UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the
quarterly period ended March 31, 2005
---------------------------------------------------------
[ ] 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 333-103503
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ICON Income Fund Ten, LLC
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 35-2193184
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
100 Fifth Avenue, New York, New York 10011-1505
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(212)418-4700
Registrant's telephone number, including area code
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. [ x] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). [ ] Yes [x] No
ICON Income Fund Ten, LLC
Index
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 2005 (Unaudited)
and December 31, 2004 3-4
Consolidated Statements of Operations for the three months ended
March 31, 2005 and 2004 (Unaudited) 5
Consolidated Statement of Changes in Partners' Equity for the three
months ended March 31, 2005 (Unaudited) 6
Consolidated Statements of Cash Flows for the three months ended March
31, 2005 and 2004 (Unaudited) 7-8
Notes to Consolidated Financial Statements (Unaudited) 9-14
Item 2. Manager's Discussion and Analysis of Financial Condition and
Results of Operations 15-24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits 26
Signatures 27
Certifications 28-31
2
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ICON Income Fund Ten, LLC
(A Delaware Limited Liability Company)
Consolidated Balance Sheets
ASSETS
(Unaudited)
March 31, December 31,
2005 2004
---- ----
Cash and cash equivalents $ 54,701,755 $ 25,006,190
--------------- ---------------
Investments in operating leases:
Equipment, at cost 129,771,508 93,644,312
Accumulated depreciation (11,191,775) (7,097,993)
---------------- ----------------
Net investments in operating leases 118,579,733 86,546,319
--------------- ---------------
Escrow deposits 7,167,441 19,001,619
Equipment held for sale or lease, net 1,658,339 477,715
Prepaid service fees, net 7,140,008 5,444,167
Investment in unguaranteed residual values 2,815,084 -
Interest rate swap contracts 663,749 -
Due from affiliates 2,777 574,725
Investments in joint ventures 402,940 382,479
Other assets, net 134,689 85,139
--------------- ---------------
Total assets $ 193,266,515 $ 137,518,353
=============== ===============
See accompanying notes to consolidated financial statements.
3
ICON Income Fund Ten, LLC
(A Delaware Limited Liability Company)
Consolidated Balance Sheets
LIABILITIES AND MEMBERS' EQUITY
(Unaudited)
March 31, December 31,
2005 2004
---- ----
Notes payable - non-recourse $ 70,998,296 $ 47,795,602
Security deposits and other liabilities 269,487 360,802
Deferred rental income 1,483,711 1,248,166
Additional Member refunds payable 100,000 -
Due to Manager and affiliates 743,683 129,831
Interest rate swap contracts - 303,619
Minority interest 967,454 1,075,900
---------------- ------------------
Total liabilities 74,562,631 50,913,920
---------------- ------------------
Commitments and Contingencies
Members' equity:
Manager (one share outstanding,
$1,000 per share original issue price) (121,295) (82,090)
Additional Members (148,512.433 and 108,861.334
shares outstanding, $1,000 per share original issue price) 118,161,430 86,990,142
Accumulated other comprehensive income (loss) 663,749 (303,619)
---------------- ------------------
Total members' equity 118,703,884 86,604,433
---------------- ------------------
Total liabilities and members' equity $ 193,266,515 $ 137,518,353
================ ==================
See accompanying notes to consolidated financial statements.
4
ICON Income Fund Ten, LLC
(A Delaware Limited Liability Company)
Consolidated Statements of Operations
Three Months Ended March 31,
2005 2004
---- ----
Revenue:
Rental income $ 5,730,336 $ 275,871
Income from investment in joint venture 20,461 -
---------------- --------------
Total revenue 5,750,797 275,871
---------------- --------------
Expenses:
Depreciation expense 4,563,878 205,576
Amortization of prepaid service fees 894,570 202,350
Interest 955,194 -
Management fees - Manager 299,690 122,966
Administrative expense reimbursements - Manager 357,677 190,574
General and administrative 115,541 19,108
Minority interest 11,094 -
---------------- --------------
Total expenses 7,197,644 740,574
---------------- --------------
Net loss $ (1,446,847) $ (464,703)
================= ==============
Net loss allocable to:
Additional Members $ (1,432,379) $ (460,056)
Manager (14,468) (4,647)
---------------- --------------
$ (1,446,847) $ (464,703)
================ ==============
Weighted average number of additional members
shares outstanding 125,247 31,108
================ ==============
Net loss per weighted average
additional members share $ (11.44) $ (14.79)
================ ==============
See accompanying notes to consolidated financial statements.
5
ICON Income Fund Ten, LLC
(A Delaware Limited Liability Company)
Consolidated Statement of Changes in Members' Equity
Three Months Ended March 31, 2005
Additional Members' Distributions Accumulated
(Per weighted average share) Other Total
Return of Investment Additional Managing Comprehensive Members'
Capital Income Members Member Income (Loss) Equity
------- ------ ------- ------ ------------ ------
Balance, January 1, 2005 $ 86,990,142 $ (82,090) $(303,619) $ 86,604,433
Proceeds from issuance of additional
members shares (39,852.482 shares) 39,852,482 - - 39,852,482
Sales and offering expenses (4,583,035) - - (4,583,035)
Additional member shares
redeemed (201.383 shares) (216,821) - - (216,821)
Cash distributions to members $ 19.55 $ - (2,448,959) (24,737) - (2,473,696)
Unrealized increase in interest rate
swap contracts - - 967,368 967,368
Net loss (1,432,379) (14,468) - (1,446,847)
---------------------------- --------- --------------
Balance, March 31, 2005 $118,161,430 $ (121,295) $ 663,749 $ 118,703,884
============ =========== ========== ==============
See accompanying notes to consolidated financial statements.
