UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
| | SECURITIES EXCHANGE ACT OF 1934 |
| | |
| | For the fiscal year ended December 31, 2011 |
| | |
| | OR |
| | |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
| | SECURITIES EXCHANGE ACT OF 1934 |
| | |
| | For the transition period from _____ to _____ |
Commission file number: 000-53919
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(Exact name of registrant as specified in its charter)
| Delaware | | |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | |
3 Park Avenue, 36th Floor New York, New York | | 10016 |
| (Address of principal executive offices) | | (Zip Code) |
(212) 418-4700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Units of Limited Partnership Interests
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer Non-accelerated filer þ Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes No þ
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: Not applicable. There is no established market for limited partnership interests of the registrant.
Number of outstanding limited partnership interests of the registrant on March 16, 2012 is 258,832.
DOCUMENTS INCORPORATED BY REFERENCE
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Forward-Looking Statements
Certain statements within this Annual Report on Form 10-K may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). These statements are being made pursuant to the PSLRA, with the intention of obtaining the benefits of the “safe harbor” provisions of the PSLRA, and, other than as required by law, we assume no obligation to update or supplement such statements. Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. You can identify these statements by the use of words such as “may,” “will,” “could,” “anticipate,” “believe,” “estimate,” “expect,” “continue,” “further,” “plan,” “seek,” “intend,” “predict” or “project” and variations of these words or comparable words or phrases of similar meaning. These forward-looking statements reflect our current beliefs and expectations with respect to future events and are based on assumptions and are subject to risks and uncertainties and other factors outside our control that may cause actual results to differ materially from those projected. We undertake no obligation to update publicly or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
Our History
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P. (the “Partnership”) was formed on August 20, 2008 as a Delaware limited partnership. The Partnership will continue until December 31, 2020, unless terminated sooner. When used in this Annual Report on Form 10-K, the terms “we,” “us,” “our” or similar terms refer to the Partnership and its consolidated subsidiaries.
Our general partner is ICON GP 14, LLC, a Delaware limited liability company (the “General Partner”), which is a wholly-owned subsidiary of ICON Capital Corp., a Delaware corporation. Our General Partner manages and controls the business affairs of the Partnership, including, but not limited to, the business-essential equipment and corporate infrastructure (collectively, “Capital Assets”) the Partnership invests in pursuant to the terms of the Partnership’s limited partnership agreement (the “Partnership Agreement”). Pursuant to the terms of an investment management agreement, our General Partner has engaged ICON Capital as an investment manager (the “Investment Manager”) to, among other things, facilitate the acquisition and servicing of the Partnership’s investments. Additionally, our General Partner has a 1% interest in our profits, losses, cash distributions and liquidation proceeds of the Partnership.
Our offering period ended on May 18, 2011 and our operating period commenced on May 19, 2011. As of May 18, 2011, 258,897 limited partnership interests (“Interests”) were sold pursuant to our offering and 10,506 Interests were issued at a discounted price in connection with our distribution reinvestment plan, representing total capital contributions to us of $257,646,987 by 7,010 limited partners.
Our Business
We operate as an equipment leasing and finance fund in which the capital our partners invest is pooled together to make investments in Capital Assets, pay fees and establish a small reserve. We primarily invest in Capital Assets, including, but not limited to, Capital Assets that are already subject to lease, Capital Assets that we purchase and lease to domestic and global businesses, loans that are secured by Capital Assets, and ownership rights to leased Capital Assets at lease expiration. In the case of leases where there is significant current cash flow generated during the primary term of the lease and the value of the Capital Assets at the end of the term will be minimal or is not considered a primary reason for making the investment, the rental payments due under the lease are expected to be, in the aggregate, sufficient to provide a return of and a return on the purchase price of the leased Capital Assets. In the case of secured loans and other financing transactions, the principal and interest payments due under the loan are expected to provide a return of and a return on the amount we lend to borrowers. We will also make investments in Capital Assets subject to operating leases and leveraged leases, interests or options to purchase interests in the residual value of Capital Assets, and other investments in Capital Assets that we expect will generate enough net proceeds from either the sale or re-lease of such Capital Assets, as applicable, to provide a satisfactory rate of return.
We divide the life of the fund into three distinct phases:
| (1) | Offering Period: We expect to invest most of the net proceeds from the sale of Interests in Capital Assets. |
| (2) | Operating Period: After the close of the offering period, we expect to continue to reinvest the cash generated from our investments to the extent that cash is not needed for our expenses, reserves and distributions to limited partners. We anticipate that the operating period will extend until five years from the end of our offering period. However, we may, at our General Partner’s discretion, extend the operating period for up to an additional three years. |
| (3) | Liquidation Period: After the operating period, we will then sell our assets in the ordinary course of business. Our goal is to complete the liquidation period in two years after the end of the operating period, but it may take longer to do so. |
At December 31, 2011 and 2010, we had total assets of $458,631,602 and $208,759,132, respectively. For the year ended December 31, 2011, we had two lessees that accounted for 66.87% of our total rental and finance income of $45,244,587. Net income attributable to us for the year ended December 31, 2011 was $1,387,802. For the year ended December 31, 2010, we had four lessees and one borrower that accounted for 88.32% of our total rental and finance income of $10,279,514. Net income attributable to us for the year ended December 31, 2010 was $2,338,378. For the year ended December 31, 2009, we had two lessees that accounted for 100% of our total rental income of $1,044,930. Net loss attributable to us for the period ended December 31, 2009 was $1,584,298.
Our initial closing date was June 19, 2009 (the “Commencement of Operations”), the date at which we raised $1,200,000. During the period from May 18, 2009 to May 18, 2011, we sold 258,897 Interests, representing $257,646,987 of capital contributions, 7,010 limited partners. In addition, pursuant to the terms of our offering, we established a reserve in the amount of 0.50% of the gross offering proceeds from the sale of our Interests. As of December 31, 2011, the reserve amounts to $1,288,235. For the period from the Commencement of Operations through May 18, 2011, we have paid $17,201,964 of sales commissions to third parties and $7,445,754 of underwriting fees to ICON Securities Corp. d/b/a ICON Investments, the dealer-manager of our offering and an affiliate of our General Partner. In addition, our General Partner and its affiliates, on our behalf, incurred $2,926,110 of organizational and offering expenses, which were recorded as a reduction of partners’ equity.
At December 31, 2011, our portfolio, which we hold either directly or through joint ventures, consisted primarily of the following investments:
Packaging Equipment
| · | Packaging and printing equipment that is subject to two sixty-month leases with Exopack, LLC. The leases expire in September 2014 and October 2014, respectively. |
Motor Coaches
| · | Motor coach buses that are subject to two sixty-month leases with Dillon’s Bus Service, Inc. (“DBS”) and Lakefront Lines, Inc. (“Lakefront”). The leases expire in June 2015. |
Marine Vessels
| · | Two supramax bulk carrier vessels, the Amazing and the Fantastic, that are subject to seven-year bareboat charters with wholly-owned subsidiaries of Geden Holdings Limited (“Geden”). The bareboat charters expire in October 2017. |
| · | Two aframax tankers, the Eagle Otome and the Eagle Subaru, that are subject to three-year bareboat charters with AET Inc. Limited (“AET”). The bareboat charters expire in March 2014. |
| · | Two Very Large Crude Carriers (“VLCCs”), the Eagle Vermont and the Eagle Virginia, that are subject to ten-year bareboat charters with AET. The bareboat charters expire in March 2021. |
| · | A crude oil tanker, the Center, that is subject to a five-year bareboat charter with Center Navigation Ltd. The bareboat charter expires in June 2016. |
| · | A 40% interest in an offshore support vessel, the Lewek Ambassador. The delivery date of the vessel is expected to be on or before April 30, 2012. Upon delivery, the vessel will be subject to a nine-year bareboat charter with Gallatin Maritime Management. |
Telecommunications Equipment
| · | A 90.916% ownership interest in telecommunications equipment that is subject to three thirty-six month leases with Global Crossing Telecommunications, Inc. (“Global Crossing”). The leases expire between September 2012 and February 2013. |
| · | Telecommunications equipment that is subject to three thirty-six month leases with Global Crossing. The leases expire between March 2014 and July 2014. |
Gas Compressors
| · | A 40.533% ownership interest in eight Ariel natural gas compressors that were purchased from AG Equipment Co. The gas compressors are subject to forty-eight month leases with Atlas Pipeline Mid-Continent, LLC (“APMC”) that expire on August 31, 2013. |
Notes Receivable
| · | A term loan to Northern Capital Associates XVIII, L.P., Northern Capital Associates XV, L.P. and Northern Capital Associates XIV, L.P. (collectively, “NL III”) secured by point of sale equipment. |
| · | A term loan to Ocean Navigation 5 Co. Ltd. and Ocean Navigation 6 Co. Ltd. (collectively, “Ocean Navigation”) secured by Aframax tankers. |
| · | 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”) secured by metal cladding and production equipment. |
| · | A term loan to Northern Crane Services Inc. (“Northern Crane”) secured by lifting and transportation equipment. |
| · | Three term loans to ARAM Rentals Corporation, a Canadian bankruptcy remote Nova Scotia unlimited liability company and ARAM Seismic Rentals Inc., a U.S. bankruptcy remote Texas corporation (collectively referred to as the “ARAM Borrowers”) secured by analog seismic system equipment. |
| · | A second priority term loan to Quattro Plant Limited secured by all of Quattro Plant’s rail support construction equipment, among other collateral. |
| · | A term loan to Western Drilling Inc. and Western Landholdings, LLC, (collectively, “Western Drilling”) secured by, among other collateral, oil and gas drilling rigs and a mortgage over real property. |
| · | A 75% ownership interest in a term loan to Jurong Aromatics Corporation Pte. Ltd. (“JAC”) secured by a second priority interest in all of JAC’s assets, which include, among other things, all equipment, plant, and machinery associated with a new condensate splitter and aromatics complex. |
For a discussion of the significant transactions that we engaged in during the years ended December 31, 2011 and 2010 and the period from the Commencement of Operations through December 31, 2009, please refer to “Item 7. General Partner’s Discussion and Analysis of Financial Condition and Results of Operations.”
Segment Information
We are engaged in one business segment, the business of investing in Capital Assets, including, but not limited to, Capital Assets that are already subject to lease, Capital Assets that we purchase and lease to domestic and global businesses, loans that are secured by Capital Assets and ownership rights to leased Capital Assets 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.
Other equipment finance companies and equipment manufacturers or their affiliated financing companies may be in a position to offer equipment to prospective customers on financial terms that are more favorable than those that we can offer. There are numerous other potential entities, including entities organized and managed similarly to us, seeking to make investments in Capital Assets. Many of these potential competitors are larger and have greater financial resources than us.
We compete primarily on the basis of pricing, terms and structure, particularly on structuring flexible, responsive, and customized financing solutions for our customers. Our investments are often made directly rather than through competition in the open market. This approach limits the competition for our typical investment, which may enhance returns. We believe our investment model may represent the best way for individual investors to participate in investing in Capital Assets. Nevertheless, to the extent that our competitors compete aggressively on any combination of the foregoing factors, we could fail 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 General Partner and Investment Manager supervise and control our business affairs and originate and service our investments.
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 Investment 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 Investment 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
Our notes receivable, finance leases and operating leases generate revenue in geographic areas outside of the United States. For additional information, see Note 13 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 Interests. In addition to the following disclosures, please refer to the other information contained in this Annual Report, including the consolidated financial statements and the related notes.
General Investment Risks
All or a substantial portion of your distributions may be a return of capital and not a return on capital, which will not necessarily be indicative of our performance.
The portion of total distributions that is a return of capital and the portion that is economic return will depend upon a number of factors that cannot be determined until all of our investments have been sold or otherwise matured. At that time, you will be able to compare the total amount of all cash distributions you receive to your total capital invested in order to determine your economic return.
The Internal Revenue Service (the “IRS”) may deem the majority of your distributions to be a return of capital for tax purposes during our early years. Distributions would be deemed to be a return of capital for tax purposes to the extent that we are distributing cash in an amount greater than our taxable income. The fact that the IRS deems distributions to be a return of capital in part and we report an adjusted tax basis to you on Form K-1 is not an indication that we are performing greater than or less than expectations and cannot be utilized to forecast what your final return might be.
Your ability to resell your Interests is limited by the absence of a public trading market and, therefore, you should be prepared to hold your Interests for the life of the fund, which is anticipated to be approximately nine years.
We do not anticipate that a public market will develop for our Interests, our Interests 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 Interests. In addition, our Partnership Agreement imposes significant restrictions on your right to transfer your Interests.
We have established these restrictions to comply with federal and State securities laws and so that we will not be considered to be a publicly traded partnership that is taxed as a corporation for federal income tax purposes. Your ability to sell or otherwise transfer your Interests 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 Interests in the event of an emergency and if you were able to arrange a sale, the price you receive would likely be at a substantial discount to the price you paid for your Interests.
As a result, you must view your investment in our Interests as a long-term, illiquid investment that may last for up to nine years.
If you choose to request that we repurchase your Interests, you may receive significantly less than you would receive if you were to hold your Interests for the life of the fund.
After you have been admitted as a limited partner and have held your Interests for at least one year, you may request that we repurchase up to all of your Interests. We are under no obligation to do so, however, and will have only limited cash available for this purpose. If we repurchase your Interests, 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 Interests are repurchased, the repurchase price may provide you a significantly lower value than the value you would realize by retaining your Interests for the duration of the fund.
You may not receive cash distributions every month and, therefore, you should not rely on any income from your Interests.
You should not rely on the cash distributions from your Interests as a source of income. While we intend to make monthly cash distributions, we may determine it is in our limited partners’ best interest to periodically change the amount of the cash distributions you receive or not make any distributions in some months. Losses from our operations of the types described in these risk factors and unexpected liabilities could result in a reduced level of distributions to you. Additionally, during the liquidation period, although we expect that lump sums will be distributed from time to time if and when financially significant assets are sold, regularly scheduled distributions will decrease because there will be fewer investments available to generate cash flow.
Your Interests may be diluted.
Some investors, including our General Partner and its officers, directors and other affiliates, may have purchased or may purchase Interests at discounted prices and generally will share in our revenues and distributions based on the number of Interests that they purchase, rather than the discounted subscription price paid by them for their Interests. As a result, investors who pay discounted prices for their investments will receive higher returns on their investments in us as compared to investors who pay the entire $1,000 per Interest.
Our assets may be plan assets for ERISA purposes, which could subject our General Partner and/or our Investment Manager to additional restrictions on their ability to operate our business.
The Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and the Internal Revenue Code of 1986, as amended (the “Code”) may apply what is known as the look-through rule to an investment in our Interests. Under that rule, the assets of an entity in which a qualified plan or IRA has made an equity investment may constitute assets of the qualified plan or IRA. If you are a fiduciary of a qualified plan or IRA, you should consult with your advisors and carefully consider the effect of that treatment if that were to occur. If the look-through rule were to apply, our General Partner and/or our Investment 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 Interests held by such qualified plan or IRA. This could result in some restriction on our General Partner’s and/or our Investment Manager’s willingness to engage in transactions that might otherwise be in the best interest of all Interest holders due to the strict rules of ERISA regarding fiduciary actions.
An investment in our Interests may not satisfy the requirements of ERISA or other applicable laws.
When considering an investment in our Interests, an individual with investment discretion over assets of any pension plan, profit-sharing plan, retirement plan, IRA or other employee benefit plan covered by ERISA or other applicable laws should consider whether the investment satisfies the requirements of Section 404 of ERISA or other applicable laws. In particular, attention should be paid to the diversification requirements of Section 404(a)(1)(C) of ERISA in light of all the facts and circumstances, including the portion of the plan’s portfolio of which the investment will be a part. All plan investors should also consider whether the investment is prudent and meets plan liquidity requirements as there are significant restrictions on the ability to sell or otherwise dispose of our Interests, and whether the investment is permissible under the plan’s governing instrument. We have not, and will not, evaluate whether an investment in our Interests is suitable for any particular plan. Rather, we will accept subscribers as limited partners if a subscriber otherwise meets our suitability standards. In addition, we can provide no assurance that any statements of estimated value of our Interests 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 fair value of the Interests.
The statements of value that we include in this Annual Report on Form 10-K and future Annual Reports on Form 10-K and that we will send to fiduciaries of plans subject to ERISA and to certain other parties is only an estimate and may not reflect the actual value of our Interests.
The statements of estimated value are based on the estimated value of each Interest (i) as of the close of our fiscal year, for the annual statements included in this and future Annual Reports on Form 10-K and (ii) as of September 30 of each fiscal year, for annual statements sent to fiduciaries of plans subject to ERISA and certain other parties. Management, in part, will rely upon third-party sources and advice in arriving at this estimated value. No independent appraisals on the particular value of our Interests will be obtained and the value will be based upon an estimated fair market value as of the referenced date for such value. Because this is only an estimate, we may subsequently revise any valuation that is provided. We cannot ensure that:
| · | this estimate of value could actually be realized by us or by our limited partners upon liquidation; |
| · | limited partners could realize this estimate of value if they were to attempt to sell their Interests; |
| · | this estimate of value reflects the price or prices that our Interests would or could trade at if they were listed on a national stock exchange or included for quotation on a national market system, because no such market exists or is likely to develop; or |
| · | the statement of value, or the method used to establish value, complies with any reporting and disclosure or valuation requirements under ERISA, Code requirements or other applicable law. |
Business Risks
Our business could be hurt by economic downturns.
Our business is affected by a number of economic factors, including the level of economic activity in the markets in which we operate. A decline in economic activity in the United States or internationally could materially affect our financial condition and results of operations. The equipment leasing and financing industry is influenced by factors such as interest rates, inflation, employment rates and other macroeconomic factors over which we have no control. Any decline in economic activity as a result of these factors typically results in a decrease in the number of transactions in which we participate and in our profitability.
Uncertainties associated with the equipment leasing and financing industry may have an adverse effect on our business and may adversely affect our ability to give you any economic return from our Interests or a complete return of your capital.
There are a number of uncertainties associated with the equipment leasing and financing industry that may have an adverse effect on our business and may adversely affect our ability to make cash distributions to you that will, in total, be equal to a return of all of your capital, or provide for any economic return from our Interests. These include:
| · | fluctuations in demand for Capital Assets 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 Capital Assets at the time our investments mature; |
| · | the technological and economic obsolescence of Capital Assets; |
| · | 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 Capital Assets by, among other things, acquiring Capital Assets subject to lease, purchasing Capital Assets and leasing Capital Assets to third-party end users, financing Capital Assets for third-party end users, acquiring ownership rights to items of leased Capital Assets at lease expiration, and acquiring interests or options to purchase interests in the residual value of Capital Assets. The lessees, borrowers, and other counterparties to these transactions operate in a variety of industries. As such, we are indirectly subject to the various risks and uncertainties that affect our lessees’, borrowers’, and other counterparties’ businesses and operations. If such risks or uncertainties were to affect our lessees, borrowers, or other counterparties, we may indirectly suffer a loss on our investment, lose future revenues or experience adverse consequences to our business, operating results and financial condition.
Instability in the credit markets could have a material adverse effect on our results of operations, financial condition and ability to meet our investment objectives.
If debt financing is not available on terms and conditions we find acceptable, we may not be able to obtain financing for some of our investments. Recently, domestic and international financial markets have experienced unusual volatility and uncertainty. If this volatility and uncertainty persists, our ability to borrow to finance the acquisition of some of our investments could be significantly impacted. If we are unable to borrow on terms and conditions that we find acceptable, we may have to reduce the number of and possibly limit the type of investments we will make, and the return on some of the investments we do make could be lower. All of these events could have a material adverse effect on our results of operations, financial condition and ability to meet our investment objectives.
Because we may 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 may in the future borrow a substantial portion of the purchase price of certain of our investments and there is no limit to the amount of indebtedness that we may incur when making our investments. While we believe the use of leverage will result in more investments with less risk than if leverage is not utilized, there can be no assurance that the benefits of greater size and diversification of our portfolio will offset the heightened risk of loss in an individual investment using leverage. With respect to non-recourse borrowings, if we are unable to pay our debt service obligations because a lessee, borrower or other counterparty defaults, a lender could foreclose on the investment securing the non-recourse indebtedness. This could cause us to lose all or part of our investment or could force us to meet debt service payment obligations so as to protect our investment subject to such indebtedness and prevent it from being subject to repossession.
Additionally, while we expect the majority of our borrowings to be non-recourse, we are liable for recourse indebtedness incurred under a senior secured revolving line of credit facility with California Bank & Trust (“CB&T”) that is secured by certain of our assets that are not otherwise pledged to other lenders. CB&T has a security interest in such assets and the right to sell those assets to pay off the indebtedness if we default on our payment obligations. This recourse indebtedness may increase our risk of loss because we must meet the debt service payment obligations regardless of the revenue we receive from the investment that is subject to such secured indebtedness.
Restrictions imposed by the terms of our indebtedness may limit our financial flexibility.
We are party to a revolving line of credit agreement with CB&T. The terms of that agreement could restrict us from paying distributions to our limited partners if such payments would cause us to not be in compliance with our financial covenants in that agreement. For additional information on the terms of our credit agreement, see “Item 7. General Partner’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
Guarantees made by the guarantors of some of our lessees, borrowers and other counterparties may be voided under certain circumstances and we may be required to return payments received from such guarantors.
Under federal bankruptcy law and comparable provisions of State fraudulent transfer laws, a guarantee could be voided, or claims in respect of a guarantee could be subordinated to all other debts of that guarantor if, among other things, the guarantor, at the time it incurred the indebtedness evidenced by its guarantee:
| · | received less than reasonably equivalent value or fair consideration for the incurrence of such guarantee; and |
| · | was insolvent or rendered insolvent by reason of such incurrence; or |
| · | was engaged in a business or transaction for which the guarantor’s remaining assets constituted unreasonably small capital; or |
| · | intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature. |
In addition, any payment by that guarantor pursuant to its guarantee could be voided and required to be returned to the guarantor, or to a fund for the benefit of the creditors of the guarantor.
The measures of insolvency for purposes of these fraudulent transfer laws will vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, a guarantor would be considered insolvent if:
| · | the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all of its assets; |
| · | if the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or |
| · | it could not pay its debts as they become due. |
We cannot assure you as to what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard. We also cannot make any assurances as to the standards that courts in foreign jurisdictions may use or that courts in foreign jurisdictions will take a position similar to that taken in the United States.
If the value of our investments declines more rapidly than we anticipate, our financial performance may be adversely affected.
A significant part of the value of a significant portion of the Capital Assets that we invest in is expected to be the potential value of the Capital Assets once the lease term expires (with respect to leased Capital Assets). Generally, a Capital Asset is expected to decline in value over its useful life. In making these types of investments, we assume a residual value for the Capital Assets 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 Capital Assets and provide a rate of return despite the expected decline in the value of the Capital Assets over the term of the investment. However, the actual residual value of the Capital Assets 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 Capital Assets; |
| · | our ability to maximize the value of the Capital Assets at maturity; |
| · | market conditions prevailing at maturity; |
| · | the cost of new Capital Assets at the time we are remarketing used Capital Assets; |
| · | the extent to which technological or regulatory developments reduce the market for such used Capital Assets; |
| · | the strength of the economy; and |
| · | the condition of the Capital Assets at maturity. |
We cannot assure you that our assumptions with respect to value will be accurate or that the Capital Assets will not lose value more rapidly than we anticipate.
If a Capital Asset is not properly maintained, its residual value may be less than expected.
If a lessee or other counterparty fails to maintain Capital Assets in accordance with the terms of our agreements, we may have to make unanticipated expenditures to repair the Capital Assets in order to protect our investment. In addition, some of the Capital Assets we invest in may be used Capital Assets. While we plan to inspect most used Capital Assets prior to making an investment, there is no assurance that an inspection of a used Capital Asset prior to purchasing it will reveal any or all defects and problems with the Capital Asset that may occur after it is acquired by us.
We typically obtain representations from the sellers and lessees of used Capital Assets that:
| · | the Capital Assets have been maintained in compliance with the terms of applicable agreements; |
| · | that neither the seller nor the lessee is in violation of any material terms of such agreements; and |
| · | the Capital Assets are in good operating condition and repair and that, with respect to leases, the lessee has no defenses to the payment of rent for the Capital Assets as a result of the condition of such Capital Assets. |
We would have rights against the seller of Capital Assets 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 Capital Assets or our expected returns on the Capital Assets, including legal costs, costs of repair and lost revenue from the delay in being able to sell or re-lease the Capital Assets due to undetected problems or issues. These costs and lost revenue could negatively affect our liquidity and cash flows, and could negatively affect our profitability if we are unable to recoup such costs from the lessee or other third parties.
If a lessee, borrower or other counterparty defaults on its obligations to us, we could incur losses.
We may enter into transactions with parties that have senior debt rated below investment grade or no credit ratings. We do not require such parties to have a minimum credit rating. Lessees, borrowers, and other counterparties with lower or no credit ratings may default on payments to us more frequently than lessees, borrowers or other counterparties with higher credit ratings. For example, if a lessee does not make lease payments to us or to a lender on our behalf or a borrower does not make loan payments to us when due, or violates the terms of its contract in another important way, we may be forced to terminate our agreements with such parties and attempt to recover the Capital Assets. 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 Capital Assets upon a lessee’s or borrower’s default, enforcing the obligations under the contract, and transporting, storing, repairing, and finding a new lessee or purchaser for the Capital Assets may be high and may negatively affect the value of our investment in the Capital Assets. These costs could also negatively affect our liquidity and cash flows, and could negatively affect our profitability.
If a lessee, borrower or other counterparty files for bankruptcy, we may have difficulty enforcing the terms of the contract and may incur losses.
If a lessee, borrower or other counterparty files for protection under the bankruptcy laws, the remaining term of the lease, loan or other financing contract could be shortened or the contract could be rejected by the bankruptcy court, which could result in, among other things, any unpaid pre-bankruptcy lease, loan or other contractual payments being cancelled as part of the bankruptcy proceeding. We may also experience difficulties and delays in recovering Capital Assets 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 Capital Assets and then have to remarket such Capital Assets. 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 Capital Assets that could become worthless if the option grantor files for bankruptcy.
We may acquire options to purchase Capital Assets, 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 Capital Assets in foreign countries may be riskier than domestic investments and may result in losses.
While we expect to make investments in Capital Assets in the United States with domestic parties, we also expect to make investments in Capital Assets for use by domestic or foreign parties outside of the United States. We may have difficulty enforcing our rights under foreign transaction documents. In addition, we may have difficulty repossessing our Capital Assets if a foreign party defaults and enforcement of our rights outside the United States could be more expensive. Moreover, foreign jurisdictions may confiscate our Capital Assets. Use of Capital Assets 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 Capital Assets and require them to maintain insurance covering the risks of confiscation of the Capital Assets, 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 may invest in Capital Assets that may travel to or between locations outside of the United States. Regulations in foreign countries may adversely affect our interest in Capital Assets 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 Capital Assets, 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 General Partner and Investment Manager consider 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 Capital Assets where payments to us are not made in U.S. dollars. In these cases, we may then enter into a contract to protect these payments from fluctuations in the currency exchange rate. These contracts, known as hedge contracts, would allow us to receive a fixed number of U.S. dollars for any fixed, periodic payments due under the transactional documents even if the exchange rate between the U.S. dollar and the currency of the transaction changes over time. If the payments to us were disrupted due to default by the lessee, borrower or other counterparty, we would try to continue to meet our obligations under the hedge contract by acquiring the foreign currency equivalent of the missed payments, which may be available at unfavorable exchange rates. If a transaction is denominated in a major foreign currency such as the pound sterling, which historically has had a stable relationship with the U.S. dollar, we may consider hedging to be unnecessary to protect the value of the payments to us, but our assumptions concerning currency stability may turn out to be incorrect. Our investment returns could be reduced in the event of unfavorable currency fluctuation when payments to us are not made in U.S. dollars.
Furthermore, when we acquire a residual interest in foreign Capital Assets, we may not be able to hedge our foreign currency exposure with respect to the value of such residual interests because the terms and conditions of such hedge contracts might not be in the best interests of our limited partners. Even with transactions requiring payments in U.S. dollars, the Capital Assets may be sold at maturity for an amount that cannot be pre-determined to a buyer paying in a foreign currency. This could positively or negatively affect our income from such a transaction when the proceeds are converted into U.S. dollars.
Sellers of leased Capital Assets could use their knowledge of the lease terms for gain at our expense.
We may acquire Capital Assets 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 Capital Assets at lease end for lower rental amounts. This may adversely affect our opportunity to maximize the residual value of the Capital Assets and potentially negatively affect our profitability.
Investment in joint ventures may subject us to risks relating to our co-investors that could adversely impact the financial results of such joint ventures.
