASU No. 2015-01, Income Statement – Extraordinary and Unusual Items (“ASU 2015-01”), which simplifies income statement presentation by eliminating the concept of extraordinary items. The adoption of ASU 2015-01 becomes effective for us on January 1, 2016, including interim periods within that reporting period. Early adoption is permitted. The adoption of ASU 2015-01 is not expected to have a material effect on our consolidated financial statements.
55
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
In February 2015, FASB issued ASU No. 2015-02, Consolidation – Amendments to the Consolidation Analysis (“ASU 2015-02”), which modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership, and affects the consolidation analysis by reducing the frequency of application of related party guidance and excluding certain fees in the primary beneficiary determination. The adoption of ASU 2015-02 becomes effective for us on January 1, 2016. Early adoption is permitted. We are currently in the process of evaluating the impact of the adoption of ASU 2015-02 on our consolidated financial statements.
(3) Net Investment in Notes Receivable
As of December 31, 2014 and 2013, we had net investment in notes receivable on non-accrual status of $966,359 and $0, respectively, and no net investment in notes receivable that was past due 90 days or more and still accruing.
Net investment in notes receivable consisted of the following:
|
|
|
|
December 31, |
||||
|
|
|
|
2014 |
|
2013 |
||
|
|
Principal outstanding (1) |
$ |
59,474,788 |
|
$ |
45,166,973 |
|
|
|
Initial direct costs |
|
522,261 |
|
|
2,043,505 |
|
|
|
Deferred fees |
|
(645,053) |
|
|
(841,262) |
|
|
|
Credit loss reserve (2) |
|
(631,986) |
|
|
- |
|
|
|
|
Net investment in notes receivable (3) |
|
58,720,010 |
|
|
46,369,216 |
|
|
Less: current portion of net investment in notes receivable |
|
6,482,004 |
|
|
13,145,322 |
|
|
|
|
Net investment in notes receivable, less current portion |
$ |
52,238,006 |
|
$ |
33,223,894 |
|
|
|
|
|
|
|
|
|
|
|
(1) As of December 31, 2014, total principal outstanding related to our impaired loan was $1,598,345. We had no impaired loans as of December 31, 2013. |
||||||
|
|
(2) As of December 31, 2014, the credit loss reserve of $631,986 was related to VAS (defined below). |
||||||
|
|
(3) As of December 31, 2014, net investment in notes receivable related to our impaired loan was $966,359. |
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|
|
|
|
|
|
|
|
|
On June 29, 2009, we and ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P. (“Fund Fourteen”), an entity also managed by our Manager, entered into a joint venture for the purpose of making secured term loans in the aggregate amount of $20,000,000 to INOVA Rentals Corporation (f/k/a ARAM Rentals Corporation) and INOVA Seismic Rentals Inc. (f/k/a ARAM Seismic Rentals Inc.) (collectively, the “INOVA Borrowers”), which were scheduled to mature on August 1, 2014. In 2011, we exchanged our 52.09% ownership interest in the joint venture for our proportionate share of the notes receivable owned by the joint venture, which was subsequently deconsolidated and then terminated. The loans bore interest at 15% per year and were secured by first priority security interest in all analog seismic system equipment owned by the INOVA Borrowers, among other collateral. On January 31, 2014, the INOVA Borrowers satisfied their obligation in connection with these loans by making a prepayment of approximately $1,672,000. No material gain or loss was recorded as a result of this transaction.
On December 23, 2009, a joint venture owned by us and Fund Fourteen made a secured term loan to Quattro Plant Limited (“Quattro Plant”) in the amount of £5,800,000 (approximately $9,462,000) as part of a £24,800,000 secured term loan facility. In 2011, we exchanged our 49.13% ownership interest in the joint venture for an assignment of our proportionate share of future cash flows of the note receivable owned by the joint venture. Upon completion of the exchange, the joint venture was deconsolidated and then terminated. The loan bore interest at 20% per year and was secured by a second priority interest in all of Quattro Plant’s rail support construction equipment, among other collateral. On October 16, 2012, Quattro Plant extended the term of its loan facility to February 28, 2013. On November 14, 2012, Quattro Plant satisfied its obligation in connection with its loan by making a prepayment of approximately $872,000. No material gain or loss was recorded as a result of this transaction.
On June 30, 2010, we made two secured term loans in the aggregate amount of $9,600,000, one to Ocean Navigation 5 Co. Ltd. and one to Ocean Navigation 6 Co. Ltd. (collectively, “Ocean Navigation”), as part of a $96,000,000 term loan facility. The loans were funded between July 2010 and September 2010 and proceeds from the facility were used by Ocean Navigation to purchase two aframax tanker vessels, the Shah Deniz and the Absheron. The loans bore interest at 15.25% per year and were for a period of six years maturing between July and September 2016. The loans were secured by a second priority security
56
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
interest in the vessels. On April 15, 2014, we sold all our interest in the loans with Ocean Navigation to Garanti Bank International, N.V. for $9,600,000. As a result, we wrote off the remaining initial direct costs associated with the notes receivable of approximately $455,000 as a charge against finance income.
On September 1, 2010, we made a secured term loan to EMS Enterprise Holdings, LLC, EMS Holdings II, LLC, EMS Engineered Materials Solutions, LLC, EMS CUP, LLC and EMS EUROPE, LLC (collectively, “EMS”) in the amount of $3,200,000. The loan bore interest at 13% per year and was scheduled to mature on September 1, 2014. The loan was secured by a first priority security interest in metal cladding and production equipment. On September 3, 2013, EMS satisfied their obligation in connection with the loan by making a prepayment of approximately $1,423,000, comprised of all outstanding principal, accrued and unpaid interest, and prepayment fees of $72,500. As a result, we recognized additional finance income of approximately $72,000.
On September 24, 2010, we made a secured term loan in the amount of $9,750,000 to Northern Crane Services, Inc. (“Northern Crane”) as part of a $150,000,000 term loan facility. The loan bore interest at 15.75% per year and was for a period of 54 months. The loan was secured by a first priority security interest in lifting and transportation equipment. On May 22, 2012, Northern Crane satisfied its obligations in connection with the loan by making a prepayment of approximately $7,955,000, which included a prepayment fee of approximately $227,000 that was recognized as additional finance income.
On December 23, 2010, a joint venture owned 52.75% by us, 12.25% by ICON Income Fund Ten Liquidating Trust (formerly known as ICON Income Fund Ten, LLC) (the “Fund Ten Liquidating Trust”), an entity in which our Manager acts as Managing Trustee, and 35% by ICON Leasing Fund Eleven, LLC (“Fund Eleven”), an entity also managed by our Manger, restructured four promissory notes issued by affiliates of Northern Leasing Systems, Inc. (collectively, “Northern Leasing”) by extending each note’s term through February 15, 2013 and increasing each note’s interest rate by 1.50% to rates ranging from 9.47% to 9.90% per year. In 2011, we exchanged our ownership interest in the joint venture for our proportionate share of the notes receivable owned by the joint venture. Upon completion of the exchange, the joint venture was deconsolidated and then terminated. On May 2, 2012, Northern Leasing satisfied their obligations in connection with the promissory notes by making a prepayment of approximately $5,018,000.
On February 3, 2012, we made a secured term loan in the amount of $13,593,750 to subsidiaries of Revstone Transportation, LLC (collectively, “Revstone”) as part of a $37,000,000 term loan facility. The loan bore interest at 15% per year and was for a period of 60 months. The loan was secured by a first priority security interest in all of Revstone’s assets, including a mortgage on real property. In addition, we agreed to make a secured capital expenditure loan (the “CapEx Loan”) to Revstone. Between April and October 2012, Revstone borrowed approximately $514,000 in connection with the CapEx Loan. The CapEx Loan bore interest at 17% per year and was scheduled to mature on March 1, 2017. The CapEx Loan was secured by a first priority security interest in automotive manufacturing equipment purchased with the proceeds from the CapEx Loan and a second priority security interest in the term loan collateral. On November 15, 2012, Revstone satisfied its obligations in connection with the term loan and the CapEx Loan by making a prepayment of approximately $13,993,000, which included a prepayment fee of approximately $660,000 that was recognized as additional finance income.
On February 29, 2012, we made a secured term loan in the amount of $2,000,000 to VAS Aero Services, LLC (“VAS”) as part of a $42,755,000 term loan facility. The loan bore interest at variable rates ranging between 12% and 14.5% per year and matured on October 6, 2014. The loan was secured by a second priority security interest in all of VAS’s assets. During 2014, VAS experienced financial hardship resulting in its failure to make the final monthly payment under the loan as well as the balloon payment due on the maturity date. Our Manager engaged in discussions with VAS, VAS’s owners, the senior creditor and other second lien creditors in order to put in place a viable restructuring or refinancing plan. In December 2014, this specific plan to restructure or refinance fell through. While discussions on other options are still ongoing, our Manager determined that we should record a credit loss reserve based on an estimated liquidation value of VAS’s inventory and accounts receivable. As a result, the loan was placed on non-accrual status and a credit loss reserve of approximately $632,000 was recorded during the year ended December 31, 2014 based on our pro-rata share of the liquidation value of the collateral. The value of the collateral was based on a third-party appraisal using a sales comparison approach. As of December 31, 2014, the remaining balance of the loan was approximately $966,000. Finance income recognized on the loan prior to recording the credit loss reserve was approximately $198,000 for the year ended December 31, 2014. No finance income was recognized since the date the loan was considered impaired.
57
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
On July 24, 2012, we made a secured term loan in the amount of $500,000 to affiliates of Frontier Oilfield Services, Inc. (collectively, “Frontier”) as part of a $5,000,000 term loan facility. The loan bore interest at 14% per year and was for a period of 66 months. The loan was secured by, among other things, a first priority security interest in Frontier’s saltwater disposal wells and related equipment and a second priority security interest in Frontier’s other assets, including real estate, machinery and accounts receivable. On October 11, 2013, Frontier made a partial prepayment of approximately $87,000, which included a prepayment fee of approximately $9,000 that was recognized as additional finance income. On December 30, 2014, we sold all of our interest in the loan to Frontier Expansion and Development, LLC for $375,000. As a result, we recognized a loss and wrote off the remaining initial direct costs associated with the notes receivable totaling approximately $62,000 as a charge against finance income.
On September 10, 2012, we made a secured term loan in the amount of $4,080,000 to Superior Tube Company, Inc. and Tubes Holdco Limited (collectively, “Superior”) as part of a $17,000,000 term loan facility. The loan bore interest at 12% per year and was for a period of 60 months. The loan was secured by, among other things, a first priority security interest in Superior’s assets, including tube manufacturing and related equipment and a mortgage on real property, and a second priority security interest in Superior’s accounts receivable and inventory. On January 30, 2015, Superior satisfied its obligations in connection with the loan by making a prepayment of approximately $4,191,000, comprised of all outstanding principal, accrued interest and a prepayment fee of approximately $122,000.
On November 28, 2012, we made a secured term loan in the amount of $4,050,000 to SAExploration, Inc., SAExploration Seismic Services (US), LLC and NES, LLC (collectively, “SAE”) as part of a $80,000,000 term loan facility. The loan bore interest at 13.5% per year and was for a period of 48 months. The loan was secured by, among other things, a first priority security interest in all the existing and thereafter acquired assets, including seismic testing equipment, of SAE and its parent company, SAExploration Holdings, Inc. (“SAE Holdings”), and a pledge of all the equity interests in SAE and SAE Holdings. In addition, we acquired warrants, exercisable until December 5, 2022, to purchase 0.051% of the outstanding common stock of SAE Holdings. On October 31, 2013, we entered into an amendment to the loan agreement with SAE to amend certain provisions and covenant ratios. As a result of the amendment, we received an amendment fee of approximately $31,000. On July 2, 2014, SAE satisfied its obligation in connection with the loan by making a prepayment of approximately $4,592,000, comprised of all outstanding principal, accrued interest and prepayment fees of approximately $449,000. The prepayment fees were recognized as additional finance income.
