The following is a discussion of our current financial position and results of operations. This discussion should be read together with our unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended
December 31, 2013. This discussion should also be read in conjunction with the disclosures below regarding "Forward-Looking Statements."
As used in this Quarterly Report on Form 10-Q, references to "we," "us," "our" or similar terms include
Forward-Looking Statements Certain statements within this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). These statements are being made pursuant to the PSLRA, with the intention of obtaining the benefits of the "safe harbor" provisions of the PSLRA, and, other than as required by law, we assume no obligation to update or supplement such statements. Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. You can identify these statements by the use of words such as "may," "would," "could," "anticipate," "believe," "estimate," "expect," "continue," "further," "plan," "seek," "intend," "predict" or "project" and variations of these words or comparable words or phrases of similar meaning. These forward-looking statements reflect our current beliefs and expectations with respect to future events. They are based on assumptions and are subject to risks and uncertainties and other factors outside of 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.
We operated as an equipment leasing and finance program in which the capital our members invested was pooled together to make investments, pay fees and establish a small reserve. We primarily acquired equipment subject to lease, purchased equipment and leased it to third parties, provided equipment and other financing and, to a lesser degree, acquired ownership rights to items of leased equipment at lease expiration. Some of our equipment leases were acquired for cash and were expected to provide current cash flow, which we refer to as "income" leases. For our other equipment leases, we financed the majority of the purchase price through borrowings from third parties. We refer to these leases as "growth" leases. These growth leases generated little or no current cash flow because substantially all of the rental payments received from the lessee were used to service the indebtedness associated with acquiring or financing the lease. For these leases, we anticipated that the future value of the leased equipment would exceed our cash portion of the purchase price. Our Manager manages and controls our business affairs, including, but not limited to, our equipment leases and other financing transactions, under the terms of our LLC Agreement. Our operating period ended on
April 30, 2014after having been extended for two years. On May 1, 2014, we commenced our liquidation period, which we expect to continue for approximately one year. During our liquidation period, we will sell our assets and/or let our investments mature in the ordinary course of business.
Recent Significant Transactions
We did not engage in any significant transactions since
Recent Accounting Pronouncements
We do not believe any recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on our consolidated financial statements.
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Results of Operations for the Three Months Ended
The following tables set forth the types of assets securing the financing transactions in our portfolio:
March 31, 2014 December 31, 2013 Percentage Percentage of Total Net of Total Net Net Carrying Carrying Net Carrying Carrying Asset Type Value Value Value Value
Seismic imaging equipment
$ 5,414,15539% $ 5,386,06435% Marine - container vessels(1) 5,350,503 38% 6,740,685 44% Telecommunications equipment 3,148,141 23% 3,223,480 21% $ 13,912,799100% $ 15,350,229100%
(1) Subsequent to the sale of the Marine-container vessels in 2011, the remaining note receivable
is unsecured. In addition, the note receivable was placed on non-accrual status during the 2014
The net carrying value of our financing transactions includes the balances of our net investment in notes receivable and net investment in finance leases, which are included in our consolidated balance sheets.
During the 2014 Quarter and the 2013 Quarter, certain customers generated significant portions (defined as 10% or more) of our total finance income as follows:
Percentage of Total Finance Income Customer Asset Type 2014 Quarter 2013 Quarter SAExploration, Inc. Seismic imaging equipment 41% 14% ZIM Integrated Shipping Services Ltd. Marine - container vessels 34% 34% NTS Communications, Inc. Telecommunications equipment 23% - Heuliez S.A. Auto parts manufacturing
equipment 2% 11% Teal Jones Lumber processing equipment - 41% 100% 100% Finance income from our net investment in notes receivable, net investment in finance leases and net investment in mortgage note receivable are included in finance income in our consolidated statements of comprehensive income. The foregoing percentages are only as of a stated period and are not expected to be comparable in future periods. Further, these percentages are only representative of the percentage of the carrying value of such assets or finance income as of each stated period, and as such are not indicative of the concentration of any asset type or customer by the amount of equity invested or our investment portfolio as a whole.