6
ICON Income Fund Ten, LLC
(A Delaware Limited Liability Company)
Consolidated Statements of Cash Flows
Three Months Ended March 31,
2005 2004
---- ----
Cash flows from operating activities
Net loss $ (1,446,847) $ (464,703)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Rental income paid directly to lenders by lessees (4,180,533) -
Interest expense on non-recourse financing paid directly
to lenders by lessees 956,694 -
Amortization of prepaid service fees 894,570 202,350
Depreciation 4,563,878 205,576
Income from investment in joint venture (20,461) -
Minority interest 11,094 -
Changes in operating assets and liabilities:
Due from Manager and affiliates, net - (194,829)
Other assets (49,550) -
Security deposits and other liabilities (45,021) 4,297
Deferred rental income 24,078 -
Due to Manager and affiliates, net 236,735 (50,159)
------------------- ----------------
Net cash provided by (used in) operating activities 944,637 (297,468)
------------------- ----------------
Cash flows from investing activities:
Investments in operating leases, net of security deposits assumed (2,167,116) (3,602,276)
Due from Manager and affiliates, net 571,948 -
Investment held in escrow - (18,400,000)
Prepaid service fees paid (2,590,411) (1,028,385)
------------------- ----------------
Net cash used in investing activities (4,185,579) (23,030,661)
------------------- ----------------
Cash flows from financing activities:
Issuance of additional members shares,
net of sales and offering expenses paid 35,269,447 13,704,573
Due to Manager and affiliates, net 377,117 -
Cash distributions to members (2,473,696) (565,046)
Member shares redeemed (216,821) -
Minority interest contribution in joint venture - 1,028,910
Distributions to minority interest holders in joint ventures (119,540) -
Additional Member refunds payable 100,000 (203,000)
------------------- ----------------
Net cash provided by financing activities 32,936,507 13,965,437
------------------- ----------------
Net increase (decrease) in cash and cash equivalents 29,695,565 (9,362,692)
Cash and cash equivalents, beginning of the period 25,006,190 15,908,041
------------------- ----------------
Cash and cash equivalents, end of the period $ 54,701,755 $ 6,545,349
=================== ================
See accompanying notes to consolidated financial statements.
7
ICON Income Fund Ten, LLC
(A Delaware Limited Liability Company)
Consolidated Statements of Cash Flows
Three Months Ended March 31,
2005 2004
---- ----
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ - $ -
============= ==========
Supplemental disclosure of non-cash investing and financing activities:
Non-cash portion of equipment purchased through non-recourse debt $ 26,150,000 $ -
============= ==========
Principal and interest paid on non-recourse notes payable
directly to lenders by lessees $ 4,180,533 $ -
============= ==========
See accompanying notes to consolidated financial statements.
8
ICON Income Fund Ten, LLC
Notes To Consolidated Financial Statements
March 31, 2005
(Unaudited)
(1) Basis of Presentation and Consolidation
The accompanying consolidated financial statements of ICON Income Fund Ten,
LLC (the "LLC") have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission for Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation have been included. These
consolidated financial statements should be read together with the consolidated
financial statements and notes included in the LLC's 2004 Annual Report on Form
10-K. The results for the interim period are not necessarily indicative of the
results for the full year.
The consolidated financial statements include the accounts of the LLC and
its majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The LLC accounts for its
interests in minority owned joint ventures under the equity method of
accounting. In such cases, the LLC's original investment is recorded at cost and
adjusted for its share of earnings, losses and distributions. In joint ventures
where the LLC's ownership interest is majority owned, minority interest
represents the minority venturer's proportionate share of their equity in the
joint venture. The minority interest is adjusted for the minority venturer's
share of the earnings or loss of the joint venture.
(2) Organization
The LLC was formed on January 2, 2003 as a Delaware limited liability
company. The LLC is engaged in one business segment, the business of acquiring
equipment subject to lease.
The LLC is currently in its "reinvestment" phase, wherein the LLC seeks to
purchase equipment from time to time through April 30, 2010. After the
"reinvestment period", the LLC will then begin to sell its assets in the
ordinary course of business during a time frame called the "disposition period".
If the LLC believes it would be beneficial to reinvest the cash flow in
equipment during the disposition period, the LLC may do so, but the Manager will
not receive any additional fees in connection with such reinvestments.
The initial capitalization of the LLC was $1,000 contributed by ICON
Capital Corp. (the "Manager"). The LLC was offering membership interests on a
"best efforts" basis with the intention of raising up to $150,000,000 of capital
from additional members. The LLC had its initial closing on August 22, 2003 when
it admitted 5,065.736 Additional Members shares, representing $5,065,736 in
capital contributions. At March 31, 2005 the LLC had admitted an additional
143,763.99 Additional Members shares representing $143,763,990 in capital
contributions, bringing the total capital contributions and Additional Member
shares to $148,829,726 and 148,829.726 respectively. Through March 31, 2005 the
LLC redeemed 317.293 additional member shares, leaving 148,512.433 Additional
Member shares outstanding at March 31, 2005. The LLC will continue until
December 31, 2023, unless terminated sooner.
The Manager is a Connecticut corporation. The Manager manages and controls
the business affairs of the LLC's equipment leases and financing transactions
under the terms of a management agreement with the LLC. Additionally, the
Manager has a 1% ownership interest in the LLC.