We have the ability to invest in joint ventures with other businesses our Investment Manager and its affiliates manage, as well as with unrelated third parties. Investing in joint ventures involves additional risks not present when acquiring leased Capital Assets that will be wholly owned by us. These risks include the possibility that our co-investors might become bankrupt or otherwise fail to meet financial commitments, thereby obligating us to pay all of the debt associated with the joint venture, as each party to a joint venture may be required to guarantee all of the joint venture’s obligations. Alternatively, the co-investors may have economic or business interests or goals that are inconsistent with our investment objectives and want to manage the joint venture in ways that do not maximize our return. Among other things, actions by a co-investor might subject leases that are owned by the joint venture to liabilities greater than those contemplated by the joint venture agreement. Also, when none of the joint owners control a joint venture, there might be a stalemate on decisions, including when to sell the Capital Assets or the prices or terms of a lease. Finally, while we typically have the right to buy out the other joint owner’s interest in the Capital Assets in the event of the sale, we may not have the resources available to do so. These risks could negatively affect our profitability and could result in legal and other costs, which would negatively affect our liquidity and cash flows.
We may not be able to obtain insurance for certain risks and would have to bear the cost of losses from non-insurable risks.
Capital Assets may be damaged or lost. Fire, weather, accidents, theft or other events can cause damage or loss of Capital Assets. 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 Capital Assets 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 Capital Assets, we could suffer a total loss of any investment in the affected Capital Assets. In investing in some types of Capital Assets, we may be 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 Capital Assets’ 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 Capital Assets are to be used outside of the United States. Failing to register the Capital Assets, or losing such registration, could result in substantial penalties, forced liquidation of the Capital Assets and/or the inability to operate and lease the Capital Assets. Governmental agencies may also require changes or improvements to Capital Assets 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 Capital Assets to be removed from service for a period of time. The terms of the transaction documents may provide for payment reductions if the Capital Assets must remain out of service for an extended period of time or are removed from service. We may then have reduced income from our investment for these Capital Assets. If we do not have the funds to make a required change, we might be required to sell the affected Capital Assets. 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 Capital Asset financing transactions in which we are deemed to be a lender. For example, equipment leases have sometimes been held by U.S. courts to be loan transactions subject to State usury laws, which limit the interest rate that can be charged. Uncertainties in the application of some laws may result in inadvertent violations that could result in reduced investment returns or, possibly, loss on our investment in the affected Capital Assets. Although part of our business strategy is to enter into or acquire leases that we believe are structured so that they avoid being deemed loans, and would therefore not be subject to usury laws, we cannot assure you that we will be successful in doing so. 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 and adversely affect our revenue.
State laws determine what rates of interest are deemed usurious, when the applicable rate of interest is determined, and how it is calculated. In addition, some U.S. courts have also held that certain lease 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 in the United States.
We compete with a variety of financing sources for our investments, which may affect our ability to achieve our investment objectives.
The commercial leasing and financing industry is highly competitive and is characterized by competitive factors that vary based upon product and geographic region. Our competitors are varied and include other equipment leasing and finance funds, hedge funds, private equity funds, captive and independent finance companies, commercial and industrial banks, manufacturers and vendors. Competition from both traditional competitors and new market entrants has intensified in recent years due to growing marketplace liquidity and increasing recognition of the attractiveness of the commercial leasing and finance industry.
We compete primarily on the basis of pricing, terms and structure. To the extent that our competitors compete aggressively on any combination of those factors, we could fail to achieve our investment objectives.
Some of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than either we or our General Partner 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 leases or loans at rates that are less than ours, potentially forcing us to lower our rates or lose potential lessees, borrowers or other counterparties.
Organization and Structure Risks
You have limited voting rights and are required to rely on our General Partner and/or our Investment Manager to make all of our investment decisions and achieve our investment objectives.
Our General Partner and/or our Investment Manager will make all of our investment decisions, including determining the investments and dispositions we make. Our success will depend upon the quality of the investment decisions our General Partner and/or our Investment Manager makes, particularly relating to our investments in Capital Assets and the realization of such investments. You are not permitted to take part in managing, establishing or changing our investment objectives or policies. Accordingly, you should not invest unless you are willing to entrust all aspects of our management to our General Partner and/or our Investment Manager.
The decisions of our General Partner and our Investment Manager may be subject to conflicts of interest.
The decisions of our General Partner and our Investment Manager may be subject to various conflicts of interest arising out of their relationship to us and their affiliates. Our General Partner and our Investment Manager could be confronted with decisions where either or both will, directly or indirectly, have an economic incentive to place its respective interests or the interests of its affiliates above ours. As of December 31, 2011, our Investment Manager, an affiliate of our General Partner, manages or is the investment manager or managing trustee of six other public equipment leasing and finance funds. See “Item 13. Certain Relationships and Related Transactions, and Director Independence.” These conflicts may include:
| · | our Investment Manager may receive more fees for making investments if we incur indebtedness to fund these investments than if indebtedness is not incurred; |
| · | our Partnership Agreement does not prohibit our General Partner or any of its affiliates from competing with us for investments and engaging in other types of business; |
| · | our Investment Manager may have opportunities to earn fees for referring a prospective investment opportunity to others; |
| · | the dealer-manager, which is an affiliate of our General Partner and not an independent securities firm, reviewed and performed due diligence and will continue to review and perform due diligence on us and the information in our prospectus and thus its review cannot be considered an independent review and may not be as meaningful as a review conducted by an unaffiliated broker-dealer; |
| · | the lack of separate legal representation for us, our General Partner, and our Investment Manager and lack of arm’s-length negotiations regarding compensation payable to our General Partner and our Investment Manager; |
| · | our General Partner is our tax matters partner and is able to negotiate with the IRS to settle tax disputes that would bind us and our limited partners that might not be in your best interest given your individual tax situation; and |
| · | our General Partner and/or our Investment 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 Investment Manager is not independent.
Any conflicts in determining and allocating investments between us and our General Partner or Investment Manager, or between us and another fund managed by our General Partner or Investment Manager, are resolved by our Investment Manager’s investment committee, which also serves as our investment committee and the investment committee for other funds managed by our Investment Manager and its affiliates. Since all of the members of our Investment Manager’s investment committee are officers of our General Partner and our Investment Manager and certain of their affiliates and are not independent, matters determined by such investment committee, including conflicts of interest between us and our General Partner, our Investment Manager and their respective affiliates involving investment opportunities, may not be as favorable to you and our other investors as they would be if independent members were on the committee. Generally, if an investment is appropriate for more than one fund, our Investment 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 Capital Asset, 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 Investment Manager’s investment committee may make exceptions to these general policies when, in our Investment Manager’s judgment, other circumstances make application of these policies inequitable or economically undesirable. In addition, our Partnership Agreement permits our General Partner and its affiliates to engage in Capital Asset acquisitions, financing secured loans, refinancing, leasing and releasing opportunities on their own behalf or on behalf of other funds even if they compete with us.
Our General Partner’s and our Investment 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 Investment 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 General Partner and/or our Investment Manager supervise and control our business affairs. Our General Partner’s officers and employees are also officers and employees of our Investment Manager and its affiliates. In addition to sponsoring and managing us and other equipment funds, our Investment Manager’s and its affiliates’ current business plan entails sponsoring, managing and/or distributing other investment products, including, but not limited to, oil and gas funds, business development companies and real estate investment trusts.
As a result, the time and resources that our Investment 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 Investment 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 General Partner and its affiliates will receive expense reimbursements and substantial fees from us and those reimbursements and fees are likely to exceed the income portion of distributions made to limited partners during our early years.
Before making any distributions to our limited partners, we will reimburse our General Partner and its affiliates for expenses incurred on our behalf, and pay our General Partner and its affiliates substantial fees, for our organization, selling our Interests and acquiring, managing, and realizing our investments for us. The expense reimbursements and fees of our General Partner and its affiliates were established by our General Partner in compliance with the NASAA Guidelines (the North American Securities Administrators Association guidelines for publicly offered, finite-life equipment leasing and finance funds) in effect on May 18, 2009, are not based on arm’s-length negotiations, but are subject to the limitations set forth in our Partnership Agreement. Nevertheless, the amount of these expense reimbursements and fees is likely to exceed the income portion of distributions made to you in our early years.
In general, expense reimbursements and fees are paid without regard to the amount of our cash distributions to our limited partners, and regardless of the success or profitability of our operations. Some of those fees and expense reimbursements will be required to be paid as we acquire our portfolio and we may pay other expenses, such as accounting and interest expenses, costs for supplies, etc., even though we may not yet have begun to receive revenues from all of our investments. This lag between the time when we must pay fees and expenses and the time when we receive revenues may result in losses to us during our early years, which our General Partner believes is typical for a start-up company such as us.
Furthermore, we are likely to borrow a significant portion of the purchase price of our investments. This use of indebtedness should permit us to make more investments than if borrowings were not utilized. As a consequence, we will pay greater fees to our Investment Manager than if no indebtedness were incurred because management and acquisition fees are based upon the gross payments earned or receivable from, or the purchase price (including any indebtedness incurred) of, our investments. Also, our General Partner and/or our Investment Manager will determine the amount of cash reserves that we will maintain for future expenses, contingencies or investments. The reimbursement of expenses, payment of fees or creation of reserves could adversely affect our ability to make distributions to our limited partners.
Our Investment 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 Investment Manager manages has grown substantially since our Investment Manager was formed in 1985 and our Investment Manager and its affiliates intend to continue to sponsor and manage, as applicable, funds similar to us that may be concurrent with us and they expect to experience further growth in their respective assets under management. Our Investment Manager’s future success will depend on the ability of its and its affiliates’ officers and key employees to implement and improve their operational, financial and management controls, reporting systems and procedures, and manage a growing number of assets and investment funds. They, however, may not implement improvements to their management information and control systems in an efficient or timely manner and they may discover deficiencies in their existing systems and controls. Thus, our Investment 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 Investment 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 Investment Manager’s information systems and technology. There can be no assurance that these information systems and technology will be able to accommodate our growth or that the cost of maintaining such systems will not increase from its current level. Such a failure to accommodate growth, or an increase in costs related to such information systems, could also negatively affect our liquidity and cash flows, and could negatively affect our profitability.
Furthermore, we depend on the headquarters of our General Partner and Investment Manager, which are located in New York City, for the operation of our business. A disaster or a disruption in the infrastructure that supports our businesses, including a disruption involving electronic communications or other services used by us or third parties with whom we conduct business, or directly affecting our headquarters, may have an adverse impact on our ability to continue to operate our business without interruption that could have a material adverse effect on us. Although we have disaster recovery programs in place, there can be no assurance that these will be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for any losses.
Finally, we rely on third-party service providers for certain aspects of our business, including certain accounting and financial services. Any interruption or deterioration in the performance of these third parties could impair the quality of our operations and could adversely affect our business and result in losses.
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 businesses, 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 businesses and customers.
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 businesses rely 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 General Partner is required to evaluate our internal controls over financial reporting in order to allow management to report on our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002, as amended, and the rules and regulations of the SEC thereunder, which we refer to as ‘‘Section 404.’’ During the course of testing, our General Partner may identify deficiencies that it may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404. We cannot be certain as to the timing of completion of our evaluation, testing and any remediation actions or the impact of the same on our operations. If we are not able to complete our annual evaluations required by Section 404 in a timely manner or with adequate compliance, we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. As a result, we may be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could negatively affect our results of operations and the achievement of our investment objectives.
We are subject to certain reporting requirements and are required to file certain periodic reports with the SEC.
We are subject to reporting requirements under the Securities Exchange Act of 1934, including the filing of quarterly and annual reports. Prior public funds sponsored by our Investment Manager have been and are subject to the same requirements. Some of these funds have been required to amend previously filed reports to, among other things, restate the audited or unaudited financial statements filed in such reports. As a result, the prior funds have been delinquent in filing subsequent quarterly and annual reports when they became due. If we experience delays in the filing of our reports, our limited partners 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 General Partner and its affiliates is limited by our Partnership Agreement.
Our Partnership Agreement provides that neither our General Partner 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 General Partner or an affiliate if the General Partner 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 Partnership Agreement, your right to institute a cause of action against our General Partner may be more limited than it would be without these provisions.
Changes in the laws or regulations that affect the terms and conditions set forth in our prospectus and/or the Partnership Agreement could negatively impact our and/or your rights and obligations.
Our General Partner may, without your consent, amend the Partnership Agreement to effect any change necessitated by a change in law or regulation that causes the terms and conditions set forth in our prospectus and/or the Partnership Agreement to be, in the sole discretion of our General Partner, no longer viable. The changes must be drawn as narrowly as possible so as to effectuate the original intent of our prospectus and the Partnership Agreement. Nevertheless, these changes could negatively impact our and/or your rights and obligations.
You are not expected to have any protection under the Investment Company Act.
We are not registered, and do not expect in the future to be required to register, as an investment company under the Investment Company Act of 1940, as amended (the "40 Act"), in reliance upon an exemption therefrom. Among other things, the 40 Act generally requires investment companies to have a minimum of forty percent (40%) independent directors and regulates the relationship between the investment adviser (i.e., our Investment Manager) and the investment company (i.e., the Partnership), in particular with regard to affiliated transactions. Such protections, and others afforded by the 40 Act, are not expected to be applicable to us. Should the 40 Act become applicable to us, these protections may be implemented in a manner that alters other rights and obligations of us and/or you with respect to other matters.
You are not expected to have any protection under the Investment Advisers Act.
Our Investment Manager will not register and does not expect in the future to be required to register as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), in reliance upon an exemption therefrom. The Advisers Act contains many provisions designed to protect clients of investment advisers, including, among other things, restrictions on the charging by registered investment advisers of performance-based compensation. Such protections, and others afforded by the Advisers Act, are not expected to be applicable to our Investment Manager and to us. Should the Advisers Act become applicable to our Investment Manager and to us, these protections may be implemented in a manner that alters other rights and obligations of us and/or you with respect to other matters.
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 Partnership Agreement places significant restrictions on your ability to transfer our Interests.
We could lose cost recovery or depreciation deductions if the IRS treats our leases as sales or financings.
We expect that, for federal income tax purposes, we will be treated as the owner and lessor of the Capital Assets 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 Capital Assets, 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. Any losses on such loans may constitute capital losses, the deductibility of which is limited.
We expect that, for federal income tax purposes, we will not be treated as the owner and lessor of the Capital Assets that we invest in through our lending activities. As a result, we will not be able to take depreciation or cost recovery deductions with respect to such Capital Assets. Depending on our level of activity with respect to these types of financings, we may take the position that we are 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 partners 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. Alternatively, we (or the IRS) may treat our lending activities as investment activities and not trade or business activities if our level of lending activity is not significant. In such circumstances, gains or losses from the loans could not be offset against passive activity gain or loss and any such losses would be capital losses that, except to a limited extent, could only be deducted to the extent you have capital gains.
You may incur tax liability in excess of the cash distributions you receive in a particular year.
In any particular year, your tax liability from owning our Interests may exceed the cash distributions you receive from this investment. While we expect that your net taxable income from owning our Interests for most years will be less than your cash distributions in those years, to the extent any of our debt is repaid with income or proceeds from Capital Asset sales, taxable income could exceed the amount of cash distributions you receive in those years. Additionally, a sale of our investments may result in taxes in any year that are greater than the amount of cash from the sale, resulting in a tax liability in excess of cash distributions. Your tax liability could also exceed the amount of cash distributions you receive due to allocations designed to cause our limited partners’ capital accounts (as adjusted by certain items) to be equal on a per Interest basis. Therefore, you will have to pay any excess tax liability with funds from another source, because the distributions we make may not be sufficient to pay such excess tax liability. Further, due to the operation of the various loss disallowance rules, in a given tax year you may have taxable income when, on a net basis, we have a loss, or you may recognize a greater amount of taxable income than our net income because, due to a loss disallowance, income from some of our activities cannot be offset by losses from some of our other activities.
You may be subject to greater income tax obligations than originally anticipated due to special depreciation rules.
We may acquire Capital Assets subject to lease that the Code requires us to depreciate over a longer period than the standard depreciation period. Similarly, some of the Capital Assets that we purchase may not be eligible for accelerated depreciation under the Modified Accelerated Costs Recovery System, which was established by the Tax Reform Act of 1986 to set forth the guidelines for accelerated depreciation under the Code. Further, if we acquire Capital Assets that the Code deems to be tax-exempt use property and the leases do not satisfy certain requirements, losses attributable to such Capital Assets are suspended and may be deducted only against income we receive from those Capital Assets or when we dispose of such Capital Assets. Depending on the Capital Assets that we acquire and their eligibility for accelerated depreciation under the Code, we may have less depreciation deductions to offset gross lease revenue, thereby increasing our taxable income.
There are limitations on your ability to deduct our losses.
Your ability to deduct your share of our losses is limited to the amounts that you have at risk from owning our Interests. 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 Capital Assets are 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 the income may be attributable to a lending trade or business. Any gains or losses we recognize from those lending activities that are associated with a trade or business are generally allowable as either passive activity income or loss, as applicable. Gains and losses we recognize from lending activities not associated with a trade or business pass through as capital gains and losses and can be offset by other capital gains and losses you may have.
The IRS may allocate more taxable income to you than our Partnership Agreement provides.
The IRS might successfully challenge our allocations of taxable income or losses. If so, the IRS would require reallocation of our taxable income and loss, resulting in an allocation of more taxable income or less loss to you than our Partnership Agreement allocates.
If you are or invest through a tax-exempt organization, you will have unrelated business taxable income from this investment.
Tax-exempt organizations are subject to income tax on unrelated business taxable income (“UBTI”). Such organizations are required to file federal income tax returns if they have UBTI from all sources in excess of $1,000 per year. Our leasing income will constitute UBTI. Furthermore, tax-exempt organizations in the form of charitable remainder trusts will be subject to an excise tax equal to 100% of their UBTI. Thus, an investment in our Interests may not be appropriate for a charitable remainder trust and such entities should consult their own tax advisors with respect to an investment in our Interests.
To the extent that we borrow money in order to finance our lending activities, a portion of our income from such activities will be treated as attributable to debt-financed property and, to the extent so attributable, will constitute UBTI. We presently do not expect to finance our lending activities with borrowed funds. Nevertheless, the debt-financed UBTI rules are broad and there is much uncertainty in determining when, and the extent to which, property should be considered debt-financed. Thus, the IRS might assert that a portion of the assets we acquire as part of our lending activities are debt-financed property generating UBTI, especially with regard to any indebtedness we incur to fund working capital at a time when we hold loans we have acquired or made to others. If the IRS were to successfully assert that debt we believed should have been attributed to our leasing activities should instead be attributed to our lending activities, the amount of our income that constitutes UBTI would be increased.
This investment may cause you to pay additional taxes.
You may be required to pay alternative minimum tax in connection with owning our Interests, since you will be allocated a proportionate share of our tax preference items. Our General Partner’s and/or our Investment Manager’s operation of our business affairs may lead to other adjustments that could also increase your alternative minimum tax. In addition, if all or a portion of our lending activities are not generated from a trade or business, then a portion of our management fees and other costs related to those investments could be considered investment expenses rather than trade or business expenses. To the extent that a portion of our fees are considered investment expenses, they are not deductible for alternative minimum tax purposes and are subject to a limitation for regular tax purposes. Alternative minimum tax is treated in the same manner as the regular income tax for purposes of making estimated tax payments.
You may incur State tax and foreign tax liabilities and have an obligation to file State or foreign tax returns.
You may be required to file tax returns and pay foreign, State or local taxes, such as income, franchise or personal property taxes, as a result of an investment in our Interests, depending upon the laws of the jurisdictions in which the Capital Assets that we own are 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 Interests, an audit of our tax return could potentially lead to an audit of your individual tax return. Finally, under certain circumstances, the IRS may automatically adjust your personal return without the opportunity for a hearing if it adjusts our tax return.
Some of the distributions on our Interests 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 Capital Assets over the term of our existence and/or borrowers repay loans we have made to them, it is very likely that a portion of each distribution 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 Interests 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 Interests, such as you might expect if you had purchased a bond. Also, payments made upon our liquidation will be taxable to the extent that such payments are not a return of capital.
As you receive distributions throughout the life of your investment, you will not know at the time of the distribution what portion of the distribution represents a return of capital and what portion represents income. The Schedule K-1 statement you receive from us each year will specify the amounts of capital and income you received throughout the prior year.
Not applicable.
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 General Partners’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.
Not applicable.
Our Interests are not publicly traded and there is no established public trading market for our Interests. It is unlikely that any such market will develop.
| | Number of Partners |
| Title of Class | as of March 16, 2012 |
| General Partner | 1 |
| Limited Partners | 7,017 |
We, at our General Partner’s discretion, pay monthly distributions to each of our limited partners beginning the first month after each such limited partner was admitted through May 2016. We paid distributions to limited partners totaling $18,987,222, $9,695,337 and $964,235 for the years ended December 31, 2011, 2010 and the period from the Commencement of Operations through December 31, 2009, respectively. Additionally, we paid our General Partner distributions of $191,790, $97,933 and $9,636 for the years ended December 31, 2011, 2010 and the period from the Commencement of Operations through December 31, 2009, respectively. The terms of our loan agreement with CB&T could restrict us from paying cash distributions to our partners if such payment would cause us to not be in compliance with our financial covenants. See “Item 7. General Partner’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
In order for Financial Industry Regulatory Authority, Inc. (“FINRA”) members and their associated persons to participate in the offering and sale of Interests pursuant to the offering or to participate in any future offering of our Interests, we are required pursuant to FINRA Rule 2310(b)(5) to disclose in each annual report distributed to our limited partners a per Interest estimated value of our Interests, the method by which we developed the estimated value, and the date used to develop the estimated value. In addition, our Investment Manager prepares statements of our estimated Interest 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 Interests. For these purposes, the estimated value of our Interests is deemed to be $759.13 per Interest as of December 31, 2011. 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 Interests is based on the estimated amount that a holder of an Interest 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 partners upon liquidation. To estimate the amount that our partners would receive upon such liquidation, we calculate the sum of: (i) the unpaid finance lease and note receivable payments on our existing finance leases and notes receivable, discounted at the implicit yield for each such transaction; (ii) the fair market value of our operating leases, equipment held for sale or lease, and other assets, as determined by the most recent third-party appraisals we have obtained for certain assets or our Investment Manager’s estimated values of certain other assets, as applicable; and (iii) our cash on hand. From this amount, we then subtract our total debt outstanding and then divide that difference by the total number of Interests outstanding.
The foregoing valuation is an estimate only. The appraisals that we obtain and the methodology utilized by our management in estimating our per Interest 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 Interest 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 Investment 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 Interests 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 Interests at this time and none is expected to develop, there can be no assurance that limited partners could receive $759.13 per Interest if such a market did exist and they sold their Interests or that they will be able to receive such amount for their Interests in the future. Furthermore, there can be no assurance:
| · | as to the amount limited partners may actually receive if and when we seek to liquidate our assets or the amount of lease and note receivable payments and asset disposition proceeds we will actually receive over our remaining term; the total amount of distributions our limited partners may receive may be less than $1,000 per Interest primarily due to the fact that the funds initially available for investment were reduced from the gross offering proceeds in order to pay selling commissions, underwriting fees, organizational and offering expenses, and acquisition or formation fees; |
| · | that the foregoing valuation, or the method used to establish value, will satisfy the technical requirements imposed on plan fiduciaries under ERISA; or |
| · | that the foregoing valuation, or the method used to establish value, will not be subject to challenge by the IRS if used for any tax (income, estate, gift or otherwise) valuation purposes as an indicator of the current value of the Interests. |
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 Interests for the ERISA and FINRA purposes described above and, therefore, the $759.13 per Interest does not reflect the amount that a limited partner would currently receive under our repurchase plan. In addition, there can be no assurance that a limited partner will be able to redeem its Interests under our repurchase plan.
The selected financial data should be read in conjunction with the consolidated financial statements and related notes included in “Item 8. Consolidated Financial Statements and Supplementary Data” contained elsewhere in this Annual Report on Form 10-K.
| | | | Period from | |
| | | | June 19, 2009 | |
| | | | (Commencement of | |
| | | Years Ended December 31, | | | Operations) through | |
| | | 2011 | | | 2010 | | | December 31, 2009 | |
| Total revenue (a) | | $ | 46,797,113 | | | $ | 12,835,226 | | | $ | 1,761,154 | |
| Net income (loss) attributable to Fund Fourteen | | $ | 1,387,802 | | | $ | 2,338,378 | | | $ | (1,584,298 | ) |
| Net income (loss) attributable to Fund Fourteen allocable to Limited Partners | | $ | 1,373,924 | | | $ | 2,314,994 | | | $ | (1,568,455 | ) |
| Net income (loss) attributable to Fund Fourteen allocable to General Partner | | $ | 13,878 | | | $ | 23,384 | | | $ | (15,843 | ) |
| | |
| Weighted average number of limited partnership interests outstanding | | | 243,491 | | | | 131,915 | | | | 32,161 | |
| Net income (loss) per weighted average limited partnership interest | | $ | 5.64 | | | $ | 17.55 | | | $ | (48.77 | ) |
| Distributions to limited partners | | $ | 18,987,222 | | | $ | 9,695,337 | | | $ | 964,235 | |
| Distributions per weighted average limited partnership interest | | $ | 77.98 | | | $ | 73.50 | | | $ | 29.98 | |
| Distributions to the General Partner | | $ | 191,790 | | | $ | 97,933 | | | $ | 9,636 | |
| | | December 31, | |
| | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
| Total assets (a) | | $ | 458,631,602 | | | $ | 208,759,132 | | | $ | 59,567,064 | | | $ | 1,001 | |
| Non-recourse long-term debt (a) | | $ | 221,045,626 | | | $ | 42,642,708 | | | $ | - | | | $ | - | |
| Partners' equity (b) | | $ | 202,214,872 | | | $ | 161,677,642 | | | $ | 58,615,050 | | | $ | 1,001 | |
| | |
(a) Increases in total revenue, total assets and non-recourse long-term debt were primarily due to our investments in marine vessels subject to lease and other financing transactions during 2011 and 2010, of which some were leveraged. (b) Partners' equity has increased primarily due to our equity raise. | |
Our General Partner’s Discussion and Analysis of Financial Condition and Results of Operations relates to our consolidated financial statements and should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. Statements made in this section may be considered forward-looking. These statements are not guarantees of future performance and are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of these risks and assumptions, including, among other things, factors discussed in “Part I. Forward-Looking Statements” and “Item 1A. Risk Factors” located elsewhere in this Annual Report on Form 10-K.
Overview
We operate as an equipment leasing and finance fund in which the capital our partners invested is pooled together to make investments in Capital Assets, pay fees and establish a small reserve. We are currently in our operating period, which commenced on May 19, 2011. From the Commencement of Operations on June 19, 2009 through May 18, 2011, we raised total equity of $257,646,987.
We used a substantial portion of the proceeds from the sale of our Interests to invest in Capital Assets, including, but not limited to, Capital Assets that are already subject to lease, Capital Assets that we purchase and lease to domestic and global businesses, loans that are secured by Capital Assets, and ownership rights to leased Capital Assets at lease expiration. Additional investments are made with the cash generated from our initial investments to the extent that cash is not needed for our expenses, reserves and distributions to limited partners. The investment in additional Capital Assets in this manner is called “reinvestment.” We anticipate investing and reinvesting in Capital Assets from time to time for five years from the date we completed the offering, May 18, 2011. This time frame is called the “operating period” and may be extended, at our General Partner’s discretion, for up to an additional three years. After the operating period, we will then sell our assets in the ordinary course of business, during a time frame called the “liquidation period.”
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.
While our Investment Manager believes the U.S. economy is likely to continue its recovery, our Investment Manager believes this recovery will maintain its gradual progression. Further, this recovery will likely face certain headwinds as we move through 2012, due to factors such as the rate of employment expansion, election-year uncertainty, and the European sovereign debt crisis.
Significant Transactions
We engaged in the following significant transactions from the Commencement of Operations through December 31, 2011:
Telecommunications Equipment
Between September 2009 and February 2010, we purchased telecommunications equipment for approximately $11,800,000 that was leased to Global Crossing. Each of the leases is for a period of thirty-six months. On April 1, 2010, we sold a 9.084% noncontrolling interest in those leases to an unaffiliated third party, Hardwood Partners, LLC (“Hardwood”), for $1,000,000. As a result of the sale, our controlling interest was reduced to 90.916%.
On February 28, 2011, we purchased telecommunications equipment for approximately $8,452,000 and simultaneously leased the equipment to Global Crossing. The lease schedule is for a period of thirty-six months.