Operating Lease Transactions
The following tables set forth the types of equipment subject to operating leases in our portfolio: March 31, 2014 December 31, 2013 Percentage Percentage of Total Net of Total Net Net Carrying Carrying Net Carrying Carrying Asset Type Value Value Value Value Mining equipment
$ 13,640,108100% $ 15,325,821100% The net carrying value of our operating lease transactions includes the balance of our leased equipment at cost, which is included in our consolidated balance sheets. 12
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During the 2014 Quarter and the 2013 Quarter, certain customers generated significant portions (defined as 10% or more) of our total rental income as follows:
Percentage of Total Rental Income
Customer Asset Type
2014 Quarter 2013 Quarter
Murray Energy Corporation Mining equipment 100% - Pliant Corporation Plastic processing and printing equipment - 100% 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 each stated period, and as such are not indicative of the concentration of any asset type or customer by the amount of equity invested or our investment portfolio as a whole. Revenue and other income for the 2014 Quarter and the 2013 Quarter is summarized as follows: Three Months Ended March 31, 2014 2013 Change Finance income
$ 473,370 $ 1,379,738 $ (906,368)Rental income 2,076,735 743,231 1,333,504
Income (loss) from investment in joint ventures 411,641 (412) 412,053
Total revenue and other income
$ 839,189Total revenue and other income for the 2014 Quarter increased $839,189, or 39.5%, as compared to the 2013 Quarter. The increase in rental income was primarily due to entering into two new operating leases subsequent to the 2013 Quarter. The increase in income from investment in joint ventures was primarily due to our investment in a new joint venture subsequent to the 2013 Quarter. The decrease in finance income was a result of (i) Teal Jones satisfying its obligations during the 2013 Quarter in connection with the mortgage note receivable and lease financing arrangement, (ii) the expiration of our lease with Heuiliz SAand Heuliez Investissements SNC (collectively, "Heuliez") in 2013, and (iii) the note receivable with ZIM being placed on non-accrual status during the 2014 Quarter. Expenses for the 2014 Quarter and the 2013 Quarter are summarized as follows: Three Months Ended March 31, 2014 2013 Change General and administrative $ 668,927 $ 434,772 $ 234,155Depreciation 1,685,713 398,272 1,287,441 Interest 8,507 169,945 (161,438) Gain on derivative financial instruments (4,070)
Loss on disposition of assets of foreign investment - 610,732 (610,732) Total expenses
$ 2,359,077 $ 1,583,795 $ 775,282Total expenses for the 2014 Quarter increased $775,282, or 49.0%, as compared to the 2013 Quarter. The increase in total expenses was primarily due to depreciation that was recognized on our purchased assets related to our two new operating leases entered into subsequent to the 2013 Quarter and an increase in legal expenses related to our arbitration proceedings with ZIM. This increase was partially offset by the decrease in loss on disposition of assets of foreign investment in connection with the prepayment by Teal Jones, which occurred during the 2013 Quarter. Income Tax Benefit Certain of our direct and indirect wholly-owned subsidiaries are unlimited liability companies and are taxed as corporations under the laws of Canada. Other indirect wholly-owned subsidiaries are taxed as corporations in Barbados. There was no income tax expense or benefit for the 2014 Quarter as a result of our foreign subsidiaries ceasing operations. For the 2013 Quarter, the income tax expense was comprised of $1,546,947in current taxes and a benefit of $1,656,563in deferred taxes. 13 --------------------------------------------------------------------------------
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Other Comprehensive Income (Loss)
Other comprehensive loss for the 2014 Quarter was
$1,831, as compared to other comprehensive income of $473,596for the 2013 Quarter. This change was primarily due to the release of the accumulation of currency translation adjustments in connection with the Teal Jones prepayment on the mortgage note receivable and lease financing arrangement during the 2013 Quarter.