9
ICON Income Fund Ten, LLC
Notes To Consolidated Financial Statements
March 31, 2005
(Unaudited)
(2) Organization - continued
Profits, losses, cash distributions and disposition proceeds are allocated
99% to the additional members and 1% to the Manager until each additional member
has received cash distributions and disposition proceeds sufficient to reduce
their adjusted capital contribution account to zero and receive, in addition,
other distributions and allocations which would provide an 8% per annum
cumulative return on their outstanding adjusted capital contribution account.
After such time, the distributions will be allocated 90% to the additional
members and 10% to the Manager.
(3) Joint Ventures
The LLC and its affiliates, entities also managed by the Manager, formed
the two joint ventures, discussed below, for the purpose of acquiring and
managing various assets. The LLC and these affiliates have substantially
identical investment objectives and participate on identical terms and
conditions. The LLC and the other affiliated members of the joint ventures have
a right of first refusal to purchase the equipment, on a pro-rata basis, if any
of the other members desire to sell their interests in the equipment or joint
venture.
The joint venture described below is majority owned and consolidated with
the LLC.
ICON GeicJV
On April 30, 2004, the LLC and ICON Income Fund Nine, LLC ("Fund Nine")
formed a joint venture, ICON GeicJV, for the purpose of purchasing information
technology equipment subject to a three year lease with Government Employees
Insurance Company ("GEICO"). The LLC paid $4,330,626 in cash for its 74%
ownership interest in the joint venture.
The joint venture described below is minority owned and is accounted for
under the equity method.
ICON Aircraft 46837, LLC
On March 31, 2004, the LLC and ICON Income Fund Eight A L.P. ("Fund Eight
A") formed a joint venture, ICON Aircraft 46837, LLC ("ICON Aircraft 46837"),
for the purpose of acquiring a 1979 McDonnell Douglas DC-10-30F aircraft subject
to a lease with Federal Express Corporation ("FedEx"). The lease is for a three
year period and expires on March 31, 2007. At March 31, 2005, the LLC owns a 10%
interest in ICON Aircraft 46837.
Information as to the unaudited results of operations of ICON Aircraft
46837 is summarized below:
Three Months Ended
March 31,
2005 2004
------------- -------------
Net income $ 204,612 $ -
============= =============
LLC's share of net income $ 20,461 $ -
============= =============
10
ICON Income Fund Ten, LLC
Notes To Consolidated Financial Statements
March 31, 2005
(Unaudited)
(4) Related Party Transactions
The LLC has entered into certain agreements with the Manager and ICON
Securities Corp., a wholly-owned subsidiary of the Manager, whereby the LLC pays
certain fees and reimbursements to those parties.
In accordance with the terms of these agreements, the LLC pays the Manager
(i) management fees ranging from 1% to 7% based on a percentage of the rentals
received either directly by the LLC or through its joint ventures, (ii) prepaid
service fees of 6.5% based upon the gross proceeds from the sale of shares to
Additional Members, and (iii) organization and offering expenses from the gross
proceeds of the sale of shares to Additional Members, as defined in the
agreement. In addition, the Manager is reimbursed for administrative expenses
incurred in connection with the LLC's operations.
ICON Securities Corp. receives or is entitled to receive, a 2% underwriting
fee from the gross proceeds from sales of shares to the Additional Members.
The total compensation which the Manager and ICON Securities Corp. may
earn, not including management fees and administrative expense reimbursements,
is limited to 12% of gross offering proceeds up to the first $37,500,000 raised,
11% of gross offering proceeds from $37,500,001 to $75,000,000 and 10% of gross
offering proceeds from $75,000,001 to $150,000,000.
Fees and other expenses paid or accrued by the LLC to the Manager or
its affiliates were as follows:
Three Months Ended
March 31,
2005 2004
------------- -------------
Prepaid service fees (1) $ 2,590,411 $ 1,028,385
Organization and offering expenses (2) 597,787 532,689
Underwriting commissions (2) 797,050 316,426
Management fees (3) 299,690 122,966
Administrative expense reimbursements (3) 357,677 190,574
------------- -------------
$ 4,642,615 $ 2,191,040
============= =============
(1) Capitalized and amortized to operations over the estimated
offering period in accordance with the LLC's accounting policies.
(2) Charged directly to members' equity.
(3) Charged directly to operations.
The LLC had a net receivable of $2,777 due from affiliates at March 31,
2005 for expense reimbursements. The LLC also had a net payable of $743,683 due
to the Manager and affiliates at March 31, 2005 of which $354,623 was owed the
Manager for administrative expense reimbursements, $271,766 was owed the Manager
for prepaid service fees, $33,582 was owed the Manager for organization and
offering expenses and $83,712 was due ICON Securities Corp. for underwriting
commissions.
11
ICON Income Fund Ten, LLC
Notes To Consolidated Financial Statements
March 31, 2005
(Unaudited)
(5) Notes Payable - Non-Recourse
Notes payable non-recourse are comprised solely of the non-recourse debt
incurred in connection with the acquisition of three containership vessels
purchased from ZIM Israel Navigation Co., Ltd. ("ZIM"). The first two Vessels,
ZIM Canada and ZIM Korea, were acquired during 2004 and the non-recourse debt
matures in July 2009. The third Vessel, ZIM Italia, was acquired during January
2005 and the non recourse debt matures in January 2010. All of the non-recourse
debt accrues interest at the London Inter Bank Offer Rate plus 1.50% per annum.
The lender has a security interest in the three vessels and an assignment of the
rental payments under the leases with ZIM. The balance of the notes payable
non-recourse debt at March 31, 2005 is $70,998,296.
