TMCnet News
ICON LEASING FUND TWELVE, LLC - 10-K - Manager's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) 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. With the proceeds from the sale of our Shares, we invested in equipment subject to leases, other equipment financing, and residual ownership rights in items of leased equipment and established a cash reserve. After the net offering proceeds were invested, additional investments were made with the cash generated from our investments to the extent that cash was not used for expenses, reserves and distributions to members. The investment in additional equipment leases and other financing transactions in this manner is called "reinvestment." We anticipate investing in equipment leases and other financing transactions from time to time through the end of our operating period on April 30, 2014. After the operating period, we will then sell our assets in the ordinary course of business during a time frame called the "liquidation period." 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 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 will end on April 30, 2014 and our liquidation period will commence on May 1, 2014. 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 2014 due to factors such as the rate of employment expansion and greater certainty with respect to U.S. tax and budget policies. Significant Transactions We engaged in the following significant transactions during the years ended December 31, 2013, 2012 and 2011: 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, "Broadview"). The base term of the four leases is 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 amount of $460,725. No gain or loss was recorded as a result of these sales. On November 30, 2011, at the expiration of a lease schedule, we sold certain telecommunications equipment to Global Crossing Telecommunications, Inc. for approximately $3,727,000. We recorded a gain on sale of approximately $1,597,000. 19 -------------------------------------------------------------------------------- Table of contents 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 back the Leighton Vessels to an affiliate of Leighton Offshore Pte. Ltd. ("Leighton") for a period of 96 months that 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. The remaining Leighton Vessels are currently subject to bareboat charters. The purchase option price of each barge is the higher of a fixed purchase option price and the fair market value. The aggregate fixed purchase option price for the three remaining barges is $106,350,000. Following an arbitration proceeding held in February 2014 to determine the validity of certain valuations submitted by our Manager, the aggregate fair market value determined by the arbitrators for the three remaining barges was $154,500,000. On March 29, 2011, we and ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P., an entity also managed by our Manager ("Fund Fourteen"), entered into a joint venture owned 25% by us and 75% by Fund Fourteen for the purpose of acquiring two aframax product tankers and two VLCCs. Our contribution to the joint venture was approximately $12,166,000. The aframax product 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. We and ICON Income Fund Ten Liquidating Trust, an entity in which our Manager acts as Managing Trustee (formerly known as ICON Income Fund Ten, LLC) (the "Fund Ten Liquidating Trust"), had ownership interests of 51% and 49%, respectively, in a joint venture which owned an aframax product tanker, the Mayon Spirit, subject to a bareboat charter. As a result of negotiations to remarket and ultimately dispose of certain vessels, our Manager reviewed the joint venture's investment in the Mayon Spirit and determined that the net book value of the vessel exceeded the fair value. As a result, the joint venture recognized impairment charges of approximately $21,858,000 during the year ended December 31, 2011. On September 23, 2011, the joint venture sold the vessel for approximately $8,275,000 and satisfied the remaining related third-party debt. The joint venture recorded a loss on sale of approximately $94,000. On May 22, 2013, we entered into a termination agreement with AET whereby AET returned the aframax product tanker, the Eagle Centaurus, to us prior to the scheduled charter termination date of November 13, 2013. As part of the termination, 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. 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 asset of approximately $438,000. A 20 -------------------------------------------------------------------------------- Table of contents 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 product tanker, the Eagle Auriga, to us prior to the scheduled charter termination date of November 14, 2013. As part of the termination, 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. There was no impairment taken as a result of our annual impairment review for the year ended December 31, 2011 on the Eagle Carina, the Eagle Corona, the Eagle Auriga and the Eagle Centaurus (collectively, the "Eagle Vessels"). However, our Manager had changed our end of lease residual values relating to the Eagle Vessels as a result of the review, which led to the remaining net book values of the Eagle Vessels being depreciated to the reduced residual values over the remaining terms of the leases using the straight-line method. In connection with our annual impairment review for the year ended December 31, 2012, our Manager concluded that the carrying value of 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 of 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 the Aegean Express and the Far Vizag (f/k/a 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 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 two containership vessels. Projected future scrap rates were a critical component of those analyses as well as negotiated rates related to re-leasing of the two vessels. Based on our Manager's review, the net book values of the Aegean Express and the Far Vizag 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. 