On February 12, 2013, we made a secured term loan in the amount of $2,700,000 to NTS Communications, Inc. and certain of its affiliates (collectively, “NTS”) as part of a $6,000,000 facility. On March 28, 2013, NTS borrowed $765,000 and on June 27, 2013, NTS drew down the remaining $1,935,000 from the facility. The loan bore interest at 12.75% per year and was scheduled to mature on July 1, 2017. The loan was secured by a first priority security interest in all equipment and assets of NTS. On June 6, 2014, NTS satisfied their obligations in connection with the loan by making a prepayment of approximately $2,701,000, comprised of all outstanding principal, accrued interest and a prepayment fee of approximately $103,000. The prepayment fee was recognized as additional finance income.
On April 5, 2013, we made a secured term loan in the amount of $3,870,000 to Lubricating Specialties Company (“LSC”) as part of an $18,000,000 facility. The loan bears interest at 13.5% per year and matures on August 1, 2018. The loan is secured by, among other things, a second priority security interest in LSC’s liquid storage tanks, blending lines, packaging equipment, accounts receivable and inventory. On December 11, 2013, LSC made a partial prepayment of approximately $1,355,000, which included a prepayment fee of approximately $65,000 that was recognized as additional finance income.
On September 16, 2013, we made a secured term loan in the amount of $11,000,000 to Cenveo Corporation (“Cenveo”). The loan bears interest at the London Interbank Offered Rate (“LIBOR”), subject to a 1% floor, plus 11.0% per year and is for a period of 60 months. The loan is secured by a first priority security interest in specific equipment used to produce, print, fold, and package printed commercial envelopes. On July 7, 2014, Cenveo made a partial prepayment of approximately $1,112,000 in connection with the loan, which included a net prepayment fee of approximately $12,000.
On November 26, 2013, we, ICON ECI Fund Fifteen, L.P (“Fund Fifteen”), an entity also managed by our Manager, and a third-party creditor made a superpriority, secured term loan in the amount of $30,000,000 to Green Field Energy Services, Inc. and its affiliates (collectively, “Green Field”), of which our share was $7,500,000. The loan bore interest at LIBOR plus 10%
58
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
per year and was scheduled to mature on August 26, 2014. The loan was secured by a superpriority security interest in all of Green Field’s assets. On March 18, 2014, Green Field satisfied its obligation in connection with the loan by making a prepayment of approximately $7,458,000, comprised of all outstanding principal and accrued interest. No material gain or loss was recorded as a result of this transaction.
On June 17, 2014, we and Fund Fourteen entered into a secured term loan credit facility agreement with SeaChange Projects LLC (“SeaChange”) to provide a credit facility of up to $7,000,000, of which our commitment was $6,300,000. On June 20, 2014 and August 20, 2014, we funded $4,050,000 and $2,250,000, respectively. The facility was used to partially finance SeaChange’s acquisition and conversion of a containership vessel to meet certain time charter specifications of the Military Sealift Command of the Department of the United States Navy. The facility bore interest at 13.25% per year and was scheduled to mature on February 15, 2018. The facility was secured by, among other things, a first priority security interest in and earnings from the vessel and the equity interests of SeaChange. Due to SeaChange’s inability to meet certain requirements of the Department of the United States Navy, which resulted in the cancellation of the time charter, SeaChange was required to repay all outstanding principal and accrued interest under the facility in accordance with the loan agreement. On September 24, 2014, SeaChange satisfied its obligation by making a prepayment of approximately $6,476,000, comprised of all outstanding principal and accrued interest.
On July 14, 2014, we, Fund Fourteen and Fund Fifteen (collectively, “ICON”) entered into a secured term loan credit facility agreement with two affiliates of Técnicas Maritimas Avanzadas, S.A. de C.V. (collectively, “TMA”) to provide a credit facility of up to $29,000,000 (the “ICON Loan”), of which our commitment of $21,750,000 was funded on August 27, 2014 (the “TMA Initial Closing Date”). The facility was used by TMA to acquire and refinance two platform supply vessels. At inception, the loan bore interest at LIBOR, subject to a 1% floor, plus a margin of 17%. Upon the acceptance of both vessels by TMA’s sub-charterer on September 19, 2014, the margin was reduced to 13%. On November 24, 2014, ICON entered into an amended and restated senior secured term loan credit facility agreement with TMA pursuant to which an unaffiliated third party agreed to provide a senior secured term loan in the amount of up to $89,000,000 (the “Senior Loan”) in addition to the ICON Loan (collectively, the “TMA Facility”) to acquire two additional vessels. The TMA Facility has a term of five years from the TMA Initial Closing Date. As a result of the amendment, the margin for the ICON Loan increased to 15% and repayment of the ICON Loan became subordinated to the repayment of the Senior Loan. The TMA Facility is secured by, among other things, a first priority security interest in the four vessels and TMA’s right to the collection of hire with respect to earnings from the sub-charterer related to the four vessels. The amendment qualified as a new loan and therefore, we wrote off the initial direct costs and deferred revenue associated with the ICON Loan of approximately $674,000 as a charge against finance income.
On September 24, 2014, we, Fund Fourteen, Fund Fifteen and ICON ECI Fund Sixteen (“Fund Sixteen”), an entity also managed by our Manager, entered into a secured term loan credit facility agreement with Premier Trailer Leasing, Inc. (“Premier Trailer”) to provide a credit facility of up to $20,000,000, of which our commitment of $10,000,000 was funded on such date. The loan bears interest at LIBOR, subject to a 1% floor, plus 9% per year and is for a period of six years. The loan is secured by a second priority security interest in all of Premier Trailer’s assets, including, without limitation, its fleet of trailers, and the equity interests of Premier Trailer.
On November 13, 2014, we and Fund Fourteen made secured term loans in the aggregate amount of $15,000,000 to NARL Marketing Inc. and certain of its affiliates (collectively, “NARL”) as a part of a $30,000,000 senior secured term loan credit facility, of which our commitment was $12,000,000. The loan bears interest at 10.75% per year and is for a period of three years. The loan is secured by a first priority security interest in all of NARL’s existing and thereafter acquired assets including, but not limited to, its retail and wholesale fuel equipment, including pumps and storage tanks, and a mortgage on certain real properties.
Credit loss allowance activities for the years ended December 31, 2014, 2013 and 2012 were as follows:
|
|
Credit Loss Allowance |
||
|
|
Allowance for credit loss as of December 31, 2011 |
$ |
674,000 |
|
|
Provisions |
|
(345,000) |
|
|
Write-offs, net of recoveries |
|
(329,000) |
|
|
Allowance for credit loss as of December 31, 2012 |
$ |
- |
|
|
Provisions |
|
- |
|
|
Write-offs, net of recoveries |
|
- |
|
|
Allowance for credit loss as of December 31, 2013 |
$ |
- |
|
|
Provisions |
|
631,986 |
|
|
Write-offs, net of recoveries |
|
- |
|
|
Allowance for credit loss as of December 31, 2014 |
$ |
631,986 |
59
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
(4) Net Investment in Finance Leases
Net investment in finance leases consisted of the following:
|
|
|
|
December 31, |
||||
|
|
|
|
2014 |
|
2013 |
||
|
|
Minimum rents receivable |
$ |
95,179,750 |
|
$ |
112,689,818 |
|
|
|
Estimated unguaranteed residual values |
|
7,988,228 |
|
|
13,963,091 |
|
|
|
Initial direct costs |
|
1,878,164 |
|
|
2,125,567 |
|
|
|
Unearned income |
|
(30,760,420) |
|
|
(26,866,001) |
|
|
|
|
Net investment in finance leases |
|
74,285,722 |
|
|
101,912,475 |
|
|
Less: current portion of net investment in finance leases |
|
12,142,423 |
|
|
11,876,248 |
|
|
|
|
Net investment in finance leases, less current portion |
$ |
62,143,299 |
|
$ |
90,036,227 |
From July 15, 2010 through March 31, 2011, we purchased telecommunications equipment for approximately $5,029,000 and simultaneously leased the equipment to Broadview Networks Holdings, Inc. and Broadview Networks Inc. (collectively, “Broadview”). The base term of the four leases was for a period of 36 months, which commenced between August 1, 2010 and April 1, 2011. On August 22, 2012, Broadview commenced a voluntary Chapter 11 proceeding in the Bankruptcy Court in the Southern District of New York. On November 14, 2012, Broadview completed a prepackaged restructuring, emerged from bankruptcy and affirmed all of our leases. During 2013, upon the expiration of three leases, Broadview purchased telecommunications equipment subject to the leases from us for an aggregate purchase price of $460,725. On March 31, 2014, upon the expiration of the fourth lease, Broadview purchased telecommunications equipment subject to the lease from us for $293,090. No gain or loss was recorded as a result of these sales.
Manufacturing Equipment
On May 16, 2011, we entered into an agreement to sell auto parts manufacturing equipment subject to lease with Sealynx Automotive Transieres SAS (“Sealynx”) for €3,000,000. The purchase price was scheduled to be paid in three installments and bore interest at 5.5% per year. We would retain title to the equipment until the final payment was received, which was due on June 1, 2013. On April 25, 2012, Sealynx filed for Redressement Judiciaire, a proceeding under French law similar to a Chapter 11 reorganization under the U.S. Bankruptcy Code. On July 8, 2013, Sealynx satisfied the terms of its finance lease by making a final payment of approximately €1,190,000 (US $1,528,000) to us, at which time, we transferred title to the equipment subject to the finance lease to Sealynx.
During 2009, we purchased three barges, the Leighton Mynx, the Leighton Stealth and the Leighton Eclipse, and a pipelay barge, the Leighton Faulkner (collectively, the “Leighton Vessels”), and simultaneously leased the Leighton Vessels to an
60
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
affiliate of Leighton Offshore Pte. Ltd. (“Leighton”) for a period of 96 months that was scheduled to expire between June 2017 and January 2018.
On May 16, 2013, Leighton provided notice to us that it was exercising its purchase options on the Leighton Vessels. On August 23, 2013, Leighton, in accordance with the terms of a bareboat charter scheduled to expire on June 25, 2017, exercised its option to purchase the Leighton Mynx from us for $25,832,445, including payment of swap-related expenses of $254,719. In addition, Leighton paid all break costs and legal fees incurred by us with respect to the sale of the Leighton Mynx. As a result of the termination of the lease and the sale of the vessel, we recognized additional finance income of approximately $562,000. A portion of the proceeds from the sale of the Leighton Mynx were used to repay Leighton’s seller’s credits of $7,335,000 related to our original purchase of the barge as well as to satisfy third-party non-recourse debts related to the barge by making a payment of approximately $13,291,000. As part of the repayment, the interest rate swaps related to the debts were terminated and a loss on derivative financial instruments of approximately $211,000 was recognized. On April 3, 2014, Leighton, in accordance with the terms of three bareboat charters scheduled to expire between 2017 and 2018, exercised its options and purchased the three remaining Leighton Vessels from us for an aggregate price of $155,220,900, including payment of swap-related expenses of $720,900. As a result of the termination of the leases and the sale of the three remaining Leighton Vessels, we recognized additional finance income of approximately $57,248,000. A portion of the aggregate purchase price due from the exercise of the purchase option was used to satisfy the Leighton seller’s credits of $47,421,000 related to our original purchase of the three Leighton Vessels as well as to satisfy our non-recourse debt obligations with Standard Chartered Bank (“Standard Chartered”) of approximately $38,426,000.
On July 2, 2013, Lily Shipping Ltd. (“Lily Shipping”), in accordance with the terms of a bareboat charter scheduled to expire on October 29, 2014, exercised its option to purchase the product tanker, the Ocean Princess, from us for $5,790,000. In addition, we collected the charter hire of $553,500 for the period July 1, 2013 through November 1, 2013. As a result of the termination of the lease and the sale of the product tanker, we recognized additional finance income of approximately $116,000, comprised of a gain on lease termination of approximately $554,000 and a loss on sale of assets of approximately $438,000. A portion of the proceeds from the sale of the vessel were used to repay Lily Shipping a seller’s credit of approximately $4,300,000 related to our original purchase of the vessel.