Simultaneously with the acquisitions of the vessels, the LLC entered into
interest rate swap contracts with Fortis Bank in order to fix the variable
interest rate on the non-recourse debt and minimize the LLC's risk for interest
rate fluctuations. The interest rate swap contracts have a fixed interest rate
of 5.36% per annum for the ZIM Canada and ZIM Korea debt and 5.80% per annum for
the ZIM Italia debt. The LLC accounts for its interest on the non-recourse debt
swap contracts in accordance with Statement of Financial Accounting Standards
No. 133, as amended, and recorded an asset and accumulated other comprehensive
income at March 31, 2005 of $663,749.
(6) Other Comprehensive Income (Loss)
Other comprehensive income (loss) consists of the following:
Three Months Ended
March 31,
---------
2005 2004
---- ----
Net loss $ (1,446,847) $ (464,703)
Other Comprehensive income (loss):
Change in valuation of interest rate
swap contracts during the period 967,368 -
--------------- ----------------
Comprehensive income (loss) $ (479,479) $ (464,703)
================ ================
(7) Escrow Deposits
During January 2005, in connection with the completion of the ZIM Italia
acquisition, the LLC released $9,200,000 in escrow deposits. During February
2005, in connection with the acquisition of four Proserv Cranes, the LLC
released $251,589, previously held in escrow deposits, to complete the
acquisition. During February 2005, in connection with the investment in
unguaranteed residual values, the LLC released $2,815,084 in escrow deposits.
Amounts held in escrow at March 31, 2005 are deposits on additional equipment
purchases.
12
ICON Income Fund Ten, LLC
Notes To Consolidated Financial Statements
March 31, 2005
(Unaudited)
(8) Recent Accounting Pronouncements
On June 1, 2005 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 154 "Accounting Changes and Error
Corrections" ("SFAS 154") which replaces Accounting Principles Board Opinion No.
20, "Accounting Changes" ("APB 20") and SFAS No. 3, "Reporting Accounting
Changes in Interim Financial Statements," and changes the requirements for the
accounting for and reporting of a change in accounting principle. SFAS 154
requires retrospective application to prior periods' financial statements of a
voluntary change in accounting principle unless it is impracticable. APB 20
previously required that most voluntary changes in accounting principle be
recognized by including in net income of the period of the change the cumulative
effect of changing to the new accounting principle. The LLC does not expect the
adoption of SFAS 154 to have an impact on its consolidated financial position or
results of operations.
Management does not believe that any recently issued, but not yet effective
accounting pronouncements, if currently adopted, would have a material effect on
the accompanying consolidated financial statements.
(9) Line of Credit Agreement
On May 30, 2002, certain affiliates of the LLC, specifically; ICON Cash
Flow Partners L.P. Seven; ICON Income Fund Eight A L.P., ICON Income Fund Eight
B L.P. and ICON Income Fund Nine, LLC, (collectively, the "Initial Funds"),
entered into a $17,500,000 line of credit agreement with Comerica Bank. The
Initial Funds accrue interest, on all outstanding balances, at an interest rate
equal to the Comerica Bank base interest rate plus 1% (together is 6.75% at
March 31, 2005). Under the terms of the line of credit agreement, the Initial
Funds may borrow money from Comerica Bank with all borrowings to be jointly and
severally collateralized by (i) cash and (ii) the present values of certain
rents receivable and equipment owned by the Initial Funds. Effective August 5,
2004, the line of credit agreement was amended to add the LLC as a borrower. On
December 6, 2004, the Loan and Security Agreement with Comerica Bank was
extended to December 30, 2005.
In connection with the line of credit agreement, the Initial Funds
previously entered into a Contribution Agreement dated as of May 30, 2002, as
amended (the "Contribution Agreement"). Pursuant to the Contribution Agreement,
the Initial Funds agreed to restrictions on the amount and the terms of their
respective borrowings under the Loan Agreement in order to minimize the unlikely
risk that a Fund would not be able to repay its allocable portion of the
outstanding revolving loan obligation at any time, including restrictions on any
Fund borrowing in excess of the lesser of (a) an amount each Fund could
reasonably expect to repay in one year out of its projected free cash flow, or
(b) the greater of (i) the Borrowing Base (as defined in the line of credit
agreement) as applied to such Fund, and (ii) 50% of the net worth of such Fund.
The Contribution Agreement provides that, in the event a Fund pays an amount
under the agreement in excess of its allocable share of the obligation under the
agreement whether by reason of an Event of Default or otherwise, the other Funds
will promptly make a contribution payment to such Fund in such amount that the
aggregate amount paid by each Fund reflects its allocable share of the aggregate
obligations under the agreement. The Initial Funds' obligations to each other
under the Contribution Agreement are collateralized by a subordinate lien on the
assets of each participating Fund. In order to facilitate the LLC's addition to
the Contribution Agreement, the Funds entered into a Second Amended and Restated
Contribution Agreement effective as of August 5, 2004. The Second Amended and
Restated Contribution Agreement contains substantially identical terms and
limitations as did the original Contribution Agreement.
13
ICON Income Fund Ten, LLC
Notes To Consolidated Financial Statements
March 31, 2005
(Unaudited)
(9) Line of Credit Agreement - continued
Effective March 8, 2005, the Initial Funds and the LLC entered into a
Seventh Amendment to the Loan and Security Agreement with Comerica Bank. This
Agreement releases ICON Cash Flow Partners L.P. Seven from all of its
obligations under the Loan and Security Agreement, dated as of May 30, 2002. As
such, ICON Cash Flow Partners L.P. Seven is no longer a party to the $17,500,000
line of credit.