On June 9, 2011, we, through a joint venture with ICON ECI Fund Fifteen, L.P. (“Fund Fifteen”), an affiliate managed by our Investment Manager, purchased telecommunications equipment for approximately $6,359,000 and simultaneously leased the equipment to Global Crossing. The lease is for a period of thirty-six months. As of June 9, 2011, we had a 100% ownership in the joint venture. Pursuant to the terms of the joint venture, Fund Fifteen had the right to contribute capital on or prior to the six month anniversary of the date the joint venture acquired the equipment. On August 11, 2011, Fund Fifteen contributed capital of approximately $1,836,000 to the joint venture, inclusive of acquisition fees, after which our and Fund Fifteen’s ownership interests in the joint venture were approximately 70.8% and 29.2%, respectively. On October 20, 2011, we exchanged our 70.8% ownership interest in the joint venture for our proportionate share of the lease schedules that were previously owned by the joint venture. Upon the completion of the exchange, the joint venture was terminated. No material gain or loss was recorded as a result of this transaction.
Marine Vessels
On September 29, 2010, we purchased two supramax bulk carrier vessels, the Amazing and the Fantastic, from wholly-owned subsidiaries of Geden for the aggregate purchase price of $67,000,000. Simultaneously with the purchases, the vessels were bareboat chartered back to the Geden subsidiaries for a period of seven-years. The purchase price for the vessels was funded by $23,450,000 in cash and a non-recourse loan in the amount of $43,550,000.
On March 29, 2011, we and ICON Leasing Fund Twelve, LLC (“Fund Twelve”), an affiliate managed by our Investment Manager, entered into a joint venture, owned 75% by us and 25% by Fund Twelve, for the purpose of acquiring two Aframax tankers and two VLCCs (collectively, the “AET Vessels”). The Aframax tankers were each acquired for a purchase price of $13,000,000, of which $9,000,000 was financed through non-recourse long-term debt, and were simultaneously bareboat chartered to AET for a period of three years. The VLCCs were each acquired for a purchase price of $72,000,000, of which $55,000,000 was financed through non-recourse long-term debt (collectively, with the non-recourse long-term debt on the Aframax tankers, the “Senior Debt”), and were simultaneously bareboat chartered to AET for a period of ten years. On April 5, 2011, the joint venture borrowed $22,000,000 of subordinated non-recourse long-term debt from an unaffiliated third-party (the “Sub Debt”) related to the investment in the AET Vessels. The loan is for a period of sixty-months and at our option may be extended for an additional twelve months. The loan is secured by the equity of the joint venture.
Due to a change in the fair value of the AET Vessels, a provision in our Senior Debt loan agreement restricts our ability to utilize cash generated by the charter of the AET Vessels as of January 12, 2012 for purposes other than paying the Senior Debt. Approximately $400,000 included in cash and cash equivalents at December 31, 2011 subsequently became restricted upon notice by the Senior Debt lender. Charter payments in excess of the Senior Debt loan service are held in reserve by the Senior Debt lender until such time as the restriction is cured. Once cured, the reserves will be released to us. While this restriction is in place, we are prevented from applying the charter proceeds to the Sub Debt. As of March 2012, we have made all required payments on the Sub Debt. While we intend to continue to make payments on the Sub Debt, if the current restriction remains in place, the Investment Manager cannot make any assurances it will be able to continue to pay the Sub Debt in the future. Should we fail to meet our future payment obligations, the Sub Debt lender has certain rights, including step-in rights, which allow it to collect cash generated from the charter until such time as the Sub Debt lender has received all unpaid amounts.
On June 21, 2011, we purchased a crude oil tanker, the Center, for the purchase price of $69,000,000, of which $16,000,000 was funded in cash, $44,000,000 was financed through non-recourse long-term debt and $9,000,000 of subordinated seller’s credit, and simultaneously bareboat chartered the tanker to Center Navigation, for a period of five years.
In connection with the non-recourse long term debt incurred related to the acquisition of the AET Vessels and the Center, we entered into interest rate swap agreements to effectively fix the variable interest rates (see Note 7 and 10 to our consolidated financial statements). For the year ended December 31, 2011, these derivative financial instruments generated a loss of approximately $12,557,000.
On December 19, 2011, we, through a joint venture owned 60% by Fund Fifteen and 40% by us, agreed to purchase the offshore support vessel, the Lewek Ambassador. The purchase price of the vessel will be the lesser of $25,000,000 and the fair market value of the vessel as determined two weeks before its delivery date, which is expected to occur on or before April 30, 2012. On December 20, 2011, the joint venture funded $9,000,000 of the purchase price and will fund the remaining portion upon delivery of the vessel. Simultaneously with the funding, the joint venture entered into a bareboat charter with Gallatin Maritime Management for a period of nine-years to commence on such delivery date. For the purpose of purchasing the Lewek Ambassador, the joint venture was capitalized using a combination of debt and equity. The joint venture has recorded notes payable to Fund Fifteen and us in the amounts of $4,200,000 and $2,800,000, respectively. The notes bear interest at 17% per year and mature eighty-four months from the delivery of the vessel. The note is presented as note receivable from joint venture on our consolidated balance sheets.
Packaging Equipment
On July 31, 2009, we purchased a 3-layer blown film extrusion line from Exopack for approximately $2,713,000, which was simultaneously leased to Exopack for sixty-months commencing on August 1, 2009. On September 30, 2009, we purchased an eight color flexographic printing press from Exopack for approximately $3,662,000, which was simultaneously leased to Exopack for sixty-months.
Motor Coaches
On March 9, 2010, we purchased eleven 2010 MCI J4500 motor coach buses for approximately $4,500,000 and leased the buses to DBS. On May 13, 2010, fifteen additional 2010 MCI J4500 motor coach buses were purchased for approximately $5,900,000 and simultaneously leased to Lakefront. The leases with DBS and Lakefront are for a period of sixty-months commencing on June 1, 2010.
On January 3, 2012, DBS, Lakefront and their parent-company, Coach Am Group Holdings Corp., commenced a voluntary Chapter 11 proceeding in U.S. Bankruptcy Court. To date, DBS and Lakefront have made substantially all of their lease payments. Our Investment Manager has reviewed DBS and Lakefront’s ability to make future rental payments through ongoing discussions with DBS and Lakefront’s management and, based on their indications, has concluded that no allowance for bad debt is required as of December 31, 2011.
Gas Compressors
Between June 26, 2009 and August 17, 2009, a joint venture between us and Fund Twelve, purchased eight gas compressors for approximately $11,298,000, which were simultaneously leased to APMC, an affiliate of Atlas Pipeline Partners, L.P. Each lease schedule is for a period of forty-eight months and expires on August 31, 2013. As of September 30, 2009, we contributed approximately $5,084,000 to the joint venture, after which our and Fund Twelve’s ownership interests were 45% and 55%, respectively. On April 1, 2010, we sold a 4.467% ownership interest in the joint venture to Hardwood for $450,000.
On July 15, 2011, the joint venture amended its master lease agreement with APMC requiring APMC to purchase the gas compressors upon lease termination. The joint venture received an amendment fee of $500,000. On September 14, 2011, the joint venture financed the future receivables related to the leases with APMC by entering into a loan agreement with Wells Fargo Equipment Finance, Inc. in the amount of approximately $10,628,000. The loan bears interest at 4.08% per year and matures on September 1, 2013. On September 29, 2011, we received a distribution of approximately $4,300,000 from the joint venture, which included the return of our capital. In connection with the distribution, we recorded approximately $949,000 of additional income from investments in joint ventures.
Notes Receivable
On March 3, 2010, we provided a senior term loan in the aggregate amount of approximately $9,858,000 to NL III. The loan bears interest at 18% per year and is for a period of forty-eight months. The loan is secured by point of sale equipment. On December 23, 2010, the payment obligations were restructured and the note was extended through July 15, 2014.
On June 30, 2010, we made a $14,400,000 second priority term loan to Ocean Navigation. The loan was funded between July and September 2010 and proceeds from the loan facility were used by Ocean Navigation to purchase two Aframax tanker vessels, the Shah Deniz and the Absheron. The loan bears interest at 15.25% per year and is for a period of six years from the delivery date of each Aframax tanker. The loan is secured by the vessels.
On September 1, 2010, we made a term loan to EMS in the amount of $4,800,000. The loan bears interest at 13% per year and is for a period of forty-eight months. The loan is secured by metal cladding and production equipment.
On September 24, 2010, we made a term loan to Northern Crane in the amount of $5,250,000. The loan bears interest at 15.75% per year and is for a period of fifty-four months. The loan is secured by lifting and transportation equipment.
On June 29, 2009, we and Fund Twelve entered into a joint venture for the purpose of making loans in the aggregate amount of $20,000,000 to the ARAM Borrowers. On that date, the joint venture funded the first tranche of the loans in the aggregate amount of $12,500,000. On July 20, 2009, the joint venture funded the second tranche in the amount of $7,500,000. The loans are secured by a first priority security interest in all of the analog seismic system equipment owned by the ARAM Borrowers, among other collateral. The loans bear interest at 15% per year for a period of sixty-months beginning on August 1, 2009. As of December 31, 2009, our and Fund Twelve’s ownership interests in the joint venture were 45% and 55%, respectively. On April 1, 2010, we sold a 2.384% noncontrolling interest in the joint venture to Hardwood for $450,000. Effective January 1, 2011, we exchanged our ownership interest in the joint venture for our proportionate share of the loans to the ARAM Borrowers. No gain or loss was recorded as a result of this transaction. Upon completion of the exchange, the joint venture was terminated.
On December 23, 2009, a joint venture owned 45% by us and 55% by Fund Twelve, made a second priority term loan to Quattro Plant in the amount of £5,800,000. The loan bears interest at 20% per year and is for a period of thirty-three months. The loan is secured by rail support construction equipment. On April 1, 2010, we sold a 4.805% noncontrolling interest in the joint venture to Hardwood for $450,000. Effective January 1, 2011, we exchanged our ownership interest in the joint venture for an assignment of its proportionate share of the future cash flows of the loan receivable. No gain or loss was recorded as a result of this transaction. Upon completion of the exchange, the joint venture was terminated.
On July 26, 2011, we made a term loan to Western Drilling in the amount of $9,465,000. The loan bears interest at 14% per year and matures on September 1, 2016. The loan is secured by, among other collateral, oil and gas drilling rigs and a mortgage over real property.
On December 22, 2011, a joint venture owned 75% by us and 25% by Fund Twelve made a $20,124,000 subordinated term loan to JAC. The loan bears interest at rates ranging between 12.50% to 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 new condensate splitter and aromatics complex.
Acquisition Fees
In connection with the new investments made during the years ended December 31, 2011 and 2010 and for the period from the Commencement of Operations through December 31, 2009, we paid total acquisition fees to our Investment Manager of $9,030,609, $5,923,983 and $1,025,143, respectively.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements.
Critical Accounting Policies
An understanding of our critical accounting policies is necessary to understand our financial results. The preparation of financial statements in conformity with US GAAP requires our General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates primarily include the determination of allowance for doubtful accounts, depreciation and amortization, impairment losses, estimated useful lives and residual values. Actual results could differ from those estimates. We applied our critical accounting policies and estimation methods consistently in all periods presented. We consider the following accounting policies to be critical to our business:
| · | Lease classification and revenue recognition; |
| · | Notes receivable and revenue recognition; |
| · | Credit quality of notes receivable and allowance for credit losses; |
| · | Allowance for doubtful accounts; 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. For a finance lease, initial direct costs are capitalized and amortized over the lease term. For an operating lease, initial direct costs are included as a component of the cost of the equipment and depreciated over the lease term.
For finance leases, we record, at lease inception, the total minimum lease payments receivable from the lessee, the estimated unguaranteed residual value of the equipment at lease termination, the initial direct costs related to the lease and the related unearned income. Unearned income represents the difference between the sum of the minimum lease payments receivable, plus the estimated unguaranteed residual value, minus the cost of the leased equipment. Unearned income is recognized as finance income over the term of the lease using the effective interest rate method.
For operating leases, rental income is recognized on a straight-line basis over the lease term. Billed operating lease receivables are included in accounts receivable until collected. 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.
The recognition of revenue may be suspended when deemed appropriate by our Investment Manager in accordance with our policy on doubtful accounts.
Our Investment Manager has an investment committee that approves each new equipment lease and other financing transaction. As part of its process, the investment committee determines the residual value, if any, to be used once the investment has been approved. The factors considered in determining the residual value include, but are not limited to, the creditworthiness of the potential lessee, the type of equipment considered, how the equipment is integrated into the potential lessee’s business, the length of the lease and the industry in which the potential lessee operates. Residual values are reviewed for impairment in accordance with our impairment review policy.
The residual value assumes, among other things, that the asset would be utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the marketplace are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. The residual value is calculated using information from various external sources, such as trade publications, auction data, equipment dealers, wholesalers and industry experts, as well as inspection of the physical asset and other economic indicators.
Asset Impairments
The significant assets in our portfolio are periodically reviewed, no less frequently than annually or when indicators of impairment exist, to determine whether events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss will be recognized only if the carrying value of a long-lived asset is not recoverable and exceeds its fair market value. If there is an indication of impairment, we will estimate the future cash flows (undiscounted and without interest charges) expected from the use of the asset and its eventual disposition. Future cash flows are the future cash inflows expected to be generated by an asset less the future outflows expected to be necessary to obtain those inflows. If an impairment is determined to exist, the impairment loss will be measured as the amount by which the carrying value of a long-lived asset exceeds its fair value and recorded in the consolidated statements of operations in the period the determination is made.
The events or changes in circumstances that generally indicate that an asset may be impaired are (i) the estimated fair value of the underlying equipment is less than its carrying value or (ii) the lessee is experiencing financial difficulties and it does not appear likely that the estimated proceeds from the disposition of the asset will be sufficient to satisfy the residual position in the asset and, if applicable, the remaining obligation to the non-recourse lender. Generally in the latter situation, the residual position relates to equipment subject to third-party non-recourse debt where the lessee remits its rental payments directly to the lender and we do not recover our residual position until the non-recourse debt is repaid in full. The preparation of the undiscounted cash flows requires the use of assumptions and estimates, including the level of future rents, the residual value expected to be realized upon disposition of the asset, estimated downtime between re-leasing events and the amount of re-leasing costs. Our Investment 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 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 operations 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. Notes receivable are generally placed in a non-accrual status when payments are more than 90 days past due. Additionally, we periodically review the creditworthiness of companies with payments outstanding less than 90 days. Based upon our Investment Manager’s judgment, accounts may be placed in a non-accrual status. Accounts on a non-accrual status are only returned to an accrual status when the account has been brought current and we believe recovery of the remaining unpaid receivable is probable. Revenue on non-accrual accounts is recognized only when cash has been received.
Credit Quality of Notes Receivable and Allowance for Credit Losses
Our Investment Manager weighs all credit decisions on a combination of external credit ratings as well as internal credit evaluations of all potential borrowers. A potential borrower’s credit application is analyzed using those credit ratings as well as the potential borrower’s financial statements and other financial data deemed relevant.
Our notes receivable are limited in number and are spread across a wide range of industries. Accordingly, we do not aggregate notes receivable into portfolio segments or classes. Due to the limited number of notes receivable, we are able to estimate the allowance for credit losses based on a detailed analysis of each note receivable as opposed to using portfolio based metrics and allowance for credit losses. Notes are analyzed quarterly and categorized as either performing or non-performing based on payment history. If a note becomes non-performing due to a borrower’s missed scheduled payments or failed financial covenants, our Investment Manager analyzes if a reserve should be established or if the note should be restructured. Material events would be specifically disclosed in the discussion of each note held.
Allowance for Doubtful Accounts
When evaluating the adequacy of the allowance for doubtful accounts, we estimate the uncollectibility of receivables by analyzing lessee, borrower and other counterparty concentrations, creditworthiness and current economic trends. We record an allowance for doubtful accounts when the analysis indicates that the probability of full collection is unlikely. Accounts receivable are generally placed in a non-accrual status when payments are more than 90 days past due. Additionally, we periodically review the creditworthiness of companies with payments outstanding less than 90 days. Based upon our Investment Manager’s judgment, accounts may be placed in a non-accrual status. Accounts on a non-accrual status are only returned to an accrual status when the account has been brought current and we believe recovery of the remaining unpaid receivable is probable. Revenue on non-accrual accounts is recognized only when cash has been received. No allowance was deemed necessary at December 31, 2011 and 2010.
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. Certain derivatives may not meet the criteria to be designated as accounting hedges, even though we believe that these are effective economic hedges.
We account for 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, 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, 2011 (“2011”) and 2010 (“2010”)
Our offering period ended on May 18, 2011 and our operating period commenced on May 19, 2011. During our operating period, we have made and will continue to make investments with the cash generated from our investments to the extent that the cash is not used for expenses, reserves and distributions to limited partners. We anticipate incurring gains or losses on our investments during our operating period. Additionally, we expect to see our rental income and finance income increase, as well as related expenses, such as depreciation and amortization expense and interest expense. We anticipate that the fees we pay our Investment Manager to manage our investment portfolio will increase during this period as the value of, and volume of activity in, our investment portfolio increases.
Financing Transactions
The following tables set forth the types of assets securing the investments in our portfolio at December 31, 2011 and 2010:
| | | 2011 | | | 2010 | |
| | | Net | | | Percentage of Total Net Carrying Value | | | Net | | | Percentage of Total Net Carrying Value | |
| | | Carrying | | | Carrying | |
| Asset Types | | Value | | | Value | |
| Marine - Crude oil tanker | | $ | 83,281,204 | | | | 38% | | | $ | 15,682,264 | | | | 15% | |
| Marine - Dry bulk vessels | | | 64,855,374 | | | | 30% | | | | 67,394,055 | | | | 64% | |
| Petrochemical Facility | | | 23,630,939 | | | | 12% | | | | - | | | | - | |
| Telecommunications equipment | | | 13,298,467 | | | | 6% | | | | 3,497,935 | | | | 3% | |
| Land drilling rigs | | | 8,943,275 | | | | 4% | | | | - | | | | - | |
| Point of sale equipment | | | 5,839,575 | | | | 3% | | | | 8,992,695 | | | | 8% | |
| Analog seismic system equipment | | | 5,352,925 | | | | 2% | | | | - | | | | - | |
| Cranes & transportation equipment | | | 4,700,665 | | | | 2% | | | | 5,601,166 | | | | 5% | |
| Metal cladding & production equipment | | | 4,187,531 | | | | 2% | | | | 4,821,017 | | | | 5% | |
| Rail support construction equipment | | | 2,291,360 | | | | 1% | | | | - | | | | - | |
| | | $ | 216,381,315 | | | | 100% | | | $ | 105,989,132 | | | | 100% | |
The net carrying value of our financing transactions includes the balances of our notes receivable and our net investment in finance leases, which are included in our consolidated balance sheets.
During 2011 and 2010, certain customers generated significant portions (defined as 10% or more) of our total finance income as follows:
| | Percentage of Total Finance Income |
| Customer | Asset Types | | 2011 | | 2010 |
| Geden Holdings Ltd. | Marine - Dry bulk vessels | | 37% | | 39% |
| Geden Holdings Ltd. | Marine - Crude oil tanker | | 18% | | - |
| Ocean Navigation 5 Co. Ltd. and Ocean Navigation 6 Co. Ltd. | Marine - Crude oil tanker | | 10% | | 16% |
| Northern Capital Associates | Point of sale equipment | | 7% | | 27% |
| | 72% | | 82% |
The foregoing percentages are only as of a stated period and are not expected to be comparable in future periods. Further, these percentages are only representative of the percentage of the carrying value of such assets or finance income as of a stated period, as applicable, and as such are not indicative of the concentration of any asset type or customer by the amount of equity invested or our investment portfolio as a whole.
Operating Lease Transactions
The following tables set forth the types of equipment subject to operating leases in our investment portfolio at December 31, 2011 and 2010:
| | | 2011 | | | 2010 | |
| | | Net | | | Percentage of Total Net Carrying Value | | | Net | | | Percentage of Total Net Carrying Value | |
| | | Carrying | | | Carrying | |
| Asset Types | | Value | | | Value | |
| Marine - Crude oil tanker | | $ | 164,212,775 | | | | 90% | | | $ | - | | | | - | |
| Motor coaches | | | 8,689,354 | | | | 5% | | | | 9,821,498 | | | | 47% | |
| Packaging equipment | | | 5,090,497 | | | | 3% | | | | 5,712,161 | | | | 28% | |
| Telecommunications equipment | | | 3,117,570 | | | | 2% | | | | 5,157,140 | | | | 25% | |
| | | $ | 181,110,196 | | | | 100% | | | $ | 20,690,799 | | | | 100% | |
During 2011 and 2010, certain customers generated significant portions (defined as 10% or more) of our total rental income as follows:
| | Percentage of Total Rental Income |
| Customer | Asset Types | | 2011 | | 2010 |
| AET Inc. Limited | Marine - Crude oil tanker | | 76% | | - |
| Global Crossing Telecommunications Inc. | Telecommunications equipment | | 11% | | 49% |
| Dillon's Bus Service, Inc. and Lakefront Lines, Inc. | Motor coaches | | 7% | | 25% |
| Exopack, LLC | Packaging equipment | | 6% | | 26% |
| | | | 100% | | 100% |
The foregoing percentages are only as of a stated period and are not expected to be comparable in future periods. Further, these percentages are only representative of the percentage of the carrying value of such assets or rental income as of a stated period, as applicable, and as such are not indicative of the concentration of any asset type or customer by the amount of equity invested or our investment portfolio as a whole.
Revenue for 2011 and 2010 is summarized as follows:
| | | Years Ended December 31, | | | | |
| | | 2011 | | | 2010 | | | Change | |
| Finance income | | $ | 19,785,844 | | | $ | 4,845,310 | | | $ | 14,940,534 | |
| Rental income | | | 25,458,743 | | | | 5,434,204 | | | | 20,024,539 | |
| Income from investments in joint ventures | | | 1,353,427 | | | | 2,413,711 | | | | (1,060,284 | ) |
| Other income | | | 199,099 | | | | 142,001 | | | | 57,098 | |
| | |
| Total revenue | | $ | 46,797,113 | | | $ | 12,835,226 | | | $ | 33,961,887 | |
Total revenue for 2011 increased $33,961,887, or 265%, as compared to 2010. The increase in rental income was due to four operating leases that we entered into during 2011. The increase in finance income was primarily due to five finance leases and seven notes receivable that we entered into during 2011. The decrease in income from investments in joint ventures is due to the exchange of our interests in two joint ventures for notes receivable.
Expenses for 2011 and 2010 are summarized as follows:
| | | Years Ended December 31, | | | | |
| | | 2011 | | | 2010 | | | Change | |
| Management fees | | $ | 1,943,217 | | | $ | 588,415 | | | $ | 1,354,802 | |
| Administrative expense reimbursements | | | 5,241,199 | | | | 4,778,359 | | | | 462,840 | |
| General and administrative | | | 4,013,938 | | | | 997,243 | | | | 3,016,695 | |
| Depreciation | | | 14,185,603 | | | | 3,467,107 | | | | 10,718,496 | |
| Interest | | | 9,128,786 | | | | 587,210 | | | | 8,541,576 | |
| Loss on derivative financial instruments | | | 12,557,138 | | | | - | | | | 12,557,138 | |
| | |
| Total expenses | | $ | 47,069,881 | | | $ | 10,418,334 | | | $ | 36,651,547 | |
Total expenses for 2011 increased $36,651,547, or 352%, as compared to 2010. The increase in loss on derivative financial instruments relates to the five new non-designated derivative financial instruments that we entered into during 2011. The increase in depreciation expense primarily relates to the equipment acquired pursuant to the four operating leases that we entered into during 2011. Interest expense increased as a result of the debt incurred on our transactions during 2011 and general and administrative expenses, management fees, and administrative expense reimbursements have increased due to the increase in the size of our investment portfolio.
Noncontrolling Interests
Net income attributable to noncontrolling interests for 2011 decreased $1,739,084 as compared to 2010. The decrease is primarily due to the net loss relating to Fund Twelve’s investment in the AET Vessels.
Net Income Attributable to Fund Fourteen
As a result of the foregoing factors, the net income attributable to us for 2011 and 2010 was $1,387,802 and $2,338,378, respectively. The net income attributable to us per weighted average Interest outstanding for 2011 and 2010 was $5.64 and $17.55, respectively.
Results of Operations for the Year Ended December 31, 2010 (“2010”) and the Period from Commencement of Operations through December 31, 2009 (“2009”)
Financing Transactions
The following tables set forth the types of assets securing the investments in our portfolio at December 31, 2010 and 2009:
| | | | |
| | | 2010 | | | 2009 | |
| | | Net | | | Percentage of Total Net Carrying Value | | | Net | | | Percentage of Total Net Carrying Value | |
| | | Carrying | | | Carrying | |
| Asset Types | | Value | | | Value | |
| Marine - Dry bulk vessels | | $ | 67,394,055 | | | | 64% | | | $ | - | | | | - | |
| Marine - Crude oil tanker | | | 15,682,264 | | | | 15% | | | | - | | | | - | |
| Point of sale equipment | | | 8,992,695 | | | | 8% | | | | - | | | | - | |
| Cranes & transportation equipment | | | 5,601,166 | | | | 5% | | | | - | | | | - | |
| Metal cladding & production equipment | | | 4,821,017 | | | | 5% | | | | - | | | | - | |
| Telecommunications equipment | | | 3,497,935 | | | | 3% | | | | - | | | | - | |
| | | $ | 105,989,132 | | | | 100% | | | $ | - | | | | - | |
During 2010 and 2009, certain customers generated significant portions (defined as 10% or more) of our total finance income as follows:
| | Percentage of Total Finance Income |
| Customer | Asset Types | | 2010 | | 2009 |
| Geden Holdings Ltd. | Marine - Dry bulk vessels | | 39% | | - |
| Northern Capital Associates | Point of sale equipment | | 27% | | - |
| Ocean Navigation 5 Co. Ltd. and Ocean Navigation 6 Co. Ltd. | Marine - Crude oil tanker | | 16% | | - |
| | 82% | | - |
The foregoing percentages are only as of a stated period and are not expected to be comparable in future periods. Further, these percentages are only representative of the percentage of the carrying value of such assets or finance income as of a stated period, as applicable, and as such are not indicative of the concentration of any asset type or customer by the amount of equity invested or our investment portfolio as a whole.
Operating Lease Transactions
The following tables set forth the types of equipment subject to operating leases in our investment portfolio at December 31, 2010 and 2009:
| | | 2010 | | | 2009 | |
| | | Net | | | Percentage of Total Net Carrying Value | | | Net | | | Percentage of Total Net Carrying Value | |
| | | Carrying | | | Carrying | |
| Asset Types | | Value | | | Value | |
| Motor coaches | | $ | 9,821,498 | | | | 47% | | | $ | - | | | | - | |
| Packaging equipment | | | 5,712,161 | | | | 28% | | | | 6,174,435 | | | | 47% | |
| Telecommunications equipment | | | 5,157,140 | | | | 25% | | | | 7,010,249 | | | | 53% | |
| | | $ | 20,690,799 | | | | 100% | | | $ | 13,184,684 | | | | 100% | |
During 2010 and 2009, certain customers generated significant portions (defined as 10% or more) of our total rental income as follows:
| | Percentage of Total Rental Income |
| Customer | Asset Types | | 2010 | | 2009 |
| Global Crossing Telecommunications Inc. | Telecommunications equipment | | 49% | | 56% |
| Exopack, LLC | Packaging equipment | | 26% | | 44% |
| Dillon's Bus Service, Inc. and Lakefront Lines, Inc. | Motor coaches | | 25% | | - |
| | 100% | | 100% |
The foregoing percentages are only as of a stated period and are not expected to be comparable in future periods. Further, these percentages are only representative of the percentage of the carrying value of such assets or rental income as of a stated period, as applicable, and as such are not indicative of the concentration of any asset type or customer by the amount of equity invested or our investment portfolio as a whole.
Revenue for 2010 and 2009 is summarized as follows:
| | | | | | Period from the | | | | |
| | | | | | Commencement of | | | | |
| | | Year Ended | | | Operations through | | | | |
| | | December 31, 2010 | | | December 31, 2009 | | | Change | |
| Finance income | | $ | 4,845,310 | | | $ | - | | | $ | 4,845,310 | |
| Rental income | | | 5,434,204 | | | | 1,044,930 | | | | 4,389,274 | |
| Income from investments in joint ventures | | | 2,413,711 | | | | 695,281 | | | | 1,718,430 | |
| Other income | | | 142,001 | | | | 20,943 | | | | 121,058 | |
| | | | | | | | | | | | | |
| Total revenue | | $ | 12,835,226 | | | $ | 1,761,154 | | | $ | 11,074,072 | |
Total revenue for 2010 increased $11,074,072, or 629%, as compared to 2009. The increase in finance income was primarily due to three finance leases and five notes receivable that we entered into during 2010. The increase in rental income was primarily due to two operating leases that we entered into during 2010. The increase in income from investments in joint ventures is due to the recognition of a full year’s income.
