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ICON LEASING FUND ELEVEN, LLC - 10-K - Manager's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Our Manager's Discussion and Analysis of Financial Condition and Results of Operations relates to our consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. Statements made in this section may be considered forward-looking. These statements are not guarantees of future performance and are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of these risks and assumptions. Please refer to "Part I. Forward-Looking Statements" located elsewhere in this Annual Report on Form 10-K. Overview We operate as an equipment leasing and finance program in which the capital our members invested was pooled together to make investments, pay fees and establish a small reserve. We primarily acquire equipment subject to lease, purchase equipment and lease it to third parties, provide equipment and other financing and, to a lesser degree, acquire ownership rights to items of leased equipment at lease expiration. Some of our equipment leases are acquired for cash and are expected to provide current cash flow, which we refer to as "income" leases. For our other equipment leases, we finance the majority of the purchase price through borrowings from third parties. We refer to these leases as "growth" leases. These growth leases generate little or no current cash flow because substantially all of the rental payments received from the lessee are used to service the indebtedness associated with acquiring or financing the lease. For these leases, we anticipate that the future value of the leased equipment will exceed our cash portion of the purchase price. Our Manager manages and controls our business affairs, including, but not limited to, our equipment leases and other financing transactions, under the terms of our LLC Agreement. We are currently in our operating period, which will end on April 30, 2014 after having been extended for two years. During our operating period, additional investments were made with the cash generated from our investments to the extent that the cash was not needed for expenses, reserves and distributions to members. The investment in additional equipment leases and other financing transactions in this manner is called "reinvestment." We will commence our liquidation period on May 1, 2014, which we expect to continue for approximately one year. 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. 5 -------------------------------------------------------------------------------- Table of contents Our Manager believes the U.S. economy is likely to continue its gradual recovery, with the pace of economic growth increasing through 2014 due to factors such as the rate of employment expansion and greater certainty with respect to U.S. tax and budget policies. Significant Transactions We engaged in the following significant transactions during the years ended December 31, 2013 and 2012: Aframax Product Tankers On May 3, 2012, we sold the Senang Spirit for gross proceeds of approximately $7,173,000. As a result, we recorded an impairment charge of $697,715 during the year ended December 31, 2012. On May 3, 2012, in connection with the sale of the Senang Spirit, we settled the outstanding debt balance of approximately $9,400,000 at an agreed upon amount of approximately $7,347,000. Accordingly, we recorded a gain on extinguishment of debt of approximately $2,053,000 during the year ended December 31, 2012. Manufacturing Equipment We invested approximately $13,427,000 in semiconductor manufacturing equipment, partly through our wholly-owned subsidiary, ICON EAR II, LLC ("ICON EAR II"), and partly through a joint venture, ICON EAR, LLC ("ICON EAR"), owned 45% by us and 55% by ICON Leasing Fund Twelve, LLC, an entity also managed by our Manager ("Fund Twelve"). ICON EAR II and ICON EAR are collectively referred to as the "ICON EAR entities". All of the equipment was leased to Equipment Acquisition Resources, Inc. ("EAR"). As additional security for the purchases and leases, the ICON EAR entities received mortgages on certain parcels of real property located in Jackson Hole, Wyoming. In October 2009, certain facts came to light that led our Manager to believe that EAR was perpetrating a fraud against EAR's lenders, including the ICON EAR entities. On October 23, 2009, EAR filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. On June 7, 2010, the ICON EAR entities received judgments in the New York State Supreme Court against two principals of EAR who had guaranteed EAR's lease obligations. The ICON EAR entities have had the New York State Supreme Court judgments recognized in Illinois, where the principals live, but do not currently anticipate being able to collect on such judgments. On June 20, 2011, the ICON EAR entities filed a complaint in the Court of Common Pleas, Hamilton County, Ohio, against the auditors of EAR alleging malpractice and negligent misrepresentation. On May 3, 2012, the case was settled in the ICON EAR entities' favor for $590,000, of which our portion was approximately $360,000. On October 21, 2011, the Chapter 11 bankruptcy trustee for EAR filed an adversary complaint against ICON EAR seeking the recovery of the lease payments that the trustee alleges were fraudulently transferred from EAR to ICON EAR. The complaint also sought the recovery of payments made by EAR to ICON EAR during the 90-day period preceding EAR's bankruptcy filing, alleging that those payments constituted a preference under the U.S. Bankruptcy Code. Additionally, the complaint sought the imposition of a constructive trust