Aggregate borrowings by all funds under the line of credit agreement
amounted to $11,830,000 at March 31, 2005. The LLC currently has no borrowings
under this line of credit.
14
Item 2. Manager's Discussion and Analysis of Financial Condition and Results of
Operations
The following is a discussion of our results of operations and current
financial position. This discussion should be read together with our unaudited
consolidated financial statements and related notes included elsewhere in this
report and the audited consolidated financial statements and related notes
included in our Annual Report on Form 10-K for the year ended December 31, 2004.
As used in this quarterly report on Form 10-Q, references to "we," "us,"
"our" or similar terms include ICON Income Fund Ten, LLC and its consolidated
subsidiary.
Forward-Looking Information - Certain statements within this Form 10-Q may
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are identified by
words such as "anticipate," "believe," "estimate," "expects," "intend,"
"predict" or "project" and similar expressions. This information may involve
risks and uncertainties that could cause actual results to differ materially
from the forward-looking statements. We believe that the expectations reflected
in such forward-looking statements are based on reasonable assumptions. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Any such forward-looking
statements are subject to risks and uncertainties and our future results of
operations could differ materially from historical results or current
expectations. Some of these risks are discussed in this report, and include,
without limitation, fluctuations in oil and gas prices; level of fleet additions
by competitors and industry overcapacity; changing customer demands for
aircraft; acts of terrorism; unsettled political conditions, war, civil unrest
and governmental actions, and environmental and labor laws. Our actual results
could differ materially from those anticipated by such forward-looking
statements due to a number of factors, some of which may be beyond our control,
including, without limitation:
o changes in our industry, interest rates or the general economy;
o the degree and nature of our competition;
o availability of qualified personnel;
o cash flows from operating activities may be less than our current level of
expenses and debt obligations;
o the financial condition of lessees; and
o lessee defaults.
Business Overview
We are an equipment leasing business formed on January 2, 2003. We began
active operations on August 22, 2003. We primarily engage in the business of
acquiring equipment subject to lease and, to a lesser degree, acquiring
ownership rights to items of leased equipment at lease expiration. Some of our
equipment leases will be acquired for cash and are expected to provide current
cash flow, which we refer to as "income" leases. The majority of the purchase
price of our other equipment leases will be borrowed, so these leases will
generate little or no current cash flow because substantially all of the rental
payments received from a lessee will be paid to a lender. For these "growth"
leases, we anticipate that the future value of the leased equipment will exceed
the cash portion of the purchase price paid for the equipment.
15
We expect to invest most of the net proceeds from our offering in items of
equipment that will be subject to a lease. After the net offering proceeds have
been invested, it is anticipated that additional investments will be made with
the cash generated from our initial investments to the extent that cash is not
needed for expenses, reserves and distributions to investors. The investment in
additional equipment in this manner is called "reinvestment." We anticipate
purchasing equipment from time to time for the next five years. This time frame
is called the "reinvestment period," which we may extend at our discretion for
an additional three years. After the "reinvestment period," we will then sell
our assets in the ordinary course of business during a time frame called the
"liquidation period." If we believe it would benefit investors to reinvest our
cash flow in equipment during the liquidation period, we may do so, but we will
not receive any additional fees in connection with such reinvestments. Our goal
is to complete the liquidation period in three years after the end of the
reinvestment period, but it may take longer to do so. Accordingly, an investor
should expect to hold his shares for at least 10 years from the time he invests.
Substantially all of our recurring operating cash flows are generated from
the operations of the "income" leases in our portfolio. On a monthly basis, we
deduct the expenses related to the recurring operations of the portfolio from
such revenues and assess the amount of the remaining cash flows that will be
required to fund known re-leasing costs and equipment management costs. Any
residual operating cash flows are considered available for distribution to the
additional members. We anticipate increases in cash available for distributions
to the additional members from the acquisition of more single-investor
transactions.
Our current equipment portfolio, which we own directly or through joint
venture investments with affiliates, consists primarily of the following:
Containership Industry
We have a 100% investment in three 3,300 TEU container vessels on bareboat
charter to ZIM Israel Navigation Co. Ltd. ("ZIM"), the 1991 ZIM Korea, the 1990
ZIM Canada and the 1991 ZIM Italia. The 1991 ZIM Korea and the 1990 ZIM Canada
have a bareboat charter that expires during June 2009 and the ZIM Italia has a
bareboat charter that expires during December 2009. The purchase price for the
ZIM Korea and ZIM Canada was approximately $70,700,000 comprised of (i)
approximately $18,400,000 in cash, and (ii) approximately $52,300,000 of
non-recourse debt. The purchase price for the ZIM Italia was approximately
$35,350,000 comprised of (i) approximately $9,200,000 in cash, and (ii)
approximately $26,150,000 of non-recourse debt.
Information Technology Industry
We have a 74% interest in information technology equipment, such as Sun
servers, HP servers, Dell desktop computers, and Panasonic laptop computers,
subject to a three year lease with Government Employees Insurance Company
("GEICO"). The expiration of the lease is March 31, 2007. Our share of the
purchase price was $4,330,626 in cash.
We have a 75% interest in a portfolio of leases currently in effect and
performing with various U.K. lessees. The portfolio is mostly comprised of
information technology equipment, including laptops, desktops and printers. The
leases all expire in less than five years. The purchase price was approximately
$2,815,000 in cash. Under the terms of the Participation Agreement with the
seller, we will receive 75% of all residual proceeds, which is defined as either
lease renewals or sales proceeds, as the equipment comes off lease.