Expenses for 2010 and 2009 is summarized as follows:
| | | | | | Period from the | | | | |
| | | | | | Commencement of | | | | |
| | | Year Ended | | | Operations through | | | | |
| | | December 31, 2010 | | | December 31, 2009 | | | Change | |
| Management fees | | $ | 588,415 | | | $ | 76,559 | | | $ | 511,856 | |
| Administrative expense reimbursements | | | 4,778,359 | | | | 1,924,682 | | | | 2,853,677 | |
| General and administrative | | | 997,243 | | | | 687,425 | | | | 309,818 | |
| Depreciation | | | 3,467,107 | | | | 649,453 | | | | 2,817,654 | |
| Interest | | | 587,210 | | | | 7,333 | | | | 579,877 | |
| | |
| Total expenses | | $ | 10,418,334 | | | $ | 3,345,452 | | | $ | 7,072,882 | |
Total expenses for 2010 increased $7,072,882, or 211%, as compared to 2009. The increase in depreciation expense was primarily due to two operating leases that we entered into during 2010. The increase in administrative expense reimbursements, management fees and general and administrative expense as a result of the increased volume of operations and transactions in 2010 as compared to 2009. Interest expense increased as a result of the debt incurred on our transactions during 2010.
Noncontrolling Interest
Net income attributable to noncontrolling interest for 2010 increased $78,514 as compared to 2009. The increase is due to Hardwood’s investment in telecommunications equipment on April 1, 2010.
Net Income (Loss) Attributable to Fund Fourteen
As a result of the foregoing factors, the net income (loss) attributable to us for 2010 and 2009 was $2,338,378 and ($1,584,298), respectively. The net income (loss) attributable to us per weighted average Interest outstanding for 2010 and 2009 was $17.55 and ($48.77), respectively.
This section discusses the major balance sheet variances from 2011 compared to 2010.
Total Assets
Total assets increased $249,872,470, from $208,759,132 at December 31, 2010 to $458,631,602 at December 31, 2011. The increase in total assets was primarily the result of cash proceeds received from the sale of our Interests, which were then used to make investments in four debt financed operating leases, three notes receivable, and five finance leases.
Total Liabilities
Total liabilities increased $198,460,581, from $46,294,389 at December 31, 2010 to $244,754,970 at December 31, 2011. The increase related primarily to non-recourse long-term debt incurred and derivative financial instruments entered into in connection with the non-recourse long-term debt.
Equity
Equity increased $51,411,889, from $162,464,743 at December 31, 2010 to $213,876,632 at December 31, 2011. The increase related to the net cash proceeds received from the sale of our Interests and investments by non-controlling interests, which were offset by distributions paid to our partners.
Liquidity and Capital Resources
Summary
At December 31, 2011 and 2010, we had cash and cash equivalents of $48,783,509 and $64,317,006, respectively. Pursuant to the terms of our offering, we have established a reserve in the amount of 0.50% of the gross offering proceeds from the sale of our Interests. As of December 31, 2011, the cash reserve was $1,288,235. During our offering period, our main source of cash was from financing activities and our main use of cash was in investing activities. During our operating period, our main source of cash is typically from operating activities and our main use of cash is in investing and financing activities. Our liquidity will vary in the future, increasing to the extent cash flows from investments and proceeds from the sale of our investments exceed expenses and decreasing as we make new investments, pay distributions to our partners and to the extent that expenses exceed cash flows from operations and the proceeds from the sale of our investments.
We believe that cash generated from the expected results of our operations will be sufficient to finance our liquidity requirements for the foreseeable future, including distributions to our partners, general and administrative expenses, new investment opportunities, management fees and administrative expense reimbursements. In addition, a revolving line of credit of $15,000,000 is available to fund our short-term liquidity needs.
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.”
We are using the net proceeds of the offering to invest in Capital Assets located in North America, Europe and other developed markets, including those in Asia, South America and elsewhere. We seek to acquire a portfolio of Capital Assets that is comprised of transactions that (a) provide current cash flow in the form of rental payments (in the case of leases) and payments of principal and/or interest (in the case of secured loans), (b) generate deferred cash flow from realizing the value of the Capital Assets or interests therein at the maturity of the investment or exercise of an option to purchase Capital Assets, or (c) provide a combination of both.
For the period from the Commencement of Operations through May 18, 2011, we sold 258,897 Interests, representing $257,646,987 of capital contributions. We admitted 7,010 limited partners. For the period from the Commencement of Operations through May 18, 2011, we paid sales commissions to third parties of $17,201,964 and underwriting commissions to ICON Securities of $7,445,754. In addition, organizational and offering expenses of $2,926,110 were paid or incurred by us, our General Partner or its affiliates during this period.
Cash Flows
The following table sets forth summary cash flow data:
| | | | | |
| | | | Period from the Commencement of Operations through December 31, 2009 | |
| | |
| | | Years Ended December 31, | |
| | | 2011 | | | 2010 | |
| | |
| Net cash provided by (used in): | |
| | |
| Operating activities | | $ | 27,353,066 | | | $ | 6,226,933 | | | $ | (265,962 | ) |
| Investing activities | | | (99,139,587 | ) | | | (69,967,736 | ) | | | (31,922,818 | ) |
| Financing activities | | | 56,253,024 | | | | 100,983,485 | | | | 59,262,103 | |
| | |
| Net (decrease) increase in cash and cash equivalents | | $ | (15,533,497 | ) | | $ | 37,242,682 | | | $ | 27,073,323 | |
Note: See the Consolidated Statements of Cash Flows included in “Item 8. Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for additional information.
Operating Activities
Cash provided by operating activities increased $21,126,133, from $6,226,933 in 2010 to $27,353,066 in 2011. The increase was primarily due to the receipt of cash from finance and rental income on a larger base of investments offset by increased payments of management fees and administrative expense reimbursements related to our increased activity during 2011.
Investing Activities
Cash used in investing activities increased $29,171,851, from $69,967,736 in 2010 to $99,139,587 in 2011. The increase was primarily due to the increased volume of investments offset by principal repayments of notes receivable and net investment in finance leases and distributions received from joint ventures in excess of profits during 2011.
Financing Activities
Cash provided by financing activities decreased $44,730,461, from $100,983,485 in 2010 to $56,253,024 in 2011. The decrease was primarily due to the decrease in net cash proceeds received from the sale of our Interests as a result of the completion of our offering period during 2011. The decrease was also the result of an increase in distributions to partners and noncontrolling interests and repayments of non-recourse long-term debt offset by proceeds from non-recourse long-term debt and investments by noncontrolling interests.
Financings and Borrowings
Non-Recourse Long-Term Debt
We had non-recourse long-term debt obligations at December 31, 2011 of $221,045,626. Most of our non-recourse long-term debt obligations consist of notes payable in which the lender has a security interest in the equipment. If the lessee were to default on the non-recourse long-term debt, the equipment would be returned to the lender in extinguishment of the non-recourse long-term debt.
Revolving Line of Credit, Recourse
On May 10, 2011, we entered into an agreement with CB&T for a revolving line of credit of up to $15,000,000 (the “Facility”), which is secured by all 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, 2011, we had $15,000,000 available under the Facility.
The Facility expires on March 31, 2013 and we may request a one year extension to the revolving line of credit within 390 days of the then-current expiration date, but CB&T has no obligation to extend. The interest rate for general advances under the Facility is CB&T’s prime rate and the interest rate on up to five separate non-prime rate advances that are permitted to be made under the Facility is the 90-day rate at which U.S. dollar deposits can be acquired by CB&T in the London Interbank Eurocurrency Market plus 2.5% per year, provided that all interest rates on advances under the Facility are subject to an interest rate floor of 4.0% per year. In addition, we are obligated to pay a commitment fee based on an annual rate of 0.50% on unused commitments under the Facility. At December 31, 2011, there were no obligations outstanding under the Facility.
Distributions
We, at our General Partner’s discretion, pay monthly distributions to each of our limited partners beginning with the first month after each such limited partner’s admission and expect to continue to pay such distributions until the termination of our operating period. We paid distributions to our limited partners in the amount of $18,987,222, $9,695,337 and $964,235 in 2011, 2010 and 2009, respectively. We paid distributions to our General Partner in the amount of $191,790, $97,933 and $9,636 in 2011, 2010 and 2009, respectively. We paid distributions to our noncontrolling interests in the amount of $6,046,713, $291,932 and $0 in 2011, 2010 and 2009, respectively.
Commitments and Contingencies and Off-Balance Sheet Transactions
Commitments and Contingencies
At the time we acquire or divest of an interest in Capital Assets, we may, under very limited circumstances, agree to indemnify the seller or buyer for specific contingent liabilities. Our General Partner believes that any liability that may arise as a result of any such indemnification obligations will not have a material adverse effect on our consolidated financial condition. We are a party to the Facility, as discussed in “Financings and Borrowings” above. We had no borrowings under the Facility at December 31, 2011.
At December 31, 2011, we had non-recourse and other debt obligations. The lender has a security interest in the majority of the equipment relating to each non-recourse debt instrument and an assignment of the rental payments under the lease associated with the equipment. 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, 2011, our outstanding non-recourse long-term indebtedness was $221,045,626.
Principal and interest maturities of our debt and related interest consisted of the following at December 31, 2011:
| | | Payments Due by Period | |
| | | | | | Less Than 1 | | | 1 - 3 | | | 4 -5 | | | | |
| | | Total | | | Year | | | Years | | | Years | | | Thereafter | |
| Non-recourse debt | | $ | 221,045,626 | | | $ | 21,609,370 | | | $ | 61,192,928 | | | $ | 59,368,336 | | | $ | 78,874,992 | |
| Non-recourse interest | | | 60,049,409 | | | | 13,596,406 | | | | 21,378,038 | | | | 13,745,502 | | | | 11,329,463 | |
| Other liabilities | | | 9,000,000 | | | | - | | | | - | | | | 9,000,000 | | | | - | |
| | |
| | | $ | 290,095,035 | | | $ | 35,205,776 | | | $ | 82,570,966 | | | $ | 82,113,838 | | | $ | 90,204,455 | |
In connection with certain investments, we are required to maintain restricted cash accounts with certain banks. At December 31, 2011, we had $2,500,000 in restricted cash which is included in other assets on our consolidated balance sheets.
On September 27, 2010, our wholly-owned subsidiary, ICON SE, LLC (“ICON SE”), participated in a $46,000,000 facility by agreeing to make a secured term loan to SE Shipping Pte Ltd. (“SE”) for the purchase of a new-build heavy lift vessel and accompanying equipment. Although all of the material conditions to closing were satisfied, SE breached its obligations under the loan by refusing to draw down on the facility. Subsequently, ICON SE commenced an action against SE in the United Kingdom for SE’s failure to pay ICON SE the commitment fee due in accordance with the loan agreement.
Off-Balance Sheet Transactions
None.
On February 3, 2012, we made a term loan in the amount of $15,406,250 to subsidiaries of Revstone Transportation, LLC. The loan bears interest at 15% per year and is for a period of sixty-months. The loan is secured by all of Revstone’s assets, including a mortgage over real property.
On February 29, 2012, we made a term loan in the amount of $6,000,000 to VAS Aero Services, LLC. The loan bears interest at variable rates ranging between 12% to 14.5% per year and is for a period of thirty-one months. The loan is secured by a second priority interest on all of VAS’s assets.
On March 9, 2012, we made a term loan in the amount of $7,500,000 to Kanza Construction, Inc. The loan bears interest at 13% per year and is for a period of sixty-months. The loan is secured by all of Kanza’s assets.
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 significantly, leases already in place would generally not be affected.
We, like most other companies, are exposed to certain market risks, which include changes in interest rates and the demand for equipment owned by us. We believe that our exposure to other market risks, including foreign currency exchange rate risk, commodity risk and equity price risk, are insignificant at this time to both our financial position and our results of operations.
We currently have eight outstanding notes payable, which are our non-recourse debt obligations. The interest rate for the non-recourse debt obligations are either fixed until September 2014, at which time it will be adjusted to the then current LIBOR rate plus a fixed margin, or variable and fixed pursuant to an interest rate swap to allow us to mitigate interest rate fluctuations. Our hedging strategy to accomplish this objective is to match the projected future cash flows with the underlying debt service. The interest rate swaps involve the receipt of floating-rate interest payments from a counterparty in exchange for us making fixed interest rate payments over the life of the agreement without exchange of the underlying notional amount. As a result, we consider these fixed positions since increases or decreases in interest rates have no effect on our interest payments since those amounts have been fixed pursuant to the contracts. Therefore, the conditions in the credit markets as of December 31, 2011 have not had any impact on us. In addition, we have considered the risk of counterparty performance of our interest rate swaps by considering, among other things, the credit agency ratings of our counterparties. Based on this assessment, we believe that the risk of counterparty non-performance is minimal. With respect to our revolving line of credit, which is subject to a variable interest rate, we have no outstanding amounts due as of December 31, 2011. Our Manager has evaluated the impact of the condition of the credit markets on our future cash flows and we do not expect any adverse impact on our cash flows should credit conditions in general remain the same or deteriorate further. See Note 10 to our consolidated financial statements.
As of December 31, 2011, we had five interest rate swaps that are non-designated with an aggregate notional balance of $161,455,000 that are not speculative and are used only to mitigate our exposure to interest rate fluctuations. While the interest rate swap contracts effectively eliminate the risks related to interest rate fluctuations, the contracts are reported at fair value each reporting period with the resulting changes being recorded as gains or losses on derivative financial instruments in our consolidated income statement. A hypothetical increase of 1% in interest rates would increase the fair value of these contracts by approximately $6,983,000 whereas a hypothetical decrease of 1% in interest rates would decrease the fair value of these contracts by approximately $7,355,000.
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.
Although one of our transactions is denominated in pounds sterling, substantially all of our transactions are denominated in the U.S. dollar, therefore reducing our risk to currency translation exposures. In addition, to further reduce this risk, we at times enter into currency hedges to reduce our risk to currency translation exposure on our foreign denominated transactions. To date, our exposure to exchange rate volatility has not been significant. We have also considered the risk of counterparty performance on our foreign currency hedges by considering, among other things, the credit ratings of our counterparty. Nevertheless, there can be no assurance that currency translation exposures will not have a material impact on our financial position, results of operations or cash flow in the future.
The Partners
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
We have audited the accompanying consolidated balance sheets of ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P. (the “Partnership”) as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in equity, and cash flows for the years ended December 31, 2011 and 2010 and for the period from June 19, 2009 (Commencement of Operations) through December 31, 2009. Our audits also included the financial statement schedule listed in the index at Item 15(a)(2). These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Partnership’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 Partnership'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 Equipment and Corporate Infrastructure Fund Fourteen, L.P. at December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for the years ended December 31, 2011 and 2010 and for the period from June 19, 2009 (Commencement of Operations) through December 31, 2009 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
March 29, 2012
New York, New York
| |
| (A Delaware Limited Partnership) | |
| Consolidated Balance Sheets | |
| | |
| Assets | |
| | |
| | | December 31, | |
| | | 2011 | | | 2010 | |
| | |
| Cash and cash equivalents | | $ | 48,783,509 | | | $ | 64,317,006 | |
| Net investment in finance leases | | | 145,974,532 | | | | 70,891,990 | |
| Leased equipment at cost (less accumulated depreciation of | | | | | | | | |
| $18,302,163 and $4,116,560, respectively) | | | 181,110,196 | | | | 20,690,799 | |
| Notes receivable | | | 70,406,783 | | | | 35,097,142 | |
| Note receivable from joint venture | | | 2,800,000 | | | | - | |
| Investments in joint ventures | | | 1,029,336 | | | | 14,329,717 | |
| Other assets, net | | | 8,527,246 | | | | 3,432,478 | |
| | |
| Total Assets | | $ | 458,631,602 | | | $ | 208,759,132 | |
| | |
| Liabilities and Equity | |
| | |
| Liabilities: | |
| Non-recourse long-term debt | | $ | 221,045,626 | | | $ | 42,642,708 | |
| Derivative financial instruments | | | 10,663,428 | | | | - | |
| Deferred revenue | | | 3,245,739 | | | | 1,051,741 | |
| Due to General Partner and affiliates | | | 381,277 | | | | 700,073 | |
| Accrued expenses and other liabilities | | | 9,418,900 | | | | 1,899,867 | |
| | |
| Total Liabilities | | | 244,754,970 | | | | 46,294,389 | |
| | |
| Commitments and contingencies (Note 15) | |
| | |
| Equity: | |
| Partners’ Equity: | | | | | | | | |
| Limited Partners | | | 202,492,816 | | | | 161,777,674 | |
| General Partner | | | (277,944 | ) | | | (100,032 | ) |
| | |
| Total Partners’ Equity | | | 202,214,872 | | | | 161,677,642 | |
| | |
| Noncontrolling Interests | | | 11,661,760 | | | | 787,101 | |
| | |
| Total Equity | | | 213,876,632 | | | | 162,464,743 | |
| | |
| Total Liabilities and Equity | | $ | 458,631,602 | | | $ | 208,759,132 | |
See accompanying notes to consolidated financial statements.
| |
| (A Delaware Limited Partnership) | |
| Consolidated Statements of Operations | |
| | | | Period from June 19, 2009 (Commencement of Operations) through December 31, 2009 | |
| | |
| | |
| | |
| | | Years Ended December 31, | |
| | | 2011 | | | 2010 | |
| Revenue: | | | | | | | | | |
| Finance income | | $ | 19,785,844 | | | $ | 4,845,310 | | | $ | - | |
| Rental income | | | 25,458,743 | | | | 5,434,204 | | | | 1,044,930 | |
| Income from investments in joint ventures | | | 1,353,427 | | | | 2,413,711 | | | | 695,281 | |
| Other income | | | 199,099 | | | | 142,001 | | | | 20,943 | |
| | | | | | | | | | | | | |
| Total revenue | | | 46,797,113 | | | | 12,835,226 | | | | 1,761,154 | |
| | |
| Expenses: | | | |
| Management fees | | | 1,943,217 | | | | 588,415 | | | | 76,559 | |
| Administrative expense reimbursements | | | 5,241,199 | | | | 4,778,359 | | | | 1,924,682 | |
| General and administrative | | | 4,013,938 | | | | 997,243 | | | | 687,425 | |
| Depreciation | | | 14,185,603 | | | | 3,467,107 | | | | 649,453 | |
| Interest | | | 9,128,786 | | | | 587,210 | | | | 7,333 | |
| Loss on dervative financial instruments | | | 12,557,138 | | | | - | | | | - | |
| | |
| Total expenses | | | 47,069,881 | | | | 10,418,334 | | | | 3,345,452 | |
| | |
| Net (loss) income | | | (272,768 | ) | | | 2,416,892 | | | | (1,584,298 | ) |
| | |
| Less: Net (loss) income attributable to noncontrolling interests | | | (1,660,570 | ) | | | 78,514 | | | | - | |
| | |
| Net income (loss) attributable to Fund Fourteen | | $ | 1,387,802 | | | $ | 2,338,378 | | | $ | (1,584,298 | ) |
| | |
| Net income (loss) attributable to Fund Fourteen allocable to: | | | |
| Limited Partners | | $ | 1,373,924 | | | $ | 2,314,994 | | | $ | (1,568,455 | ) |
| General Partner | | | 13,878 | | | | 23,384 | | | | (15,843 | ) |
| | |
| | | $ | 1,387,802 | | | $ | 2,338,378 | | | $ | (1,584,298 | ) |
| | |
| Weighted average number of limited | | | |
| partnership interests outstanding | | | 243,491 | | | | 131,915 | | | | 32,161 | |
| | |
| Net income (loss) attributable to Fund Fourteen | | | |
| per weighted average limited partnership | | | |
| interest outstanding | | $ | 5.64 | | | $ | 17.55 | | | $ | (48.77 | ) |
See accompanying notes to consolidated financial statements.
| |
| (A Delaware Limited Partnership) | |
| Consolidated Statements of Changes in Partners' Equity | |
| | |
| | | Partners' Equity | | | | |
| | | Limited | | | | | | | | | Total | | | | | | | |
| | | Partnership | | | Limited | | | | | | Partners' | | | Noncontrolling | | | Total | |
| | | Interests | | | Partners | | | General Partner | | | Equity | | | Interests | | | Equity | |
| Opening balance, June 19, 2009 | | | 1 | | | $ | 1,000 | | | $ | 1 | | | $ | 1,001 | | | $ | - | | | $ | 1,001 | |
| | |
| Net loss | | | - | | | | (1,568,455 | ) | | | (15,843 | ) | | | (1,584,298 | ) | | | - | | | | (1,584,298 | ) |
| Repurchase of limited partnership interest | | | (1 | ) | | | (1,000 | ) | | | - | | | | (1,000 | ) | | | - | | | | (1,000 | ) |
| Proceeds from sale of limited partnership interests | | | 68,411 | | | | 68,300,139 | | | | - | | | | 68,300,139 | | | | - | | | | 68,300,139 | |
| Sales and offering expenses | | | - | | | | (7,126,921 | ) | | | - | | | | (7,126,921 | ) | | | - | | | | (7,126,921 | ) |
| Cash distributions | | | - | | | | (964,235 | ) | | | (9,636 | ) | | | (973,871 | ) | | | - | | | | (973,871 | ) |
| | |
| Balance, December 31, 2009 | | | 68,411 | | | | 58,640,528 | | | | (25,478 | ) | | | 58,615,050 | | | | - | | | | 58,615,050 | |
| | |
| Net income | | | - | | | | 2,314,994 | | | | 23,384 | | | | 2,338,378 | | | | 78,514 | | | | 2,416,892 | |
| Proceeds from sale of limited partnership interests | | | 124,363 | | | | 123,673,315 | | | | - | | | | 123,673,315 | | | | - | | | | 123,673,315 | |
| Sales and offering expenses | | | - | | | | (13,155,312 | ) | | | - | | | | (13,155,312 | ) | | | - | | | | (13,155,312 | ) |
| Cash distributions | | | - | | | | (9,695,337 | ) | | | (97,933 | ) | | | (9,793,270 | ) | | | (291,932 | ) | | | (10,085,202 | ) |
| Investment by noncontrolling interest | | | - | | | | (514 | ) | | | (5 | ) | | | (519 | ) | | | 1,000,519 | | | | 1,000,000 | |
| | |
| Balance, December 31, 2010 | | | 192,774 | | | | 161,777,674 | | | | (100,032 | ) | | | 161,677,642 | | | | 787,101 | | | | 162,464,743 | |
| | |
| Net income (loss) | | | - | | | | 1,373,924 | | | | 13,878 | | | | 1,387,802 | | | | (1,660,570 | ) | | | (272,768 | ) |
| Repurchase of limited partnership interests | | | (65 | ) | | | (53,498 | ) | | | - | | | | (53,498 | ) | | | - | | | | (53,498 | ) |
| Proceeds from sale of limited partnership interests | | | 66,123 | | | | 65,673,533 | | | | - | | | | 65,673,533 | | | | - | | | | 65,673,533 | |
| Sales and offering expenses | | | - | | | | (7,291,595 | ) | | | - | | | | (7,291,595 | ) | | | - | | | | (7,291,595 | ) |
| Cash distributions | | | - | | | | (18,987,222 | ) | | | (191,790 | ) | | | (19,179,012 | ) | | | (6,046,713 | ) | | | (25,225,725 | ) |
| Investment by noncontrolling interests | | | - | | | | - | | | | - | | | | - | | | | 20,316,111 | | | | 20,316,111 | |
| Exchange of noncontrolling interests | | | | | | | | | | | | | | | | | | | | | | | | |
| in joint venture | | | - | | | | - | | | | - | | | | - | | | | (1,734,169 | ) | | | (1,734,169 | ) |
| | |
| Balance, December 31, 2011 | | | 258,832 | | | $ | 202,492,816 | | | $ | (277,944 | ) | | $ | 202,214,872 | | | $ | 11,661,760 | | | $ | 213,876,632 | |
See accompanying notes to consolidated financial statements.
| |
| (A Delaware Limited Partnership) | |
| Consolidated Statements of Cash Flows | |
| | |
| | | | Period from June 19, 2009 (Commencement of Operations) through December 31, 2009 | |
| | |
| | |
| | | Years Ended December 31, | |
| | | 2011 | | | 2010 | |
| Cash flows from operating activities: | | | | | | |
| Net (loss) income | | $ | (272,768 | ) | | $ | 2,416,892 | | | $ | (1,584,298 | ) |
| Adjustments to reconcile net (loss) income to net cash | | | | | | | | | | | | |
| provided by (used in) operating activities: | | | | | | | | | | | | |
| Finance income, net of costs and fees | | | 840,302 | | | | 296,186 | | | | - | |
| Income from investments in joint ventures | | | (1,353,427 | ) | | | (2,413,711 | ) | | | (695,281 | ) |
| Depreciation | | | 14,185,603 | | | | 3,467,107 | | | | 649,453 | |
| Interest expense from amortization of debt financing costs | | | 729,195 | | | | 32,686 | | | | - | |
| Interest expense, other | | | 235,870 | | | | - | | | | - | |
| Other loss | | | 609,423 | | | | 25,045 | | | | - | |
| Loss on financial instruments | | | 10,619,755 | | | | - | | | | - | |
| Changes in operating assets and liabilities: | | | | | | | | | | | | |
| Other assets, net | | | (1,840,492 | ) | | | (2,587,763 | ) | | | (53,839 | ) |
| Accrued expenses and other liabilities | | | 347,991 | | | | 1,739,886 | | | | 86,383 | |
| Deferred revenue | | | 2,193,998 | | | | 824,580 | | | | 227,161 | |
| Due to General Partner and affiliates | | | (316,475 | ) | | | 12,314 | | | | 409,178 | |
| Distributions from joint ventures | | | 1,374,091 | | | | 2,413,711 | | | | 695,281 | |
| | |
| Net cash provided by (used in) operating activities | | | 27,353,066 | | | | 6,226,933 | | | | (265,962 | ) |
| | |
| Cash flows from investing activities: | | | | | | | | | | | | |
| Purchase of equipment | | | (79,564,939 | ) | | | (39,468,973 | ) | | | (14,179,989 | ) |
| Principal repayment on net investment in finance leases | | | 6,790,895 | | | | 1,431,761 | | | | - | |
| Investments in joint ventures | | | (1,050,000 | ) | | | (214,418 | ) | | | (18,807,294 | ) |
| Distributions received from joint ventures in excess of profits | | | 3,817,746 | | | | 2,252,485 | | | | 1,064,465 | |
| Investment in joint ventures by noncontrolling interest | | | - | | | | 1,350,000 | | | | - | |
| Investment in notes receivable | | | (33,157,413 | ) | | | (36,372,471 | ) | | | - | |
| Investment in note receivable from joint venture | | | (2,800,000 | ) | | | - | | | | - | |
| Principal repayment on notes receivable | | | 6,824,124 | | | | 1,053,880 | | | | - | |
| | |
| Net cash used in investing activities | | | (99,139,587 | ) | | | (69,967,736 | ) | | | (31,922,818 | ) |
| | |
| Cash flows from financing activities: | | | | | | | | | | | | |
| Proceeds from non-recourse long-term debt | | | 22,000,000 | | | | - | | | | - | |
| Repayments of non-recourse long-term debt | | | (15,597,082 | ) | | | (907,292 | ) | | | - | |
| Debt financing costs | | | (4,420,000 | ) | | | - | | | | - | |
| Sale of limited partnership interests | | | 65,673,533 | | | | 123,673,315 | | | | 68,300,139 | |
| Sales and offering expenses paid | | | (6,166,877 | ) | | | (11,728,597 | ) | | | (6,641,287 | ) |
| Deferred charges | | | (273,438 | ) | | | (968,739 | ) | | | (1,421,878 | ) |
| Investment by noncontrolling interest | | | 20,316,111 | | | | 1,000,000 | | | | - | |
| Distributions to noncontrolling interest | | | (6,046,713 | ) | | | (291,932 | ) | | | - | |
| Cash distributions to partners | | | (19,179,012 | ) | | | (9,793,270 | ) | | | (973,871 | ) |
| Repurchase of limited partnership interests | | | (53,498 | ) | | | - | | | | (1,000 | ) |
| | |
| Net cash provided by financing activities | | | 56,253,024 | | | | 100,983,485 | | | | 59,262,103 | |
| | |
| Net (decrease) increase in cash and cash equivalents | | | (15,533,497 | ) | | | 37,242,682 | | | | 27,073,323 | |
| Cash and cash equivalents, beginning of the period | | | 64,317,006 | | | | 27,074,324 | | | | 1,001 | |
| | |
| Cash and cash equivalents, end of the period | | $ | 48,783,509 | | | $ | 64,317,006 | | | $ | 27,074,324 | |
See accompanying notes to consolidated financial statements.