over certain real property and the proceeds from the sale that ICON EAR received as security in connection with its investment. Our Manager filed an answer to the complaint, which included certain affirmative defenses. Our Manager believes these claims are frivolous and intends to vigorously defend this action. At this time, we are unable to predict the outcome of this action or loss therefrom. Subsequent to the filing of the bankruptcy petition, EAR disclaimed any right to its equipment and such equipment became the subject of an Illinois State Court proceeding. The equipment was subsequently sold as part of the Illinois State Court proceeding. On March 6, 2012, one of the creditors in the Illinois State Court proceeding won a summary judgment motion filed against 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 Illinois appealing the decision of the Illinois Appellate Court, which petition was denied on January 29, 2014. The only remaining asset owned by ICON EAR at December 31, 2013 and 2012 was real property with a carrying value of approximately $290,000 and the carrying value of our investment in the joint venture was approximately $134,000. At 6 -------------------------------------------------------------------------------- Table of contents December 31, 2013 and 2012, 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. On January 4, 2012, MW Universal, Inc. ("MWU") and certain of its subsidiaries satisfied their obligations relating to two of the three lease schedules. On August 20, 2012, we sold the automotive manufacturing equipment subject to lease with LC Manufacturing and terminated warrants issued to us for aggregate proceeds of approximately $8,300,000. As a result, based on our 6.33% ownership interest in ICON MW, LLC, our joint venture with Fund Twelve, we received proceeds in the amount of approximately $525,000 and recognized a loss on the sale of approximately $6,000. In addition, our Manager evaluated the collectability of the personal guaranty of a previous owner of LC Manufacturing and, based on the findings, ICON MW, LLC recorded a credit loss of approximately $5,411,000, of which our portion was approximately $343,000. In February 2013, we commenced an action against such guarantor, which is currently pending. On April 8, 2013, HSA and Heuliez filed for "Redressement Judiciaire", a proceeding under French law similar to Chapter 11 reorganization under the U.S. Bankruptcy Code. During the quarter ended September 30, 2013, we were notified by the French bankruptcy court of the court's intention to liquidate the companies. Our Manager estimated the amount to be recovered in the liquidation proceedings based on a third-party appraisal and determined that a credit loss reserve in the amount of approximately €1,738,846 ($2,324,000) was required. On October 31, 2013, our finance lease with HSA and Heuliez was terminated. Effective as of November 1, 2013, we leased our auto parts manufacturing equipment to a third party who purchased most of Heuliez's other real estate and movable assets pursuant to the bankruptcy proceeding for an amount of €2,000 per month. The lease is for a renewable 3 month period, may be terminated by either party and automatically terminates upon our sale of the auto parts manufacturing equipment. We expect to sell such assets and have engaged a third party to actively locate a buyer. As of December 31, 2013, the auto parts manufacturing equipment is included in the consolidated balance sheet as assets held for sale. On October 7, 2013, we, upon the expiration of the lease with Pliant Corporation ("Pliant"), sold the plastic processing and printing equipment previously on lease to Pliant for $7,000,000. As a result of the sale, we recognized a gain on sale of assets of approximately $2,400,000. Additionally, we had a remarketing agreement associated with our lease with Pliant. As a result of the sale, our remarketing liability increased to approximately $1,587,000 due to recording an additional remarketing expense of approximately $914,000 during the year ended December 31, 2013. Subsequent to the sale, the remarketing liability was satisfied. Lumber processing equipment On March 8, 2013, the Teal Jones Group and Teal Jones Lumber Services, Inc. (collectively, "Teal Jones") satisfied their obligations in connection with the mortgage note receivable and lease financing arrangement by making a prepayment of approximately $22,698,000. In connection with the prepayment, we recorded a net loss of approximately $611,000 related to the release of the accumulation of currency translation adjustments. Mining Equipment On August 5, 2013, we purchased mining equipment for approximately $1,979,000. The equipment is subject to a 36 month lease with Murray and its affiliate. The lease expires on August 31, 2016. On September 12, 2013, a joint venture owned by us, Fund Twelve and ICON ECI Fund Sixteen, an entity also managed by our Manager ("Fund Sixteen"), purchased mining equipment for approximately $15,107,000. The equipment is subject to a 24 month lease with Murray, which expires on September 30, 2015. On December 1, 2013, Fund Sixteencontributed capital of $933,678 to the joint venture, inclusive of acquisition fees, resulting in a reallocation of the percentage ownership interests in the joint venture to 67.0% by us, 26.4% by Fund Twelve and 6.6% by Fund Sixteen. On February 1, 2014, Fund Sixteen contributed additional capital of $1,725,517 to the joint venture, inclusive of acquisition fees, resulting in a further reallocation of the percentage ownership interests in the joint venture to 67.0% by us, 13.2% by Fund Twelve and 19.8% by Fund Sixteen. Notes Receivable On May 2, 2012, Northern Capital Associates XIV, L.P. satisfied its obligations in connection with certain notes receivable by making a prepayment of $1,015,000. No material gain or loss resulted from the prepayment. 