We have a 100% interest in two Mitel Networks 3340 Global Branch Office
Solution Phone Systems on lease to CompUSA, Inc. One lease has a lease term of
approximately 48 months while the second has a lease term of approximately 58
months. The purchase price of the two systems, respectively, was approximately
$2,976,000 in cash and approximately $1,174,000 in cash.
We have a 100% interest in 101 Noritsu QSS-3011 digital mini-labs on lease
to the Rite Aid Corporation. The lease expires during December 2008. The
purchase price of the equipment was approximately $9,203,000 in cash.
16
2005 Portfolio Activity
Mitel Networks 3340 Global Branch Office Solution Phone Systems
During March 2005, we entered into an Assignment Agreement with The CIT
Group/Equipment Financing, Inc. for the purchase of a second Mitel Networks 3340
Global Branch Office Solution Phone System subject to lease with CompUSA, Inc.
The lease expires in December 2009. The purchase price was approximately
$1,174,000 in cash.
Four Double Box Girder Cranes
During December 2004, we entered into a Purchase Agreement with Varilease
Finance Group, Inc. for the purchase of Four Double Box Girder Cranes
manufactured by Proserv Anchor Crane Group on lease to WPS, Inc. with an
expiration date of March 2009. The purchase price was $894,048, of which we paid
$251,589 during December 2004. The remaining balance of the purchase price was
paid as follows: (a) we paid $27,220 on the date we received an installation
certificate for the first shipment; (b) we paid $511,230 on the due date of the
second installment, as defined in the agreement, and (c) we paid $104,009 on the
date we received an installation certificate for the second shipment. The lease
will commence on the first day of the calendar quarter following our receipt of
the second installation certificate. The lease term is for 48 months. This
transaction was completed in February 2005.
United Kingdom Information Technology Equipment Portfolio
During December 2004, we entered into a Commitment Agreement with Summit
Asset Management, Ltd. to purchase a 75% interest in a portfolio of leases
currently in effect and performing with various United Kingdom lessees. The
portfolio is mostly comprised of information technology equipment, including
laptops, desktops and printers. The leases expire within five years of our
acquisition. The purchase price was approximately $2,815,000 in cash. Under the
terms of a Participation Agreement with the seller, we will receive 75% of all
residual proceeds, which is defined as either lease renewals or sales proceeds,
as the equipment comes off lease. This transaction was completed during February
2005.
Bedside Entertainment and Communication Terminals
During December 2004, we entered into a Commitment Agreement with Summit
Asset Management, Ltd. for the purchase of approximately 8,762 bedside
entertainment and communication terminals, subject to lease with Premier Telecom
Contracts Limited. The equipment will be installed in several National Health
Service hospitals in the United Kingdom. The lessee is one of four companies in
the United Kingdom to receive the right to install and operate the equipment in
the hospitals, and the lessee anticipates it will have the exclusive right to
install and operate the equipment in fifteen hospitals by December 2006. The
Manager anticipates completing this transaction in July 2005.
Economic and Industry Factors
Our results of operations continue to be impacted by a number of factors
influencing the United States of America's economy as well as the equipment
leasing industry, some of which are discussed below.
17
United States Economy
The economy of the United States of America appears to be recovering, and
the leasing industry's outlook for the foreseeable future is encouraging. We
foresee an increase in capital spending by corporations through 2007 which
should increase the pool of available leases, and to that end, we believe there
will be more opportunities in this market. Nonetheless, a key obstacle still
facing the leasing industry is the continued low interest rate environment,
which reduces leasing volume inasmuch as customers are more prone to purchase
than lease. Other factors which may negatively affect the leasing industry are
the proposed legal and regulatory changes that may affect tax benefits of
leasing and the continued misperception by potential lessees, stemming from
Enron, WorldCom and others, that leasing should not play a central role as a
financing alternative. However, as economic growth continues and interest rates
inevitably begin to rise over time, we are optimistic that more lessees will
return to the marketplace.
Containership Industry
The containership industry experienced high levels of demand during 2004.
The volume of trade with China and other countries has been the primary catalyst
for this growth. China has reported significant growth increases in both its
volume of imports and exports in the past two years. This increased volume of
trade has resulted in shortages of containerships and container capacity.
Shipping lines report that freight rates have increased in line with the strong
demand. Although, favorable market conditions currently exist there are possible
problems on the horizon; sharply rising oil prices, the increased freight rates
and increased port congestion all negatively affect the containership industry.
Information Technology Industry
As a result of the computer hardware market's cyclical behavior and its
focus on the consumer, all hardware manufacturers are vulnerable to market down
turns. Regardless of the product being offered, the intrinsic boom-bust nature
of the technology sector challenges hardware companies to constantly try to
improve and/or create innovative hardware, aggressively pushing the incumbent
equipment into obsolescence. There is no assurance that we will be able to
locate a willing buyer or lessee for our assets, or if one is located, that the
buyer or lessee will pay a price for the asset at least equal to the appraised
value.
Inability to Remarket Assets
The market for some of our assets is not very liquid. If current equipment
lessees choose not to renew their leases or purchase the equipment upon
expiration of the lease, we will need to remarket the equipment. There is no
assurance that we will be able to locate a willing buyer or lessee for our
assets, or if one is located, that the buyer or lessee will pay a price for the
asset at least equal to the appraised value.