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P. | |
| (A Delaware Limited Partnership) | |
| Consolidated Statements of Cash Flows | |
| | |
| | | | Period from June 19, 2009 (Commencement of Operations) through December 31, 2009 | |
| | |
| | |
| | | Years Ended December 31, | |
| | | 2011 | | | 2010 | |
| | |
| Supplemental disclosure of cash flow information: | | | | | | | | | |
| | |
| Cash paid during the period for interest | | $ | 9,888,212 | | | $ | 572,607 | | | $ | - | |
| | |
| Supplemental disclosure of non-cash investing and financing activities: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Underwriting fees due to ICON Securities | | $ | - | | | $ | 16,526 | | | $ | - | |
| Organizational and offering expenses due to Investment Manager | | $ | - | | | $ | 106,361 | | | $ | 155,694 | |
| Sales commissions due to third parties | | $ | - | | | $ | - | | | $ | 94,431 | |
| Organizational and offering expenses charged to equity | | $ | 1,124,718 | | | $ | 1,410,189 | | | $ | 391,203 | |
| Equipment purchased with non-recourse long-term debt paid directly by lender | | $ | 172,000,000 | | | $ | 43,550,000 | | | $ | - | |
| Exchange of noncontrolling interest in investment in joint ventures for notes receivable | | $ | 10,450,296 | | | $ | - | | | $ | - | |
| Equipment purchased with subordinated financing provided by seller | | $ | 9,000,000 | | | $ | - | | | $ | - | |
| Exchange of net investment in finance lease for noncontrolling interest | | | | | | | | | | | | |
| in investment in joint venture | | $ | 1,744,724 | | | $ | - | | | $ | - | |
See accompanying notes to consolidated financial statements.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2011
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P. (the “Partnership”) was formed on August 20, 2008 as a Delaware limited partnership. The Partnership is engaged in one business segment: the business of investing in business-essential equipment and corporate infrastructure (collectively, “Capital Assets”), including, but not limited to, Capital Assets that are already subject to lease, Capital Assets that the Partnership purchases and leases to domestic and global businesses, loans that are secured by Capital Assets, and ownership rights to leased Capital Assets at lease expiration. The Partnership will continue until December 31, 2020, unless terminated sooner.
The Partnership’s principal investment objective is to obtain the maximum economic return from its investments for the benefit of its partners. To achieve this objective, the Partnership: (i) acquires a diversified portfolio by making investments in Capital Assets; (ii) makes monthly cash distributions, at the Partnership’s general partner’s discretion, to its partners commencing, with respect to each partner, the month following such partner’s admission to the Partnership, continuing until the end of the operating period; (iii) will reinvest substantially all undistributed cash from operations and cash from sales of investments in Capital Assets during the operating period; and (iv) will dispose of its investments and distribute the excess cash from such dispositions to its partners beginning with the commencement of the liquidation period.
The general partner of the Partnership is ICON GP 14, LLC, a Delaware limited liability company (the “General Partner”), which is a wholly-owned subsidiary of ICON Capital Corp., a Delaware corporation. The General Partner manages and controls the business affairs of the Partnership, including, but not limited to, the Capital Assets the Partnership invests in. The General Partner has engaged ICON Capital as an investment manager (the “Investment Manager”) to, among other things, facilitate the acquisition and servicing of the Partnership’s investments. Additionally, the General Partner has a 1% interest in the profits, losses, cash distributions and liquidation proceeds of the Partnership.
The Partnership is currently in its operating period, which commenced on May 19, 2011. With the proceeds from the sale of limited partnership interests (“Interests”), the Partnership invested in a diverse pool of Capital Assets and established a cash reserve in the amount of 0.50% of the gross offering proceeds from the sale of our Interests. The initial capitalization of the Partnership was $1,001, which consisted of $1 from the General Partner and $1,000 from ICON Capital. The Partnership offered Interests on a “best efforts” basis with the intention of raising up to $418,000,000 of capital, consisting of 420,000 Interests, of which 20,000 had been reserved for the Partnership’s distribution reinvestment plan (the “DRIP Plan”). The DRIP Plan allowed limited partners to purchase Interests with distributions received from the Partnership and/or certain affiliates of the Partnership.
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2011
| (1) | Organization - continued |
The Partnership’s initial closing date was June 19, 2009 (the “Commencement of Operations”), the date at which the Partnership raised $1,200,000. Upon the Commencement of Operations, the Partnership returned the initial capital contribution of $1,000 to ICON Capital. During the period from May 18, 2009 to May 18, 2011, the Partnership sold 258,897 Interests to 7,010 limited partners, representing $257,646,987 of capital contributions. For the period from the Commencement of Operations through May 18, 2011, the Partnership paid the following fees in connection with its offering of its Interests: (i) sales commissions to third parties in the amount of $17,201,964 and (ii) underwriting fees in the amount of $7,445,754 to ICON Securities Corp. d/b/a ICON Investments, an affiliate of the General Partner and the dealer-manager of the Partnership’s offering. In addition, the General Partner and its affiliates, on behalf of the Partnership, incurred organizational and offering expenses in the amount of $2,926,110 which were recorded as a reduction of partners’ equity.
Partners’ capital accounts are increased for their initial capital contribution plus their proportionate share of earnings and decreased by their proportionate share of losses and distributions. Profits, losses, cash distributions and liquidation proceeds are allocated 99% to the limited partners and 1% to the General Partner until the aggregate amount of cash distributions paid to limited partners equals the sum of the limited partners’ aggregate capital contributions plus an 8% cumulative annual return on their aggregate unreturned capital contributions, compounded daily. After such time, distributions will be allocated 90% to the limited partners and 10% to the General Partner.
| (2) | Summary of Significant Accounting Policies |
Basis of Presentation and Consolidation
The accompanying consolidated financial statements of the Partnership have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”). In the opinion of the General Partner, all adjustments considered necessary for a fair presentation have been included.
The consolidated financial statements include the accounts of the Partnership and its majority-owned subsidiaries and other controlled entities. All intercompany accounts and transactions have been eliminated in consolidation. In joint ventures where the Partnership has 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.
The Partnership accounts for its noncontrolling interests in joint ventures where the Partnership has influence over financial and operational matters, generally 50% or less ownership interest, under the equity method of accounting. In such cases, the Partnership’s original investments are recorded at cost and adjusted for its share of earnings, losses and distributions. The Partnership accounts for investments in joint ventures where the Partnership has virtually no influence over financial and operational matters using the cost method of accounting. In such cases, the Partnership’s original investments are recorded at cost and any distributions received are recorded as revenue. All of the Partnership’s investments in joint ventures are subject to its impairment review policy.
Net income (loss) attributable to the Partnership per weighted average Interest is based upon the weighted average number of Interests outstanding during the applicable period.
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2011
| (2) | Summary of Significant Accounting Policies – continued |
Certain reclassifications have been made to the accompanying consolidated financial statements in prior years to conform to the current presentation. Interest income from notes receivable has been reclassified to finance income within the consolidated statements of operations. All capitalized initial direct costs and deferred fees associated with notes receivable have been reclassified to notes receivable within the consolidated balance sheets. Amortization expense relating to the capitalized initial direct costs has been reclassified to finance income within the consolidated income statements and consolidated statements of cash flows. Collection of finance leases relating to principal repayments has been reclassified as cash flows provided by investing activities within the consolidated statements of cash flows.
Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and highly liquid investments with original maturity dates of three months or less.
The Partnership's cash and cash equivalents are held principally at two financial institutions and at times may exceed insured limits. The Partnership has placed these funds in high quality institutions in order to minimize risk relating to exceeding insured limits.
Risks and Uncertainties
In the normal course of business, the Partnership is exposed to two significant types of economic risk: credit and market. Credit risk is the risk of a lessee, borrower or other counterparty’s inability or unwillingness to make contractually required payments. Concentrations of credit risk with respect to lessees, borrowers or other counterparties are dispersed across different industry segments within the United States of America and throughout the world. See Note 12 for a discussion of concentrations of risk.
Market risk reflects the change in the value of debt instruments, derivatives and credit facilities due to changes in interest rate spreads or other market factors. The Partnership believes that the carrying value of its investments is reasonable, taking into consideration these risks, along with estimated collateral values, payment history and other relevant information.
Debt Financing Costs
Expenses associated with the incurrence of debt are capitalized and amortized over the term of the debt instrument using the effective interest rate method. These costs are included in other assets.
Leased Equipment at Cost
Investments in leased equipment are stated at cost less accumulated depreciation. Leased equipment is depreciated on a straight-line basis over the lease term, which typically ranges from 3 to 8 years, to the asset’s residual value.
The Investment Manager has an investment committee that approves each new equipment lease and other financing transaction. As part of its process, the investment committee determines the residual value, if any, to be used once the investment has been approved. The factors considered in determining the residual value include, but are not limited to, the creditworthiness of the potential lessee, the type of equipment considered, how the equipment is integrated into the potential lessee’s business, the length of the lease and the industry in which the potential lessee operates. Residual values are reviewed for impairment in accordance with the Partnership’s impairment review policy.
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2011
| (2) | Summary of Significant Accounting Policies – continued |
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.
Depreciation
The Partnership records depreciation expense on equipment when the lease is classified as an operating lease. In order to calculate depreciation, the Partnership first determines 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.
Asset Impairments
The significant assets in the Partnership’s portfolio are periodically reviewed, no less frequently than annually or when indicators of impairment exist, to determine whether events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss will be recognized only if the carrying value of a long-lived asset is not recoverable and exceeds its fair market value. If there is an indication of impairment, the Partnership 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 Partnership’s consolidated statements of operations in the period the determination is made.
The events or changes in circumstances that generally indicate that an asset may be impaired are (i) the estimated fair value of the underlying equipment is less than its carrying value or (ii) the lessee is experiencing financial difficulties and it does not appear likely that the estimated proceeds from the disposition of the asset will be sufficient to satisfy the residual position in the asset and, if applicable, the remaining obligation to the non-recourse lender. Generally in the latter situation, the residual position relates to equipment subject to third-party non-recourse debt where the lessee remits its rental payments directly to the lender and the Partnership does not recover its residual position until the non-recourse debt is repaid in full. The preparation of the undiscounted cash flows requires the use of assumptions and estimates, including the level of future rents, the residual value expected to be realized upon disposition of the asset, estimated downtime between re-leasing events and the amount of re-leasing costs. The Investment 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.
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2011
| (2) | Summary of Significant Accounting Policies – continued |
Revenue Recognition
The Partnership leases equipment to third parties and each such lease is classified as either a finance lease or an operating lease, based upon the terms of each lease. For a finance lease, initial direct costs are capitalized and amortized over the lease term. For an operating lease, initial direct costs are included as a component of the cost of the equipment and depreciated over the estimated useful life of the equipment.
For finance leases, the Partnership records, at lease inception, the total minimum lease payments receivable from the lessee, the estimated unguaranteed residual value of the equipment at lease termination, the initial direct costs related to the lease and the related unearned income. Unearned income represents the difference between the sum of the minimum lease payments receivable, plus the estimated unguaranteed residual value, minus the cost of the leased equipment. Unearned income is recognized as finance income over the term of the lease using the effective interest rate method.
For operating leases, rental income is recognized on a straight-line basis over the lease term. Billed operating lease receivables are included in accounts receivable until collected. 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.
For notes receivable, the Partnership uses the effective interest rate method to recognize finance income, which produces a constant periodic rate of return on the investment.
Notes Receivable
Notes receivable are reported in the Partnership’s 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. Unearned income, discounts and premiums are amortized to finance income in the Partnership’s consolidated statements of operations using the effective interest rate method. Interest receivable related to the unpaid principal is recorded separately from the outstanding balance in the Partnership’s consolidated balance sheets.
Credit Quality of Notes Receivable and Allowance for Credit Losses
The Investment Manager weighs all credit decisions on a combination of external credit ratings as well as internal credit evaluations of all potential borrowers. A potential borrower’s credit is analyzed using those credit ratings as well as the potential borrower’s financial statements and other financial data deemed relevant.
The Partnership’s notes receivables are limited in number and are spread across a wide range of industries. Accordingly, the Partnership does not aggregate notes receivable into portfolio segments or classes. Due to the limited number of notes receivable, the Partnership is able to estimate the allowance for credit losses based on a detailed analysis of each note receivable as opposed to using portfolio based metrics and allowance for credit losses. Notes are analyzed quarterly and categorized as either performing or non-performing based on payment history. If a note becomes non-performing due to a borrower’s missed scheduled payments or failed financial covenants, the Investment Manager analyzes if a reserve should be established or if the note should be restructured. Material events would be specifically disclosed in the discussion of each note held.
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2011
| (2) | Summary of Significant Accounting Policies – continued |
Allowance for Doubtful Accounts
When evaluating the adequacy of the allowance for doubtful accounts, the Partnership estimates the uncollectibility of receivables by analyzing lessee, borrower and other counterparty concentrations, creditworthiness and current economic trends. The Partnership records an allowance for doubtful accounts when the analysis indicates that the probability of full collection is unlikely. Accounts receivable are generally placed in a non-accrual status when payments are more than 90 days past due. Additionally, the Partnership periodically reviews the creditworthiness of companies with payments outstanding less than 90 days. Based upon the Investment Manager’s judgment, accounts may be placed in a non-accrual status. Accounts on a non-accrual status are only returned to an accrual status when the account has been brought current and the Partnership believes recovery of the remaining unpaid receivable is probable. Revenue on non-accrual accounts is recognized only when cash has been received. No allowance was deemed necessary at December 31, 2011 and 2010.
Initial Direct Costs
The Partnership capitalizes initial direct costs, including acquisition fees, associated with the origination and funding of leased assets and other financing transactions. The Partnership pays acquisition fees to the Investment Manager equal to 2.50% of the investment made in Capital Assets by or on behalf of the Partnership, including, but not limited to, the cash paid, indebtedness incurred or assumed, and the excess of the collateral value of the Capital Asset over the amount of the investment, if any (the “Purchase Price”). These costs 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 the Partnership’s consolidated statements of operations. Costs related to leases or other financing transactions that are not consummated are expensed as an acquisition expense in the Partnership’s consolidated statements of operations.
Derivative Financial Instruments
The Partnership 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 its non-recourse long-term debt. The Partnership enters into these instruments only for hedging underlying exposures. The Partnership does not hold or issue derivative financial instruments for purposes other than hedging. Certain derivatives may not meet the criteria to be designated as accounting hedges, even though the Partnership believes that these are effective economic hedges.
The Partnership accounts for 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 the Partnership must document and assess at inception and on an ongoing basis, the Partnership recognizes the changes in fair value of such instruments in accumulated other comprehensive 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.
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2011
| (2) | Summary of Significant Accounting Policies – continued |
Income Taxes
The Partnership is taxed as a partnership for federal and State income tax purposes. No provision for income taxes has been recorded since the liability for such taxes is that of each of the partners rather than the Partnership. The Partnership's income tax returns are subject to examination by the federal and State taxing authorities, and changes, if any, could adjust the individual income tax of the partners.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates primarily include the determination of allowance for doubtful accounts, allowance for credit losses, depreciation and amortization, impairment losses, estimated useful lives and residual values. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In May 2011, the FASB issued ASU No 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs (“ASU 2011-04”), which amends its guidance related to fair value measurements in order to align the definition of fair value measurements and the related disclosure requirements between US GAAP and International Financial Reporting Standards. The new guidance also changes certain existing fair value measurement principles and disclosure requirements. The adoption of ASU 2011-04 becomes effective for the Partnership’s interim and annual periods beginning after December 15, 2011. The Partnership does not believe the adoption of this guidance will have a material impact on its consolidated financial statements.
On March 3, 2010, the Partnership provided a senior term loan in the aggregate amount of $9,857,589 to Northern Capital Associates XVIII, L.P., Northern Capital Associates XV, L.P. and Northern Capital Associates XIV, L.P. The loan bears interest at 18% per year, is payable for a period of forty-eight months and is secured by point of sale equipment. On December 23, 2010, the payment obligations were restructured and the term was extended through July 15, 2014.
On June 30, 2010, the Partnership made a $14,400,000 second priority term loan to Ocean Navigation 5 Co. Ltd and Ocean Navigation 6 Co. Ltd. (collectively, “Ocean Navigation”). The loan was funded between July and September of 2010 and the proceeds were used by Ocean Navigation to purchase two Aframax tanker vessels, the Shah Deniz and the Absheron. The loan bears interest at 15.25% per year and is for a period of six-years from the delivery date of each vessel. The note is secured by the vessels.
On September 1, 2010, the Partnership 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 in the amount of $4,800,000. The loan bears interest at 13% per year and is for a period of forty-eight months. The note is secured by metal cladding and production equipment.
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2011
| (3) | Notes Receivable - continued |
On September 24, 2010, the Partnership made a term loan to Northern Crane Services Inc. in the amount of $5,250,000. The loan bears interest at 15.75% per year and is for a period of fifty-four months beginning on October 1, 2010. The note is secured by lifting and transportation equipment.
On July 26, 2011, the Partnership made a term loan in the amount of $9,465,000 to Western Drilling Inc. and Western Landholdings, LLC. The loan bears interest at 14% per year, matures on September 1, 2016 and is secured by, among other collateral, oil and gas drilling rigs and a mortgage over real property.
On December 22, 2011, a joint venture owned 75% by the Partnership and 25% by ICON Leasing Fund Twelve, LLC (“Fund Twelve”) made a $20,124,000 subordinated term loan to Jurong Aromatics Corporation Pte. Ltd. (“JAC”). The loan bears interest at rates ranging between 12.50% to 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 new condensate splitter and aromatics complex.
For the year ended December 31, 2011, the Partnership recorded an allowance for credit losses of $620,000, which is included in general and administrative expenses on the Partnership's consolidated statements of operations.
| (4) | Net Investment in Finance Leases |
Net investment in finance leases consisted of the following at December 31, 2011 and 2010:
| | | 2011 | | | 2010 | |
| Minimum rents receivable | | $ | 165,864,991 | | | $ | 70,027,335 | |
| Estimated residual values | | | 45,859,529 | | | | 43,641,942 | |
| Initial direct costs, net | | | 3,240,012 | | | | 1,685,898 | |
| Unearned income | | | (68,990,000 | ) | | | (44,463,185 | ) |
| | |
| Net investment in finance leases | | $ | 145,974,532 | | | $ | 70,891,990 | |
Telecommunications Equipment
On February 25, 2010, the Partnership purchased telecommunications equipment for approximately $4,300,000 and simultaneously leased the equipment to Global Crossing Telecommunications, Inc. (“Global Crossing”) for a period of thirty-six months.
On February 28, 2011, the Partnership purchased information technology equipment for approximately $8,452,000 and simultaneously leased the equipment to Global Crossing for a period of thirty-six months.
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2011
| (4) | Net Investment in Finance Leases - continued |
On June 9, 2011, the Partnership, through a joint venture with ICON ECI Fund Fifteen, L.P., an entity managed by the Investment Manager (“Fund Fifteen”), purchased information technology equipment for approximately $6,359,000 and simultaneously leased the equipment to Global Crossing for a period of thirty-six months. As of June 9, 2011, the Partnership had a 100% ownership in the joint venture. Pursuant to the terms of the joint venture, Fund Fifteen could contribute capital on or prior to the six month anniversary of the date the joint venture acquired the equipment. On August 11, 2011, Fund Fifteen contributed capital of approximately $1,836,000 to the joint venture, inclusive of acquisition fees, after which, the Partnership and Fund Fifteen’s ownership interests in the joint venture were approximately 70.8% and 29.2%, respectively. On October 20, 2011, the Partnership exchanged its 70.8% ownership interest in the joint venture for a proportionate share of the lease schedules that were previously owned by the joint venture. Upon the completion of the exchange, the joint venture was terminated. No material gain or loss was recorded as a result of this transaction.
Marine Vessels
On September 29, 2010, the Partnership purchased two supermax bulk carrier vessels, the Amazing and the Fantastic, from wholly-owned subsidiaries of Geden Holdings Limited (“Geden”) for $67,000,000. Simultaneously with these acquisitions, the vessels were bareboat chartered back to the Geden subsidiaries for a period of seven-years. The purchase price for the vessels was funded by $23,450,000 in cash and a non-recourse loan in the amount of $43,550,000.
On June 21, 2011, the Partnership purchased a crude oil tanker, the Center, for $69,000,000, of which $16,000,000 was funded by cash, $44,000,000 was financed through non-recourse long-term debt and $9,000,000 of subordinated seller’s credit, and simultaneously bareboat chartered the tanker to Center Navigation Ltd., a wholly-owned subsidiary of Geden, for a period of five-years. The seller’s credit is recorded on a discounted basis within accrued expenses and other liabilities and is being accreted to its stated value as interest expense over its term.
Non-cancelable minimum annual amounts due on investment in finance leases over the next five years and thereafter were as follows at December 31, 2011:
| Years Ending December 31, | | | |
| 2012 | | $ | 23,631,859 | |
| 2013 | | | 22,249,346 | |
| 2014 | | | 18,535,786 | |
| 2015 | | | 17,155,000 | |
| 2016 | | | 76,922,000 | |
| Thereafter | | | 7,371,000 | |
| | | $ | 165,864,991 | |
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2011
| (5) | Leased Equipment at Cost |
Leased equipment at cost consisted of the following at December 31, 2011 and 2010:
| | | 2011 | | | 2010 | |
| Packaging equipment | | $ | 6,535,061 | | | $ | 6,535,061 | |
| Telecommunications equipment | | | 7,644,928 | | | | 7,644,928 | |
| Motor coaches | | | 10,627,370 | | | | 10,627,370 | |
| Marine - crude oil tankers | | | 174,605,000 | | | | - | |
| | | | 199,412,359 | | | | 24,807,359 | |
| Less: Accumulated depreciation | | | 18,302,163 | | | | 4,116,560 | |
| | | $ | 181,110,196 | | | $ | 20,690,799 | |
Depreciation expense was $14,185,603, $3,467,107 and $649,453 for the years ended December 31, 2011 and 2010 and the period from Commencement of Operations through December 31, 2009, respectively.
Packaging Equipment
On July 31, 2009, the Partnership purchased a 3-layer blown film extrusion line from Exopack, LLC for approximately $2,713,000, which was simultaneously leased back to Exopack for a period of sixty-months. On September 30, 2009, the Partnership purchased an eight color flexographic printing press from Exopack for approximately $3,662,000, which was simultaneously leased back to Exopack for a period of sixty-months.
Telecommunications Equipment
On September 30, 2009 the Partnership purchased telecommunications equipment for approximately $5,323,000, which was simultaneously leased to Global Crossing for a period of thirty- six months. On November 12, 2009, the Partnership purchased additional telecommunications equipment for approximately $2,136,000 and simultaneously leased the equipment to Global Crossing for thirty-six months. On April 1, 2010, the Partnership sold a 9.084% noncontrolling interest in the entity holding these leases to an unaffiliated third party, Hardwood Partners, LLC (“Hardwood”), for $1,000,000, after which the Partnership’s controlling interest in was reduced to 90.916%.
Motor Coaches
On March 9, 2010, the Partnership purchased eleven 2010 MCI J4500 motor coach buses for approximately $4,500,000 and simultaneously leased the buses to Dillon's Bus Service, Inc (“DBS”). On May 13, 2010, fifteen additional motor coach buses were purchased for approximately $5,900,000 and simultaneously leased to Lakefront Lines, Inc (“Lakefront”). The leases are for a period of sixty-months and the base term commenced on June 1, 2010.
On January 3, 2012, DBS, Lakefront and its parent-company, Coach Am Group Holdings Corp., commenced a voluntary Chapter 11 proceeding in U.S. Bankruptcy Court. To date, DBS and Lakefront have made substantially all of their lease payments. The Investment Manager has reviewed DBS and Lakefront’s ability to make future rental payments through ongoing discussions with DBS and Lakefront’s management and, based on its indications, has concluded that no allowance for bad debt is required as of December 31, 2011.
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2011
| (5) | Leased Equipment at Cost - continued |
Marine Vessels
On March 29, 2011, the Partnership and Fund Twelve entered into a joint venture, owned 75% by the Partnership and 25% by Fund Twelve, for the purpose of acquiring two Aframax tankers and two Very Large Crude Carriers (the “VLCCs”) (collectively, the “AET Vessels”). The Aframax tankers were each acquired for a purchase price of $13,000,000, of which $9,000,000 was financed through non-recourse long-term debt, and were simultaneously bareboat chartered to AET Inc. Limited (“AET”) for a period of three years. The VLCCs were each acquired for a purchase price of $72,000,000, of which $55,000,000 was financed through non-recourse long-term debt, and were simultaneously bareboat chartered to AET for a period of ten-years.
Aggregate annual minimum future rentals receivable from the Partnership’s non-cancelable leases over the next five years and thereafter consisted of the following at December 31, 2011:
| Years Ending December 31, | | | |
| 2012 | | $ | 30,447,254 | |
| 2013 | | | 28,117,592 | |
| 2014 | | | 22,201,708 | |
| 2015 | | | 19,009,656 | |
| 2016 | | | 19,010,144 | |
| Thereafter | | | 78,416,844 | |
| | | | | |
| | | $ | 197,203,198 | |
| (6) | Investments in Joint Ventures |
Between June 26, 2009 and August 17, 2009, a joint venture between the Partnership and Fund Twelve, purchased eight natural gas compressors for approximately $11,298,000, which were simultaneously leased to Atlas Pipeline Mid-Continent, LLC (“APMC”), an affiliate of Atlas Pipeline Partners, L.P. Each lease is for a period of forty-eight months and expires on August 31, 2013. Cumulatively, the Partnership contributed approximately $5,084,000, after which the Partnership’s and Fund Twelve’s ownership interests were 45% and 55%, respectively.
On June 29, 2009, a joint venture between the Partnership and Fund Twelve made secured term loans to ARAM Rentals Corporation, a Canadian bankruptcy remote Nova Scotia unlimited liability company and ARAM Seismic Rentals Inc., a U.S. bankruptcy remote Texas corporation (collectively the “ARAM Borrowers”) in the amount of $12,500,000. On July 20, 2009, the joint venture funded the second tranche of the loans in the amount of $7,500,000. The loans bear interest at 15% per year and are for a period of sixty months beginning on August 1, 2009. Cumulatively, the Partnership contributed $9,000,000 to the joint venture, after which the Partnership’s and Fund Twelve’s ownership interests were 45% and 55%, respectively.
On December 23, 2009, a joint venture owned 45% by the Partnership and 55% by Fund Twelve made a second priority secured term loan to Quattro Plant Limited, a wholly-owned subsidiary of Quattro Group Limited. The secured term loan bears interest at 20% per year and is for a period of thirty-three months.
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2011
| (6) | Investments in Joint Ventures – continued |
On April 1, 2010, the Partnership and Fund Twelve (each a “Seller” and together, the “Sellers”), sold ownership interests to Hardwood in the joint ventures with leases to APMC, loans to the ARAM Borrowers and a loan to Quattro Plant. Hardwood paid $1,000,000 for each of these three investments. The ownership interest in each of the three entities provided by each Seller to Hardwood was proportionate to the Sellers’ ownership percentages immediately prior to the sale. The Partnership received aggregate proceeds of $1,350,000 and recorded an aggregate loss on sale of approximately $25,000.
Immediately following the sales, the resulting ownership interests were as follows:
| | Partnership | Fund Twelve | Hardwood | Total |
| APMC | 40.533% | 49.540% | 9.927% | 100% |
| ARAM Borrowers | 42.616% | 52.087% | 5.297% | 100% |
| Quattro Plant | 40.195% | 49.127% | 10.678% | 100% |
Effective January 1, 2011, the Partnership exchanged its 42.62% ownership interest in the joint venture that made loans to the ARAM Borrowers for a proportionate share of the loans. No gain or loss was recorded as a result of this transaction. Upon completion of the exchange, the joint venture was terminated.
Effective January 1, 2011, the Partnership exchanged its 40.20% ownership interest in the joint venture that made a loan to Quattro Plant for a proportionate share of the future cash flows of the loan. No gain or loss was recorded as a result of this transaction. Upon completion of the exchange, the joint venture was terminated.
On July 15, 2011, the joint venture amended the master lease agreement with APMC. As a result, the joint venture received an amendment fee of $500,000. On September 14, 2011, the joint venture entered into a loan agreement with Wells Fargo Equipment Finance, Inc. in the amount of approximately $10,628,000. The loan bears interest at the rate of 4.08% per year and matures on September 1, 2013. On September 29, 2011, the Partnership received a distribution of approximately $4,300,000 from the joint venture, which included the return of the Partnership’s capital. In connection with the distribution, the Partnership reduced its investment in the joint venture to zero and recorded approximately $949,000 of additional income from investments in joint ventures.