7 -------------------------------------------------------------------------------- Table of contents Between May and October of 2012, subsidiaries of Revstone Transportation, LLC (collectively, "Revstone") borrowed approximately $1,139,000 in connection with a secured capital expenditure loan (the "CapEx Loan"). The CapEx Loan bore interest at 17% per year and was expected to mature on March 1, 2017. The CapEx Loan was secured by a first priority security interest in the automotive manufacturing equipment purchased with the proceeds from the CapEx Loan. On November 15, 2012, Revstone satisfied its obligations in connection with the CapEx Loan by making a prepayment of approximately $1,208,000, which included a prepayment fee of approximately $57,000, which was recognized as additional finance income. On November 28, 2012, we made a secured term loan in the amount of $5,400,000 to SAE. The loan bears interest at 13.5% per year and is for a period of 48 months. The loan is secured by, among other things, a first priority security interest in all the existing and thereafter acquired assets, including seismic testing equipment, of SAE and its parent company, SAExploration Holdings, Inc. ("SAE Holdings"), and a pledge of all the equity interests in SAE and SAE Holdings. In addition, we acquired warrants, exercisable until December 5, 2022, to purchase 0.0675% of the outstanding common stock of SAE Holdings. On October 31, 2013, we entered into an amendment to the loan agreement with SAE to amend certain provisions and covenant ratios. As a result of the amendment, we received an amendment fee of approximately $41,000. On February 12, 2013, we made available a secured term loan in the amount of $3,300,000 to NTS as part of a $6,000,000 facility. On March 28, 2013, NTS borrowed $935,000 in connection with the loan and on June 27, 2013, NTS drew down the remaining $2,365,000 from the facility. The loan bears interest at 12.75% per year and matures on July 1, 2017. The loan is secured by a first priority security interest in all of the equipment and assets of NTS. On May 15, 2013, a joint venture owned 39% by us, 21% by Fund Twelve, and 40% by ICON ECI Fund Fifteen, L.P., an entity also managed by our Manager ("Fund Fifteen"), purchased a portion of an approximately $208,000,000 subordinated credit facility for JAC from Standard Chartered. The aggregate purchase price for the joint venture's portion of the subordinated facility was $28,462,500. The subordinated credit facility bears interest at rates ranging between 12.5% and 15.0% per year and matures in January 2021. The subordinated credit facility is secured by a second priority security interest in all of JAC's assets, which include, among other things, all equipment, plant, and machinery associated with a condensate splitter and aromatics complex. Our initial contribution to the joint venture was approximately $11,101,000. Recent Accounting Pronouncements In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires an entity to disclose information about the amounts reclassified out of accumulated other comprehensive income by component on the respective line items of net (loss) income. The adoption of ASU 2013-02 became effective for us on January 1, 2013 and did not have a material effect on the consolidated financial statements. In March 2013, the FASB issued ASU No. 2013-05, Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity, which clarifies guidance to the release of the cumulative translation adjustment when an entity sells all or part of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity. We are required to adopt ASU 2013-05 on January 1, 2014, which is not expected to have a material effect on the consolidated financial statements. Critical Accounting Policies An understanding of our critical accounting policies is necessary to understand our financial results. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires our Manager to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates primarily include the determination of credit loss reserves, impairment losses, deferred tax valuation allowances, estimated useful lives and residual values. Actual results could differ from those estimates. We applied our critical accounting policies and estimation methods consistently in all periods presented. We consider the following accounting policies to be critical to our business: † Lease classification and revenue recognition; † Asset impairments; † Depreciation; † Notes receivable and revenue recognition; 8 -------------------------------------------------------------------------------- Table of contents † Credit quality of notes receivable and finance leases and credit loss reserve; † Derivative financial instruments; and † Valuation allowance on deferred tax assets or liabilities. Lease Classification and Revenue Recognition Each equipment lease we enter into is classified as either a finance lease or an operating lease, based upon the terms of each lease. The estimated residual value is a critical component of and can directly influence the determination as to whether a lease is classified as an operating or a finance lease. Our Manager has an investment committee that approves each new equipment lease and other financing transaction. As part of its process, the investment committee determines the estimated residual value, if any, to be used