On March 21, 2014, a joint venture owned 75% by us, 12.5% by Fund Fifteen and 12.5% by Fund Fourteen, through two indirect subsidiaries, entered into memoranda of agreement to purchase two LPG tanker vessels, the SIVA Coral and the SIVA Pearl (collectively, the “SIVA Vessels”), from Siva Global Ships Limited (“Siva Global”) for an aggregate purchase price of $41,600,000. The SIVA Coral and the SIVA Pearl were delivered on March 28, 2014 and April 8, 2014, respectively. The SIVA Vessels were bareboat chartered to an affiliate of Siva Global for a period of eight years upon the delivery of each respective vessel. The SIVA Vessels were each acquired for approximately $3,550,000 in cash, $12,400,000 of financing through a senior secured loan from DVB Group Merchant Bank (Asia) Ltd. (“DVB”) and $4,750,000 of financing through a subordinated, non-interest-bearing seller’s credit.
Gas Compressors
On July 15, 2011, a joint venture owned 49.54% by us, 40.53% by Fund Fourteen and 9.93% by Hardwood Partners, LLC (“Hardwood”) amended the master lease agreement with Atlas Pipeline Mid-Continent, LLC (“APMC”), an affiliate of Atlas Pipeline Partners, L.P., requiring APMC to purchase eight gas compressors it leased from the joint venture upon lease termination. The joint venture received an amendment fee of $500,000 and the leases were reclassified from operating leases to finance leases. On September 14, 2011, the joint venture financed future receivables related to the leases by entering into a non-recourse loan agreement with Wells Fargo Equipment Finance, Inc. (“Wells Fargo”) in the amount of approximately $10,628,000. Wells Fargo received a first priority security interest in the gas compressors, among other collateral. The loan bore interest at 4.08% per year and was scheduled to mature on September 1, 2013. On May 30, 2013, the joint venture, in accordance with the terms of the lease, sold the eight gas compressors to APMC for $7,500,000. As a result, we recognized a gain on sale of approximately $384,000. Simultaneously with the sale, the joint venture prepaid and satisfied its non-recourse debt obligation with Wells Fargo, secured by the gas compressors, for $7,500,000. As a result, we recognized a loss on extinguishment of debt of approximately $86,000, which is included in interest expense on the consolidated statements of comprehensive income (loss).
Coal Drag Line
61
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
On July 9, 2012, Patriot Coal Corporation and substantially all of its subsidiaries, including Magnum Coal Company, LLC (“Magnum”), commenced a voluntary Chapter 11 proceeding in the Bankruptcy Court in the Southern District of New York. On March 11, 2013, we amended our lease with Magnum to expire on August 1, 2015. Upon our receipt of the final payment, title to the underlying equipment will be transferred to Magnum. The terms of the amendment resulted in the reclassification of the lease from an operating lease to a finance lease.
Mining Equipment
On March 4, 2014, a joint venture owned 60% by us, 15% by Fund Fourteen, 15% by Fund Fifteen and 10% by Fund Sixteen purchased mining equipment from an affiliate of Spurlock Mining, LLC (f/k/a Blackhawk Mining, LLC) (“Spurlock”). Simultaneously, the mining equipment was leased to Spurlock and its affiliates for four years. The aggregate purchase price for the mining equipment of approximately $25,359,000 was funded by approximately $17,859,000 in cash and $7,500,000 of non-recourse long-term debt.
Trucks and Trailers
On March 28, 2014, a joint venture owned 60% by us, 27.5% by Fund Fifteen and 12.5% by Fund Sixteen purchased trucks, trailers and other equipment from subsidiaries of D&T Holdings, LLC (“D&T”) for $12,200,000. Simultaneously, the trucks, trailers and other equipment were leased to D&T and its subsidiaries for 57 months. On September 15, 2014, the lease agreement with D&T was amended to allow D&T to increase its capital expenditure limit. In consideration for agreeing to such increase, lease payments of approximately $1,500,000 that were scheduled to be paid in 2018 were paid by October 31, 2014. In addition, the joint venture received an amendment fee of $100,000, which will be recognized as finance income throughout the remaining lease term.
Non-cancelable minimum annual amounts due on investment in finance leases over the next five years were as follows at December 31, 2014:
|
|
Years Ending December 31, |
|
|
|
|
|
2015 |
|
$ |
18,834,985 |
|
|
2016 |
|
|
13,685,766 |
|
|
2017 |
|
|
13,633,116 |
|
|
2018 |
|
|
8,319,333 |
|
|
2019 |
|
|
4,270,500 |
|
|
Thereafter |
|
|
36,436,050 |
|
|
|
|
$ |
95,179,750 |
Leased equipment at cost consisted of the following:
|
|
|
|
|
December 31, |
||||
|
|
|
|
|
2014 |
|
2013 |
||
|
|
Offshore oil field services equipment |
$ |
43,973,698 |
|
$ |
54,383,809 |
||
|
|
Marine - container vessels |
|
40,350,587 |
|
|
39,671,485 |
||
|
|
Mining equipment |
|
6,858,074 |
|
|
- |
||
|
|
|
Leased equipment at cost |
|
91,182,359 |
|
|
94,055,294 |
|
|
|
Less: accumulated depreciation |
|
18,430,584 |
|
|
38,848,729 |
||
|
|
|
Leased equipment at cost, less accumulated depreciation |
$ |
72,751,775 |
|
$ |
55,206,565 |
|
|
|
|
|
|
|
|
|
|
|
62
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
Depreciation expense was $7,127,975, $29,824,603 and $40,560,520 for the years ended December 31, 2014, 2013 and 2012, respectively. Included in depreciation expense for the year ended December 31, 2014 was $1,286,547 related to the Aegean Express and the Arabian Express, which are classified as vessels on our consolidated balance sheets.
Marine Vessels and Equipment
On June 25, 2009, we purchased marine diving equipment from Swiber Engineering Ltd. (“Swiber”) for $10,000,000. Simultaneously, we entered into a 60-month lease with Swiber, which commenced on July 1, 2009. Subsequent to the expiration of the lease, on November 14, 2014, we sold the diving equipment to a subsidiary of Swiber Holdings Limited (“Swiber Holdings”) for $4,000,000 net, after deducting the $2,000,000 seller’s credit owed to Swiber.
On May 22, 2013, we entered into a termination agreement with AET Inc. Limited (“AET”) whereby AET returned the aframax tanker, the Eagle Centaurus, to us prior to the scheduled charter termination date of November 13, 2013. AET paid an early termination fee of $1,400,000 and the balance of the charter hire through the end of the original charter term of approximately $1,487,000. On June 5, 2013, the Eagle Centaurus was sold to a third party for approximately $6,689,000. We recognized a net gain of approximately $197,000 from the transactions, comprised of a gain on lease termination of approximately $2,887,000 and a loss on sale of assets of approximately $2,690,000.
On August 6, 2013, we entered into a termination agreement with AET whereby AET returned the aframax tanker, the Eagle Auriga, to us prior to the scheduled charter termination date of November 14, 2013. AET paid an early termination fee of $1,400,000 and the balance of the charter hire through the end of the original charter term of approximately $1,505,000. On August 15, 2013, the Eagle Auriga was sold to a third party for approximately $5,579,000. We recognized a net gain of approximately $157,000 from the transactions, comprised of a gain on lease termination of approximately $2,905,000 and a loss on sale of assets of approximately $2,748,000.
On October 17, 2013, two joint ventures owned 64.3% by us and 35.7% by the Fund Ten Liquidating Trust entered into two termination agreements with AET whereby AET returned two aframax tankers, the Eagle Carina and the Eagle Corona, to us prior to the scheduled charter termination date of November 14, 2013 and paid early termination fees of $2,800,000. On November 7, 2013, the Eagle Carina and the Eagle Corona were sold to third parties for approximately $12,569,000. The joint ventures recognized total net gains of approximately $1,777,000 from the transactions, comprised of gains on lease terminations of approximately $3,034,000 and losses on sale of assets of approximately $1,257,000.
In connection with our annual impairment review for the year ended December 31, 2012, our Manager concluded that the carrying value of the Eagle Centaurus, the Eagle Auriga, the Eagle Carina and the Eagle Corona (collectively, the “Eagle Vessels”) was not recoverable and determined that an impairment existed. That determination was based on a forecast of undiscounted contractual cash flows for the remaining term of the lease and non-contractual cash flows based on a weighted average probability of alternate opportunities of re-leasing or disposing of Eagle Vessels. Projected future scrap rates were a critical component of that analysis as well as negotiated rates related to re-leasing the Eagle Vessels. Based on our Manager’s review of the Eagle Vessels, the net book value of the Eagle Vessels exceeded the estimated undiscounted cash flows and exceeded the fair value and, as a result, we recognized an impairment loss of approximately $35,296,000 for the year ended December 31, 2012.
During 2013, several potential counterparties with whom our Manager was discussing re-leasing opportunities for the Eagle Vessels terminated negotiations, which was an indicator that the Eagle Vessels’ carrying value may be further impaired. We updated the estimates of the forecasted future cash flows and performed impairment testing. As a result, we recognized an additional impairment loss of approximately $1,800,000 for the year ended December 31, 2013. Projected future scrap rates were a critical component of these analyses.
In connection with our annual impairment review for the year ended December 31, 2013, our Manager concluded that the carrying values of two containership vessels, the Aegean Express and the Arabian Express, were not recoverable and determined that an impairment existed. That determination was based on a forecast of undiscounted contractual cash flows for the remaining terms of the leases and non-contractual cash flows based on a weighted average probability of alternate opportunities of re-leasing or disposing of the two containership vessels. Projected future scrap rates were a critical component of those analyses as well as negotiated rates related to re-leasing the two vessels. Based on our Manager’s review, the net book
63
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
values of the Aegean Express and the Arabian Express exceeded the estimated undiscounted cash flows and exceeded the fair values and, as a result, we recognized an aggregate impairment loss of approximately $13,020,000 for the year ended December 31, 2013.
On April 1, 2014, the Aegean Express and the Arabian Express were returned to us in accordance with the terms of the leases. Upon redelivery, the bareboat charters were terminated and we assumed the underlying time charters for the vessels. As we assumed operational responsibility of the vessels, we simultaneously contracted with Fleet Ship Management Inc. (“Fleet Ship”) to manage the vessels on our behalf. Accordingly, these vessels have been reclassified to Vessels on our consolidated balance sheets. The time charters for the Aegean Express and the Arabian Express are scheduled to expire on June 9, 2015 and September 12, 2015, respectively.
On June 12, 2014, a joint venture owned 75% by us, 12.5% by Fund Fourteen and 12.5% by Fund Fifteen purchased an offshore supply vessel from Pacific Crest Pte. Ltd. (“Pacific Crest”) for $40,000,000. Simultaneously, the vessel was bareboat chartered to Pacific Crest for ten years. The vessel was acquired for approximately $12,000,000 in cash, $26,000,000 of financing through a senior secured loan from DVB and $2,000,000 of financing through a subordinated, non-interest-bearing seller’s credit.
Manufacturing Equipment
During 2008, ICON EAR, LLC (“ICON EAR”), a joint venture owned 55% by us and 45% by Fund Eleven purchased and simultaneously leased semiconductor manufacturing equipment to Equipment Acquisition Resources, Inc. (“EAR”) for approximately $15,730,000, of which our share was approximately $8,651,000. The lease term commenced on July 1, 2008 and was scheduled to expire on June 30, 2013. As additional security for the lease, ICON EAR received mortgages on certain parcels of real property located in Jackson Hole, Wyoming.
In October 2009, certain facts came to light that led our Manager to believe that EAR was perpetrating a fraud against EAR’s lenders, including ICON EAR. On October 23, 2009, EAR filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code.