Net Income Attributable to Fund Eleven
As a result of the foregoing factors, net income attributable to us for the 2014 Quarter and the 2013 Quarter was
$505,577and $503,981, respectively. Net income attributable to us per weighted average additional share of limited liability company interests ("Share") outstanding was $1.38for both the 2014 Quarter and the 2013 Quarter. Financial Condition
This section discusses the major balance sheet variances at
Total assets increased
Current assets increased
$1,739,689, from $27,081,030at December 31, 2013to $28,820,719at March 31, 2014. The increase was primarily due to cash receipts from finance and rental income, which was partially offset by distributions to noncontrolling interests during the 2014 Quarter.
$27,989, from $57,124,159at December 31, 2013to $57,096,170at March 31, 2014. The decrease was primarily due to distributions to noncontrolling interests, which was partially offset by our net income for the 2014 Quarter.
Liquidity and Capital Resources
March 31, 2014and December 31, 2013, we had cash and cash equivalents of $19,627,002and $16,626,672, respectively. During the three months ended March 31, 2014, our main sources of cash were from collections on operating leases and principal received on our notes receivable. Our main use of cash was distributions to our noncontrolling interests. During our liquidation period, which commenced on May 1, 2014, our main sources of cash will be from the collection of income and proceeds from the sale of assets held directly by us or indirectly by our joint ventures and our main use of cash will be for distributions to our members. Our liquidity will vary in the future, increasing to the extent cash flows from investments and proceeds from the sale of our investments exceed expenses and decreasing as we pay distributions and to the extent that expenses exceed cash flows from operations and the proceeds from the sale of our investments. We anticipate being able to meet our liquidity requirements into the foreseeable future through our expected results of our operations, as well as cash received from our investments at maturity. However, our ability to generate cash in the future is subject to general economic, financial, competitive, regulatory and other factors that affect us and our lessees' and borrowers' businesses that are beyond our control.
Pursuant to the terms of our offering, we established a cash reserve in the amount of 0.5% of the gross offering proceeds. As of
As we previously indicated to our members, we have experienced liquidity pressures in our portfolio as a result of the recent unprecedented economic environment, coupled with our prior investment strategy that, among other things, relied significantly on third parties to originate investments, used a substantial amount of long-term debt to make investments, and was highly dependent on the residual value of equipment to achieve investment returns.
a result, we reduced our distribution rate from 9.1% per year to 4.0% per year effective
January 1, 2011through April 2012. We extended our operating period two years and have not made any distributions during this extended operating period. We commenced our liquidation period on May 1, 2014, which we expect to continue for approximately one year. While we believe that these actions taken by our Manager have improved our financial position, we will be unable to meet our investment objectives. 14
Table of contents Cash Flows Operating Activities Cash provided by operating activities decreased
$78,137, from $2,221,007in the 2013 Quarter to $2,142,870in the 2014 Quarter. The decrease was primarily a result of (i) reduced collections on finance leases due to the sale of assets previously on lease to Teal Jones, (ii) the termination of the finance lease with Heuliez, and (iii) the note receivable from ZIM being placed on non-accrual status during the 2014 Quarter. The decrease was partially offset by an increase in collections on operating leases. Investing Activities Cash provided by investing activities decreased $21,143,913, from $22,630,096in the 2013 Quarter to $1,486,183in the 2014 Quarter. This decrease was primarily due to proceeds we received from the prepayment of the mortgage note receivable and lease financing arrangement by Teal Jones during the 2013 Quarter. Financing Activities Cash used in financing activities increased $294,254, from $334,573in the 2013 Quarter to $628,827in the 2014 Quarter. This increase was primarily due to the increase in distributions to noncontrolling interests. Distributions We, at our Manager's discretion, made monthly distributions to our members and noncontrolling interests starting with the first month after each member's admission and the commencement of our joint venture operations, respectively. During the 2014 Quarter, we made distributions to our Manager, additional members and noncontrolling interests of $0, $0, and $628,827, respectively. Distributions made during our liquidation period will vary, depending on the timing of the sale of our assets and/or the maturity of our investments and our receipt of finance and other income from our investments.