once the investment has been approved. The factors considered in determining the residual value include, but are not limited to, the creditworthiness of the potential lessee, the type of equipment considered, how the equipment is integrated into the potential lessee's business, the length of the lease and the industry in which the potential lessee operates. Residual values are reviewed for impairment in accordance with our impairment review policy. The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the marketplace are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. The residual value is calculated using information from various external sources, such as trade publications, auction data, equipment dealers, wholesalers and industry experts, as well as inspection of the physical asset and other economic indicators. For finance leases, we capitalize, at lease inception, the total minimum lease payments receivable from the lessee, the estimated unguaranteed residual value of the equipment at lease termination and the initial direct costs related to the lease less unearned income. Unearned income represents the difference between the sum of the minimum lease payments receivable, plus the estimated unguaranteed residual value, minus the cost of the leased equipment. Unearned income is recognized as finance income over the term of the lease using the effective interest rate method. For operating leases, rental income is recognized on a straight-line basis over the lease term. Billed operating lease receivables are included in accounts receivable until collected or written off. We record a reserve if we deem any receivable not collectible. The difference between the timing of the cash received and the income recognized on a straight-line basis is recognized as either deferred revenue or other assets, as appropriate. Initial direct costs are capitalized as a component of the cost of the equipment and depreciated over the lease term. Asset Impairments The significant assets in our portfolio are periodically reviewed, no less frequently than annually or when indicators of impairment exist, to determine whether events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss will be recognized only if the carrying value of a long-lived asset is not recoverable and exceeds its fair market value. If there is an indication of impairment, we will estimate the future cash flows (undiscounted and without interest charges) expected from the use of the asset and its eventual disposition. Future cash flows are the future cash inflows expected to be generated by an asset less the future outflows expected to be necessary to obtain those inflows. If an impairment is determined to exist, the impairment loss will be measured as the amount by which the carrying value of a long-lived asset exceeds its fair value and recorded in the consolidated statements of comprehensive (loss) income in the period the determination is made. The events or changes in circumstances that generally indicate that an asset may be impaired are (i) the estimated fair value of the underlying equipment is less than its carrying value or (ii) the lessee is experiencing financial difficulties and it does not appear likely that the estimated proceeds from the disposition of the asset will be sufficient to satisfy the residual position in the asset. The preparation of the undiscounted cash flows requires the use of assumptions and estimates, including the level of future rents, the residual value expected to be realized upon disposition of the asset, estimated downtime between re-leasing events and the amount of re-leasing costs. Our Manager's review for impairment includes a consideration of the existence of impairment indicators including third-party appraisals, published values for similar assets, recent transactions for similar assets, adverse changes in market conditions for specific asset types and the occurrence of significant adverse changes in general industry and market conditions that could affect the fair value of the asset. Depreciation 9 -------------------------------------------------------------------------------- Table of contents 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 comprehensive (loss) income using the effective interest rate method. Interest receivable related to the unpaid principal is recorded separately from the outstanding balance in our consolidated balance sheets. Upon the prepayment of a note receivable, any prepayment penalties and unamortized loan origination, closing and commitment fees are recorded as part of finance income in our consolidated statements of comprehensive (loss) income. Credit Quality of Notes Receivable and Finance Leases and Credit Loss Reserve Our Manager weighs all credit decisions based on a combination of external credit ratings as well as internal credit evaluations of all borrowers. A borrower's credit is analyzed using those credit ratings as well as the borrower's financial statements and other financial data deemed relevant. As our financing receivables, generally finance leases and notes receivable, are limited in number, our Manager is able to estimate the credit loss reserve based on a detailed analysis of each financing receivable as opposed to using portfolio based metrics and credit loss reserve. Financing receivables are analyzed quarterly and categorized as either performing or non-performing based on payment history. If a financing receivable becomes non-performing due to a borrower's missed scheduled payments or failed financial covenants, our Manager analyzes whether a credit loss reserve should be established or whether the