On June 7, 2010, ICON EAR received judgments in the New York State Supreme Court against two principals of EAR who had guaranteed EAR’s lease obligations. ICON EAR has had the New York State Supreme Court judgments recognized in Illinois, where the principals live, but does not currently anticipate being able to collect on such judgments.
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, which 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 6, 2012, one of the creditors in the Illinois State Court proceeding won a summary judgment motion filed against ICON EAR, thereby dismissing ICON EAR’s claims to the proceeds resulting from the sale of the EAR equipment. ICON EAR appealed this decision. On September 16, 2013, the lower court’s ruling was affirmed by the Illinois Appellate Court. On October 21, 2013, ICON EAR filed a Petition for Leave to Appeal with the Supreme Court of Illinois appealing the decision of the Illinois Appellate Court, which petition was denied on January 29, 2014. The only remaining asset owned by ICON EAR at December 31, 2013 was real property with a carrying value of approximately $290,000, which
64
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
was included in other non-current assets within our consolidated balance sheets. During the year ended December 31, 2014, we recognized an impairment charge of approximately $70,000 based on the estimated fair value less cost to sell the real property. On December 24, 2014, ICON EAR sold the real property for $208,000. No material gain or loss was recorded as result of this sale.
On January 4, 2012, MWU Universal, Inc. (“MWU”) and certain of its subsidiaries satisfied their obligations relating to two of the three lease schedules. On August 20, 2012, we sold the automotive manufacturing equipment subject to lease with LC Manufacturing, LLC, a wholly owned subsidiary of MWU (“LC Manufacturing”), and terminated warrants issued to us for aggregate proceeds of approximately $8,300,000. As a result, based on our 93.67% ownership interest in ICON MW, LLC (“ICON MW”), our joint venture with Fund Eleven, we received proceeds in the amount of approximately $7,775,000 and recognized a loss on the sale of approximately $89,000. 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 $5,068,000. In February 2013, we commenced an action against the guarantor, which is currently pending.
Mining Equipment
On September 18, 2014, a joint venture owned 55.817% by us and 44.183% by Hardwood purchased mining equipment for $6,789,928. The equipment is subject to a 36-month lease with Murray Energy Corporation and certain of its affiliates (collectively, “Murray”), which expires on September 30, 2017.
Motor Coaches
On January 3, 2012, CUSA PRTS, LLC (“CUSA”) and its parent company, Coach Am Group Holdings Corp., commenced a voluntary Chapter 11 proceeding in U.S. Bankruptcy Court. On July 20, 2012, we sold all of the remaining motor coaches to CUSA for approximately $3,607,000 and recorded a gain on sale of approximately $881,000.
Aggregate annual minimum future rentals receivable from our non-cancelable leases related to our leased equipment at cost and vessels over the next five years consisted of the following at December 31, 2014:
|
|
Years Ending December 31, |
|
|
|
|
|
2015 |
|
$ |
17,614,404 |
|
|
2016 |
|
|
14,152,554 |
|
|
2017 |
|
|
7,918,291 |
|
|
2018 |
|
|
4,679,250 |
|
|
2019 |
|
|
4,641,000 |
|
|
Thereafter |
|
|
20,553,000 |
|
|
|
|
$ |
69,558,499 |
|
|
|
|
|
|
(6) Investment in Joint Ventures
On March 29, 2011, ICON AET Holdings, LLC (“ICON AET Holdings”), a joint venture owned 25% by us and 75% by Fund Fourteen acquired two aframax tankers and two very large crude carriers (the “VLCCs”). Our contribution to the joint venture was approximately $12,166,000. The aframax tankers were each acquired for $13,000,000 and simultaneously bareboat chartered to AET for a period of three years. The VLCCs were each acquired for $72,000,000 and simultaneously bareboat chartered to AET for a period of 10 years. On April 14, 2014 and May 21, 2014, upon expiration of the leases with AET, the joint venture sold the aframax tankers, the Eagle Otome and the Eagle Subaru, to third-party purchasers for an aggregate price of approximately $14,822,000. As a result, the joint venture recognized an aggregate gain on sale of assets of approximately $2,200,000. Our share of such gain was approximately $550,000, which is included within income from investment in joint ventures on our consolidated statements of comprehensive income (loss).
Information as to the financial position of ICON AET Holdings is summarized as follows:
65
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
|
|
|
Years Ended December 31, |
|||||
|
|
|
2014 |
|
2013 |
|
||
|
|
Non-current assets |
$ |
121,801,052 |
|
$ |
149,113,722 |
|
|
|
Current liabilities |
$ |
26,714,977 |
|
$ |
46,379,592 |
|
|
|
Non-current liabilities |
$ |
61,617,780 |
|
$ |
75,505,128 |
|
Information as to the results of operations of ICON AET Holdings is summarized below:
|
|
|
Years Ended December 31, |
|||||||
|
|
|
2014 |
|
2013 |
|
2012 |
|||
|
|
Revenue |
$ |
23,274,344 |
|
$ |
25,673,722 |
|
$ |
25,673,722 |
|
|
Net income |
$ |
6,180,849 |
|
$ |
6,935,415 |
|
$ |
1,261,383 |
|
|
Our share of net income |
$ |
1,545,212 |
|
$ |
1,733,854 |
|
$ |
315,346 |
|
|
|
|
|
|
|
|
|
|
|
On May 15, 2013, a joint venture owned 21% by us, 39% by Fund Eleven and 40% by Fund Fifteen purchased a portion of an approximately $208,000,000 subordinated credit facility for Jurong Aromatics Corporation Pte. Ltd. (“JAC”) from Standard Chartered. The aggregate purchase price for the joint venture’s portion of the subordinated facility was $28,462,500. The subordinated credit facility bears interest at rates ranging between 12.5% and 15.0% per year and matures in January 2021. The subordinated credit facility is secured by a second priority security interest in all of JAC’s assets, which include, among other things, all equipment, plant and machinery associated with a condensate splitter and aromatics complex. Our initial contribution to the joint venture was approximately $6,456,000.
On September 12, 2013, a joint venture owned by us, Fund Eleven and Fund Sixteen purchased mining equipment for approximately $15,107,000. The equipment is subject to a 24 month lease with Murray, which expires on September 30, 2015. On December 1, 2013 and February 1, 2014, Fund Sixteen contributed capital of approximately $934,000 and $1,726,000, respectively, to the joint venture, inclusive of acquisition fees. Subsequent to Fund Sixteen’s second capital contribution, the joint venture is owned 13.2% us, 67% by Fund Eleven and 19.8% by Fund Sixteen. As a result, we received corresponding returns of capital.
On October 7, 2013, ICON Pliant, LLC (“ICON Pliant”), a joint venture owned 45% by us and 55% by Fund Eleven, upon the expiration of the lease with Pliant Corporation (“Pliant”), sold the plastic processing and printing equipment to Pliant for $7,000,000. Our share of the gain on sale of assets was approximately $1,100,000.
Information as to the results of operations of ICON Pliant is summarized below:
|
|
|
Years Ended December 31, |
|||||||
|
|
|
2014 |
|
2013 |
|
2012 |
|||
|
|
Revenue |
$ |
- |
|
$ |
4,625,994 |
|
$ |
2,972,925 |
|
|
Net income |
$ |
- |
|
$ |
2,444,639 |
|
$ |
1,292,230 |
|
|
Our share of net income |
$ |
- |
|
$ |
1,100,088 |
|
$ |
581,504 |
(7) Non-Recourse Long-Term Debt
As of December 31, 2014 and 2013, we had the following non-recourse long-term debt:
|
|
|
|
|
December 31, |
|
|
|
|
||||
|
|
Counterparty |
|
2014 |
|
2013 |
|
Maturity |
|
Rate |
|||
|
|
DVB Group Merchant Bank (Asia) Ltd. |
|
$ |
48,250,000 |
|
$ |
- |
|
2021-2022 |
|
5.04%-6.1225% |
|
|
|
People's Capital and Leasing Corp. |
|
|
5,916,785 |
|
|
- |
|
2018 |
|
6.50% |
|
|
|
NXT Capital, LLC |
|
|
5,029,001 |
|
|
6,947,417 |
|
2018 |
|
7.50% |
|
|
|
Standard Chartered Bank |
|
|
- |
|
|
41,025,017 |
|
2014-2015 |
|
5.58%-7.96% |
|
|
|
BNP Paribas |
|
|
- |
|
|
7,398,549 |
|
2013-2014 |
|
3.85%-5.43% |
|
|
|
|
Total non-recourse long-term debt |
|
|
59,195,786 |
|
|
55,370,983 |
|
|
|
|
|
|
Less: current portion of non-recourse long-term debt |
|
|
7,332,765 |
|
|
44,606,812 |
|
|
|
|
|
|
|
|
Total non-recourse long-term debt, less current portion |
|
$ |
51,863,021 |
|
$ |
10,764,171 |
|
|
|
|
66
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
All of our non-recourse long-term debt obligations consist of notes payable in which the lender has a security interest in the underlying assets. If the borrower were to default on the underlying lease or loan, resulting in our default on the non-recourse long-term debt, the assets could be foreclosed upon and the proceeds would be remitted to the lender in extinguishment of that debt. As of December 31, 2014, the total carrying value of assets subject to non-recourse long term debt was $107,226,456.
On May 30, 2013, simultaneously with the sale of eight gas compressors to APMC, our joint venture prepaid and satisfied its non-recourse debt obligations with Wells Fargo, secured by the gas compressors, for $7,500,000. As a result, we recognized a loss on extinguishment of debt of approximately $86,000, which is included in interest expense on the consolidated statements of comprehensive income (loss).
On June 3, 2013, the proceeds from the sale of the Eagle Centaurus were used to satisfy debt obligations of approximately $9,732,000 related to the Eagle Centaurus and the Eagle Auriga.
On June 24, 2013, we satisfied our non-recourse debt obligations with Nordea Bank Finland, PLC (“Nordea”) by making a payment of approximately $1,660,000. The debt obligation was associated with the product tanker subject to the bareboat charter with Lily Shipping which was sold on July 2, 2013.
On August 23, 2013, simultaneously with our sale of the Leighton Mynx to Leighton, we satisfied our related non-recourse debt obligations with Standard Chartered by making a payment of approximately $13,291,000. On April 3, 2014, a portion of the proceeds from the sale of the remaining three Leighton Vessels were used to satisfy our related non-recourse debt obligations with Standard Chartered of approximately $38,426,000
On October 31, 2013, we borrowed $7,150,000 of non-recourse long-term debt from NXT Capital, LLC (“NXT”) secured by our interest in the secured term loan to and collateral from Cenveo. The loan matures on October 1, 2018 and bears interest at LIBOR, subject to a 1% floor, plus 6.5% per year. As a result of the partial prepayment by Cenveo, on July 7, 2014 we partially paid down our non-recourse long-term debt with NXT by making a payment of approximately $703,000.
On November 6, 2013, we satisfied our non-recourse debt obligations associated with the Eagle Carina and the Eagle Corona with BNP Paribas by making a payment of approximately $6,470,000.
On March 4, 2014, a joint venture owned 60% by us, 15% by Fund Fourteen, 15% by Fund Fifteen and 10% by Fund Sixteen financed the acquisition of certain mining equipment that is on lease to Spurlock and its affiliates by entering into a non-recourse loan agreement with People’s Capital and Leasing Corp. (“People’s Capital”) in the amount of $7,500,000. People’s Capital received a first priority security interest in such mining equipment. The loan bears interest at a rate of 6.5% per year and matures on February 1, 2018.
A joint venture owned 75% by us, 12.5% by Fund Fourteen and 12.5% by Fund Fifteen financed the acquisition of the SIVA Vessels by entering into a non-recourse loan agreement with DVB in the amount of $24,800,000. The loan bears interest at a rate of 6.1225% per year and matures on March 25, 2022.