Critical Accounting Policies
An appreciation of our critical accounting policies is necessary to
understand our financial results. These policies may require the Manager to make
difficult and subjective judgments regarding uncertainties, and as a result,
such estimates may significantly impact our financial results. The precision of
these estimates and the likelihood of future changes depend on a number of
underlying variables and a range of possible outcomes. 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:
o Lease classification and revenue recognition
o Asset impairments
o Depreciation
18
Lease Classification and Revenue Recognition
The equipment we lease to third parties is classified either as a finance
lease, a leveraged lease, or an operating lease, which is determined based upon
the terms of each lease. Initial direct costs are capitalized and amortized over
the term of the related lease for both a finance lease and a leveraged lease.
For an operating lease, the initial direct costs are included as a component of
the cost of the equipment and depreciated. 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 minus the cost of
the leased equipment. Unearned income is recognized as finance income ratably
over the term of the lease.
For leveraged leases, we record, at lease inception, our net investment in
the equipment which consists of the minimum lease payments receivable, the
estimated unguaranteed residual value of the equipment at lease termination and
the initial direct costs related to the lease, net of the unearned income and
principal and interest on the related non-recourse debt. Unearned income is
recognized as income over the life of the lease at a constant rate of return on
the positive net investment.
For operating leases, income is recorded as rental income and is recognized
on the straight line method over the lease term.
Our Manager has an Investment Committee that approves each new equipment
acquisition. As part of the Committee's process, it determines the residual
value to be used once the acquisition 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 being
considered, how the equipment is integrated into the potential lessees business,
the length of the lease and industry in which the potential lessee operates.
Residual values are reviewed for potential impairment in accordance with our
policy to review all significant assets in our portfolio.
Asset Impairments
The significant assets in our portfolio are periodically reviewed, at least
annually, by management, to determine whether events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. Management
uses qualified third party appraisers to assist in the review process. An
impairment loss will be recognized only if the carrying amount of a long-lived
asset is not recoverable and exceeds its fair value. In such circumstances, we
will estimate the future cash flows (undiscounted and without interest charges)
expected to result from the use of the asset and its eventual disposition.
Future cash flows are the cash inflows expected to be generated by an asset less
the future outflows expected to be necessary to obtain those inflows. An
impairment loss will be measured as the amount by which the carrying amount of a
long-lived asset exceeds its fair value.
The events or changes in circumstances which generally indicate that an
asset may be impaired are (i) the estimated fair value of the underlying
equipment is less than our 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 remaining
obligation to the non-recourse lender and our residual position in the asset.
Generally, in the latter situation, the residual position relates to equipment
subject to third party notes payable non-recourse where the lessee remits their
rental payments directly to the lender and we do not recover our residual
position until the note payable non-recourse is repaid in full.
19
Depreciation
We record depreciation expense on equipment classified as an operating
lease. In order to calculate depreciation, we first determine the depreciable
equipment cost, which is the cost less estimated residual value. The estimated
residual value is our estimate of the value of the equipment at lease
termination. The estimated residual value is reviewed annually, by management,
to determine whether an impairment charge may be required. Management uses
qualified third party appraisers to assist in the review process. Depreciation
expense is recorded ratably over the term of the related lease.
New Accounting Pronouncements
On June 1, 2005 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 154 "Accounting Changes and Error
Corrections" ("SFAS 154") which replaces Accounting Principles Board Opinion No.
20, "Accounting Changes" ("APB 20") and SFAS No. 3, "Reporting Accounting
Changes in Interim Financial Statements," and changes the requirements for the
accounting for and reporting of a change in accounting principle. SFAS 154
requires retrospective application to prior periods' financial statements of a
voluntary change in accounting principle unless it is impracticable. APB 20
previously required that most voluntary changes in accounting principle be
recognized by including in net income of the period of the change the cumulative
effect of changing to the new accounting principle.
Management does not believe that any recently issued, but not yet effective
accounting pronouncements, if currently adopted, would have a material effect on
the accompanying consolidated financial statements.
Results of Operations for the Three Months Ended March 31, 2005 (the "2005
Quarter") and 2004 (the "2004 Quarter")
During April 2005 our offering period closed as we had raised approximately
$150,000,000. We are currently in our reinvestment period, which is anticipated
to last until April 2010, but may be extended for an additional three years.
During this period we expect to acquire both income leases and growth leases. As
our leases expire, we may sell the equipment and reinvest the proceeds in
additional equipment leases. We will incur both gains and losses on the sales of
equipment during the reinvestment period. During this period we expect to see
our rental income and finance income increase, as well as related expenses such
as depreciation and interest. We anticipate that the fees we pay to our Manager
to operate and manage our business affairs will increase during this period as
our Manager will be spending a greater portion of their time managing our
affairs.
Revenue for the 2005 Quarter and the 2004 Quarter are summarized as
follows:
Three Months Ended March 31,
2005 2004 Change
---- --- ------
Total revenue $ 5,750,797 $ 275,871 $ 5,474,926
================ =============== ================
Rental income $ 5,730,336 $ 275,871 $ 5,454,465
Income from investments in joint ventures $ 20,461 $ - $ 20,461
Revenues for the 2005 Quarter increased by $5,474,926, or 1,984.6%, as
compared to the 2004 Quarter. The increase in revenue is due primarily to the
leases we entered into in 2004, particularly at the end of the year. During the
2004 Quarter we only had one lease: Air Atlanta Icelandic. During the 2005
Quarter we had several more leases that contributed to the increase in rental
income. We anticipate rental income increasing substantially in 2005 due to an
increased level of lease transactions.