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. A joint venture, ICON EAR, LLC ("ICON EAR"), owned 55% by us and 45% by ICON Leasing Fund Eleven, LLC, an entity also managed by our Manager ("Fund Eleven"), purchased and simultaneously leased back 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 21 -------------------------------------------------------------------------------- Table of contents additional security for the purchase and lease, ICON EAR received mortgages on certain parcels of real property located in Jackson Hole, Wyoming. In October 2009, certain facts came to light that led our Manager to believe that EAR was perpetrating a fraud against EAR's lenders, including ICON EAR. On October 23, 2009, EAR filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. 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. 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 and 2012 was real property with a carrying value of approximately $290,000 and the carrying value of our investment in the joint venture was approximately $175,000. 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, 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 such guarantor, which is currently pending. On October 7, 2013, we, through 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 December 30, 2011, we sold mining equipment that was subject to lease with American Energy Corp. and The Ohio Valley Coal Company for approximately $1,300,000 and recorded a loss on the sale of approximately $487,000. On September 12, 2013, a joint venture owned by us, ICON ECI Fund Sixteen, an entity also managed by our Manager ("Fund Sixteen"), and Fund Eleven, purchased mining equipment for $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, Fund Sixteen contributed capital of $933,678 to the joint venture, inclusive of acquisition fees, resulting in a reallocation of the percentage ownership interests in the joint venture to 26.4% by us, 67.0% by Fund Eleven and 6.6% by Fund Sixteen. As a result, we received a corresponding return of capital. On February 1, 2014, Fund Sixteen contributed additional capital of $1,725,517 to the joint venture, inclusive of acquisition fees, resulting in a further reallocation 22 -------------------------------------------------------------------------------- Table of contents of the percentage ownership interests in the joint venture to 13.2% by us, 67% by Fund Eleven and 19.8% by Fund Sixteen. As a result, we received a corresponding return of capital. Motor Coaches On January 3, 2012, CUSA PRTS, LLC 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 Partners, LLC ("Hardwood"), amended the master lease agreement with Atlas Pipeline Mid-Continent, LLC ("APMC") requiring APMC to purchase the 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 with APMC 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 the rate of 4.08% per year and was scheduled to mature on September 1, 2013. On May 30, 2013, in accordance with the terms of the lease, the joint venture 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 loss. Notes Receivable On June 29, 2009, we and Fund Fourteen entered into a joint venture for the purpose of making term loans in the aggregate amount of $20,000,000 to the INOVA Borrowers. Effective January 1, 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. The aggregate principal balance of the notes on January 1, 2011 was approximately $8,348,000, and the notes bore interest at 15% per year and were scheduled to mature on August 1, 2014. No gain or loss was recorded as a result of this transaction. Upon completion of the exchange, the joint venture was deconsolidated and then terminated. On January 31, 2014, the INOVA Borrowers satisfied their obligation in connection with three term loans scheduled to mature on August 1, 2014 by making a prepayment of approximately $1,672,000. On December 23, 2009, a joint venture owned by us and Fund Fourteen made a second priority 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 term loan facility. The loan was secured by all of Quattro Plant's rail support construction equipment, among other collateral. The loan bore interest at 20% per year and was for a period of 33 months, which began on January 1, 2010. Effective January 1, 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 loan receivable from Quattro Plant, which was previously owned by the joint venture. As a result of this assignment, we recorded a loan receivable of approximately £2,478,000, which bore interest at 20% per year and was scheduled to mature on October 1, 2012. No gain or loss was recorded as a result of this transaction. Upon completion of the exchange, the joint venture was deconsolidated and then terminated. On October 16, 2012, Quattro Plant extended the term of its loan facility for a period of five months until February 28, 2013. On November 14, 2012, Quattro Plant satisfied its obligation in connection with its loan facility by making a prepayment of approximately $872,000. On September 1, 2010, we made a 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 metal cladding and production equipment. On September 3, 2013, EMS satisfied its obligation in connection with the term loan by making a prepayment of approximately $1,423,000 to us, 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 term loan to Northern Crane Services, Inc. ("Northern Crane") in the amount of $9,750,000 as part of a $150,000,000 term loan facility. The loan accrued interest at 15.75% per year and was for a period of 54 months beginning on October 1, 2010. The loan was secured by a first priority security interest in lifting and transportation 23 -------------------------------------------------------------------------------- Table of contents 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 term loan by making a prepayment of approximately $7,955,000, which included a prepayment fee of approximately $227,000, which 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 and increasing each note's interest rate by 1.50%. The restructured notes bore interest at rates ranging from 9.47% to 9.90% per year and were scheduled to mature through February 15, 2013. Effective January 1, 2011, we exchanged our 52.75% ownership interest in the joint venture for our proportionate share of the notes receivable from Northern Leasing previously owned by the joint venture. The aggregate principal balance of the notes was approximately $5,327,000. No gain or loss was recorded as a result of this transaction. Upon completion of the exchange, the joint venture was deconsolidated and then terminated. On May 2, 2012, certain affiliates of Northern Leasing satisfied their obligations in connection with the promissory notes by making a prepayment of approximately $5,018,000. On December 22, 2011, a joint venture owned 25% by us and 75% by Fund Fourteen made a $20,124,000 subordinated term loan to JAC as part of a $171,050,000 term loan facility. The loan bears interest at rates ranging between 12.50% and 15% per year and matures in January 2021. The loan is secured by a second priority interest on all of JAC's assets, which include, among other things, all equipment, plant and machinery associated with a condensate splitter and aromatics complex. On February 3, 2012, we made a 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 to Revstone (the "CapEx Loan"). 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, which was recognized as additional finance income. On February 29, 2012, we made a term loan in the amount of $2,000,000 to VAS as part of a $42,755,000 term loan facility. The loan bears interest at variable rates ranging between 12% and 14.5% per year and is for a period of 33 months. The loan is 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. On July 24, 2012, we made a term loan in the amount of $500,000 to Frontier as part of a $5,000,000 term loan facility. The loan bears interest at 14% per year and is for a period of 66 months. The loan is 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 $78,000 and paid a prepayment fee of approximately $8,900, which was recognized as additional finance income. On September 10, 2012, we made a term loan in the amount of $4,080,000 to Superior as part of a $17,000,000 term loan facility. The loan bears interest at 12% per year and is for a period of 60 months. The loan is 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 November 28, 2012, we made a term loan in the amount of $4,050,000 to SAE as part of a $80,000,000 term loan facility. The loan bears interest at 13.5% per year and is for a period of 48 months. The loan is 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 0.05% 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 February 12, 2013, we made available a secured term loan in the amount of $2,700,000 to NTS as part of a $6,000,000 facility. On March 28, 2013, NTS borrowed $765,000 in connection with the loan and on June 27, 2013, NTS drew down the 24 -------------------------------------------------------------------------------- Table of contents remaining $1,935,000 from the facility. The loan bears interest at 12.75% per year and matures on July 1, 2017. The loan is secured by a first priority security interest in all of the equipment and assets of NTS. On April 5, 2013, we made a secured term loan in the amount of $3,870,000 to LSC. 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. The value of the collateral on the date the transaction occurred exceeded the total amount of the first and second liens. On December 11, 2013, LSC made a partial prepayment of approximately $1,355,000, which included a prepayment fee of approximately $65,000, which 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 current 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 secured by our interest in the secured term 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 May 15, 2013, a joint venture owned 21% by us, 39% by Fund Eleven and 40% by ICON ECI Fund Fifteen, L.P., an entity also managed by our Manager ("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 credit 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 November 26, 2013, we, Fund Fifteen and a third-party creditor (collectively the "Lenders"), made a superpriority, secured term loan in the amount of $30,000,000 to Green Field of which our share was $7,500,000. The loan bears interest at LIBOR plus 10%, matures in 9 months and is secured by a superpriority security interest in all of Green Field's assets. Subsequent to December 31, 2013, Green Field satisfied its obligations in connection with the loan. Acquisition Fees In connection with the transactions that we entered into during the years ended December 31, 2013, 2012 and 2011, we paid acquisition fees to our Manager in the aggregate amount of approximately $1,975,000, $1,367,000 and $2,585,000, respectively. Subsequent Events On March 4, 2014, a joint venture owned 60% by us, 15% by Fund Fifteen, 15% by Fund Fourteen and 10% by Fund Sixteen, purchased mining equipment, which was subsequently leased to Blackhawk Mining, LLC for 48 months. The aggregate purchase price for the equipment was funded by approximately $17,860,000 in cash and $7,500,000 of non-recourse long-term debt. Recent Accounting Pronouncements In January 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-01, Clarifying the Scope of Disclosure about Offsetting Assets and Liabilities ("ASU 2013-01"). ASU 2013-01 clarified ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, which was issued in December 2011. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transaction subject to an agreement similar to a master netting arrangement. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on a basis of U.S. GAAP basis and those entities that prepare their financial statements on the basis of International Financial Reporting Standards (IFRS). The adoption of ASU 2013-01 became effective for us on January 1, 2013 and resulted in additional disclosure requirements. In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"), which requires an entity to disclose information about the amounts reclassified out of accumulated other comprehensive income, by component, on the respective line items of net income. The adoption of ASU 2013-02 became effective for us on January 1, 2013 and did not have a material effect on our consolidated financial statements. 25 -------------------------------------------------------------------------------- Table of contents In March 2013, the FASB issued 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. We are required to adopt ASU 2013-05 on January 1, 2014, which is not expected to have a material effect 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 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 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. 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 26 -------------------------------------------------------------------------------- Table of contents 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 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 equipment is less than its carrying value or (ii) the lessee is experiencing financial difficulties and it does not appear likely that the estimated proceeds from the disposition of the asset will be sufficient to satisfy the residual position in the asset. 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 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 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 loss. Credit Quality of Notes Receivable and Finance Leases and Credit Loss Reserve Our Manager weighs all credit decisions based on a combination of external credit ratings as well as internal credit evaluations of all borrowers. A borrower's credit is analyzed using those credit ratings as well as the borrower's financial statements and other financial data deemed relevant. As 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 and credit loss reserve. Financing receivables are analyzed quarterly and categorized as either performing or non-performing based on payment history. If a financing receivable becomes non-performing due to a borrower's missed scheduled payments or failed financial covenants, our Manager analyzes whether a credit loss reserve should be established or whether the financing receivable should be restructured. Material events would be specifically disclosed in the discussion of each financing receivable held. Notes receivable 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 loans are applied to principal if there is doubt regarding the ultimate collectability of principal. If collection of the principal of non-accrual loans is not in doubt, interest income is recognized on a cash basis. Loans 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 note receivable, we perform an analysis to determine if a credit loss reserve is necessary. This analysis considers the estimated cash flows from the note, or the collateral value of the asset underlying the note when note repayment is collateral dependent. If it is determined that the impaired value of the non-performing note 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 27 -------------------------------------------------------------------------------- Table of contents then charge off a loan in the period that it is deemed uncollectible by reducing the credit loss reserve and the balance of the loan. 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 accumulated other comprehensive (loss) income, 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, 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: 28 -------------------------------------------------------------------------------- Table of contents 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, which are included in our consolidated balance sheets. 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 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% The net carrying value of our operating lease transactions includes the balance of our leased equipment at cost, which is included in our consolidated balance sheets. 