financing receivable should be restructured. Material events would be specifically disclosed in the discussion of each financing receivable held. Notes receivable are generally placed in a non-accrual status when payments are more than 90 days past due. Additionally, our Manager periodically reviews the creditworthiness of companies with payments outstanding less than 90 days and based upon our Manager's judgment, these accounts may be placed in a non-accrual status. In accordance with the cost recovery method, payments received on non-accrual loans are applied to principal if there is doubt regarding the ultimate collectability of principal. If collection of the principal of non-accrual loans is not in doubt, interest income is recognized on a cash basis. Loans in non-accrual status may not be restored to accrual status until all delinquent payments have been received, and we believe recovery of the remaining unpaid receivable is probable. When our Manager deems it is probable that we will not be able to collect all contractual principal and interest on a non-performing note receivable, we perform an analysis to determine if a credit loss reserve is necessary. This analysis considers the estimated cash flows from the note, or the collateral value of the asset underlying the note when note repayment is collateral dependent. If it is determined that the impaired value of the non-performing note receivable is less than the net carrying value, we will recognize a credit loss reserve or adjust the existing credit loss reserve with a corresponding charge to earnings. We then charge off a loan in the period that it is deemed uncollectible by reducing the credit loss reserve and the balance of the loan. Derivative Financial Instruments We may enter into derivative transactions for purposes of hedging specific financial exposures, including movements in foreign currency exchange rates and changes in interest rates on our non-recourse long-term debt. We enter into these instruments only for hedging underlying exposures. We do not hold or issue derivative financial instruments for purposes other than hedging, except for warrants, which are not hedges. Certain derivatives may not meet the established criteria to be designated as qualifying accounting hedges, even though we believe that these are effective economic hedges. We account for all derivative financial instruments as either assets or liabilities on the consolidated balance sheets and measure those instruments at fair value. Changes in the fair value of such instruments are recognized immediately in earnings unless certain criteria are met. These criteria demonstrate that the derivative is expected to be highly effective at offsetting changes in the fair value or expected cash flows of the underlying exposure at both the inception of the hedging relationship and on an ongoing basis and include an evaluation of the counterparty risk and the impact, if any, on the effectiveness of the 10 -------------------------------------------------------------------------------- Table of contents derivative. If these criteria are met, which we must document and assess at inception and on an ongoing basis, we recognize the changes in fair value of such instruments in accumulated other comprehensive loss, 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. Valuation allowance on deferred tax assets or liabilities Some of our wholly-owned foreign subsidiaries are taxed as corporations in their local tax jurisdictions. For these entities, we use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established when it is determined that it is more likely than not that the deferred tax assets will not be realized. Results of Operations for the Years Ended December 31, 2013 ("2013") and 2012 ("2012") Financing Transactions The following tables set forth the types of assets securing the financing transactions in our portfolio: December 31, 2013 2012 Percentage of Percentage of Total Net Total Net Asset Type Net CarryingValue Carrying Value Net Carrying Value Carrying Value Marine - container vessels(1) $ 6,740,685 44% $ 13,197,463 30% Seismic imaging equipment 5,386,064 35% 5,324,057 12% Telecommunications Equipment 3,223,480 21% - - Auto parts manufacturing equipment - - 4,157,727 9% Lumber processing equipment - - 22,172,888 49% $ 15,350,229 100% $ 44,852,135 100% (1) Subsequent to the sale of the Marine-container vessels in 2011, the remaining note receivable is unsecured. The net carrying value of our financing transactions includes the balances of our net investment in notes receivable, net investment in finance leases and mortgage note receivable, which are included in our consolidated balance sheets. During 2013 and 2012, 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 2013 2012 ZIM Integrated Shipping Services Ltd. Marine - container vessels 43% 32% SAExploration Inc. Seismic imaging equipment 21% 1% Teal Jones Lumber processing equipment 15% 54% Heuliez S.A. Auto parts manufacturing equipment 12% 8% 91% 95% 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 (loss) 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 and 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 11 -------------------------------------------------------------------------------- Table of contents The following tables set forth the types of equipment subject to operating leases in our portfolio: December 31, 2013 2012 Percentage Percentage of Total Net of Total Net Carrying Net Carrying Carrying Asset Type Net Carrying Value Value Value Value Mining equipment $ 15,325,821 100% $ - - Plastic processing and printing equipment - - 5,798,515 100% $ 