On December 19, 2011, the Partnership, through a joint venture owned 60% by Fund Fifteen and 40% by the Partnership, agreed to purchase the offshore support vessel, the Lewek Ambassador. The purchase price of the vessel will be the lesser of $25,000,000 and the fair market value of the vessel as determined two weeks before the vessel's delivery date, which is expected to occur on or before April 30, 2012. On December 20, 2011, the joint venture funded $9,000,000 of the purchase price and will fund the remaining portion upon delivery of the vessel. Simultaneously with the funding, the joint venture entered into a bareboat charter with Gallatin Maritime Management for a period of nine-years to commence on the delivery date of the vessel. For the purpose of purchasing the Lewek Ambassador, the joint venture was capitalized using a combination of debt and equity. The joint venture has recorded notes payable to Fund Fifteen and the Partnership in the amounts of $4,200,000 and $2,800,000, respectively. The notes bear interest at 17% per year and mature eighty-four months from the delivery of the vessel. The note is presented as note receivable from joint venture on the Partnership's consolidated balance sheets.
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2011
| (7) | Non-Recourse Long-Term Debt |
The Partnership had $221,045,626 of non-recourse long-term debt at December 31, 2011.
On October 1, 2010, the Partnership borrowed $43,500,000 in connection with the acquisition of the Amazing and the Fantastic. The non-recourse long-term debt matures on September 30, 2017 and bears interest at the London Interbank Offered Rate (“LIBOR”) plus 3.85% and was fixed at a rate of 4.9825% for the first four years. Thereafter, the interest rate will be fixed again at LIBOR plus 3.85% on September 29, 2014. The lender has a security interest in the Amazing and the Fantastic and an assignment of the charter hire. The Partnership paid and capitalized approximately $653,000 in debt financing costs.
On March 29, 2011, the Partnership, through certain subsidiaries of its joint venture with Fund Twelve, borrowed $128,000,000 (the “Senior Debt”) in connection with the acquisition of the AET Vessels. The $18,000,000 of debt relating to the Aframax tankers accrued interest at a rate of 3.3075% per year through June 29, 2011 and was thereafter fixed pursuant to a swap agreement at 4.5550% per year through maturity on March 29, 2014. The $110,000,000 of debt relating to the VLCCs accrued interest at a rate of 3.3075% per year through June 29, 2011 and was thereafter fixed pursuant to a swap agreement at 6.3430% per year through maturity on March 29, 2021. The lender has a security interest in the AET Vessels.
On April 5, 2011, the joint venture borrowed $22,000,000 of subordinated non-recourse long-term debt from an unaffiliated third-party (the “Sub Debt”) related to the investment in the AET Vessels. The loan bears interest at 12% and is for a period of sixty months and at the joint venture's option may be extended for an additional twelve months. The loan is secured by an interest in the equity of the joint venture.
Due to a change in the fair value of the AET Vessels, a provision in the Senior Debt loan agreement restricts the Partnership’s ability to utilize cash generated by the charter of the AET Vessels as of January 12, 2012 for purposes other than paying the Senior Debt. Approximately $400,000 included in cash and cash equivalents at December 31, 2011 subsequently became restricted upon notice by the Senior Debt lender. Charter payments in excess of the Senior Debt loan service are held in reserve by the Senior Debt lender until such time as the restriction is cured. Once cured, the reserves will be released to the Partnership. While this restriction is in place, the Partnership is prevented from applying the charter proceeds to the Sub Debt. As of March 2012, all required payments on the Sub Debt have been made. Should the Partnership fail to meet its future payment obligations, the Sub Debt lender has certain rights, including step-in rights, which allow it to collect cash generated from the charter until such time as the Sub Debt lender has received all unpaid amounts.
On June 21, 2011, the Partnership borrowed $44,000,000 in connection with the acquisition of the crude oil tanker, the Center. The loan is for a period of five years and bore interest at 3.500% per year through September 21, 2011 and was thereafter fixed pursuant to a swap agreement at 5.235% per year through maturity. The loan is secured by the crude oil tanker.
As of December 31, 2011 and 2010, the Partnership had capitalized net debt financing costs of $4,311,368 and $620,565, respectively. For the years ended December 31, 2011 and 2010 and the Commencement of Operations through December 31, 2009, the Partnership recognized additional interest expense of $729,195, $32,686 and $0, respectively, related to the amortization of the debt financing costs.
The aggregate maturities of non-recourse long-term debt over the next five years and thereafter were as follows at December 31, 2011:
| Years Ending December 31, | | | |
| 2012 | | $ | 21,609,370 | |
| 2013 | | | 23,369,059 | |
| 2014 | | | 37,823,869 | |
| 2015 | | | 15,769,168 | |
| 2016 | | | 43,599,168 | |
| Thereafter | | | 78,874,992 | |
| | | $ | 221,045,626 | |
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2011
| (8) | Revolving Line of Credit, Recourse |
On May 10, 2011, the Partnership entered into an agreement with California Bank & Trust (“CB&T”) for a revolving line of credit of up to $15,000,000 (the “Facility”), which is secured by all of the Partnership’s assets not subject to a first priority lien. Amounts available under the Facility are subject to a borrowing base that is determined, subject to certain limitations, based on the present value of the future receivables under certain loans and lease agreements in which the Partnership has a beneficial interest. At December 31, 2011, the Partnership had $15,000,000 available under the Facility.
The Facility expires on March 31, 2013 and the Partnership may request a one year extension to the revolving line of credit within 390 days of the then-current expiration date, but CB&T has no obligation to extend. The interest rate for general advances under the Facility is CB&T’s prime rate and the interest rate on up to five separate non-prime rate advances that are permitted to be made under the Facility is the 90-day rate at which U.S. dollar deposits can be acquired by CB&T in the London Interbank Eurocurrency Market plus 2.5% per year, provided that all interest rates on advances under the Facility are subject to an interest rate floor of 4.0% per year. In addition, the Partnership is obligated to pay a commitment fee based on an annual rate of 0.50% on unused commitments under the Facility. At December 31, 2011, there were no obligations outstanding under the Facility.
At December 31, 2011, the Partnership was in compliance with all covenants related to the Facility.
| (9) | Transactions with Related Parties |
The Partnership has entered into certain agreements with the General Partner, the Investment Manager and ICON Securities, whereby the Partnership pays certain fees and reimbursements to these parties. ICON Securities is entitled to receive a 3% underwriting fee from the gross proceeds from sales of the Partnership’s Interests.
The Partnership pays the Investment Manager (i) an annual management fee, payable monthly, equal to 3.50% of the gross periodic payments due and paid from the Partnership’s investments and (ii) acquisition fees, through the end of the operating period, equal to 2.50% of the Purchase Price of each investment the Partnership makes in Capital Assets.
In addition, the Partnership reimbursed the General Partner and its affiliates for organizational and offering expenses incurred in connection with the Partnership’s organization and offering. The reimbursement of these expenses was capped at the lesser of 1.44% of the gross offering proceeds (assuming all of the Interests are sold in the offering) and the actual costs and expenses incurred by the General Partner and its affiliates. The General Partner also has a 1% interest in the Partnership’s profits, losses, cash distributions and liquidation proceeds.
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2011
| (9) | Transactions with Related Parties - continued |
In addition, the General Partner and its affiliates are reimbursed for administrative expenses incurred in connection with the Partnership’s operations. Administrative expense reimbursements are costs incurred by the General Partner or its affiliates that are necessary to the Partnership’s operations. These costs include the General Partner’s and its affiliates’ legal, accounting, investor relations and operations personnel costs, as well as professional fees and other costs that are charged to the Partnership based upon the percentage of time such personnel dedicate to the Partnership. Excluded are salaries and related costs, office rent, travel expenses and other administrative costs incurred by individuals with a controlling interest in the General Partner.
The Partnership paid distributions to the General Partner of $191,790, $97,933 and $9,636 for the years ended December 31, 2011 and 2010 and from Commencement of Operations through December 31, 2009, respectively. The General Partner’s interest in the Partnership’s net income (loss) for the years ended December 31, 2011 and 2010 and from Commencement of Operations through December 31, 2009 was $13,878, $23,384 and ($15,843), respectively.
Fees and other expenses paid or accrued by the Partnership to the General Partner or its affiliates were as follows:
| | | | Period from the | |
| | | | Commencement of | |
| | | Years Ended December 31, | | | Operations through | |
| Entity | | Capacity | | Description | | 2011 | | | 2010 | | | December 31, 2009 | |
| ICON Capital Corp. | | Investment Manager | | Organizational and offering | | | | | | | | | |
| | | expense reimbursements (1) | | $ | 273,438 | | | $ | 1,075,100 | | | $ | 1,577,572 | |
| ICON Securities Corp. | | Dealer-Manager | | Underwriting fees (2) | | | 1,877,234 | | | | 3,542,132 | | | | 2,026,388 | |
| ICON Capital Corp. | | Investment Manager | | Acquisition fees (3) | | | 9,030,609 | | | | 5,923,983 | | | | 1,025,143 | |
| ICON Capital Corp. | | Investment Manager | | Management fees (4) | | | 1,943,217 | | | | 588,415 | | | | 76,559 | |
| ICON Capital Corp. | | Investment Manager | | Administrative expense | | | | | | | | | | | | |
| | | reimbursements (4) | | | 5,241,199 | | | | 4,778,359 | | | | 1,924,682 | |
| | | $ | 18,365,697 | | | $ | 15,907,989 | | | $ | 6,630,344 | |
| | |
| (1) Amount capitalized and amortized to partners' equity. | |
| (2) Amount charged directly to partners' equity. | |
| (3) Amount capitalized and amortized to operations over the estimated service period in accordance with the Partnership's accounting policies. | |
| (4) Amount charged directly to operations. | |
At December 31, 2011 and 2010, the Partnership had a net payable of $381,277 and $700,073, respectively, due to the General Partner and its affiliates that primarily consisted of administrative expense reimbursements.
At December 31, 2011, the Partnership had a note receivable from joint venture of $2,800,000 (see Note 6).
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2011
| (10) | Derivative Financial Instruments |
The Partnership 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 its non-recourse long-term debt. The Partnership enters into these instruments only for hedging underlying exposures. The Partnership does not hold or issue derivative financial instruments for purposes other than hedging. Certain derivatives may not meet the criteria to be designated as accounting hedges, even though the Partnership believes that these are effective economic hedges.
The Partnership recognizes all derivatives as either assets or liabilities on the consolidated balance sheets and measures those instruments at fair value. Changes in the fair value of such instruments are recognized immediately in earnings unless certain criteria are met. These criteria demonstrate that the derivative is expected to be highly effective at offsetting changes in the fair value or expected cash flows of the underlying exposure at both the inception of the hedging relationship and on an ongoing basis and include an evaluation of the counterparty risk and the impact, if any, on the effectiveness of the derivative. If these criteria are met, which the Partnership must document and assess at inception and on an ongoing basis, the Partnership recognizes 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.
Non-designated Derivatives
As of December 31, 2011, the Partnership had five interest rate swaps that are not designated as cash flow hedges with an aggregate notional amount of $161,455,000. These interest rate swaps are not speculative and are used to meet the Partnership’s objectives in using interest rate derivatives to add stability to interest expense and to manage its exposure to interest rate movements. The Partnership’s strategy to accomplish this objective is to match the projected future cash flows with the underlying debt service. Each interest rate swap involves the receipt of floating rate payments from a counterparty in exchange for the Partnership making fixed rate payments over the life of the agreement without exchange of the underlying notional amount.
The table below presents the fair value of the Partnership’s derivative financial instruments as well as their classification within the Partnership’s consolidated balance sheets as of December 31, 2011 and 2010:
| | Liability Derivatives | |
| | | | December 31, | |
| | Balance Sheet Location | | 2011 Fair Value | | | 2010 Fair Value | |
| | |
| Derivatives not designated as hedging instruments: | |
| | |
| Interest rate swaps | Derivative financial instruments | | $ | 10,663,428 | | | $ | - | |
The Partnership’s derivative financial instruments not designated as hedging instruments generated a loss on derivative financial instruments on the consolidated statements of operations for the year ended December 31, 2011 of $12,557,138 related to interest rate swaps.
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2011
| (10) | Derivative Financial Instruments - continued |
Derivative Risks
The Partnership manages exposure to possible defaults on derivative financial instruments by monitoring the concentration of risk that the Partnership has with any individual bank and through the use of minimum credit quality standards for all counterparties. The Partnership does not require collateral or other security in relation to derivative financial instruments. Since it is the Partnership’s policy to enter into derivative contracts with banks of internationally acknowledged standing only, the Partnership considers the counterparty risk to be remote.
As of December 31, 2011, the fair value of the derivatives in a liability position was $10,663,428. In the event that the Partnership would be required to settle its obligations under the derivative contracts as of December 31, 2011, the termination value would be $11,575,725.
| (11) | Fair Value Measurements |
Assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
| · | Level 1: Quoted market prices available in active markets for identical assets or liabilities as of the reporting date. |
| · | Level 2: Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. |
| · | Level 3: Pricing inputs that are generally unobservable and cannot be corroborated by market data. |
Financial Assets and Liabilities Measured on a Recurring Basis
Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Investment Manager’s assessment, on the Partnership’s behalf, of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.
The following table summarizes the valuation of the Partnership’s material financial liabilities measured at fair value on a recurring basis as of December 31, 2011:
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | |
| Liabilities: | |
| | |
| Derivative financial instruments | | $ | - | | | $ | 10,663,428 | | | $ | - | | | $ | 10,663,428 | |
The Partnership’s derivative financial instruments, including interest rate swaps, are valued using models based on readily observable or unobservable market parameters for all substantial terms of the Partnership’s derivative contracts and are classified within Level 2. As permitted by the accounting pronouncements, the Partnership uses market prices and pricing models for fair value measurements of its derivative instruments. The fair value of the derivative liabilities was recorded in derivative financial instruments within the consolidated balance sheets.
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2011
| (11) | Fair Value Measurements – continued |
Fair value information with respect to the Partnership’s leased assets and liabilities is not separately provided since (i) the current accounting pronouncements do not require fair value disclosures of lease arrangements and (ii) the carrying value of financial assets, other than lease-related investments, and the recorded value of recourse debt approximate fair value due to their short-term maturities and variable interest rates. The estimated fair value of the Partnership’s fixed rate notes receivable, fixed rate non-recourse long term debt and other liabilities was based on the discounted value of future cash flows related to the loans based on recent transactions of this type.
| | | December 31, 2011 | |
| | | Carrying Amount | | | Fair Value | |
| Fixed rate notes receivable | | $ | 73,206,783 | | | $ | 75,752,509 | |
| | |
| Fixed rate non-recourse long term debt | | $ | 59,590,626 | | | $ | 60,447,957 | |
| | |
| Other liabilities | | $ | 7,097,436 | | | $ | 7,504,620 | |
| (12) | Concentrations of Risk |
At times, the Partnership's cash and cash equivalents may exceed insured limits. The Partnership has placed these funds in high quality institutions in order to minimize the risk of loss relating to exceeding insured limits.
For the year ended December 31, 2011, the Partnership had two lessees that accounted for 66.87% of the Partnership’s rental and finance income.
For the year ended December 31, 2010, the Partnership had four lessees and one borrower that accounted for 88.32% of the Partnership’s rental and finance income.
For the year ended December 31, 2009, the Partnership had two lessees that accounted for 100.00% of the Partnership’s rental income.
As of December 31, 2011 and 2010, equipment on lease to two lessees accounted for approximately 64.73% and 32.28% of total assets, respectively.
As of December 31, 2011 and 2010, the Partnership had two and one lenders that accounted for 90.31% and 92.11% of total liabilities, respectively.
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2011
Geographic information for revenue and long-lived assets, which includes operating leases (net of accumulated depreciation), finance leases, investments in joint ventures and notes receivable, were as follows:
| | | Year Ended December 31, 2011 | |
| | | North | | | | |
| | | America | | | Europe | | | Asia | | | Vessels (a) | | | Total | |
| Revenue: | | | | | | | | | | | | | | | |
| Finance income | | $ | 5,984,920 | | | $ | 617,278 | | | $ | 373,378 | | | $ | 12,810,268 | | | $ | 19,785,844 | |
| Rental income | | $ | 5,989,688 | | | $ | - | | | $ | - | | | $ | 19,469,055 | | | $ | 25,458,743 | |
| Income from investments in joint ventures | | $ | 1,353,427 | | | $ | - | | | $ | - | | | $ | - | | | $ | 1,353,427 | |
| | | At December 31, 2011 | |
| | | North | | | | |
| | | America | | | Europe | | | Asia | | | Vessels (a) | | | Total | |
| Long-lived assets: | | | | | | | | | | | | | | | |
| Net investment in finance leases | | $ | 13,298,467 | | | $ | - | | | $ | - | | | $ | 132,676,065 | | | $ | 145,974,532 | |
| Leased equipment at cost, net | | $ | 16,897,421 | | | $ | - | | | $ | - | | | $ | 164,212,775 | | | $ | 181,110,196 | |
| Notes receivable | | $ | 29,023,971 | | | $ | 2,291,360 | | | $ | 23,630,939 | | | $ | 15,460,513 | | | $ | 70,406,783 | |
| Note receivable from joint venture | | $ | - | | | $ | - | | | $ | - | | | $ | 2,800,000 | | | $ | 2,800,000 | |
| Investments in joint ventures | | $ | - | | | $ | - | | | $ | - | | | $ | 1,029,336 | | | $ | 1,029,336 | |
| | |
| (a) Vessels are free to trade worldwide. | |
| | | Year Ended December 31, 2010 | |
| | | North | | | | | | | | | | |
| | | America | | | Europe | | | Vessels (a) | | | Total | |
| Revenue: | | | | | | | | | | | | |
| Finance income | | $ | 2,187,649 | | | $ | - | | | $ | 2,657,661 | | | $ | 4,845,310 | |
| Rental income | | $ | 5,434,204 | | | $ | - | | | $ | - | | | $ | 5,434,204 | |
| Income from investments in joint ventures | | $ | 1,775,660 | | | $ | 638,051 | | | $ | - | | | $ | 2,413,711 | |
| | | At December 31, 2010 | |
| | | North | | | | | | | | | | |
| | | America | | | Europe | | | Vessels (a) | | | Total | |
| Long-lived assets: | | | | | | | | | | | | |
| Net investment in finance leases | | $ | 3,497,935 | | | $ | - | | | $ | 67,394,055 | | | $ | 70,891,990 | |
| Leased equipment at cost, net | | $ | 20,690,799 | | | $ | - | | | $ | - | | | $ | 20,690,799 | |
| Notes receivable | | $ | 19,414,878 | | | $ | - | | | $ | 15,682,264 | | | $ | 35,097,142 | |
| Investments in joint ventures | | $ | 10,878,169 | | | $ | 3,451,548 | | | $ | - | | | $ | 14,329,717 | |
| | |
| (a) Vessels are free to trade worldwide. | |
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2011
| (13) | Geographic Information - continued |
| | | Year Ended December 31, 2009 | |
| | | North | | | | | | | |
| | | America | | | Europe | | | Total | |
| Revenue: | | | | | | | | | |
| Rental income | | $ | 1,044,930 | | | $ | - | | | $ | 1,044,930 | |
| Income from investments in joint ventures | | $ | 751,812 | | | $ | (56,531 | ) | | $ | 695,281 | |
| | | At December 31, 2009 | |
| | | North | | | | | | | |
| | | America | | | Europe | | | Total | |
| Long-lived assets: | | | | | | | | | |
| Leased equipment at cost, net | | $ | 13,530,536 | | | $ | - | | | $ | 13,530,536 | |
| Investments in joint ventures | | $ | 13,502,011 | | | $ | 4,240,818 | | | $ | 17,742,829 | |
| (14) | Selected Quarterly Financial Data (unaudited) |
The following table is a summary of selected financial data by quarter:
| | | (unaudited) | | | Year ended | |
| | | Quarters Ended in 2011 | | | December 31, | |
| | | March 31, | | | June 30, | | | September 30, | | | December 31, | | | 2011 | |
| | |
| Total revenue | | $ | 5,657,525 | | | $ | 12,241,646 | | | $ | 14,783,502 | | | $ | 14,114,441 | | | $ | 46,797,113 | |
| | |
| Net income (loss) | | $ | 2,109,370 | | | $ | (2,709,883 | ) | | $ | (1,700,484 | ) | | $ | 2,028,229 | | | $ | (272,678 | ) |
| | | | |
| Net income (loss) attributable to Fund Fourteen | | | |
| allocable to limited partners | | $ | 2,047,677 | | | $ | (1,832,459 | ) | | $ | (626,627 | ) | | $ | 1,785,333 | | | $ | 1,373,924 | |
| | |
| Weighted average number of limited partnership | | | |
| interests outstanding | | | 208,471 | | | | 247,140 | | | | 258,832 | | | | 258,832 | | | | 243,491 | |
| | |
| Net income (loss) attributable to Fund Fourteen | | | |
| per weighted average limited partnership interest | | $ | 9.82 | | | $ | (7.41 | ) | | $ | (2.42 | ) | | $ | 6.90 | | | $ | 5.64 | |
| | | (unaudited) | | | Year ended | |
| | | Quarters Ended in 2010 | | | December 31, | |
| | | March 31, | | | June 30, | | | September 30, | | | December 31, | | | 2010 | |
| | |
| Total revenue | | $ | 1,951,264 | | | $ | 2,629,183 | | | $ | 2,929,667 | | | $ | 5,325,102 | | | $ | 12,835,226 | |
| | |
| Net income (loss) | | $ | 10,541 | | | $ | (310,687 | ) | | $ | 547,389 | | | $ | 2,169,649 | | | $ | 2,416,892 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) attributable to Fund Fourteen | | | |
| allocable to limited partners | | $ | 10,436 | | | $ | (334,043 | ) | | $ | 515,885 | | | $ | 2,122,716 | | | $ | 2,314,994 | |
| | |
| Weighted average number of limited partnership | | | |
| interests outstanding | | | 84,756 | | | | 117,468 | | | | 147,266 | | | | 176,986 | | | | 131,915 | |
| | |
| Net income (loss) attributable to Fund Fourteen | | | |
| per weighted average limited partnership interest | | $ | 0.12 | | | $ | (2.84 | ) | | $ | 3.50 | | | $ | 11.99 | | | $ | 17.55 | |
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2011
| (15) | Commitments and Contingencies and Off-Balance Sheet Transactions |
At the time the Partnership acquires or divests of its interest in a Capital Asset, the Partnership may, under very limited circumstances, agree to indemnify the seller or buyer for specific contingent liabilities. The General Partner believes that any liability that may arise as a result of any such indemnification obligations will not have a material adverse effect on the consolidated financial condition of the Partnership taken as a whole.
In connection with certain investments, we are required to maintain restricted cash accounts with certain banks. At December 31, 2011, the Partnership had $2,500,000 in restricted cash, which is included in other assets on the Partnership’s consolidated balance sheets.
On September 27, 2010, the Partnership’s wholly-owned subsidiary, ICON SE, LLC (“ICON SE”), participated in a $46,000,000 facility by agreeing to make a secured term loan to SE Shipping Pte Ltd. (“SE”) for the purchase of a new-build heavy lift vessel and accompanying equipment. Although all of the material conditions to closing were satisfied, SE breached its obligations under the loan by refusing to draw down on the facility. Subsequently, ICON SE commenced an action against SE in the United Kingdom for SE’s failure to pay ICON SE the commitment fee due in accordance with the loan agreement.
| (16) | Income Tax Reconciliation (unaudited) |
No provision for income taxes has been recorded by the Partnership since the liability for such taxes is the responsibility of each of the individual partners rather than the Partnership. The Partnership’s income tax returns are subject to examination by federal and State taxing authorities, and changes, if any, could adjust the individual income taxes of the partners.
At December 31, 2011 and 2010, the partners’ equity included in the consolidated financial statements totaled $202,214,872 and $161,677,642, respectively. The partners’ capital for federal income tax purposes at December 31, 2011 and 2010, totaled $214,601,490 and $148,376,322, respectively. The difference arises primarily from sales and offering expenses reported as a reduction in the limited partners’ capital accounts for financial reporting purposes, but not for federal income tax reporting purposes, and differences in depreciation and amortization between financial reporting purposes and federal income tax purposes.
The following table reconciles net income (loss) for financial statement reporting purposes to the net loss for federal income tax purposes for the years ended December 31, 2011, 2010 and 2009:
| | | 2011 | | | 2010 | | | 2009 | |
| Net income (loss) attributable to Fund Fourteen per consolidated financial statements | | $ | 1,387,802 | | | $ | 2,338,378 | | | $ | (1,584,298 | ) |
| | |
| Rental income | | | (28,528 | ) | | | 2,134,479 | | | | 210,820 | |
| Depreciation and amortization | | | (288,385 | ) | | | (7,546,470 | ) | | | (6,396,843 | ) |
| Tax gain (loss) from consolidated joint venture | | | 16,694,669 | | | | 877,362 | | | | (1,915,676 | ) |
| Other | | | 2,097,312 | | | | 10,832 | | | | 213,117 | |
| | |
| Net income (loss) for federal income tax purposes | | $ | 19,862,870 | | | $ | (2,185,419 | ) | | $ | (9,472,880 | ) |
On February 3, 2012, the Partnership made a term loan in the amount of $15,406,250 to subsidiaries of Revstone Transportation, LLC. The loan bears interest at 15% per year and is for a period of sixty-months. The loan is secured by all of Revstone’s assets, including a mortgage over real property.
On February 29, 2012, the Partnership made a term loan in the amount of $6,000,000 to VAS Aero Services, LLC. The loan bears interest at variable rates ranging between 12% to 14.5% per year and is for a period of thirty-one months. The loan is secured by a second priority interest on all of VAS’s assets.
On March 9, 2012, the Partnership made a term loan in the amount of $7,500,000 to Kanza Construction, Inc. The loan bears interest at 13% per year and is for a period of sixty-months. The loan is secured by all of Kanza’s assets.
| |
| | |
| | | Balance at Beginning of Year | | | Charged to Costs and Expenses | | | Charged to Notes Receivable | | | | | | Other Charges Add (Deduct) | | | Balance at End of Year | |
| | | Deduction | |
| | |
| Allowance for credit losses: | | | | | | | | | | | | | | | | | | |
| | |
| Year ended December 31, 2011 | | | | | | | | | | | | | | | | | | |
| Credit loss reserve | | | | | | | | | | | | | | | | | | |
| (deducted from notes receivable) | | $ | - | | | $ | - | | | $ | 620,000 | | | $ | - | | | $ | - | | | $ | 620,000 | |
| | |
| Year ended December 31, 2010 | | | | | | | | | | | | | | | | | | | | | | | | |
| Credit loss reserve | | | | | | | | | | | | | | | | | | | | | | | | |
| (deducted from notes receivable) | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | |
| Year ended December 31, 2009 | | | | | | | | | | | | | | | | | | | | | | | | |
| Credit loss reserve | | | | | | | | | | | | | | | | | | | | | | | | |
| (deducted from notes receivable) | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
None.
Evaluation of disclosure controls and procedures
In connection with the preparation of this Annual Report on Form 10-K for the period ended December 31, 2011, as well as the financial statements for our General Partner, our General Partner carried out an evaluation, under the supervision and with the participation of the management of our General Partner, including its Co-Chief Executive Officers and the Principal Accounting and Financial Officer, of the effectiveness of the design and operation of our General Partner’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 Accounting and Financial Officer concluded that our General Partner’s disclosure controls and procedures were effective.
In designing and evaluating our General Partner’s disclosure controls and procedures, our General Partner 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 General Partner’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 General Partner’s Co-Chief Executive Officers and Principal Accounting and Financial Officer have determined that no weakness in disclosure controls and procedures had any material effect on the accuracy and completeness of our financial reporting and disclosure included in this Annual Report on Form 10-K.
Evaluation of internal control over financial reporting
Our General Partner 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 General Partner assessed the effectiveness of its internal control over financial reporting as of December 31, 2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in "Internal Control — Integrated Framework."
Based on its assessment, our General Partner believes that, as of December 31, 2011, its internal control over financial reporting is effective.
Changes in internal control over financial reporting
There were no changes in our General Partner’s internal control over financial reporting during the quarter ended December 31, 2011 that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Not applicable.
Our General Partner
Our General Partner was formed as a Delaware limited liability company in August 2008 to act as our general partner. Its principal office is located at 3 Park Avenue, 36th Floor, New York, New York 10016, and its telephone number is (212) 418-4700. The sole member of our General Partner is ICON Capital Corp., our Investment Manager.
| | | | |
Michael A. Reisner | | 41 | | Co-Chief Executive Officer, Co-President, and Director |
Mark Gatto | | 39 | | Co-Chief Executive Officer, Co-President, and Director |
Joel S. Kress | | 39 | | Senior Managing Director |
Keith S. Franz | | 43 | | Managing Director |
Craig A. Jackson | | 52 | | Managing Director |
Biographical information regarding the officers and directors of our General Partner follows the table setting forth information regarding our Investment Manager’s current executive officers and directors.