29 -------------------------------------------------------------------------------- Table of contents 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) 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 Far Vizag (f/k/a 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 30 -------------------------------------------------------------------------------- Table of contents 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 accumulated other comprehensive (loss) income ("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%, as compared to 2012 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. Results of Operations for the Years Ended December 31, 2012 ("2012") and 2011 ("2011") 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: December 31, 2012 2011 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 $ 129,432,754 74% $ 143,464,624 71% Marine - crude oil tanker 10,291,463 6% 10,485,419 6% Gas compressors 7,093,864 4% 7,841,466 4% Marine - product tankers 6,493,303 4% 7,709,533 4% Analog seismic system equipment 4,377,368 3% 6,542,561 3% Tube manufacturing equipment 4,185,608 2% - - Seismic imaging equipment 4,111,660 2% - - Telecommunications equipment 2,374,753 1% 4,213,063 2% Metal cladding & production equipment 1,950,932 1% 2,800,041 1% Aicraft engines 1,937,546 1% - - Automotive manufacturing equipment 1,535,780 1% 2,695,055 1% On-shore oil field services equipment 562,405 1% - - Cranes & transportation equipment - - 8,729,806 4% Point of sale equipment - - 5,306,784 3% Rail support construction equipment - - 2,800,538 1% $ 174,347,436 100% $ 202,588,890 100% 31 -------------------------------------------------------------------------------- Table of contents 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, which are included in our consolidated balance sheets. During 2012 and 2011, certain customers generated significant portions (defined as 10% or more) of our total finance income as follows: Percentage of Total Finance Income Customer Asset Type 2012 2011 Leighton Holdings Limited Offshore oil field services equipment 58% 59% 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 loss. Operating Lease Transactions The following tables set forth the types of equipment subject to operating leases in our portfolio: December 31, 2012 2011 Net Percentage of Net Percentage of Carrying Total Net Carrying Total Net Asset Type Value Carrying Value Value Carrying Value Marine - crude oil tanker $ 56,059,700 39% $ 122,078,577 54% Offshore oil field services equipment 39,234,370 28% 43,333,507 19% Marine - container vessels 36,538,579 26% 39,985,602 17% Coal drag line 9,436,912 7% 10,166,296 5% Automotive manufacturing equipment - - 6,065,808 3% Motor coaches - - 3,485,769 2% $ 141,269,561 100% $ 225,115,559 100% The net carrying value of our operating lease transactions includes the balance of our leased equipment at cost, which is included in our consolidated balance sheets. During 2012 and 2011, certain customers generated significant portions (defined as 10% or more) of our total rental income as follows: Percentage of Total Rental Income Customer Asset Type 2012 2011 AET Inc. Limited Marine - crude oil tanker 54% 44% Swiber Holdings Limited Offshore oil field services equipment 21% 17% Vroon Group B.V. Marine - container vessels 15% 12% 90% 73% Revenue and other income for 2012 and 2011 is summarized as follows: Years Ended December 31, 2012 2011 Change Finance income $ 20,244,446 $ 21,683,823 $ (1,439,377) Rental income 44,294,357 54,240,376 (9,946,019) Income (loss) from investment in joint ventures 1,498,912 (1,224,469) 2,723,381 Net gain on sale of assets 1,075,778 1,082,177 (6,399) Litigation settlement 418,900 - 418,900 Total revenue and other income $ 67,532,393 $ 75,781,907 $ (8,249,514) 32 -------------------------------------------------------------------------------- Table of contents Total revenue and other income for 2012 decreased $8,249,514, or 10.9%, as compared to 2011. The decrease in rental income was primarily due to the termination of ten operating leases and the reclassification of two leases from operating to finance leases during and after 2011. The decrease in finance income was primarily due to (i) the prepayment of six notes receivable during 2012 and (ii) the termination of five finance leases during and after 2011. The decrease in finance income was partially offset by our investment in six new notes receivable during 2012. The increase in income from investment in joint ventures was primarily due to the operating results of our investments in two new joint ventures entered into during 2011. Expenses for 2012 and 2011 are summarized as follows: Years Ended December 31, 2012 2011 Change Management fees $ 4,569,168 $ 4,812,299 $ (243,131) Administrative expense reimbursements 2,857,713 2,795,143 62,570 General and administrative 2,689,890 2,740,019 (50,129) Interest 12,252,988 14,799,661 (2,546,673) Depreciation 40,560,520 30,010,953 10,549,567 Credit loss, net 5,066,484 674,000 4,392,484 Impairment loss 35,295,894 23,016,556 12,279,338 Vessel operating expense - 1,444,183 (1,444,183) Gain on derivative financial instruments (2,780,814) (756,451) (2,024,363) Total expenses $ 100,511,843 $ 79,536,363 $ 20,975,480 Total expenses for 2012 increased $20,975,480, or 26.4%, as compared to 2011. The increase in impairment loss was primarily due to a larger impairment loss during 2012 recorded in connection with the Eagle Vessels as compared to the impairment loss during 2011 recorded in connection with the Mayon Spirit. The increase in depreciation was primarily due to the reduction in residual values for certain vessels during 2011. The increase in credit loss was due to the credit loss on the personal guarantee relating to the lease with LC Manufacturing during 2012. The increase in total expenses was partially offset by (i) the decrease in interest expense due to the scheduled repayments of our non-recourse long-term debt obligations, (ii) an increase in the valuation of our warrants during 2012 and (iii) the vessel operating expense recorded in connection with the Mayon Spirit during 2011. Net Loss Attributable to Noncontrolling Interests Net loss attributable to