15,325,821 100% $ 5,798,515 100% The net carrying value of our operating lease transactions includes the balance of our leased equipment at cost, which is included in our consolidated balance sheets. During 2013 and 2012, certain customers generated significant portions (defined as 10% or more) of our total rental income as follows: Percentage of Total Rental Income Customer Asset Type 2013 2012 Murray Energy Corporation Mining equipment 54% - Plastic processing and Pliant Corporation printing equipment 46% 70% Teekay Corporation Marine - product tanker - 30% 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 and 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 2013 and 2012 is summarized as follows: Years Ended December 31, 2013 2012 Change Finance income $ 3,632,858 $ 6,856,680 $ (3,223,822) Rental income 4,816,712 4,234,659 582,053 Income from investment in joint ventures 916,884 14,310 902,574 Gain on sale of assets, net 2,396,300 - 2,396,300 Gain on extinguishment of debt - 2,052,960 (2,052,960) Litigation settlement - 171,100 (171,100) Total revenue and other income $ 11,762,754 $ 13,329,709 $ (1,566,955) Total revenue and other income for 2013 decreased $1,566,955, or 11.8%, as compared to 2012. The decrease in finance income was a result of Teal Jones satisfying its obligations during 2013 in connection with the mortgage note receivable and lease financing arrangement. The decrease in gain on extinguishment of debt was due to the settlement of debt related to the sale of the Senang Spirit during 2012. The decrease was primarily offset by a gain on sale of assets related to the sale of equipment previously on lease to Pliant. The increase in income from investment in joint ventures was primarily due to our investment in a new joint venture during 2013. Expenses for 2013 and 2012 are summarized as follows: 12 -------------------------------------------------------------------------------- Table of contents Years Ended December 31, 2013 2012 Change Administrative expense reimbursements $ - $ 403,145 $ (403,145) General and administrative 2,737,823 2,092,315 645,508 Vessel operating expense - 1,047,506 (1,047,506) Depreciation 3,286,277 2,918,528 367,749 Impairment loss - 697,715 (697,715) Credit loss reserve 2,323,655 - 2,323,655 Loss on litigation 4,700,000 - 4,700,000 Interest 226,785 167,688 59,097 Remarketing expense 913,891 - 913,891 Gain on derivative financial instruments (9,824) (75,922) 66,098 Loss on disposition of assets of foreign investment 610,732 - 610,732 Total expenses $ 14,789,339 $ 7,250,975 $ 7,538,364 Total expenses for 2013 increased $7,538,364, or 104.0%, as compared to 2012. The increase in total expenses was primarily due to the (i) loss on litigation as a result of the ZIM arbitration ruling (see "Commitments and Contingencies and Off-Balance Sheet Transactions" below), (ii) credit loss reserve recorded in connection with HSA and Heuliez, (iii) additional remarketing expense incurred in connection with the sale of equipment previously on lease to Pliant, (iv) increase in general and administrative expenses due to various legal fees incurred and (v) loss on disposition of assets of foreign investment in connection with the prepayment by Teal Jones, all of which occurred during 2013. The increase was partially offset by decreases in vessel operating expense and impairment loss, both as a result of the sale of the Senang Spirit during 2012, and the decrease in administrative expense reimbursements due to our Manager's waiver of such reimbursements. Income Tax Benefit (Expense) Certain of our direct and indirect wholly-owned subsidiaries are unlimited liability companies and are taxed as corporations under the laws of Canada. Other indirect wholly-owned subsidiaries are taxed as corporations in Barbados. For 2013, the current income tax benefit was $1,525,563 and the deferred income tax expense was $1,415,947. For 2012, the current income tax expense was $650,011 and the deferred income tax expense was $484,504. The increase in income tax benefit was due to Teal Jones satisfying its obligations during the quarter ended March 31, 2013 in connection with the mortgage note receivable and lease financing arrangement. Net Income Attributable to Noncontrolling Interests Net income attributable to noncontrolling interests for 2013 increased $640,824, or 111%, as compared to 2012, primarily due to a new operating lease related to mining equipment held through a joint venture in 2013. Other Comprehensive Income Other comprehensive income for 2013 increased $469,802, or 201.5%, as compared to 2012, 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. Net (Loss) Income Attributable to Fund Eleven As a result of the foregoing factors, net (loss) income attributable to us for 2013 and 2012 was $(4,135,610) and $5,335,410, respectively. Net (loss) income attributable to us per weighted average additional Share outstanding for 2013 and 2012 was $(11.29) and $14.56, respectively. Financial Condition This section discusses the major balance sheet variances at 2013 compared to 2012. Total Assets 13 -------------------------------------------------------------------------------- Table of contents Total assets increased $3,204,277, from $59,460,737 at December 31, 2012 to $62,665,014 at December 31, 2013. The increase was primarily due to cash receipts from finance income, contributions by noncontrolling interests and income from our investment in a new joint venture, partially offset by distributions to noncontrolling interests. Current Assets Current assets decreased $10,415,293, from $37,496,323 at December 31, 2012 to $27,081,030 at December 