67
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
On May 12, 2014, we satisfied our non-recourse debt obligations related to the Aegean Express and the Arabian Express by making a payment in the aggregate amount of approximately $6,000,000 to BNP Paribas.
A joint venture owned 75% by us, 12.5% by Fund Fourteen and 12.5% by Fund Fifteen financed the acquisition of an offshore supply vessel from Pacific Crest by entering into a non-recourse loan agreement with DVB in the amount of $26,000,000. The senior secured loan bears interest at a rate of 5.04% per year and matures on June 24, 2021.
As of December 31, 2014 and 2013, we had capitalized net debt financing costs of $786,841 and $487,512, respectively. For the years ended December 31, 2014, 2013 and 2012, we recognized additional interest expense of $617,069, $691,194 and $895,309, respectively, related to the amortization of debt financing costs.
As of December 31, 2014 and 2013, we had non-recourse long-term debt obligations of $59,195,786 and $55,370,983, respectively, with maturity dates ranging from February 1, 2018 to March 25, 2022, and interest rates ranging from 5.04% to 7.96% per year.
The aggregate maturities of non-recourse long-term debt over the next five years were as follows at December 31, 2014:
|
|
Years Ending December 31, |
|
|
|
|
|
2015 |
|
$ |
7,332,765 |
|
|
2016 |
|
|
7,421,139 |
|
|
2017 |
|
|
7,693,428 |
|
|
2018 |
|
|
6,433,454 |
|
|
2019 |
|
|
4,700,000 |
|
|
Thereafter |
|
|
25,615,000 |
|
|
|
|
$ |
59,195,786 |
|
|
|
|
|
|
At December 31, 2014, we were in compliance with all covenants related to our non-recourse long-term debt.
(8) Revolving Line of Credit, Recourse
We entered into an agreement with California Bank & Trust (“CB&T”) for a revolving line of credit through March 31, 2015 of up to $10,000,000 (the “Facility”), which was secured by all of our assets not subject to a first priority lien. Amounts available under the Facility were subject to a borrowing base that was determined, subject to certain limitations, by the present value of future receivables under certain loans and lease agreements in which we had a beneficial interest.
The interest rate for general advances under the Facility was CB&T’s prime rate. We could have elected to designate up to five advances on the outstanding principal balance of the Facility to bear interest at LIBOR plus 2.5% per year. In all instances, borrowings under the Facility were subject to an interest rate floor of 4.0% per year. In addition, we were obligated to pay an annualized 0.50% fee on unused commitments under the Facility. On February 28, 2014 and March 31, 2014, we drew down $3,000,000 and $7,000,000, respectively. On November 6, 2014, we repaid the $10,000,000.
On December 22, 2014, the Facility with CB&T was terminated. There were no obligations outstanding as of the date of the termination.
(9) Transactions with Related Parties
We pay or paid our Manager (i) management fees ranging from 1% to 7% based on a percentage of the rentals and other contractual payments recognized either directly by us or through our joint ventures and (ii) acquisition fees, through the end of the operating period, of 3% of the purchase price (including indebtedness incurred or assumed therewith) of, or the value of the long-lived assets secured by or subject to, each of our investments. Our Manager is not paid acquisition fees or management fees for additional investments initiated during the liquidation period, although management fees continue to be paid for investments that were part of our portfolio prior to the commencement of the liquidation period. In addition, our Manager is reimbursed for administrative expenses incurred in connection with our operations. Our Manager also has a 1% interest in our profits, losses, distributions and liquidation proceeds.
68
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
Our Manager performs certain services relating to the management of our equipment leasing and other financing activities. Such services include, but are not limited to, the collection of lease payments from the lessees of the equipment or loan payments from borrowers, re-leasing services in connection with equipment that is off-lease, inspections of the equipment, liaising with and general supervision of lessees and borrowers to ensure that the equipment is being properly operated and maintained, monitoring performance by the lessees of their obligations under the leases and the payment of operating expenses.
Administrative expense reimbursements are costs incurred by our Manager or its affiliates on our behalf that are necessary to our operations. These costs include our Manager’s and its affiliates’ legal, accounting, investor relations and operations personnel costs, as well as professional fees and other costs that are charged to us based upon the percentage of time such personnel dedicate to us. Excluded are salaries and related costs, office rent, travel expenses and other administrative costs incurred by individuals with a controlling interest in our Manager.
We paid distributions to our Manager of $255,127, $262,158 and $339,749 for the years ended December 31, 2014, 2013 and 2012, respectively. Our Manager’s interest in our net income (loss) for the years ended December 31, 2014, 2013 and 2012 was $598,803, $(93,774) and $(280,097), respectively.
Fees and other expenses incurred by us to our Manager or its affiliates were as follows:
|
|
|
|
Years Ended December 31, |
||||||||||||
|
|
Entity |
|
Capacity |
|
Description |
|
2014 |
|
2013 |
|
2012 |
||||
|
|
ICON Capital, LLC |
|
Manager |
|
Acquisition fees (1) |
|
$ |
3,884,570 |
|
$ |
1,975,062 |
|
$ |
1,366,728 |
|
|
|
ICON Capital, LLC |
|
Manager |
|
Management fees (2) |
|
|
1,918,023 |
|
|
3,247,710 |
|
|
4,569,168 |
|
|
|
ICON Capital, LLC |
|
Manager |
|
Administrative expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
reimbursements (2) |
|
|
4,785,387 |
|
|
2,284,264 |
|
|
2,857,713 |
||||
|
|
|
|
$ |
10,587,980 |
|
$ |
7,507,036 |
|
$ |
8,793,609 |
|||||
|
|
|
||||||||||||||
|
|
(1) Amount capitalized and amortized to operations. |
||||||||||||||
|
|
(2) Amount charged directly to operations. |
||||||||||||||
At December 31, 2014 and 2013, we had a net payable due to our Manager and affiliates of $2,798,414 and $374,363, respectively, primarily related to administrative expense reimbursements. These administrative expense reimbursements in 2014 included approximately $2,100,000 of professional fees and other costs incurred in connection with our Manager’s proposed sale of our assets during our liquidation period. Our Manager may continue to incur additional professional fees and costs on our behalf as it continues to pursue the sale of our assets in one or more strategic transactions.
(10) Derivative Financial Instruments
We may enter into derivative financial instruments for purposes of hedging specific financial exposures, including movements in foreign currency exchange rates and changes in interest rates on our non-recourse long-term debt. We enter into these instruments only for hedging underlying exposures. We do not hold or issue derivative financial instruments for purposes other than hedging, except for warrants, which are not hedges. Certain derivatives may not meet the established criteria to be designated as qualifying accounting hedges, even though we believe that these are effective economic hedges.
We recognize all derivative financial instruments as either assets or liabilities on our consolidated balance sheets and measure 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 we must document and assess at inception and on an ongoing basis, we recognize the
69
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
changes in fair value of such instruments in AOCI, a component of equity on our consolidated balance sheets. Changes in the fair value of the ineffective portion of all derivatives are recognized immediately in earnings.
U.S. GAAP and relevant International Swaps and Derivatives Association, Inc. agreements permit a reporting entity that is a party to a master netting agreement to offset fair value amounts recognized for derivative instruments that have been offset under the same master netting agreement. We elected to present the fair value of derivative contracts on a gross basis on our consolidated balance sheets.
Interest Rate Risk
Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements on our variable non-recourse debt. Our strategy to accomplish these objectives is to match the projected future cash flows with the underlying debt service. Each interest rate swap involve the receipt of floating-rate interest payments from the counterparty in exchange for us making fixed-rate interest payments over the life of the agreement without exchange of the underlying notional amount.
We manage exposure to possible defaults on derivative financial instruments by monitoring the concentration of risk that we have with any individual bank and through the use of minimum credit quality standards for all counterparties. We do not require collateral or other security in relation to derivative financial instruments. Since it is our policy to enter into derivative contracts only with banks of internationally acknowledged standing and the fair value of our derivatives is in a liability position, we consider the counterparty risk to be remote.
As of December 31, 2014 , we no longer hold any derivative financial instruments. As of December 31, 2013, we had only warrants in an asset position that were not material to the consolidated financial statements; therefore, we consider the counterparty risk to be remote.
Credit Risk
Derivative contracts may contain credit risk-related contingent features that can trigger a termination event, such as maintaining specified financial ratios. In the event that we would be required to settle our obligations under the derivative contracts as of December 31, 2013, the termination value was $821,875.
Non-designated Derivatives
As of December 31, 2013, we had one interest rate swap with Standard Chartered that was not designated and not qualifying as a cash flow hedge with a notional amount of $6,580,645. On April 1, 2014, this interest rate swap was terminated prior to its maturity date. The lessee to the transaction associated with this interest rate swap was responsible for all costs related to such termination.
Additionally, we held warrants for purposes other than hedging. On July 21, 2014, we exercised all of such warrants for cash consideration. All changes in the fair value of the interest rate swap not designated as a hedge and the warrants were recorded directly in earnings, which is included in loss (gain) on derivative financial instruments.
Our derivative financial instruments not designated as hedging instruments generated a loss (gain) on derivative financial instruments on our consolidated statements of comprehensive income (loss) for the years ended December 31, 2014, 2013, and 2012 of $(13,699), $(187,692) and $(2,814,366), respectively. The loss recorded for the year ended December 31, 2014 was comprised of a gain of $32,618 relating to interest rate swap contracts and a loss of $46,317 relating to warrants. The gain recorded for the year ended December 31, 2013 was comprised of gains of $180,323 relating to interest rate swap contracts and $7,369 relating to warrants. The gain recorded for the year ended December 31, 2012 was comprised of gains of $132,366 related to interest rate swaps contracts and $2,682,000 relating to warrants.
70
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
As of December 31, 2013, we had four floating-to-fixed interest rate swaps, two with Standard Chartered and two with BNP Paribas, which were designated and qualifying as cash flow hedges with an aggregate notional amount of $41,405,424. On April 1, 2014, the two interest rate swaps with Standard Chartered were terminated prior to their maturity date. The lessee to the transaction associated with the interest rate swaps was responsible for all costs related to such termination. On April 24, 2014, the two interest rate swaps with BNP Paribas matured. As a result, $346,668 was reclassified from AOCI to interest expense and loss (gain) on derivative financial instruments during 2014.
For these derivatives, we record the gain or loss from the effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges in AOCI and such gain or loss is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings and within the same line item on the consolidated statements of comprehensive income (loss) as the impact of the hedged transaction. During the years ended December 31, 2014, 2013, and 2012, we recorded approximately $3,400, $22,000 and $34,000, respectively, of hedge ineffectiveness in earnings, which is included in loss (gain) on derivative financial instruments. At December 31, 2014 and 2013, the total unrealized loss recorded to AOCI related to the change in fair value of these interest rate swaps was $0 and approximately $636,000, respectively.