noncontrolling interests decreased $1,738,459, from $6,708,229 in 2011 to $4,969,770 in 2012. The decrease was primarily due to a larger noncontrolling interest impact from the impairment loss during 2011 recorded in connection with the Mayon Spirit, as compared to the noncontrolling interest impact from the impairment and operating loss recorded during 2012 in connection with the Eagle Corona and the Eagle Carina. Other Comprehensive Income Other comprehensive income for 2012 increased $329,264, or 17.7%, as compared to 2011 primarily due to the change in fair value of our derivative financial instruments. Net (Loss) Income Attributable to Fund Twelve As a result of the foregoing factors, net (loss) income attributable to us for 2012 and 2011 was $(28,009,680) and $2,953,773, respectively. Net (loss) income attributable to us per weighted average additional Share outstanding for 2012 and 2011 was $(79.56) and $8.39, respectively. Financial Condition This section discusses the major balance sheet variances at December 31, 2013 compared to December 31, 2012. Total Assets 33 -------------------------------------------------------------------------------- Table of contents Total assets decreased $121,560,514, from $365,787,022 at December 31, 2012 to $244,226,508 at December 31, 2013. The decrease was primarily due to (i) cash used for repayment of non-recourse long-term debt, (ii) distributions to our members and noncontrolling interests, (iii) depreciation of leased equipment at cost and (iv) the impairment of certain leased equipment. Current Assets Current assets decreased $18,931,929, from $58,820,536 at December 31, 2012 to $39,888,607 at December 31, 2013. The decrease was primarily due to (i) distributions to our members and noncontrolling interests, (ii) cash used for repayment of our non-recourse long term debt, including the termination of two finance leases of which proceeds were paid directly to our lender by the lessee, and (iii) cash used for our investment in two new joint ventures and four new notes receivable. The decrease was partially offset by cash collections of rentals from operating leases and prepayments of notes receivable which were previously classified in non-current assets. Total Liabilities Total liabilities decreased $83,925,310, from $189,458,513 at December 31, 2012 to $105,533,203 at December 31, 2013. The decrease was primarily due to repayments of our non-recourse long-term debt during 2013. Current Liabilities Current liabilities decreased $20,888,694, from $72,923,290 at December 31, 2012 to $52,034,596 at December 31, 2013. The decrease was primarily due to (i) repayment of non-recourse long-term debt, (ii) the decrease in deferred revenue due to the recognition of income previously deferred from our operating leases and (iii) the decrease in derivative financial instruments liability due to the termination of six interest rate swaps during 2013. The decrease in current liabilities was offset by an increase in accrued expenses and other current liabilities due to the increase in principal payments of our seller's credit in 2014 as compared to 2013. Equity Equity decreased $37,635,204, from $176,328,509 at December 31, 2012 to $138,693,305 at December 31, 2013. The decrease was primarily due to distributions to our members and noncontrolling interests and our net loss. Liquidity and Capital Resources Summary At December 31, 2013 and 2012, we had cash and cash equivalents of $13,985,307 and $30,980,776, respectively. During our operating period, our main source of cash is typically from operating activities and our main use of cash is in investing and financing activities. Our liquidity will vary in the future, increasing to the extent cash flows from investments and proceeds from 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." In the event that our working capital is not adequate to fund our short-term liquidity needs, we could borrow against our revolving line of credit to meet such requirements. Our revolving line of credit is discussed in further detail below in "Revolving Line of Credit, Recourse." 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, 2013, the cash reserve was $1,738,435. Cash Flows The following table sets forth summary cash flow data: Years Ended December 31, 2013 2012 2011 Net cash provided by (used in): Operating activities $ 31,200,193 $ 38,132,076 $ 42,423,491 Investing activities 16,677,549 22,294,745 12,990,912 Financing activities (64,873,321) (55,773,168) (58,176,317) Effects of exchange rates on cash and cash equivalents 110 9,688 (139,938) Net (decrease) increase in cash and cash equivalents $ (16,995,469) $ 4,663,341 $ (2,901,852) 34 -------------------------------------------------------------------------------- Table of contents 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 $6,931,883, from $38,132,076 in 2012 to $31,200,193 in 2013. The decrease was primarily due to the decrease in collection of rentals from operating leases and finance leases as a result of sales of leased assets and the decrease in interest income due to the repayment of notes receivable, partially offset by a reduction in administrative expense reimbursements and management fees. Investing Activities Cash provided by investing activities decreased $5,617,196, from $22,294,745 in 2012 to $16,677,549 in 2013. The decrease was primarily due to principal received on notes receivable as a result of six note receivable repayments in 2012 compared to one repayment in 2013 and an increase in investment in joint ventures, partially offset by an increase in proceeds from the sale of equipment and an increase in distributions received from joint ventures in excess of profits. Financing