31, 2013. The decrease in current assets was primarily due to investing in one new joint venture, two new operating leases and one new note receivable during 2013. The decrease was also due to the reclassification of the current portion of net investment in finance lease, in connection with HSA and Heuliez, to assets held for sale subsequent to recording a credit loss reserve during 2013. Total Liabilities Total liabilities increased $4,508,485, from $1,032,370 at December 31, 2012 to $5,540,855 at December 31, 2013. The increase was primarily due to the recording of a litigation liability as a result of the ZIM arbitration ruling and the net increase in remarketing liabilities due to new agreements entered into during 2013. Equity Equity decreased $1,304,208, from $58,428,367 at December 31, 2012 to $57,124,159 at December 31, 2013. The decrease was primarily the result of our net loss in 2013 and distributions to noncontrolling interests, partially offset by contributions by noncontrolling interests. Liquidity and Capital Resources Summary At December 31, 2013 and 2012, we had cash and cash equivalents of $16,626,672 and $6,963,672, respectively. During the year ended December 31, 2013, our main sources of cash were from (i) principal received on the mortgage note receivable and notes receivable, (ii) proceeds from sales of leased equipment, (iii) contributions by noncontrolling interests and (iv) collections on finance and operating leases. During the year ended December 31, 2013, our main uses of cash were in (i) the purchase of equipment, (ii) an investment in a joint venture, (iii) an investment in a note receivable and (iv) distributions to our noncontrolling interests. Our liquidity will vary in the future, increasing to the extent cash flows from investments and proceeds from the sale of our investments exceed expenses and decreasing as we pay distributions and to the extent that expenses exceed cash flows from operations and the proceeds from the sale of our investments. We had an agreement with CB&T for a revolving line of credit of up to $5,000,000 (the "Facility"), which was secured by all of our assets not subject to a first priority lien. The interest rate on general advances under the Facility was CB&T's prime rate. We could have elected to designate up to five advances on the outstanding principal balance of the Facility to bear interest at the current London Interbank Offered Rate ("LIBOR") plus 2.5% per year. In all instances, borrowings under the Facility were subject to an interest rate floor of 4.0% per year. In addition, we were obligated to pay a 0.5% fee on unused commitments under the Facility. At December 31, 2013, we had $5,000,000 available under the Facility pursuant to the borrowing base, available to fund our short-term liquidity needs. At December 31, 2013, there were no obligations outstanding under the Facility. On January 8, 2014, our Facility with CB&T was terminated. 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 December 31, 2013, the cash reserve was $1,825,993. 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 14 -------------------------------------------------------------------------------- Table of contents was highly dependent on the residual value of equipment to achieve investment returns. As a result, we reduced our distribution rate from 9.1% per year to 4.0% per year effective January 1, 2011 through April 2012. We extended our operating period two years and have not made any distributions during this extended operating period. We will commence 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. Cash Flows The following table sets forth summary cash flow data: Years Ended December 31, 2013 2012 Net cash provided by (used in): Operating activities $ 4,677,380 $ 8,962,927 Investing activities 4,224,045 6,433,150 Financing activities 760,239 (15,269,538) Effects of exchange rates on cash and cash equivalents 1,336 12,777 Net increase in cash and cash equivalents $ 9,663,000 $ 139,316 Note: See the Consolidated Statements of Cash Flows included in "Item 8. Consolidated Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for additional information. Operating Activities Cash provided by operating activities decreased $4,285,547, from $8,962,927 in 2012 to $4,677,380 in 2013. This decrease was primarily the result of reduced collections on finance leases due to the sale of assets previously on lease to Teal Jones and the termination of the lease with HSA and Heuliez. In addition, we satisfied an additional remarketing liability during 2013 related to the sale of assets previously on lease to Pliant. The decrease was partially offset by an increase in interest collected on our notes receivable entered into subsequent to 2012. Investing Activities Cash provided by investing activities decreased $2,209,105, from $6,433,150 in 2012 to $4,224,045 in 2013. This decrease was the result of investing a greater portion of the principal received on our notes and mortgage receivable and the proceeds received from our sale of assets as compared to 2012. Financing Activities Cash flows from financing activities increased $16,029,777, from a use of cash of $15,269,538 in 2012 to a source of cash of $760,239 in 2013. This increase was primarily due to the repayment of long-term debt and distributions to our members during 2012 with no corresponding use of cash during 2013. In addition, during 2013, contributions by noncontrolling interests were in excess of distributions to noncontrolling interests. Financing and Borrowings Long-Term Debt On May 3, 2012, we used the proceeds from the sale of the Senang Spirit to settle the