The table below presents the fair value of our derivative financial instruments as well as their classification within our consolidated balance sheets as of December 31, 2014 and 2013:
|
|
|
|
|
Asset Derivatives |
|
Liability Derivatives |
|||||||||||
|
|
|
|
|
Balance |
|
|
|
|
Balance |
|
|
||||||
|
|
|
|
|
Sheet |
|
|
2014 |
|
|
2013 |
|
Sheet |
|
2014 |
|
|
2013 |
|
|
|
|
|
Location |
|
|
Fair Value |
|
|
Fair Value |
|
Location |
|
Fair Value |
|
|
Fair Value |
|
|
Derivatives designated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financial |
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
$ |
- |
|
$ |
- |
|
instruments |
$ |
- |
|
$ |
634,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financial |
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
$ |
- |
|
$ |
- |
|
instruments |
$ |
- |
|
$ |
175,018 |
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
assets |
|
$ |
- |
|
$ |
60,525 |
|
|
$ |
- |
|
$ |
- |
The table below presents the effect of our derivative financial instruments designated as cash flow hedging instruments on the consolidated statements of comprehensive income (loss) for the years ended December 31, 2014, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of |
|
|
Amount of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss |
|
|
Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized |
|
|
Recognized |
|
|
|
|
|
|
|
Amount of |
|
Location of |
|
|
Amount of |
|
in Income |
|
|
in Income |
|
|
|
|
|
|
|
Loss |
|
Loss |
|
|
Loss |
|
on Derivatives |
|
|
on Derivatives |
|
|
|
|
|
|
|
Recognized in |
|
Reclassified |
|
|
Reclassified |
|
(Ineffective Portion |
|
|
(Ineffective Portion |
|
|
|
|
Derivatives |
|
|
AOCI on |
|
from AOCI into |
|
|
from AOCI into |
|
and Amounts |
|
|
and Amounts |
|
|
|
|
Designated as |
|
|
Derivatives |
|
Income |
|
|
Income |
|
Excluded from |
|
|
Excluded from |
|
|
Years Ended |
|
Hedging |
|
|
(Effective |
|
(Effective |
|
|
(Effective |
|
Effectiveness |
|
|
Effectiveness |
|
|
December 31, |
|
Instruments |
|
|
Portion) |
|
Portion)* |
|
|
Portion) |
|
Testing) |
|
|
Testing) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on derivative |
|
|
|
|
|
|
|
Interest rate |
|
|
|
|
Interest |
|
|
|
|
financial |
|
|
|
|
|
2014 |
|
swaps |
|
$ |
(23,878) |
|
expense |
|
$ |
(653,465) |
|
instruments |
|
$ |
(3,431) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on derivative |
|
|
|
|
|
|
|
Interest rate |
|
|
|
|
Interest |
|
|
|
|
financial |
|
|
|
|
|
2013 |
|
swaps |
|
$ |
(141,021) |
|
expense |
|
$ |
(2,321,209) |
|
instruments |
|
$ |
(21,684) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on derivative |
|
|
|
|
|
|
|
Interest rate |
|
|
|
|
Interest |
|
|
|
|
financial |
|
|
|
|
|
2012 |
|
swaps |
|
$ |
(933,529) |
|
expense |
|
$ |
(3,100,462) |
|
instruments |
|
$ |
(33,552) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*For the year ended December 31, 2014, a loss in the amount of approximately $361,000 was reclassified into earnings as a loss on derivative financial instruments as a result of the discontinuance of two cash flow hedges because it was probable that the original forecasted transactions would not occur by the end of the originally specified time period or within the additional period of time. These two cash flow hedges related to the Leighton Eclipse and the Leighton Stealth, which were sold during 2014. |
|||||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
71
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
(11) Accumulated Other Comprehensive Income (Loss)
As of December 31, 2014 and 2013, we had AOCI of $0 and $(629,587), respectively. As of December 31, 2013, AOCI of $(629,587) was related to accumulated unrealized losses on derivative financial instruments.
For the year ended December 31, 2014, we reclassified approximately $347,000 from AOCI to interest expense and loss on derivative financial instruments due to the early termination of certain interest rate swap agreements. For the year ended December 31, 2013, we reclassified approximately $1,447,000 of accumulated loss on currency translation adjustments out of AOCI and into loss on disposition of asset of foreign investment within the consolidated statements of comprehensive income (loss).
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 are supported by little or no 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. Our Manager’s assessment, on our 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.
72
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
The following table summarizes the valuation of our financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2013:
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
$ |
- |
|
$ |
- |
|
$ |
60,525 |
|
$ |
60,525 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
$ |
- |
|
$ |
809,705 |
|
$ |
- |
|
$ |
809,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our derivative financial instruments, including interest rate swaps and warrants, were valued using models based on readily observable or unobservable market parameters for all substantial terms of our derivative financial instruments and were classified within Level 2 or Level 3. In accordance with U.S. GAAP, we used market prices and pricing models for fair value measurements of our derivative financial instruments.
We utilized a model that incorporates common market pricing methods as well as underlying characteristics of the particular swap contract. Interest rate swaps were modeled by incorporating such inputs as the term to maturity, LIBOR swap curves, Overnight Index Swap (“OIS”) curves and the payment rate on the fixed portion of the interest rate swap. Such inputs were classified within Level 2. Thereafter, we compared third party quotations received to our own estimate of fair value to evaluate for reasonableness. The fair value of the interest rate swaps was recorded in derivative financial instruments within the consolidated balance sheets.
As of January 1, 2013, we made two significant, but related, changes to our derivatives valuation methodology: (1) changing from LIBOR-based discount factors to OIS-based discount factors; and (2) changing from a traditional LIBOR swap curve to a dual-curve including both the LIBOR swap curve and the OIS curve. We made the changes to better align our inputs, assumptions, and pricing methodologies with those used in our principal market by most dealers and major market participants. The change in valuation methodology was applied prospectively as a change in accounting estimate and was not material to our consolidated financial statements.
Warrants
As of December 31, 2013, our warrants were valued using the Black-Scholes-Merton option pricing model based on observable and unobservable inputs that are significant to the fair value measurement and are classified within Level 3. Unobservable inputs used in the Black-Scholes-Merton option pricing model include, but are not limited to, the expected stock price volatility and the expected period until the warrants are exercised. Increases or decreases of these inputs would result in a higher or lower fair value measurement. On July 21, 2014, we exercised the warrants and received net cash proceeds of $14,208, which resulted in a loss of $43,126.
The fair value of the warrants was recorded in other non-current assets within the consolidated balance sheets. The realized loss upon exercise of the warrants and the unrealized loss or gain on the change in fair value of the warrants was recorded in loss (gain) on derivative financial instruments on the consolidated statements of comprehensive income (loss).
Assets Measured at Fair Value on a Nonrecurring Basis
We are required, on a nonrecurring basis, to adjust the carrying value or provide valuation allowances for certain assets using fair value measurements. The valuation of our financial assets, such as notes receivable or direct financing leases, is included below only when fair value has been measured and recorded based on the fair value of the underlying collateral. Our 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. To determine the fair value when impairment indicators exist, we utilize different valuation approaches based on transaction-specific facts and circumstances to determine fair value, including discounted cash flow models and the use of comparable transactions. The following tables summarize the valuation
73
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
of our material financial and non-financial assets measured at fair value on a nonrecurring basis, which is presented as of the date the credit or impairment loss was recorded, while the carrying value of the assets is presented as of December 31, 2014 or 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Loss |
|
|
|
|
Carrying Value at |
|
Fair Value at Impairment Date |
|
|
for the Year Ended |
|||||||
|
|
|
|
December 31, 2014 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
December 31, 2014 |
|
|
Net investment in note receivable |
$ |
966,359 |
|
$ |
- |
|
$ |
- |
|
$ |
966,359 |
|
$ |
634,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment Loss |
|
|
|
|
Carrying Value at |
|
Fair Value at Impairment Date |
|
|
for the Year Ended |
|||||||
|
|
|
|
December 31, 2013 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
December 31, 2013 |
|
|
Leased equipment at cost, net |
$ |
20,071,331 |
|
$ |
- |
|
$ |
- |
|
$ |
66,816,242 |
|
$ |
14,790,755 |
Our collateral dependent note receivable was valued using inputs that are generally unobservable and are supported by little or no market data and were classified within Level 3. For the credit loss recorded during the year ended December 31, 2014, our collateral dependent note receivable was valued based on the liquidation value of the collateral provided by an independent third-party appraiser.
During 2013, we identified impairment indicators and measured certain non-financial assets for impairment purposes. The estimated fair value of our non-financial assets was based on inputs that are generally unobservable and are supported by little or no market data and were classified within Level 3. The significant unobservable inputs included a discount rate of 8% per year for fair value measurements of our leased equipment at cost.
Assets and Liabilities for which Fair Value is Disclosed
Certain of our financial assets and liabilities, which includes fixed-rate notes receivable, fixed-rate non-recourse long-term debt and seller’s credits, for which fair value is required to be disclosed, were valued using inputs that are generally unobservable and are supported by little or no market data and are therefore classified within Level 3. Under U.S. GAAP, we use projected cash flows for fair value measurements of these financial assets and liabilities. Fair value information with respect to certain of our other assets and liabilities is not separately provided since (i) U.S. GAAP does not require fair value disclosures of lease arrangements and (ii) the carrying 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 our fixed-rate notes receivable was based on the discounted value of future cash flows related to the loans at inception, adjusted for changes in variables, including, but not limited to, credit quality, industry, financial markets and other recent comparables. The estimated fair value of our fixed-rate non-recourse long-term debt and seller’s credits was based on the discounted value of future cash flows related to the debt and seller’s credits based on a discount rate derived from the margin at inception, adjusted for material changes in risk, plus the applicable fixed rate based on the current interest rate curve. Principal outstanding on fixed-rate notes receivable was discounted at rates ranging between 10% and 16% as of December 31, 2014. Principal outstanding on fixed-rate non-recourse long-term debt and the seller’s credits was discounted at rates ranging between 1.56% and 7.77% as of December 31, 2014.
|
|
|
December 31, 2014 |
||||
|
|
|
|
Carrying |
|
|
Fair Value |
|
|
|
|
Value |
|
|
(Level 3) |
|
|
Principal outstanding on fixed-rate notes receivable |
$ |
59,474,788 |
|
$ |
59,006,275 |
|
|
|
|
|
|
|
|
|
|
Principal outstanding on fixed-rate non-recourse long-term debt |
$ |
59,195,786 |
|
$ |
59,632,525 |
|
|
|
|
|
|
|
|
|
|
Seller's credits |
$ |
12,295,998 |
|
$ |
12,781,678 |
74
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
In the normal course of business, we are exposed to two significant types of economic risk: credit and market. Credit risk is the risk of a lessee, borrower or other counterparty’s inability or unwillingness to make contractually required payments. Concentrations of credit risk with respect to lessees, borrowers or other counterparties are dispersed across different industry segments within the United States of America and throughout the world.
Market risk reflects the change in the value of debt instruments, derivatives and credit facilities due to changes in interest rate spreads or other market factors. We believe that the carrying value of our investments and derivative obligations are reasonable, taking into consideration these risks, along with estimated collateral values, payment history and other relevant information.
At times, our cash and cash equivalents may exceed insured limits. We have placed these funds in high quality institutions in order to minimize the risk of loss relating to exceeding insured limits.
For the years ended December 31, 2014, 2013 and 2012, we had two, four and four lessees that accounted for approximately 62.1%, 87.4% and 80.4% of rental and finance income, respectively.
As of December 31, 2014 and 2013, we had three and three lessees that accounted for approximately 39.0% and 61.1% of total assets, respectively.
As of December 31, 2014 and 2013, we had three and three lenders that accounted for 77.3% and 52.5% of total liabilities, respectively.