Our Investment Manager
Our Investment Manager, ICON Capital Corp., a Delaware corporation (“ICON”), was formed in 1985. Our Investment 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 Investment 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 Capital Assets that are off-lease; inspecting Capital Assets; 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.
| | | | |
Michael A. Reisner | | 41 | | Co-Chairman, Co-Chief Executive Officer and Co-President |
Mark Gatto | | 39 | | Co-Chairman, Co-Chief Executive Officer and Co-President |
Joel S. Kress | | 39 | | Senior Managing Director |
Keith S. Franz | | 43 | | Managing Director |
David J. Verlizzo | | 39 | | Managing Director and Counsel |
Craig A. Jackson | | 52 | | Managing Director |
Harry Giovani | | 37 | | Managing Director and Chief Credit Officer |
Michael A. Reisner, Co-President, Co-CEO and Director joined ICON in 2001. Prior to purchasing the company, 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, 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-President, Co-CEO, and Director originally joined ICON in 1999. Prior to purchasing the company, 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, 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, co-founded a specialty business consulting firm in New York City where he served as its managing partner before re-joining ICON 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.
Joel S. Kress, Senior Managing Director, joined ICON in 2005 as Vice President and Associate General Counsel. In 2006, he was promoted to Senior Vice President and General Counsel, and in 2007, was promoted to his current position. Prior to joining ICON, Mr. Kress was an attorney from 2001 to 2005, with Fried, Frank, Harris, Shriver & Jacobson LLP in New York and London, England, concentrating on mergers and acquisitions, corporate finance and financing transactions (including debt and equity issuances) and private equity investments. Mr. Kress received a J.D. from Boston University School of Law and a B.A. from Connecticut College.
Keith S. Franz, Managing Director, joined ICON in March 2009. Mr. Franz was previously Vice President of Accounting and Finance from March 2009 to July 2011. Mr. Franz was previously a Senior Manager at Smart & Associates LLP from December 2008 until March 2009 and the Vice President of Corporate Finance for Audiovox Corporation from August 2004 to November 2008. Prior to Audiovox, from September 1991 through August 2004, Mr. Franz was employed by Ernst & Young LLP, rising to the level of Senior Audit Manager. Mr. Franz received a B.S. from Binghamton University and is a certified public accountant.
David J. Verlizzo has been Managing Director and Counsel, joined ICON in 2005. Mr. Verlizzo was formerly Vice President and Deputy General Counsel from February 2006 to June 2007 and was Assistant Vice President and Associate General Counsel from May 2005 until January 2006. Previously, from 2001 to 2005, Mr. Verlizzo was an attorney with Cohen Tauber Spievack & Wagner LLP in New York, concentrating on public and private securities law compliance, and corporate and commercial transactions. Mr. Verlizzo received a J.D. from Hofstra University School of Law and a B.S. from the University of Scranton.
Craig A. Jackson, Managing Director, joined ICON in February in 2006. Mr. Jackson was previously Vice President – Remarketing and Portfolio Management from February 2006 through March 2008. Previously, from October 2001 to February 2006, Mr. Jackson was President and founder of Remarketing Services, Inc., a transportation equipment remarketing company. Prior to 2001, Mr. Jackson served as Vice President of Remarketing and Vice President of Operations for Chancellor Fleet Corporation (an equipment leasing company). Mr. Jackson received a B.A. from Wilkes University.
Harry Giovani, Managing Director - Chief Credit Officer, joined ICON in 2008. Most recently 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 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 General Partner, on our behalf, has adopted a code of ethics for its Co-Chief Executive Officers and Principal Accounting and Financial Officer. The Code of Ethics is available free of charge by requesting it in writing from our General Partner. Our General Partner’s address is 3 Park Avenue, 36th Floor, New York, New York 10016.
We have no directors or officers. Our General Partner and its affiliates were paid or we accrued the following compensation and reimbursement for costs and expenses:
| | | | Period from the | |
| | | | Commencement of | |
| | | Years Ended December 31, | | | Operations through | |
| Entity | | Capacity | | Description | | 2011 | | | 2010 | | | December 31, 2009 | |
| ICON Capital Corp. | | Investment Manager | | Organizational and offering | | | | | | | | | |
| | | expense reimbursements (1) | | $ | 273,438 | | | $ | 1,075,100 | | | $ | 1,577,572 | |
| ICON Securities Corp. | | Dealer-Manager | | Underwriting fees (2) | | | 1,877,234 | | | | 3,542,132 | | | | 2,026,388 | |
| ICON Capital Corp. | | Investment Manager | | Acquisition fees (3) | | | 9,030,609 | | | | 5,923,983 | | | | 1,025,143 | |
| ICON Capital Corp. | | Investment Manager | | Management fees (4) | | | 1,943,217 | | | | 588,415 | | | | 76,559 | |
| ICON Capital Corp. | | Investment Manager | | Administrative expense | | | | | | | | | | | | |
| | | reimbursements (4) | | | 5,241,199 | | | | 4,778,359 | | | | 1,924,682 | |
| | | $ | 18,365,697 | | | $ | 15,907,989 | | | $ | 6,630,344 | |
| | |
| (1) Amount capitalized and amortized to partners' equity. | |
| (2) Amount charged directly to partners' equity. | |
| (3) Amount capitalized and amortized to operations over the estimated service period in accordance with our accounting policies. | |
| (4) Amount charged directly to operations. | |
Our General Partner also has a 1% interest in our profits, losses, cash distributions and liquidation proceeds. We paid distributions to our General Partner of $191,790, $97,933 and $9,636 for the years ended December 31, 2011 and 2010 and for the period from the Commencement of Operations through December 31, 2009, respectively. Our General Partner’s interest in our net income (loss) was $13,878, $23,384 and ($15,843) for the year ended December 31, 2011 and 2010 and for the period from the Commencement of Operations through December 31, 2009, respectively.
| | (a) | We do not have any securities authorized for issuance under any equity compensation plan. No person of record owns, or is known by us to own, beneficially more than 5% of any class of our securities. |
| | (b) | As of March 16, 2012, no directors or officers of our General Partner own any of our equity securities. |
| | (c) | Neither we nor our General Partner are aware of any arrangements with respect to our securities, the operation of which may at a subsequent date result in a change of control of us. |
See “Item 11. Executive Compensation” for a discussion of our related party transactions. See Notes 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 General Partner’s directors are independent. Under this definition, the board of directors of our General Partner has determined that our General Partner does not have any independent directors, nor are we required to have any.
During the years ended December 31, 2011 and 2010, our auditors provided audit services relating to our Registration Statement on Form S-1, our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q. The following table presents the fees for both audit and non–audit services rendered by Ernst & Young LLP for the years ended December 31, 2011 and 2010:
| | | 2011 | | | 2010 | |
| Audit Fees | | $ | 415,100 | | | $ | 424,823 | |
| Tax Fees | | | 45,623 | | | | 40,000 | |
| | | $ | 460,723 | | | $ | 464,823 | |
| (a) | 1. Financial Statements |
| | |
| | See index to financial statements included as Item 8 to this Annual Report on Form 10-K hereof. |
| | |
| | 2. Financial Statement Schedules |
| | |
| | Schedules not listed above have been omitted because they are not applicable or the information required to be set forth therein is included in the financial statements or notes thereto. |
| | |
| | 3. Exhibits: |
| | |
| | 3.1 Certificate of Limited Partnership of Registrant (Incorporated by reference to Exhibit 3.1 to Registrant’s Registration Statement on Form S-1 filed with the SEC on October 3, 2008 (File No. 333-153849)). |
| | |
| | 4.1 Limited Partnership Agreement of Registrant (Incorporated by reference to Exhibit A to Registrant’s Prospectus filed with the SEC on May 18, 2009 (File No. 333- 153849)). |
| | |
| | 10.1 Investment Management Agreement, by and between ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P. and ICON Capital Corp., dated as of May 18, 2009 (Incorporated by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009, filed August 13, 2009). |
| | |
| | 10.2 Commercial Loan Agreement, by and between California Bank & Trust and ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON Income Fund Ten, LLC and ICON Leasing Fund Eleven, LLC, dated as of August 31, 2005 (Incorporated by reference to Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009, filed August 13, 2009). |
| | |
| | 10.3 Loan Modification Agreement, by and between California Bank & Trust and ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON Income Fund Ten, LLC and ICON Leasing Fund Eleven, LLC, dated as of December 26, 2006 (Incorporated by reference to Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009, filed August 13, 2009). |
| | |
| | 10.4 Loan Modification Agreement, by and between California Bank & Trust and ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON Income Fund Ten, LLC, ICON Leasing Fund Eleven, LLC and ICON Leasing Fund Twelve, LLC, dated as of June 20, 2007 (Incorporated by reference to Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009, filed August 13, 2009). |
| | |
| | 10.5 Third Loan Modification Agreement, by and between California Bank & Trust and ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON Income Fund Ten, LLC, ICON Leasing Fund Eleven, LLC and ICON Leasing Fund Twelve, LLC, dated as of May 1, 2008 (Incorporated by reference to Exhibit 10.5 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009, filed August 13, 2009). |
| | |
| | 10.6 Fourth Loan Modification Agreement, by and between California Bank & Trust and ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON Income Fund Ten, LLC, ICON Leasing Fund Eleven, LLC, ICON Leasing Fund Twelve, LLC and ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P., dated as of August 12, 2009 (Incorporated by reference to Exhibit 10.6 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009, filed August 13, 2009). |
| | |
| | 10.7 Termination of Commercial Loan Agreement, by and among California Bank & Trust and ICON Income Fund Eight B L.P.; ICON Income Fund Nine, LLC; ICON Income Fund Ten, LLC; ICON Leasing Fund Eleven, LLC; ICON Leasing Fund Twelve, LLC; and ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P., 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). |
| | |
| | 10.8 Commercial Loan Agreement, by and between California Bank & Trust and ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P., dated as of May 10, 2011. (Incorporated by reference to Exhibit 10.8 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011, filed on May 16, 2011). |
| | |
| | 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 Accounting and Financial Officer. |
| | |
| | 32.1 Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| | 32.2 Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| | 32.3 Certification of Principal Accounting and Financial 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.LAB* XBRL Taxonomy Extension Labels Linkbase Document. |
| | |
| | 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document. |
| | |
| (b) | 1. Financial Statements of ICON Atlas, LLC. |
| (c) | 1. Financial Statements of ICON ION, LLC. |
| (d) | 1. Financial Statements of ICON Quattro, LLC. |
| | |
| | * 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. |
ICON Atlas, LLC
(A Delaware Limited Liability Company)
Table of Contents
The Members
ICON Atlas, LLC
We have audited the accompanying balance sheets of ICON Atlas, LLC (the “Company”) as of December 31, 2011 and 2010, and the related statements of operations, changes in members’ (deficit) equity and cash flows for each of the two years in the period ended December 31, 2011. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ICON Atlas, LLC at December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
March 29, 2012
New York, New York
| |
| (A Delaware Limited Liability Company) | |
| Balance Sheets | |
| | |
| Assets | |
| | |
| | | December 31, | |
| | | 2011 | | | 2010 | |
| | |
| | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | $ | 26,545 | | | $ | 210,683 | |
| Current portion of net investment in finance leases | | | 707,772 | | | | - | |
| Due from affiliates | | | 22,592 | | | | 20,307 | |
| | |
| Total current assets | | | 756,909 | | | | 230,990 | |
| | |
| Non-current assets: | | | | | | | | |
| Net investment in finance leases, less current portion | | | 7,205,369 | | | | - | |
| Leased equipment at cost (less accumulated | | | | | | | | |
| depreciation of $1,329,809) | | | - | | | | 10,281,711 | |
| Other non-current assets, net | | | 77,302 | | | | - | |
| | |
| Total non-current assets | | | 7,282,671 | | | | 10,281,711 | |
| | |
| Total Assets | | $ | 8,039,580 | | | $ | 10,512,701 | |
| | |
| Liabilities and Members’ (Deficit) Equity | |
| | |
| Current liabilities: | | | | | | | | |
| Current portion of non-recourse long-term debt | | $ | 1,883,868 | | | $ | - | |
| Deferred revenue | | | - | | | | 1,088,530 | |
| Accrued expenses | | | 34,110 | | | | 29,310 | |
| | |
| Total current liabilities | | | 1,917,978 | | | | 1,117,840 | |
| | |
| Non-current liabilities: | | | | | | | | |
| Non-recourse long-term debt, less current portion | | | 8,076,460 | | | | - | |
| | |
| Total non-current liabilities | | | 8,076,460 | | | | - | |
| | |
| Total Liabilities | | | 9,994,438 | | | | 1,117,840 | |
| | |
| Commitments and contingencies | | | | | | | | |
| | |
| Members’ (Deficit) Equity: | | | | | | | | |
| Total Members’ (Deficit) Equity | | | (1,954,858 | ) | | | 9,394,861 | |
| | |
| Total Liabilities and Members’ (Deficit) Equity | | $ | 8,039,580 | | | $ | 10,512,701 | |
See accompanying notes to financial statements.
| |
| (A Delaware Limited Liability Company) | |
| Statements of Operations | |
| | |
| | |
| | | For the period from June 26, 2009 (Commencement of Operations) through December 31, 2009 | |
| | | Years Ended December 31, | |
| | | 2011 | | | 2010 | |
| | | (unaudited) | |
| | |
| Revenue: | | | | | | | | | |
| Finance income | | $ | 856,579 | | | $ | - | | | $ | - | |
| Rental income | | | 1,321,491 | | | | 2,455,820 | | | | 1,052,362 | |
| | |
| Total revenue | | | 2,178,070 | | | | 2,455,820 | | | | 1,052,362 | |
| | |
| Expenses: | | | | | | | | | | | | |
| General and administrative | | | 32,308 | | | | 2,116 | | | | 908 | |
| Interest | | | 160,255 | | | | - | | | | - | |
| Depreciation and amortization | | | 531,345 | | | | 933,765 | | | | 396,044 | |
| | |
| Total expenses | | | 723,908 | | | | 935,881 | | | | 396,952 | |
| | |
| Net income | | $ | 1,454,162 | | | $ | 1,519,939 | | | $ | 655,410 | |
See accompanying notes to financial statements.
| |
| (A Delaware Limited Liability Company) | |
| Statements of Changes in Members’ Equity (Deficit) | |
| | |
| | |
| | | Members’ Equity (Deficit) | |
| | | | |
| Balance, June 26, 2009 (Commencement of Operations) (unaudited) | | $ | - | |
| | | | | |
| Equity investment from members | | | 11,611,520 | |
| Net income | | | 655,410 | |
| Cash distributions to members | | | (1,967,666 | ) |
| | |
| Balance, December 31, 2009 (unaudited) | | | 10,299,264 | |
| | |
| Net income | | | 1,519,939 | |
| Cash distributions to members | | | (2,424,342 | ) |
| | |
| Balance, December 31, 2010 | | | 9,394,861 | |
| | |
| Net income | | | 1,454,162 | |
| Cash distributions to members | | | (12,803,881 | ) |
| | |
| Balance, December 31, 2011 | | $ | (1,954,858 | ) |
See accompanying notes to financial statements.
| |
| (A Delaware Limited Liability Company) | |
| Statements of Cash Flows | |
| | |
| | |
| | | | For the period from June 26, 2009 (Commencement of Operations) through December 31, 2009 | |
| | |
| | | Years Ended December 31, | |
| | | 2011 | | | 2010 | |
| | | | | | | | | (unaudited) | |
| Cash flows from operating activities: | | | | | | | | | |
| Net income | | $ | 1,454,162 | | | $ | 1,519,939 | | | $ | 655,410 | |
| Adjustments to reconcile net income to net cash | | | | | | | | | | | | |
| provided by operating activities: | | | | | | | | | | | | |
| Depreciation and amortization | | | 531,345 | | | | 933,765 | | | | 396,044 | |
| Interest expense on non-recourse financing paid | | | | | | | | | | | | |
| directly to lenders by lessees | | | 141,146 | | | | - | | | | - | |
| Interest expense from amortization of debt financing costs | | | 19,109 | | | | - | | | | - | |
| Finance income paid directly to lender by lessee | | | (358,832 | ) | | | - | | | | - | |
| Changes in operating assets and liabilities: | | | | | | | | | | | | |
| Deferred revenue | | | (496,882 | ) | | | 173,225 | | | | 915,305 | |
| Accrued expenses | | | 4,800 | | | | (11,603 | ) | | | 40,913 | |
| Due from affilates | | | (2,285 | ) | | | (3,890 | ) | | | (16,417 | ) |
| | | | | | | | | | | | | |
| Net cash provided by operating activities | | | 1,292,563 | | | | 2,611,436 | | | | 1,991,255 | |
| | | | | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | | | |
| Purchase of equipment | | | - | | | | - | | | | (11,611,520 | ) |
| Principal repayment on net investment in finance leases | | | 795,470 | | | | - | | | | - | |
| | | | | | | | | | | | | |
| Net cash provided by (used in) investing activities | | | 795,470 | | | | - | | | | (11,611,520 | ) |
| | | | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | | |
| Payments of loan origination fees | | | (96,409 | ) | | | | | | | | |
| Proceeds from non-recourse long-term debt | | | 10,628,119 | | | | - | | | | - | |
| Equity investment from members | | | - | | | | - | | | | 11,611,520 | |
| Cash distributions to members | | | (12,803,881 | ) | | | (2,424,342 | ) | | | (1,967,666 | ) |
| | | | | | | | | | | | | |
| Net cash (used in) provided by financing activities | | | (2,272,171 | ) | | | (2,424,342 | ) | | | 9,643,854 | |
| | | | | | | | | | | | | |
| Net (decrease) increase in cash | | | (184,138 | ) | | | 187,094 | | | | 23,589 | |
| | | | | | | | | | | | | |
| Cash, beginning of period | | | 210,683 | | | | 23,589 | | | | - | |
| | | | | | | | | | | | | |
| Cash, end of period | | $ | 26,545 | | | $ | 210,683 | | | $ | 23,589 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Supplemental disclosure of non-cash investing and financing activities: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Principal and interest on non-recourse long-term debt | | | | | | | | | | | | |
| paid directly to lender by lessee | | $ | 808,937 | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | |
| Reclassification of deferred revenue to net investment in finance lease | | $ | 777,945 | | | $ | - | | | $ | - | |
| Reclassification of net assets from leased equipment at cost to net | | | | | | | | | | | | |
| investment in finance lease | | $ | 9,781,065 | | | $ | - | | | $ | - | |
See accompanying notes to financial statements.
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2011
(unaudited with respect to the period ended December 31, 2009)
ICON Atlas, LLC (the “LLC”) was formed on June 1, 2009, as a Delaware limited liability company, for the purpose of investing in eight new Ariel natural gas compressors from AG Equipment Co. (“AG”). The LLC was originally formed as a joint venture between two affiliated entities, ICON Leasing Fund Twelve, LLC (“Fund Twelve”) and ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P. (“Fund Fourteen”) (collectively, the “LLC’s Members”). Fund Twelve and Fund Fourteen had ownership interests of 55% and 45%, respectively, in the LLC’s profits, losses and cash distributions. The LLC is engaged in one business segment, the business of purchasing business essential equipment and corporate infrastructure and leasing to businesses.
On April 1, 2010, the LLC’s Members sold to Hardwood Partners, LLC a 9.927% nonvoting, noncontrolling interest in the LLC. As a result, Fund Twelve’s and Fund Fourteen’s economic interest in the LLC was reduced to 49.54% and 40.533%, respectively.
The Manager of the LLC’s Members is ICON Capital Corp., a Delaware corporation (the “Manager”). The Manager manages and controls the business affairs of the LLC, including, but not limited to, the financing transactions that the LLC entered into pursuant to the terms of the respective limited partnership or limited liability company agreement of each of the LLC’s Members.
| (2) | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying financial statements of the LLC have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”). In the opinion of the Manager, all adjustments considered necessary for a fair presentation have been included.
Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and highly liquid investments with original maturity dates of three months or less.
The LLC’s cash is held principally at one financial institution and at times may exceed insured limits. The LLC has placed these funds in a high quality institution in order to minimize risk relating to exceeding insured limits.
Risks and Uncertainties
In the normal course of business, the LLC is exposed to two significant types of economic risk: credit and market. Credit risk is the risk of a lessee, borrower or other counterparty’s inability or unwillingness to make contractually required payments. See Note 7 for a discussion of concentrations of risk.
Market risk reflects the change in the value of debt instruments, derivatives and credit facilities due to changes in interest rate spreads or other market factors. The LLC believes that the carrying value of its investments is reasonable, taking into consideration these risks, along with estimated collateral values, payment history and other relevant information.
Debt Financing Costs
Expenses associated with the incurrence of debt are capitalized and amortized over the term of the debt instrument using the effective interest rate method. These costs are included in other current and other non-current assets.
ICON Atlas, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2011
(unaudited with respect to the period ended December 31, 2009)
| (2) | Summary of Significant Accounting Policies - continued |
Leased Equipment at Cost
Investments in leased equipment are stated at cost less accumulated depreciation. Leased equipment is depreciated on a straight-line basis over the lease term, which typically ranges from 3 to 8 years, to the asset’s residual value.
The Manager has an investment committee that approves each new equipment lease and other financing transaction. As part of its process, the investment committee determines the residual value, if any, to be used once the investment has been approved. The factors considered in determining the residual value include, but are not limited to, the creditworthiness of the potential lessee, the type of equipment considered, how the equipment is integrated into the potential lessee’s business, the length of the lease and the industry in which the potential lessee operates. Residual values are reviewed for impairment in accordance with the LLC’s impairment review policy.
The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the marketplace are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. The residual value is calculated using information from various external sources, such as trade publications, auction data, equipment dealers, wholesalers and industry experts, as well as inspection of the physical asset and other economic indicators.
Asset Impairments
The significant assets in the LLC’s portfolio are periodically reviewed, no less frequently than annually or when indicators of impairment exist, to determine whether events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss will be recognized only if the carrying value of a long-lived asset is not recoverable and exceeds its fair market value. If there is an indication of impairment, the LLC will estimate the future cash flows (undiscounted and without interest charges) expected from the use of the asset and its eventual disposition. Future cash flows are the future cash inflows expected to be generated by an asset less the future outflows expected to be necessary to obtain those inflows. If an impairment is determined to exist, the impairment loss will be measured as the amount by which the carrying value of a long-lived asset exceeds its fair value and recorded in the consolidated statement of operations in the period the determination is made.
Revenue Recognition
The LLC leases equipment to third parties and each such lease is classified as either a finance lease or an operating lease, which is based upon the terms of each lease. For a finance lease, initial direct costs are capitalized and amortized over the term of the related lease. For an operating lease, the initial costs are included as a component of the cost of the equipment and depreciated over the lease term.
For finance leases, the LLC records, at lease inception, the total minimum lease payments receivable from the lessee, the estimated unguaranteed residual value of the equipment at lease termination, the initial direct costs related to the lease and the related unearned income. Unearned income represents the difference between the sum of the minimum lease payments receivable, plus the estimated unguaranteed residual value, minus the cost of the leased equipment. Unearned income is recognized as finance income over the term of the lease using the effective interest rate method.
ICON Atlas, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2011
(unaudited with respect to the period ended December 31, 2009)
| (2) | Summary of Significant Accounting Policies - continued |
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. Deferred revenue is the difference between the timing of the cashed received and the income recognized on a straight-line basis.
Allowance for Doubtful Accounts
When evaluating the adequacy of the allowance for doubtful accounts, the LLC estimates the uncollectibility of receivables by analyzing lessee, borrower and other counterparty concentrations, creditworthiness and current economic trends. The LLC records an allowance for doubtful accounts when the analysis indicates that the probability of full collection is unlikely. Accounts receivable are generally placed in a non-accrual status when payments are more than 90 days past due. Additionally, the LLC periodically reviews the creditworthiness of companies with payments outstanding less than 90 days. Based upon the Manager’s judgment, accounts may be placed in a non-accrual status. Accounts on a non-accrual status are only returned to an accrual status when the account has been brought current and the LLC believes recovery of the remaining unpaid receivable is probable. Revenue on non-accrual accounts is recognized only when cash has been received. No allowance was deemed necessary at December 31, 2011 and 2010.
Initial Direct Costs
The LLC capitalizes initial direct costs, including acquisition fees, associated with the origination and funding of leased assets and other financing transactions. The LLC pays 3% and 2.5% of the purchase price for Fund Twelve and Fund Fourteen’s portion, respectively, of the investment made by or on behalf of the LLC, 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. These costs are amortized over the transaction term using the straight-line method for operating leases and the effective interest rate method for finance leases in the LLC’s statements of operations. Costs related to leases or other financing transactions are expensed as an acquisition expense in the LLC’s consolidated statement of operations.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires the Manager to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates primarily include the determination of allowance for doubtful accounts, amortization and impairment losses. Actual results could differ from those estimates.
ICON Atlas, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2011
(unaudited with respect to the period ended December 31, 2009)
| (3) | Net Investment in Finance Leases |
Net investment in finance lease consisted of the following at December 31, 2011:
| | | 2011 | |
| | | | |
| Minimum rents receivable | | $ | 10,533,513 | |
| Initial direct costs, net | | | 100,759 | |
| Unearned income | | | (2,721,131 | ) |
| | |
| Net investment in finance leases | | | 7,913,141 | |
| | |
| Less: Current portion of net | | | | |
| investment in finance leases | | | 707,772 | |
| | |
| Net investment in finance leases, | | | | |
| less current portion | | $ | 7,205,369 | |
During 2009, the LLC purchased eight new Ariel natural gas compressors from AG for approximately $11,298,000. Simultaneously with the purchase, the LLC entered into leases with Atlas Pipeline Mid-Continent, LLC (“APMC”), an affiliate of Atlas Pipeline Partners, L.P. Each lease schedule is for a period of forty-eight months and expires on August 31, 2013. The LLC paid an acquisition fee to the Manager in the amount of approximately $314,000 in connection with this transaction.
On July 15, 2011, the LLC amended the master lease agreement with APMC requiring APMC to purchase the gas compressors upon lease termination. The LLC received an amendment fee of $500,000 and the leases were reclassified from operating leases to direct finance leases.
Aggregate annual minimum future rentals receivable from the LLC’s non-cancelable finance leases over the next two years consisted of the following at December 31, 2011:
| Years Ending | | | |
| December 31, | | | |
| | |
| 2012 | | $ | 9,724,576 | |
| 2013 | | | 808,937 | |
| | | | | |
| | | $ | 10,533,513 | |
| | | | | |
ICON Atlas, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2011
(unaudited with respect to the period ended December 31, 2009)
| (4) | Leased Equipment at Cost |
Leased equipment at cost consisted of the following at December 31, 2010:
| | | 2010 | |
| Gas compressors | | $ | 11,611,520 | |
| Less: Accumulated depreciation | | | 1,329,809 | |
| | | | | |
| | | $ | 10,281,711 | |
Depreciation expense was $500,646, $933,765 and $396,044 for the years ended December 31, 2011 and 2010 and for the period from June 26, 2009 (commencement of operations) through December 31, 2009, respectively.
| (5) | Non-Recourse Long-Term Debt |
On September 14, 2011, the LLC entered into a loan agreement with Wells Fargo Equipment Finance, Inc. (“Wells Fargo”) in the amount of $10,628,000. Wells Fargo received a first priority security interest in the leased equipment, among other collateral. The loan bears interest at the rate of 4.08% per year and matures on September 1, 2013.
As of December 31, 2011, the LLC had capitalized net debt financing costs of $77,302. For the year ended December 31, 2011, the LLC recognized interest expense from amortization expense of debt financing costs of $19,109.
The aggregate maturities of non-recourse long-term debt over the next two years were as follows at December 31, 2011:
| Years Ending | | | |
| December 31, | | | |
| | | | |
| 2012 | | $ | 1,883,868 | |
| 2013 | | | 8,076,460 | |
| | | | | |
| | | $ | 9,960,328 | |
The carrying value of the LLC's non-recourse debt approximates its fair value at December 31, 2011.
| (6) | Transactions with Related Parties |
In the normal course of operations, the LLC’s Members will pay certain operating and general and administrative expenses on behalf of the LLC in proportion to their membership interests.
The financial condition and results of operations of the LLC, as reported, are not necessarily indicative of the results that would have been reported had the LLC operated completely independently.
For the years ended December 31, 2011 and 2010 and the period from June 26, 2009 (Commencement of operations) through December 31, 2009, the LLC had one lessee that accounted for 100% of total finance and rental income.
As of December 31, 2011 and 2010, the LLC had one lessee that accounted for 98.4% and 97.8% of total assets, respectively.