outstanding debt balance of approximately $9,400,000 at an agreed upon amount of approximately $7,347,000. Accordingly, we recorded a gain on extinguishment of debt of approximately $2,053,000 during 2012. We had no long-term debt obligations at December 31, 2013. Revolving Line of Credit, Recourse 15 -------------------------------------------------------------------------------- Table of contents On May 10, 2011, we entered into an agreement with CB&T for a revolving line of credit of up to $5,000,000, which was secured by all of our assets not subject to a first priority lien. Amounts available under the Facility were subject to a borrowing base that was determined, subject to certain limitations, based on the present value of the future receivables under certain loans and lease agreements in which we have a beneficial interest. At December 31, 2013, we had $5,000,000 available under the Facility. The interest rate on general advances under the Facility was CB&T's prime rate. We could have elected to designate up to five advances on the outstanding principal balance of the Facility to bear interest at the current LIBOR plus 2.5% per year. In all instances, borrowings under the Facility were subject to an interest rate floor of 4.0% per year. In addition, we were obligated to pay an annualized 0.5% fee on unused commitments under the Facility. On April 10, 2012 and May 1, 2012, we borrowed $3,500,000 and $1,500,000, respectively, under the Facility. On May 3, 2012, we made a repayment of $5,000,000, which represented the entire balance outstanding. At December 31, 2013, there were no obligations outstanding under the Facility and we were in compliance with all covenants related to the Facility. On January 8, 2014, the Facility with CB&T was terminated. There were no obligations outstanding as of the date of the termination. Distributions We, at our Manager's discretion, paid monthly distributions to our members and noncontrolling interests starting with the first month after each member's admission and the commencement of our joint venture operations, respectively. We paid distributions to our additional members of $0 and $6,044,264, respectively, for the years ended December 31, 2013 and 2012. We paid distributions to our Manager of $0 and $61,054, respectively, for the years ended December 31, 2013 and 2012. Additionally, we paid distributions to our noncontrolling interests of $4,217,788 and $1,338,290, respectively, for the years ended December 31, 2013 and 2012. During our liquidation period, we plan to make distributions in accordance with the terms of our LLC Agreement. We expect that distributions made during the liquidation period will vary, depending on the timing of the sale of our assets, and our receipt of rental, finance and other income from our investments. Commitments and Contingencies and Off-Balance Sheet Transactions Commitments and Contingencies At the time we acquire or divest of our interest in an equipment lease or other financing transaction, we may, under very limited circumstances, agree to indemnify the seller or buyer for specific contingent liabilities. Our Manager believes that any liability of ours that may arise as a result of any such indemnification obligations will not have a material adverse effect on our consolidated financial condition or results of operations taken as a whole. From November 2010 through March 2011, we, through our wholly-owned subsidiaries, sold four container vessels previously on bareboat charter to ZIM to unaffiliated third parties. During June 2011, we received notices from ZIM claiming it was allegedly owed various amounts for unpaid seller's credits in the aggregate amount of approximately $7,300,000. Our Manager believes any obligation to repay the seller's credits was extinguished when ZIM defaulted by failing to fulfill certain of its obligations under the bareboat charters. On August 8, 2011, our Manager agreed to a three party arbitration panel to hear such claims. On April 19, 2012, ZIM filed arbitration claim submissions. On 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 are in the process of appealing the arbitration panel's ruling. Future events may change the approximate amount of the accrual. 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 16 -------------------------------------------------------------------------------- Table of contents vigorously defend this action. At this time, we are unable to predict the outcome of this action or loss therefrom. Subsequent to the filing of the bankruptcy petition, EAR disclaimed any right to its equipment and such equipment became the subject of an Illinois State Court proceeding. The equipment was subsequently sold as part of the Illinois State Court proceeding. On March 6, 2012, one of the creditors in the Illinois State Court proceeding won a summary judgment motion filed against 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 Illinois appealing the decision of the Illinois Appellate Court, which petition was denied on January 29, 2014. The only remaining asset owned by ICON EAR at December 31, 2013 and 2012 was real property with a carrying value of approximately $290,000 and the carrying value of our investment in the joint venture was approximately $134,000. At December 31, 2013 and 2012, 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 $190,000 at December 31, 2013. Off-Balance Sheet Transactions None. Inflation and Interest Rates The potential effects of inflation on us are difficult to predict. If the general economy experiences significant rates of inflation, 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. |