Geographic information for revenue, long-lived assets and other assets deemed relatively illiquid, based on the country of origin, was as follows:
|
|
Year Ended December 31, 2014 |
|||||||||||||||
|
|
|
|
North |
|
|
|
|
|
|
|
|
|
|
|
||
|
|
America |
|
Europe |
|
Asia |
|
Vessels(a) |
|
Total |
|||||||
|
|
Revenue and other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income |
$ |
7,138,033 |
|
$ |
(81,686) |
|
$ |
- |
|
$ |
61,169,489 |
|
$ |
68,225,836 |
|
|
|
Rental income |
$ |
631,225 |
|
$ |
- |
|
$ |
- |
|
$ |
13,280,482 |
|
$ |
13,911,707 |
|
|
|
Time charter revenue |
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
4,132,289 |
|
$ |
4,132,289 |
|
|
|
Income from investment in joint ventures |
$ |
147,331 |
|
$ |
- |
|
$ |
1,594,177 |
|
$ |
1,529,684 |
|
$ |
3,271,192 |
|
|
|
|||||||||||||||
|
|
|
|
December 31, 2014 |
|||||||||||||
|
|
|
|
North |
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
America |
|
Europe |
|
Asia |
|
Vessels(a) |
|
Total |
|||||
|
|
Long-lived assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment in notes receivable |
$ |
37,130,967 |
|
$ |
- |
|
$ |
- |
|
$ |
21,589,043 |
|
$ |
58,720,010 |
|
|
|
Net investment in finance leases |
$ |
36,286,791 |
|
$ |
- |
|
$ |
- |
|
$ |
37,998,931 |
|
$ |
74,285,722 |
|
|
|
Leased equipment at cost, net |
$ |
6,395,518 |
|
$ |
- |
|
$ |
- |
|
$ |
66,356,257 |
|
$ |
72,751,775 |
|
|
|
Vessels |
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
18,266,677 |
|
$ |
18,266,677 |
|
|
|
Investment in joint ventures |
$ |
945,574 |
|
$ |
- |
|
$ |
15,838,805 |
|
$ |
8,451,448 |
|
$ |
25,235,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2013 |
|||||||||||||||
|
|
|
|
North |
|
|
|
|
|
|
|
|
|
|
|
||
|
|
America |
|
Europe |
|
Asia |
|
Vessels (a) |
|
Total |
|||||||
|
|
Revenue and other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income |
$ |
4,536,002 |
|
$ |
1,305,760 |
|
$ |
- |
|
$ |
10,969,314 |
|
$ |
16,811,076 |
|
|
|
Rental income |
$ |
79,539 |
|
$ |
- |
|
$ |
- |
|
$ |
32,705,994 |
|
$ |
32,785,533 |
|
|
|
Income from investment in joint ventures |
$ |
1,212,102 |
|
$ |
- |
|
$ |
1,148,327 |
|
$ |
1,700,888 |
|
$ |
4,061,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013 |
|||||||||||||
|
|
|
North |
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
America |
|
Europe |
|
Asia |
|
Vessels (a) |
|
Total |
|||||
|
|
Long-lived assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment in notes receivable |
$ |
36,266,631 |
|
$ |
10,102,585 |
|
$ |
- |
|
$ |
- |
|
$ |
46,369,216 |
|
|
|
Net investment in finance leases |
$ |
7,961,106 |
|
$ |
- |
|
$ |
- |
|
$ |
93,951,369 |
|
$ |
101,912,475 |
|
|
|
Leased equipment at cost, net |
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
55,206,565 |
|
$ |
55,206,565 |
|
|
|
Investment in joint ventures |
$ |
3,592,960 |
|
$ |
- |
|
$ |
14,331,816 |
|
$ |
6,907,152 |
|
$ |
24,831,928 |
75
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
|
|
Year Ended December 31, 2012 |
|||||||||||||||
|
|
|
|
North |
|
|
|
|
|
|
|
|
|
|
|
||
|
|
America |
|
Europe |
|
Asia |
|
Vessels(a) |
|
Total |
|||||||
|
|
Revenue and other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income |
$ |
6,228,433 |
|
$ |
1,773,683 |
|
$ |
- |
|
$ |
12,242,330 |
|
$ |
20,244,446 |
|
|
|
Rental income |
$ |
4,154,765 |
|
$ |
- |
|
$ |
- |
|
$ |
40,139,592 |
|
$ |
44,294,357 |
|
|
|
Income from investment in joint ventures |
$ |
581,503 |
|
$ |
- |
|
$ |
612,472 |
|
$ |
304,937 |
|
$ |
1,498,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Vessels are generally free to trade worldwide |
|||||||||||||||
(15) 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 as a whole.
In connection with certain investments, we are required to maintain restricted cash accounts with certain banks. Restricted cash of approximately $1,351,000 is presented within other non-current assets in our consolidated balance sheets at December 31, 2014.
During 2008, a joint venture owned 55% by us and 45% by Fund Eleven purchased and simultaneously leased back semiconductor manufacturing equipment to EAR for approximately $15,730,000. On October 23, 2009, EAR filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. 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, which 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.
76
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
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 6, 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 appealed this decision. On September 16, 2013, the lower court’s ruling was affirmed by the Illinois Appellate Court. On October 21, 2013, ICON EAR filed a Petition for Leave to Appeal with the Supreme Court of Illinois appealing the decision of the Illinois Appellate Court, which petition was denied on January 29, 2014. The only remaining asset owned by ICON EAR at December 31, 2013 was real property with a carrying value of approximately $290,000, which was included in other non-current assets within our consolidated balance sheets. During the year ended December 31, 2014, we recognized an impairment charge of approximately $70,000 based on the estimated fair value less cost to sell the real property. On December 24, 2014, ICON EAR sold the real property for approximately $208,000. No material gain or loss was recorded as a result of this sale.
We have entered into remarketing agreements with third parties. Residual proceeds received in excess of specific amounts will be shared with these third parties in accordance with the terms of the remarketing agreements. The present value of the obligations related to these agreements was approximately $70,000 at December 31, 2014.
(16) Selected Quarterly Financial Data (unaudited)
The following table is a summary of selected financial data by quarter:
77
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
|
|
|
|
Year Ended |
|||||||||||||||
|
|
Quarters Ended in 2014 |
|
December 31, |
|||||||||||||||
|
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
|
2014 |
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
Total revenue and other income |
$ |
8,146,719 |
|
$ |
63,719,444 |
|
$ |
9,320,515 |
|
$ |
10,073,529 |
|
$ |
91,260,207 |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
Net income (loss) |
$ |
2,785,139 |
|
$ |
57,442,872 |
|
$ |
3,014,691 |
|
$ |
(3,362,371) |
|
$ |
59,880,331 |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Fund Twelve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
allocable to additional members |
$ |
2,142,378 |
|
$ |
55,877,413 |
|
$ |
1,951,786 |
|
$ |
(690,049) |
|
$ |
59,281,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of additional shares of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
limited liability company interests outstanding |
|
348,335 |
|
|
348,335 |
|
|
348,335 |
|
|
348,335 |
|
|
348,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Fund Twelve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
per weighted average additional share of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
limited liability company interests outstanding |
$ |
6.15 |
|
$ |
160.41 |
|
$ |
5.60 |
|
$ |
(1.98) |
|
$ |
170.19 |
|
|
|
|
|
Year Ended |
|||||||||||||||
|
|
Quarters Ended in 2013 |
|
December 31, |
|||||||||||||||
|
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
|
2013 |
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
Total revenue and other income |
$ |
15,025,747 |
|
$ |
15,612,707 |
|
$ |
12,616,930 |
|
$ |
12,534,060 |
|
$ |
55,789,444 |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
Net (loss) income |
$ |
(885,987) |
|
$ |
1,063,309 |
|
$ |
69,366 |
|
$ |
(8,086,958) |
|
$ |
(7,840,270) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Fund Twelve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
allocable to additional members |
$ |
(1,025,892) |
|
$ |
747,425 |
|
$ |
(12,293) |
|
$ |
(8,992,935) |
|
$ |
(9,283,695) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of additional shares of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
limited liability company interests outstanding |
|
348,429 |
|
|
348,346 |
|
|
348,335 |
|
|
348,335 |
|
|
348,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Fund Twelve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
per weighted average additional share of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
limited liability company interests outstanding |
$ |
(2.94) |
|
$ |
2.2 |
|
$ |
(0.04) |
|
$ |
(25.82) |
|
$ |
(26.65) |
|
78
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
|
|
|
|
Year Ended |
|||||||||||||||
|
|
Quarters Ended in 2012 |
|
December 31, |
|||||||||||||||
|
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
|
2012 |
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
Total revenue and other income |
$ |
17,659,447 |
|
$ |
16,665,349 |
|
$ |
16,950,378 |
|
$ |
16,257,219 |
|
$ |
67,532,393 |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
Net income (loss) |
$ |
4,188,949 |
|
$ |
638,994 |
|
$ |
(3,682,825) |
|
$ |
(34,124,568) |
|
$ |
(32,979,450) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Fund Twelve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
allocable to additional members |
$ |
3,620,302 |
|
$ |
109,403 |
|
$ |
(3,648,166) |
|
$ |
(27,811,122) |
|
$ |
(27,729,583) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of additional shares of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
limited liability company interests outstanding |
|
348,636 |
|
|
348,598 |
|
|
348,507 |
|
|
348,436 |
|
|
348,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Fund Twelve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
per weighted average additional share of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
limited liability company interests outstanding |
$ |
10.38 |
|
$ |
0.31 |
|
$ |
(10.47) |
|
$ |
(79.82) |
|
$ |
(79.56) |
|
(17) Income Tax Reconciliation (unaudited)
At December 31, 2014 and 2013, the members’ equity included in the consolidated financial statements totaled $161,494,839 and $126,497,651, respectively. The members’ capital for federal income tax purposes at December 31, 2014 and 2013 totaled $167,988,989 and $151,059,634, respectively. The difference arises from differences in income from joint ventures, finance income, rental income, minority interests, loss on debt extinguishment and gain (loss) on disposal of assets between financial reporting purposes and federal income tax purposes.
The following table reconciles net income (loss) attributable to us for financial statement reporting purposes to the net income (loss) attributable to us for federal income tax purposes:
|
|
|
|
Years Ended December 31, |
|||||||
|
|
|
|
2014 |
|
2013 |
|
2012 |
|||
|
|
Net income (loss) attributable to Fund Twelve per consolidated financial statements |
$ |
59,880,331 |
|
$ |
(9,377,469) |
|
$ |
(28,009,680) |
|
|
|
|
Finance income |
|
(416,067) |
|
|
16,654,653 |
|
|
(7,080,416) |
|
|
|
Rental income |
|
29,348,962 |
|
|
13,420,676 |
|
|
21,175,447 |
|
|
|
Depreciation and amortization |
|
(4,711,485) |
|
|
(3,262,016) |
|
|
7,798,022 |
|
|
|
(Loss) gain on disposal of assets |
|
(42,052,420) |
|
|
8,980,035 |
|
|
1,549,494 |
|
|
|
Income from joint ventures |
|
752,724 |
|
|
(111,547,214) |
|
|
7,131,529 |
|
|
|
Fixed asset impairment |
|
- |
|
|
13,020,226 |
|
|
29,048,394 |
|
|
|
Interest expense |
|
(756,102) |
|
|
781,695 |
|
|
994,127 |
|
|
|
Minority interest |
|
3,429,854 |
|
|
13,314,909 |
|
|
- |
|
|
|
Loss on debt extinguishment |
|
(857,724) |
|
|
(1,457,702) |
|
|
- |
|
|
|
Bad debt |
|
- |
|
|
- |
|
|
(345,000) |
|
|
|
Other |
|
3,546,573 |
|
|
(146,460) |
|
|
(360,614) |
|
|
Net income (loss) attributable to Fund Twelve for federal income tax purposes |
$ |
48,164,646 |
|
$ |
(59,618,667) |
|
$ |
31,901,303 |
|
79
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
80
|
|
Schedule II - Valuation and Qualifying Accounts |
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description |
|
|
Balance at Beginning of Year |
|
|
Additions Charged to Costs and Expenses |
|
|
Additions Charged to Notes Receivable |
|
Deduction |
|
|
Balance at End of Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance from asset accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
|
Year Ended December 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit loss reserve |
|
$ |
- |
|
$ |
631,986 |
|
$ |
- |
$ |
- |
|
$ |
631,986 |
|
|
|
|
|||||||||||||||
|
|
Year Ended December 31, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit loss reserve |
|
$ |
- |
|
$ |
- |
|
$ |
- |
$ |
- |
|
$ |
- |
|
|
|
|
|||||||||||||||
|
|
Year Ended December 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit loss reserve |
|
$ |
674,000 |
|
$ |
(345,000) |
|
$ |
- |
$ |
329,000 |
(a) |
$ |
- |
|
|
|
|
|||||||||||||||
|
|
(a) Credit loss reserve removed due to prepayment of term loan. |
|||||||||||||||
81
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures
In connection with the preparation of this Annual Report on Form 10-K for the year ended December 31, 2014, 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.