ICON ION, LLC
(A Delaware Limited Liability Company)
Table of Contents
The Members
ICON ION, LLC
We have audited the accompanying balance sheet of ICON ION, LLC (the “Company”) as of December 31, 2010, and the related statements of operations, changes in members’ equity, and cash flows for the year ended December 31, 2010 and for the period from June 29, 2009 (Commencement of Operations) through December 31, 2009. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ICON ION, LLC at December 31, 2010, and the results of its operations and its cash flows for the year ended December 31, 2010 and for the period from June 29, 2009 (Commencement of Operations) through December 31, 2009, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young, LLP
March 31, 2011
New York, New York
| |
| (A Delaware Limited Liability Company) | |
| Balance Sheet | |
| | |
| Assets | |
| | |
| | | December 31, | |
| | | 2010 | |
| Current assets: | | | |
| Cash | | $ | 14,123 | |
| Interest receivable | | | 285,268 | |
| Current portion of notes receivable | | | 3,542,378 | |
| Other current assets | | | 61,342 | |
| | |
| Total current assets | | | 3,903,111 | |
| | |
| Non-current assets: | | | | |
| Notes receivable, less current portion | | | 12,485,562 | |
| Other non-current assets, net | | | 298,425 | |
| | |
| Total non-current assets | | | 12,783,987 | |
| | |
| Total Assets | | $ | 16,687,098 | |
| | |
| Liabilities and Members’ Equity | |
| | |
| Current liabilities: | | | | |
| Deferred revenue | | $ | 161,311 | |
| Due to affiliates | | | 36,986 | |
| Other current liabilities | | | 172,720 | |
| | |
| Total current liabilities | | | 371,017 | |
| | |
| Total Liabilities | | | 371,017 | |
| | |
| Commitments and contingencies | | | | |
| | |
| Members’ Equity: | | | | |
| Total Members’ Equity | | | 16,316,081 | |
| | |
| Total Liabilities and Members’ Equity | | $ | 16,687,098 | |
See accompanying notes to financial statements.
| |
| (A Delaware Limited Liability Company) | |
| Statements of Operations | |
| | |
| | | Year Ended December 31, 2010 | | | For the period from June 29, 2009 (Commencement of Operations) through December 31, 2009 | |
| | | | | | | |
| Revenue: | | | | | | |
| Interest income - notes receivable | | $ | 2,829,132 | | | $ | 1,542,050 | |
| | |
| Total revenue | | | 2,829,132 | | | | 1,542,050 | |
| Expenses: | | | | | | | | |
| General and administrative | | | 185,040 | | | | - | |
| Amortization | | | 166,092 | | | | 90,483 | |
| | |
| Total expenses | | | 351,132 | | | | 90,483 | |
| | |
| Net income | | $ | 2,478,000 | | | $ | 1,451,567 | |
See accompanying notes to financial statements.
| |
| (A Delaware Limited Liability Company) | |
| Statements of Changes in Members’ Equity | |
| | |
| | |
| | | Members’ Equity | |
| | | | |
| Balance, June 29, 2009 (Commencement of Operations) | | $ | - | |
| | |
| Equity investment from members | | | 20,555,000 | |
| Net income | | | 1,451,567 | |
| Cash distributions to members | | | (2,409,701 | ) |
| | |
| Balance, December 31, 2009 | | | 19,596,866 | |
| | |
| Net income | | | 2,478,000 | |
| Cash distributions to members | | | (5,758,785 | ) |
| | |
| Balance, December 31, 2010 | | $ | 16,316,081 | |
See accompanying notes to financial statements.
| |
| (A Delaware Limited Liability Company) | |
| Statements of Cash Flows | |
| | |
| | |
| | | | | | For the period from June 29, 2009 (Commencement of Operations) through December 31, 2009 | |
| | | | |
| | | Year Ended December 31, 2010 | |
| |
| Cash flows from operating activities: | | | | | | |
| Net income | | $ | 2,478,000 | | | $ | 1,451,567 | |
| Adjustments to reconcile net income to net cash | | | | | | | | |
| provided by operating activities: | | | | | | | | |
| Amortization | | | 166,092 | | | | 90,483 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Interest receivable | | | 18,442 | | | | (303,710 | ) |
| Other current assets | | | (61,342 | ) | | | - | |
| Deferred revenue | | | (89,779 | ) | | | 251,090 | |
| Due to affiliates | | | - | | | | 36,986 | |
| Other current liabilities | | | 172,720 | | | | - | |
| | |
| Net cash provided by operating activities | | | 2,684,133 | | | | 1,526,416 | |
| | |
| Cash flows from investing activities: | | | | | | | | |
| Investment in term loans | | | - | | | | (20,555,000 | ) |
| Proceeds received from repayment of term loans | | | 3,051,789 | | | | 920,271 | |
| | |
| Net cash provided by (used in) investing activities | | | 3,051,789 | | | | (19,634,729 | ) |
| | |
| Cash flows from financing activities: | | | | | | | | |
| Equity investment from members | | | - | | | | 20,555,000 | |
| Cash distributions to members | | | (5,758,785 | ) | | | (2,409,701 | ) |
| | |
| Net cash (used in) provided by financing activities | | | (5,758,785 | ) | | | 18,145,299 | |
| | |
| Net (decrease) increase in cash | | | (22,863 | ) | | | 36,986 | |
| | |
| Cash, beginning of period | | | 36,986 | | | | - | |
| | |
| Cash, end of period | | $ | 14,123 | | | $ | 36,986 | |
See accompanying notes to financial statements.
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2010
ICON ION, LLC (the “LLC”) was formed on June 29, 2009, as a Delaware limited liability company, for the purpose of making secured term loans (the “ION Loans”) in the aggregate amount of $20,000,000 to ARAM Rentals Corporation, a Canadian bankruptcy remote Nova Scotia unlimited liability company (“ARC”) and ARAM Seismic Rentals Inc., a U.S. bankruptcy remote Texas corporation (“ASR,” together with ARC, collectively referred to as the “ARAM Borrowers”). The LLC is a joint venture between two affiliated entities, ICON Leasing Fund Twelve, LLC (“Fund Twelve”) and ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P. (“Fund Fourteen”) (collectively, the “LLC’s Members”). Fund Twelve and Fund Fourteen have a 55% and 45% ownership interest, respectively, in the LLC’s profits, losses and cash distributions. The LLC is engaged in one business segment, the business of making secured term loans.
On April 1, 2010, the LLC’s Members sold to Hardwood Partners, LLC a 5.297% noncontrolling interest in ICON ION. As a result, Fund Twelve’s and Fund Fourteen’s interest in ICON ION was reduced to 52.087% and 42.616%, respectively.
The Manager of the LLC’s Members is ICON Capital Corp., a Delaware corporation (the “Manager”). The Manager manages and controls the business affairs of the LLC, including, but not limited to, the financing transactions that the LLC entered into pursuant to the terms of the respective limited partnership or limited liability company agreement of each of the LLC’s Members.
| (2) | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying financial statements of the LLC have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”). In the opinion of the Manager, all adjustments considered necessary for a fair presentation have been included.
Cash
The LLC’s cash is held principally at one financial institution and at times may exceed insured limits. The LLC has placed these funds in a high quality institution in order to minimize risk relating to exceeding insured limits.
Risks and Uncertainties
In the normal course of business, the LLC is exposed to two significant types of economic risk: credit and market. Credit risk is the risk of a borrower or other counterparty’s inability or unwillingness to make contractually required payments. See Note 7 for a discussion of concentrations of risk.
Market risk reflects the risk that material events will change the borrower’s business and its ability to pay. The LLC believes that the carrying value of its notes receivable are reasonable, taking into consideration these risks, along with estimated collateral values, payment history and other relevant information.
Revenue Recognition
The LLC uses the effective interest rate method to recognize interest income, which produces a constant periodic rate of return on the notes receivable, when earned.
ICON ION, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2010
| (2) | Summary of Significant Accounting Policies – continued |
Notes receivable are reported at the outstanding principal balance net of any unamortized deferred fees. Costs on originated loans are reported as other non-current assets on the LLC’s balance sheets. Unearned income is amortized to interest income using the effective interest rate method. Interest receivable resulting from the unpaid principal is recorded separately from the outstanding balance on the LLC’s balance sheet.
Allowance for Credit Losses
When evaluating the adequacy of the allowance for credit losses, the LLC estimates the collectibility of its notes receivable by analyzing the borrowers’ creditworthiness, current economic trends and the value of the collateral. The LLC records an allowance for doubtful accounts when the analysis indicates that the probability of full collection is unlikely. No allowance was deemed necessary at December 31, 2010.
Initial Direct Costs
The LLC capitalizes initial direct costs associated with the origination and funding of financing transactions. These costs are amortized using the effective interest rate method and included in amortization expense on the accompanying statements of operations.
Income Taxes
The LLC is taxed as a partnership for federal and State income tax purposes. No provision for income taxes has been recorded since the liability for such taxes is that of each of the LLC’s Members rather than the LLC. The LLC's income tax returns are subject to examination by the federal and State taxing authorities, and changes, if any, could adjust the individual income tax of the LLC’s Members.
The LLC accounts for uncertainties in income taxes in accordance with Accounting Standards Codification 740-10 Accounting from Income Taxes.
Reclassifications
Certain reclassifications have been made to the accompanying financial statements in prior years to conform to the current presentation.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires the Manager to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates primarily include the determination of allowance for credit losses, amortization and impairment losses. Actual results could differ from those estimates.
ICON ION, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2010
| (2) | Summary of Significant Accounting Policies – continued |
Recently Adopted Accounting Pronouncements
In 2010, the LLC adopted the accounting pronouncement related to the disclosures about the credit quality of financing receivables and the allowance for credit losses. The pronouncement requires entities to provide disclosures designed to facilitate financial statements users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowances for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses and class of financing receivable. The required disclosures include, among other things, a rollforward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators. The pronouncement is effective for the LLC’s financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period will be required for the LLC’s financial statements that include periods beginning on or after January 1, 2011. The adoption of these additional disclosures did not have a material effect on the LLC’s financial statements as of December 31, 2010.
In 2010, the LLC adopted the accounting pronouncement that amends the requirements for disclosures about the fair value of financial instruments, including the fair value of financial instruments for annual, as well as interim, reporting periods. This standard requires additional disclosures related to recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements, and information on purchases, sales, issuances, and settlements in a rollforward reconciliation of Level 3 fair-value measurements. Except for the Level 3 reconciliation disclosures, which will be effective for fiscal years beginning after December 15, 2010, the guidance became effective for the LLC beginning January 1, 2010. The adoption of this accounting pronouncement did not have a material effect on the LLC’s financial statements as of December 31, 2010.
On June 29, 2009, the LLC funded the first tranche of the ION Loans in the amounts of $8,825,000 and $3,675,000 to ARC and ASR, respectively. On July 20, 2009, the LLC funded the second tranche of the ION Loans to ARC in the amount of $7,500,000.
The ARAM Borrowers are wholly-owned subsidiaries of ION Geophysical Corporation, a Delaware corporation (“ION”). The ION Loans are secured by (i) a first priority security interest in all of the ARAM analog seismic system equipment owned by the ARAM Borrowers and (ii) a pledge of all of the equity interests in the ARAM Borrowers. In addition, ION guaranteed all obligations of the ARAM Borrowers under the ION Loans. Interest accrues at the rate of 15% per year and the ION Loans are payable monthly in arrears for a period of 60 months beginning on August 1, 2009.
Credit Quality of Note Receivable and Allowance for Credit Losses
The Manager weighs all credit decisions on a combination of external credit ratings as well as internal credit evaluations of all potential borrowers. A potential borrower’s credit application is analyzed using those credit ratings as well as the potential borrower’s financial statements and other financial data deemed relevant.
ICON ION, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2010
| (3) | Notes Receivable - continued |
The LLC’s notes receivable are limited to a single industry. The LLC estimates the allowance for credit losses based on a detailed analysis of each note. Each note is analyzed quarterly and categorized as either performing or nonperforming based on payment history. If the note becomes non-performing due to the borrower’s missed scheduled payments or failed financial covenants, the Manager analyzes if a reserve should be established or if the note should be restructured. Such events are specifically disclosed in the discussion of each note held. As of December 31, 2010, the Manager determined that no allowance for credit losses was required.
| (4) | Transactions with Related Parties |
In the normal course of operations, the LLC’s Members will pay certain operating and general and administrative expenses on behalf of the LLC in proportion to their membership interests.
The financial condition and results of operations of the LLC, as reported, are not necessarily indicative of the results that would have been reported had the LLC operated completely independently.
The LLC is treated as a partnership for federal and state tax purposes. Therefore, no provision has been recorded for federal or state income taxes as such taxes are the liability of the partners. The LLC may, however, be subject to certain local income taxes, including a New York City unincorporated business tax. In connection with its valuation of its tax position, the LLC has recorded approximately $167,000 of tax liability as of December 31, 2010. The LLC’s policy is to record tax related interest and penalties in general and administrative expense.
| (6) | Fair Value Measurements |
The LLC is required, on a nonrecurring basis, to adjust the carrying value or provide valuation allowances for certain assets and liabilities using fair value measurements. The estimated fair value of the LLC’s notes receivable was based on the discounted value of future cash flows expected to be received from the loans based on terms consistent with the range of the LLC’s internal pricing strategies for transactions of this type.
| | | December 31, 2010 | |
| | | Carrying Amount | | | Fair Value | |
| Fixed rate notes receivable | | $ | 16,027,940 | | | $ | 16,263,679 | |
| (7) | Concentrations of Risk |
For the year ended December 31, 2010 and period from June 29, 2009 (Commencement of Operations) through December 31, 2009, the LLC had two affiliated borrowers that accounted for 100% of interest income.
As of December 31, 2010, the LLC had two affiliated borrowers that accounted for 100% of the notes receivable balance.
ICON Quattro, LLC
(A Delaware Limited Liability Company)
Table of Contents
| | Page |
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| 105 |
| 106 |
The Members
ICON Quattro, LLC
We have audited the accompanying balance sheet of ICON Quattro, LLC (the “Company”) as of December 31, 2010, and the related statements of operations, changes in members’ equity, and cash flows for the year ended December 31, 2010. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ICON Quattro, LLC at December 31, 2010, and the results of its operations and its cash flows for the year ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young, LLP
March 31, 2011
New York, New York
| |
| (A Delaware Limited Liability Company) | |
| Balance Sheet | |
| | |
| Assets | |
| | |
| | | December 31, | |
| | | 2010 | |
| | | | |
| | | | |
| Current assets: | | | |
| Interest receivable | | $ | 130,324 | |
| Current portion of note receivable | | | 3,237,110 | |
| | |
| Total current assets | | | 3,367,434 | |
| | |
| Non-current assets: | | | | |
| Note receivable, less current portion | | | 4,582,358 | |
| Other non-current assets, net | | | 790,523 | |
| | |
| Total non-current assets | | | 5,372,881 | |
| | |
| Total Assets | | $ | 8,740,315 | |
| | |
| Liabilities and Members’ Equity | |
| | |
| Current liabilities: | | | | |
| Deferred revenue | | $ | 79,353 | |
| Other current liabilities | | | - | |
| | |
| Total current liabilities | | | 79,353 | |
| | |
| Total Liabilities | | | 79,353 | |
| | |
| Commitments and contingencies | | | | |
| | |
| Members’ Equity: | | | | |
| Total Members’ Equity | | | 8,660,962 | |
| | |
| Total Liabilities and Members’ Equity | | $ | 8,740,315 | |
See accompanying notes to financial statements.
| |
| (A Delaware Limited Liability Company) | |
| Statements of Operations | |
| | |
| | | Year Ended December 31, 2011 | | | For the period from December 23, 2009 (Commencement of Operations) through December 31, 2009 | |
| | | | | | (unaudited) | |
| | | | | | | |
| Revenue: | | | | | | |
| Interest income - note receivable | | $ | 2,248,161 | | | $ | 58,819 | |
| Loss on foreign exchange | | | (299,057 | ) | | | (173,963 | ) |
| | |
| Total revenue | | | 1,949,104 | | | | (115,144 | ) |
| | |
| Expenses: | | | | | | | | |
| Amortization | | | 416,249 | | | | 10,481 | |
| | |
| Total expenses | | | 416,249 | | | | 10,481 | |
| | |
| Net income (loss) | | $ | 1,532,855 | | | $ | (125,625 | ) |
See accompanying notes to financial statements.
| |
| (A Delaware Limited Liability Company) | |
| Statements of Changes in Members’ Equity | |
| | |
| | |
| | | Members’ Equity | |
| | | | |
| Balance, December 23, 2009 (Commencement of Operations) (unaudited) | | $ | - | |
| | |
| Equity investment from members | | | 9,793,515 | |
| Net loss | | | (125,625 | ) |
| Cash distributions to members | | | (163,871 | ) |
| | |
| Balance, December 31, 2009 (unaudited) | | | 9,504,019 | |
| | |
| Equity investment from members | | | 475,852 | |
| Net income | | | 1,532,855 | |
| Cash distributions to members | | | (2,851,764 | ) |
| | |
| Balance, December 31, 2010 | | $ | 8,660,962 | |
See accompanying notes to financial statements.
| |
| (A Delaware Limited Liability Company) | |
| Statements of Cash Flows | |
| | |
| | | Year Ended December 31, 2010 | | | For the period from December 23, 2009 (Commencement of Operations) through December 31, 2009 | |
| | | | | | (unaudited) | |
| | | | | | | |
| Cash flows from operating activities: | | | | | | |
| Net income (loss) | | $ | 1,532,855 | | | $ | (125,625 | ) |
| Adjustments to reconcile net income (loss) to net cash | | | | | | | | |
| provided by (used in) operating activities: | | | | | | | | |
| Amortization | | | 416,249 | | | | 10,481 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Interest receivable | | | (84,138 | ) | | | (46,186 | ) |
| Other non-current assets | | | (399,847 | ) | | | (817,406 | ) |
| Deferred revenue | | | (82,389 | ) | | | 161,742 | |
| Other current liabilities | | | (480,690 | ) | | | 480,690 | |
| | |
| Net cash provided by (used in) operating activities | | | 902,040 | | | | (336,304 | ) |
| | |
| Cash flows from investing activities: | | | | | | | | |
| Investment in term loan | | | - | | | | (9,293,340 | ) |
| Proceeds received from repayment of term loan | | | 1,473,872 | | | | - | |
| | |
| Net cash provided by (used in) investing activities | | | 1,473,872 | | | | (9,293,340 | ) |
| | |
| Cash flows from financing activities: | | | | | | | | |
| Equity investment from members | | | 475,852 | | | | 9,793,515 | |
| Cash distributions to members | | | (2,851,764 | ) | | | (163,871 | ) |
| | |
| Net cash (used in) provided by financing activities | | | (2,375,912 | ) | | | 9,629,644 | |
| | |
| Net increase in cash | | | - | | | | - | |
| | |
| Cash, beginning of period | | | - | | | | - | |
| | |
| Cash, end of period | | $ | - | | | $ | - | |
See accompanying notes to financial statements.
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2010
(unaudited with respect to the period ended December 31, 2009)
ICON Quattro, LLC (the “LLC”) was formed on November 12, 2009, as a Delaware limited liability company, for the purpose of making a secured term loan (the “Quattro Loan”) in the aggregate amount of £5,800,000 to Quattro Plant Limited, a wholly-owned subsidiary of Quattro Group Limited (“Quattro Plant”). The LLC is a joint venture between two affiliated entities, ICON Leasing Fund Twelve, LLC (“Fund Twelve”) and ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P. (“Fund Fourteen”) (collectively, the LLC’s Members”). Fund Twelve and Fund Fourteen had ownership interests of 55% and 45%, respectively, in the LLC’s profits, losses and cash distributions. The LLC is engaged in one business segment, the business of making secured term loans.
On April 1, 2010, the LLC’s members sold to Hardwood Partners, LLC a 10.678% nonvoting, noncontrolling interest in the LLC. As a result, Fund Twelve’s and Fund Fourteen’s economic interest in the LLC was reduced to 49.127% and 40.195%, respectively.
The Manager of the LLC’s Members is ICON Capital Corp., a Delaware corporation (the “Manager”). The Manager manages and controls the business affairs of the LLC, including, but not limited to, the financing transactions that the LLC entered into pursuant to the terms of the respective limited partnership or limited liability company agreement of each of the LLC’s Members.
| (2) | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying financial statements of the LLC have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”). In the opinion of the Manager, all adjustments considered necessary for a fair presentation have been included.
Cash
The LLC’s cash is held principally at one financial institution and at times may exceed insured limits. The LLC has placed these funds in a high quality institution in order to minimize risk relating to exceeding insured limits.
Risks and Uncertainties
In the normal course of business, the LLC is exposed to two significant types of economic risk: credit and market. Credit risk is the risk of a borrower or other counterparty’s inability or unwillingness to make contractually required payments. See Note 6 for a discussion of concentrations of risk.
Market risk reflects the risk that material events will change the borrower’s business, its ability to pay and the underlying collateral value. The LLC believes that the carrying value of its note receivable is reasonable, taking into consideration these risks, along with estimated collateral values, payment history and other relevant information.
Revenue Recognition
The LLC uses the effective interest rate method to recognize interest income, which produces a constant periodic rate of return on the note receivable, when earned.
ICON Quattro, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2010
(unaudited with respect to the period ended December 31, 2009)
| (2) | Summary of Significant Accounting Policies - continued |
Notes Receivable
Notes receivable are reported at the outstanding principal balance net of any unamortized deferred fees. Costs on originated loans are reported as other non-current assets on the LLC’s balance sheets. Unearned income is amortized to interest income using the effective interest rate method. Interest receivable resulting from the unpaid principal is recorded separately from the outstanding balance on the LLC’s balance sheets.
Allowance for Credit Losses
When evaluating the adequacy of the allowance for credit losses, the LLC estimates the collectability of its notes receivable by analyzing the borrowers’ creditworthiness, current economic trends and the value of the collateral. The LLC records an allowance for doubtful accounts when the analysis indicates that the probability of full collection is unlikely. No allowance was deemed necessary at December 31, 2010.
Initial Direct Costs
The LLC capitalizes initial direct costs associated with the origination and funding of financing transactions. These costs are amortized using the effective interest rate method and included in amortization expense on the accompanying statements of operations.
Foreign Currency
Assets and liabilities denominated in non-U.S. dollar currencies are remeasured at the balance sheet date exchange rates. Revenues, expenses and cash flow items are remeasured at the weighted average exchange rate for the reporting period. Resulting adjustments are recorded as a gain or loss on foreign exchange on the accompanying statements of operations.
Income Taxes
The LLC is taxed as a partnership for federal and State income tax purposes. No provision for income taxes has been recorded since the liability for such taxes is that of each of the LLC’s Members rather than the LLC. The LLC's income tax returns are subject to examination by the federal and State taxing authorities, and changes, if any, could adjust the individual income tax of the LLC’s Members.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires the Manager to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates primarily include the determination of allowance for credit losses, amortization and impairment losses. Actual results could differ from those estimates.
ICON Quattro, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2010
(unaudited with respect to the period ended December 31, 2009)
| (2) | Summary of Significant Accounting Policies - continued |
Recently Adopted Accounting Pronouncements
In 2010, the LLC adopted the accounting pronouncement related to the disclosures about the credit quality of financing receivables and the allowance for credit losses. The pronouncement requires entities to provide disclosures designed to facilitate financial statements users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowances for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses and class of financing receivable. The required disclosures include, among other things, a rollforward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators. The pronouncement is effective for the LLC’s financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period will be required for the LLC’s financial statements that include periods beginning on or after January 1, 2011. The adoption of these additional disclosures did not have a material effect on the LLC’s financial statements as of December 31, 2010.
In 2010, the LLC adopted the accounting pronouncement that amends the requirements for disclosures about the fair value of financial instruments, including the fair value of financial instruments for annual, as well as interim, reporting periods. This standard requires additional disclosures related to recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements, and information on purchases, sales, issuances, and settlements in a rollforward reconciliation of Level 3 fair-value measurements. Except for the Level 3 reconciliation disclosures, which will be effective for fiscal years beginning after December 15, 2010, the guidance became effective for the LLC beginning January 1, 2010. The adoption of this accounting pronouncement did not have a material effect on the LLC’s financial statements as of December 31, 2010.
On December 23, 2009, the LLC participated in a £24,800,000 loan facility by making a second priority secured term loan to Quattro Plant in the amount of £5,800,000. The loan is secured by (i) all of Quattro Plant’s rail support construction equipment, which consists of railcars, attachments to railcars, bulldozers, excavators, tractors, lowboy trailers, street sweepers, service trucks, forklifts and any other existing or future asset owned by Quattro Plant, (ii) all of Quattro Plant’s accounts receivable, and (iii) a mortgage on certain real estate in London, England owned by the majority shareholder of Quattro Plant. In addition, ICON Quattro received a key man insurance policy insuring the life of the majority shareholder of Quattro Plant in the amount of £5,500,000. All of Quattro Plant’s obligations under the loan are guaranteed by Quattro Group and its subsidiaries, Quattro Hire Limited and Quattro Occupational Academy Limited.
Interest on the Quattro Loan accrues at a rate of 20% per year and is payable monthly in arrears for a period of 33 months, which began on January 1, 2010.
In connection with the Quattro Loan, the LLC will receive a success fee of £500,000 at the maturity of the loan. This fee is recognized as additional interest income using the effective interest method over the term of the loan. The aggregate amount of the success fee earned of approximately $400,000 is included in other non-current assets as of December 31, 2010, of which approximately $389,000 has been earned during 2010.
ICON Quattro, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2010
(unaudited with respect to the period ended December 31, 2009)
| (3) | Note Receivable – continued |
On September 20, 2010, the LLC was notified by Quattro Plant’s senior lender that Quattro Plant was in default under its senior loan agreement. As a result of the default and in accordance with the intercreditor deed governing the relationship between the LLC and the senior lender, Quattro Plant’s principal payment obligations to the LLC were suspended. During the suspension period, the LLC received interest only payments from Quattro Plant. Subsequent to September 30, 2010, Quattro Plant cured the default under its senior loan agreement and was permitted to resume payments of principal to the LLC beginning November 1, 2010. As of December 31, 2010, Quattro Plant had made all required payments due under the loan agreement.
On February 25, 2011, the LLC was notified that Quattro Plant was in default under its senior loan agreement. As a result of the default, Quattro Plant’s principal payment obligations to the LLC were suspended for a period of 28 days. On March 7, 2011, the LLC notified Quattro Plant that it was in default under its loan agreement relating to, among other things, its default under the senior loan agreement. The Manager expects the LLC to receive all past due principal amounts due under the loan agreement plus default interest.
Credit Quality of Note Receivable and Allowance for Credit Losses
The Manager weighs all credit decisions on a combination of external credit ratings as well as internal credit evaluations of all potential borrowers. A potential borrower’s credit application is analyzed using those credit ratings as well as the potential borrower’s financial statements and other financial data deemed relevant.
The LLC’s note receivable is limited to a single entity. The LLC estimates the allowance for credit losses based on a detailed analysis of the note. The note is analyzed quarterly and categorized as either performing or nonperforming based on payment history. If the note becomes non-performing due to the borrower’s missed scheduled payments or failed financial covenants, the Manager analyzes if a reserve should be established or if the note should be restructured. Such events are specifically disclosed in the discussion of the note. As of December 31, 2010, the Manager determined that no allowance for credit losses was required.
| (4) | Transactions with Related Parties |
In the normal course of operations, the LLC’s Members will pay certain operating and general and administrative expenses on behalf of the LLC in proportion to their membership interests.
The financial condition and results of operations of the LLC, as reported, are not necessarily indicative of the results that would have been reported had the LLC operated completely independently.
| (5) | Fair Value Measurements |
The LLC is required, on a nonrecurring basis, to adjust the carrying value or provide valuation allowances for certain assets and liabilities using fair value measurements. The estimated fair value of the LLC’s notes receivable was based on the discounted value of future cash flows expected to be received from the loans based on terms consistent with the range of the LLC’s internal pricing strategies for transactions of this type.
| | | December 31, 2010 | |
| | | Carrying Amount | | | Fair Value | |
| Fixed rate notes receivable | | $ | 7,819,468 | | | $ | 8,358,193 | |
| (6) | Concentrations of Risk |
For the year ended December 31, 2010, and for the period from December 23, 2009 (Commencement of Operations) through December 31, 2009, the LLC had one borrower that accounted for 100% of interest income.
As of December 31, 2010, the LLC had one borrower that accounted 100% of the notes receivable balance.
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 Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(Registrant)
By: ICON GP 14, LLC
(General Partner of the Registrant)
March 29, 2012
By: /s/ Michael A. Reisner |
| Michael A. Reisner |
Co-Chief Executive Officer and Co-President (Co-Principal Executive Officer) |
By: /s/ Mark Gatto |
| Mark Gatto |
Co-Chief Executive Officer and Co-President (Co-Principal Executive Officer) |
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 Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(Registrant)
By: ICON GP 14, LLC
(General Partner of the Registrant)
March 29, 2012
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/ Keith S. Franz |
| Keith S. Franz |
Managing Director (Principal Accounting and Financial Officer) |