Commitments and Contingencies and Off-Balance Sheet Transactions
Commitments and Contingencies
At the time we acquire or divest of our interest in an equipment lease or other financing transaction, we may, under very limited circumstances, agree to indemnify the seller or buyer for specific contingent liabilities. Our Manager believes that any liability of ours that may arise as a result of any such indemnification obligations will not have a material adverse effect on our consolidated financial condition or results of operations taken as a whole. From
November 2010through March 2011, we, through our wholly-owned subsidiaries, sold four container vessels previously on bareboat charter to ZIM to unaffiliated third parties. During June 2011, we received notices from ZIM claiming it was allegedly owed various amounts for unpaid seller's credits in the aggregate amount of approximately $7,300,000. Our Manager believes any obligation to repay the seller's credits was extinguished when ZIM defaulted by failing to fulfill certain of its obligations under the bareboat charters. On August 8, 2011, our Manager agreed to a three party arbitration panel to hear such claims. On April 19, 2012, ZIM filed arbitration claim submissions. On June 26, 2012, our Manager filed a defense and counterclaim. On February 21, 2014, the arbitration panel ruled that the seller's credits were forfeited by virtue of ZIM's default but that such forfeiture was not proved to be an accurate representation of genuine loss suffered from such default and thus, could not be enforced under English law. In light of the arbitration panel's ruling, we accrued approximately $4,700,000. We have filed for the right to appeal the arbitration panel's ruling. Future events may change the approximate amount of the accrual.
During 2008, a joint venture owned 45% by us and 55% by Fund Twelve purchased and simultaneously leased back semiconductor manufacturing equipment to EAR for approximately
$15,730,000. In addition, our wholly-owned subsidiary, ICON EAR II, LLC, purchased and simultaneously leased back semiconductor manufacturing equipment to EAR for a purchase price of approximately $6,348,000. On October 23, 2009, EAR filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. On October 21, 2011, the Chapter 11 bankruptcy trustee for EAR filed an adversary complaint against the ICON EAR entities seeking the recovery of the lease payments that the trustee alleges were fraudulently transferred from EAR to the ICON EAR entities. The complaint also sought the recovery of payments made by EAR to the ICON EAR entities during the 90-day period preceding EAR's bankruptcy filing, alleging that those payments constituted a preference under the U.S. Bankruptcy Code. Additionally, the complaint sought the imposition of a constructive trust over certain real property and the proceeds from the sale that the ICON EAR entities received as security in connection with their investment. Our Manager filed an answer to the complaint that included certain affirmative defenses. Our Manager believes these claims are frivolous and intends to vigorously defend this action. At this time, we are unable to predict the outcome of this action or loss therefrom. 15 --------------------------------------------------------------------------------
Table of contents Subsequent to the filing of the bankruptcy petition, EAR disclaimed any right to its equipment and such equipment became the subject of an
IllinoisState Court proceeding. The equipment was subsequently sold as part of the Illinois State Court proceeding. On March 6, 2012, one of the creditors in the Illinois State Court proceeding won a summary judgment motion filed against the ICON EAR entities, thereby dismissing the ICON EAR entities' claims to the proceeds resulting from the sale of the EAR equipment. The ICON EAR entities appealed this decision. On September 16, 2013, the lower court's ruling was affirmed by the Illinois Appellate Court. On October 21, 2013, the ICON EAR entities filed a Petition for Leave to Appeal with the Supreme Court of Illinoisappealing the decision of the Illinois Appellate Court, which petition was denied on January 29, 2014. The only remaining asset owned by ICON EAR at March 31, 2014and December 31, 2013was real property with a carrying value of approximately $290,000and the carrying value of our investment in the joint venture was approximately $134,000. At March 31, 2014and December 31, 2013, the only remaining asset owned by ICON EAR II was real property with a carrying value of approximately $117,000, which is included in assets held for sale on the consolidated balance sheets. We have entered into remarketing agreements with third parties. Residual proceeds received in excess of specific amounts will be shared with these third parties in accordance with the terms of the remarketing agreements. The present value of the obligations related to these agreements was approximately $199,000at March 31, 2014and is included in accrued expenses and other liabilities on the consolidated balance sheets.
Off-Balance Sheet Transactions
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