Our Manager’s Co-Chief Executive Officers and Principal Financial and Accounting Officer have determined that no weakness in disclosure controls and procedures had any material effect on the accuracy and completeness of our financial reporting and disclosure included in this Annual Report on Form 10-K.
Evaluation of internal control over financial reporting
Our Manager is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our Manager assessed the effectiveness of its internal control over financial reporting as of December 31, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control — Integrated Framework” as issued in 2013.
Based on its assessment, our Manager believes that, as of December 31, 2014, its internal control over financial reporting is effective.
Changes in internal control over financial reporting
82
There were no changes in our Manager’s internal control over financial reporting during the quarter ended December 31, 2014 that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
83
Item 10. Directors, Executive Officers of the Registrant's Manager and Corporate Governance
Our Manager, ICON Capital, LLC, a Delaware limited liability company (“ICON Capital”), was formed in 1985. Our Manager's principal office is located at 3 Park Avenue, 36th Floor, New York, New York 10016, and its telephone number is (212) 418-4700.
In addition to the primary services related to our making and disposing of investments, our Manager provides services relating to the day-to-day management of our investments. These services include collecting payments due from lessees, borrowers, and other counterparties; remarketing equipment that is off-lease; inspecting equipment; serving as a liaison with lessees, borrowers, and other counterparties; supervising equipment maintenance; and monitoring performance by lessees, borrowers, and other counterparties of their obligations, including payment of contractual payments and all operating expenses.
Name |
Age |
Title |
|
Michael A. Reisner.................. |
44 |
Co-Chairman, Co-Chief Executive Officer, Co-President and Director |
|
Mark Gatto............................... |
42 |
Co-Chairman, Co-Chief Executive Officer, Co-President and Director |
|
Christine H. Yap...................... |
44 |
Managing Director and Principal Financial and Accounting Officer |
|
Blake E. Estes........................... |
41 |
Senior Managing Director and Counsel |
|
Harry Giovani.......................... |
40 |
Managing Director and Chief Credit Officer |
|
|
|
|
On January 9, 2015, Craig A. Jackson resigned as Managing Director and member of the investment committee of our Manager. Following his resignation, the investment committee consists of Michael A. Reisner, Mark Gatto and Harry Giovani.
Michael A. Reisner, Co-Chairman, Co-CEO, Co-President and Director, joined ICON Capital in 2001. Prior to purchasing the company in 2008, Mr. Reisner held various positions in the firm, including Executive Vice President and Chief Financial Officer, General Counsel and Executive Vice President of Acquisitions. Before his tenure with ICON Capital, Mr. Reisner was an attorney from 1996 to 2001 with Brodsky Altman & McMahon, LLP in New York, concentrating on commercial transactions. Mr. Reisner received a J.D. from New York Law School and a B.A. from the University of Vermont.
Mark Gatto, Co-Chairman, Co-CEO, Co-President and Director, originally joined ICON Capital in 1999. Prior to purchasing the company in 2008, Mr. Gatto held various positions in the firm, including Executive Vice President and Chief Acquisitions Officer, Executive Vice President - Business Development and Associate General Counsel. Before his tenure with ICON Capital, he was an attorney with Cella & Goldstein in New Jersey, concentrating on commercial transactions and general litigation matters. Additionally, he was Director of Player Licensing for the Topps Company and in 2003, he co-founded a specialty business consulting firm in New York City, where he served as managing partner before re-joining ICON Capital in 2005. Mr. Gatto received an M.B.A. from the W. Paul Stillman School of Business at Seton Hall University, a J.D. from Seton Hall University School of Law, and a B.S. from Montclair State University.
Christine H. Yap, Managing Director and Principal Financial and Accounting Officer joined ICON Capital in May 2013. Prior to joining ICON Capital, Ms. Yap was previously a Vice President and Fund Controller at W.P. Carey Inc. from October 2011 to December 2012. Prior to W.P. Carey, from June 1997 to October 2011, Ms. Yap was employed by PricewaterhouseCoopers LLP, rising to the level of Director. Ms. Yap received a B.S. in Accounting from Meredith College and an M.S. in Accounting from the University of Rhode Island and is a certified public accountant.
Blake E. Estes, Senior Managing Director and Counsel joined ICON Capital in January 2011. Prior to joining ICON Capital, Mr. Estes was Associate General Counsel for JWM Partners, LLC, an SEC-registered manager of hedge funds and managed accounts that employed relative value arbitrage and macro trading strategies, where he was lead counsel for the front office trading and operations group. Previously, Mr. Estes was an attorney with Sidley Austin LLP (2004 to 2006) and Cadwalader, Wickersham & Taft LLP (2000 to 2004) where his practice focused on structured credit products and credit and commodity derivatives. Mr. Estes received a J.D. from Georgetown University Law Center where he was an Olin Fellow and a B.A. in Economics from the University of Texas at Austin.
Harry Giovani, Managing Director and Chief Credit Officer, joined ICON Capital in 2008. Most recently, from March 2007 to January 2008, he was Vice President for FirstLight Financial Corporation, responsible for underwriting and syndicating middle market leveraged loan transactions. Previously, he spent three years at GE Commercial Finance, initially as an Assistant
84
Vice President in the Intermediary Group, where he was responsible for executing middle market transactions in a number of industries including manufacturing, steel, paper, pharmaceutical, technology, chemicals and automotive, and later as a Vice President in the Industrial Project Finance Group, where he originated highly structured project finance transactions. He started his career at Citigroup’s Citicorp Securities and CitiCapital divisions, where he spent six years in a variety of roles of increasing responsibility including underwriting, origination and strategic marketing / business development. Mr. Giovani graduated from Cornell University in 1996 with a B.S. in Finance.
Code of Ethics
Our Manager, on our behalf, has adopted a code of ethics for its Co-Chief Executive Officers and Principal Financial and Accounting Officer. The Code of Ethics is available free of charge by requesting it in writing from our Manager. Our Manager's address is 3 Park Avenue, 36th Floor, New York, New York 10016.
Item 11. Executive Compensation
We have no directors or officers. Our Manager and its affiliates were paid or we accrued the following compensation and reimbursement for costs and expenses:
|
|
|
|
Years Ended December 31, |
||||||||||||
|
|
Entity |
|
Capacity |
|
Description |
|
2014 |
|
2013 |
|
2012 |
||||
|
|
ICON Capital, LLC |
|
Manager |
|
Acquisition fees (1) |
|
$ |
3,884,570 |
|
$ |
1,975,062 |
|
$ |
1,366,728 |
|
|
|
ICON Capital, LLC |
|
Manager |
|
Management fees (2) |
|
|
1,918,023 |
|
|
3,247,710 |
|
|
4,569,168 |
|
|
|
ICON Capital, LLC |
|
Manager |
|
Administrative expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
reimbursements (2) |
|
|
4,785,387 |
|
|
2,284,264 |
|
|
2,857,713 |
||||
|
|
|
|
$ |
10,587,980 |
|
$ |
7,507,036 |
|
$ |
8,793,609 |
|||||
|
|
|
||||||||||||||
|
|
(1) Amount capitalized and amortized to operations. |
||||||||||||||
|
|
(2) Amount charged directly to operations. |
||||||||||||||
Our Manager also has a 1% interest in our profits, losses, distributions and liquidation proceeds. We paid distributions to our Manager of $255,127, $262,158 and $339,749 for the years ended December 31, 2014, 2013 and 2012, respectively. Our Manager’s interest in our net income (loss) was $598,803, $(93,774) and $(280,097) for the years ended December 31, 2014, 2013 and 2012, respectively.
Item 12. Security Ownership of Certain Beneficial Owners and the Manager and Related Security Holder Matters
(a) We do not have any securities authorized for issuance under any equity compensation plan. No person of record owns, or is known by us to own, beneficially more than 5% of any class of our securities.
(b) As of March 20, 2015, no directors or officers of our Manager own any of our equity securities.
(c) Neither we nor our Manager are aware of any arrangements with respect to our securities, the operation of which may at a subsequent date result in a change of control of us.
Item 13. Certain Relationships and Related Transactions, and Director Independence
See “Item 11. Executive Compensation” for a discussion of our related party transactions. See Notes 6 and 9 to our consolidated financial statements for a discussion of our investments in joint ventures and transactions with related parties, respectively.
Because we are not listed on any national securities exchange or inter-dealer quotation system, we have elected to use the Nasdaq Stock Market’s definition of “independent director” in evaluating whether any of our Manager’s directors are independent. Under this definition, the board of directors of our Manager has determined that our Manager does not have any independent directors, nor are we required to have any.
85
Item 14. Principal Accounting Fees and Services
During the years ended December 31, 2014 and 2013, our auditors provided audit services relating to our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q. Additionally, our auditors provided other services in the form of tax compliance work. The following table presents the fees for both audit and non-audit services rendered by Ernst & Young LLP:
|
|
|
Years Ended December 31, |
||||
|
|
|
2014 |
|
2013 |
||
|
|
Audit fees |
$ |
536,969 |
|
$ |
490,700 |
|
|
Tax fees |
|
264,584 |
|
|
208,166 |
|
|
|
$ |
801,553 |
|
$ |
698,866 |
|
|
|
|
|
|
|
|
86
Item 15. Exhibits, Financial Statement Schedules
(a) 1. Financial Statements
See index to consolidated financial statements included as Item 8 to this Annual Report on Form 10-K hereof.
2. Financial Statement Schedules
Financial Statement Schedule II – Valuation and Qualifying Accounts is filed with this Annual Report on Form 10-K. Schedules not listed above have been omitted because they are not applicable or the information required to be set forth therein is included in the financial statements or notes thereto.
3. Exhibits:
3.1 Certificate of Formation of Registrant (Incorporated by reference to Exhibit 3.1 to Registrant’s Registration Statement on Form S-1 filed with the SEC on November 13, 2006 (File No. 333-138661)).
3.1 Limited Liability Company Agreement of Registrant (Incorporated by reference to Exhibit A to Registrant’s Prospectus filed with the SEC on May 8, 2007 (File No. 333-138661)).
10.1 Commercial Loan Agreement, by and between California Bank & Trust and ICON Leasing Fund Twelve, LLC, dated as of May 10, 2011 (Incorporated by reference to Exhibit 10.7 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011, filed May 16, 2011).
10.2 Loan Modification Agreement, dated as of March 31, 2013, by and between California Bank & Trust and ICON Leasing Fund Twelve, LLC (Incorporated by reference to Exhibit 10.2 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012, filed March 22, 2013).
31.1 Rule 13a-14(a)/15d-14(a) Certification of Co-Chief Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Co-Chief Executive Officer.
31.3 Rule 13a-14(a)/15d-14(a) Certification of Principal Financial and Accounting Officer.
32.1 Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.3 Certification of Principal Financial and Accounting Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS* XBRL Instance Document.
101.SCH* XBRL Taxonomy Extension Schema Document.
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB* XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document.
* XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ICON Leasing Fund Twelve, LLC
(Registrant)
By: ICON Capital, LLC
(Manager of the Registrant)
March 23, 2015
|
By: /s/ Michael A. Reisner |
|
Michael A. Reisner |
|
Co-Chief Executive Officer and Co-President (Co-Principal Executive Officer)
|
|
By: /s/ Mark Gatto |
|
Mark Gatto |
Co-Chief Executive Officer and Co-President
(Co-Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
ICON Leasing Fund Twelve, LLC
(Registrant)
By: ICON Capital, LLC
(Manager of the Registrant)
March 23, 2015
|
By: /s/ Michael A. Reisner |
|
Michael A. Reisner |
|
Co-Chief Executive Officer, Co-President and Director (Co-Principal Executive Officer)
|
|
By: /s/ Mark Gatto |
|
Mark Gatto |
|
Co-Chief Executive Officer, Co-President and Director (Co-Principal Executive Officer)
|
|
By: /s/ Christine H. Yap |
|
Christine H. Yap |
|
Managing Director (Principal Financial and Accounting Officer)
|
88