Activities Cash used in financing activities increased $9,100,153, from $55,773,168 in 2012 to $64,873,321 in 2013. The increase was primarily due to an increase in repayments of non-recourse long-term debt and distributions to noncontrolling interests, partially offset by an increase in proceeds by incurring new non-recourse long-term debt through back leveraging a note receivable, and a decrease in distributions to members. Non-Recourse Long-Term Debt We had non-recourse long-term debt obligations at December 31, 2013 of $55,370,983. Most 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 would be returned to the lender in extinguishment of that debt. Revolving Line of Credit, Recourse On May 10, 2011, we entered into an agreement with CB&T for a revolving line of credit of up to $10,000,000 (the "Facility"), which is secured by all of our assets not subject to a first priority lien. Amounts available under the Facility are subject to a borrowing base that is determined, subject to certain limitations, based on the present value of the future receivables under certain loans and lease agreements in which we have a beneficial interest. At December 31, 2013, we had $9,370,177 available under the Facility pursuant to the borrowing base. The Facility was extended through March 31, 2015. The interest rate on general advances under the Facility is CB&T's prime rate. We may elect 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 are subject to an interest rate floor of 4.0% per year. In addition, we are obligated to pay an annualized 0.50% fee on unused commitments under the Facility. At December 31, 2013, there were no obligations outstanding under the Facility and we were in compliance with all covenants related to the Facility. Subsequent to December 31, 2013, we drew down $10,000,000 under the facility. Distributions We, at our Manager's discretion, pay monthly distributions to each of our additional members beginning with the first month after each such member's admission and expect to continue to pay such distributions until the end of our operating period. We paid distributions to our additional members of $25,953,936, $33,634,797 and $33,644,883 for the years ended December 31, 2013, 2012 and 2011, respectively. We paid distributions to our Manager of $262,158, $339,749 and $339,752 for the years ended December 31, 2013, 2012 and 2011, respectively. We paid distributions to our noncontrolling interests of $7,182,576, $4,364,926 and $12,169,963 for the years ended December 31, 2013, 2012 and 2011, respectively. During our liquidation period, we plan to make distributions in accordance with the terms of our LLC Agreement. We expect that distributions made during the liquidation period will vary, depending on the timing of the sale of our assets, and our receipt of rental, finance and other income from our investments. 35 -------------------------------------------------------------------------------- Table of contents Commitments and Contingencies and Off-Balance Sheet Transactions Commitments and Contingencies At December 31, 2013, we had non-recourse and other debt obligations. The lenders have a security interest in the majority of the equipment collateralizing each non-recourse debt instrument and an assignment of the rental payments under the lease associated with the equipment. In such cases, the lender is being paid directly by the lessee. In other cases, we receive the rental payments and pay the lender. If the lessee defaults on the lease, the equipment would be returned to the lender in extinguishment of the non-recourse debt. At December 31, 2013 and 2012, our outstanding non-recourse long-term indebtedness and other debt obligations were $102,922,419 and $180,276,813, respectively. We are a party to the Facility and had no borrowings under the Facility at December 31, 2013 and 2012. Principal and interest maturities of our debt, seller's credit and related interest consisted of the following at December 31, 2013: Payments Due by Period Less Than 1 1 - 3 4 - 5 Total Year Years Years Thereafter Non-recourse debt $ 55,370,983 $ 44,606,812 $ 7,463,254 $ 3,300,917 $ - Seller's credit 54,631,000 4,817,000 6,994,000 37,640,000 5,180,000 Non-recourse debt interest and interest rate swap payments* 4,246,473 2,855,674 1,039,413 351,386 - $ 114,248,456 $ 52,279,486 $ 15,496,667 $ 41,292,303 $ 5,180,000 *These amounts contain (1) future interest payments on non-recourse debt that reflect the applicable fixed or variable rate in effect at December 31, 2013 and (2) future cash flows on interest rate swaps that reflect interest rates in effect at December 31, 2013. The cash flows on the non-recourse debt and the future cash flows on interest rate swaps, individually, will differ, perhaps significantly, based on the applicable market interest rates during their remaining term. However, since the purpose of our interest rate swaps is to fix the interest payments, when aggregated as in the above table, such amounts are not expected to differ during their remaining term. In connection with certain investments, we are required to maintain restricted cash accounts with certain banks. Restricted cash of approximately $491,250 and $2,425,000 are presented within other non-current assets in our consolidated balance sheets at December 31, 2013 and 2012, respectively. 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. 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. Off-Balance Sheet Transactions None. 36 -------------------------------------------------------------------------------- Table of contents 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. 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. |