20
Expenses for the 2005 Quarter and the 2004 Quarter are summarized as follows:
Three Months Ended March 31,
2005 2004 Change
---- ---- -----
Total expenses $ 7,197,644 $ 740,574 $ 6,457,070
================= ============ =============
Depreciation $ 4,563,878 $ 205,576 $ 4,358,302
Amortization of prepaid service fees $ 894,570 $ 202,350 $ 692,220
Interest $ 955,194 $ - $ 955,194
Management fees - Manager $ 299,690 $ 122,966 $ 176,724
Administrative expense reimburesement - Manager $ 357,677 $ 190,574 $ 167,103
General and administrative $ 115,541 $ 19,108 $ 96,433
Minority interest $ 11,094 $ - $ 11,094
Expenses for the 2005 Quarter increased by $6,457,070, or 871.9%, over the
2004 Quarter. The overall increase in expenses is due primarily to increased
lease activity. As discussed above, we had one lease in the 2004 Quarter and
several more in the 2005 Quarter. The leases we entered into had greater
equipment cost, which accounts for the increase in depreciation. The increase in
amortization of prepaid service fees is due to our continued admission of
additional members and the resulting amortization of these fees. The increase in
interest expense is due solely to the acquisition of the ZIM vessels. We
financed a large portion of these acquisitions. The increase in management fees
- - Manager is a direct result of continued acquisitions. The increase in
administrative expense reimbursements - Manager is due to the additional
services provided by the Manager as we acquire additional leased equipment. The
Manager performs certain functions relating to the management of our equipment.
Such services include the collection of lease payments from the lessee of the
equipment, re-leasing services in connection with equipment which is off-lease,
inspections of the equipment, liaison with and general supervision of lessees to
assure that the equipment is being properly operated and maintained, monitoring
performance by the lessees of their obligations under the leases and the payment
of operating expenses.
Net Loss
As a result of the foregoing factors, net loss in the 2005 Quarter and the
2004 Quarter was $1,446,847 and $464,703, respectively. The net loss per
weighted average additional member shares was $11.44 and $14.79 for the 2005
Quarter and 2004 Quarter, respectively.
Liquidity and Capital Resources
Sources of Cash
We believe that with the cash we have currently available, the additional
cash we received through the closing of our offering period, which occurred
during April 2005, and from cash being generated from our leases, we have
sufficient cash to continue our operations into the foreseeable future. We do
not anticipate the need to borrow from our line of credit.
Our main source of cash flow for the three months ended March 31, 2005 and
2004 was from financing activities, principally through the issuance of
additional members' shares totaling approximately $35,269,000 and $13,705,000,
respectively, net of sales and offering expenses. For the three months ended
March 31, 2005 and 2004, we admitted 39,852.482 and 15,821.31 additional
members' shares, respectively.
21
Our primary cash outflows for the 2005 Quarter and the 2004 Quarter were
for prepaid service fees, distributions to members and for acquisitions of
equipment subject to lease. We paid approximately $2,590,000 and $1,028,000 in
prepaid service fees for the 2005 Quarter and the 2004 Quarter, respectively.
For the 2005 Quarter and the 2004 Quarter we paid distributions to our members
of approximately $2,474,000 and $565,000, respectively. We paid approximately
$2,167,000 for our investments in equipment during the 2005 Quarter and
approximately $22,002,000, including escrow deposits, for the 2004 Quarter. We
expect to continue acquiring equipment subject to lease, and also make other
types of related investments during 2005.
We have amounts available to borrow, if necessary, under our line of credit
agreement with Comerica Bank.
Financings and Borrowings
We have non-recourse debt at March 31, 2005. Our non-recourse debt consists
of notes payable in which the lender has a security interest in the equipment
and an assignment of the rental payments under the leases. The lender is being
paid directly by the lessee. The outstanding balance of our non-recourse notes
payable at March 31, 2005 was $70,998,296.
Certain of our affiliates, specifically; ICON Cash Flow Partners L.P.
Seven, ICON Income Fund Eight A L.P.; ICON Income Fund Eight B L.P. and ICON
Income Fund Nine, LLC (collectively, the "Initial Funds"), entered into a
$17,500,000 line of credit agreement with Comerica Bank as of May 30, 2002, as
amended. Interest accrues on all outstanding balances, at an interest rate equal
to the Comerica Bank base interest rate plus 1% (together is 6.75% at March 31,
2005). Under the terms of the line of credit agreement, the Initial Funds may
borrow money from Comerica Bank with all borrowings to be jointly and severally
collateralized by (i) cash, and (ii) the present values of certain rents
receivable and equipment owned by the Initial Funds. Effective August 5, 2004,
the line of credit agreement was amended to add us as a borrower. The Initial
Funds and us are collectively referred to as the Borrowers. The line of credit
agreement expires on December 30, 2005.
The Initial Funds entered into a Contribution Agreement, dated May 30,
2002, as subsequently amended to include us, pursuant to which the Borrowers
have agreed to certain restrictions on the amounts and terms of their respective
borrowings under the line of credit agreement in order to minimize the risk that
a Borrower would be unable to repay its allocable portion of outstanding line of
credit obligations at any time. These restrictions include borrowing in excess
of the lesser of (a) an amount each Borrower could reasonably expect to repay in
one year from its projected cash flow, or (b) the greater of (i) the borrowing
base, as defined in the line of credit agreement, as applied to such and (ii)
50% of the net worth of such Borrower. The Contribution Agreement provides that,
in the event a Borrower pays an amount under this agreement in excess of its
allocable share of the total obligations under the line of credit agreement,
whether by reason of an event or default or otherwise, the other Borrowers will
immediately make a contribution payment to such Borrower and in such amount that
the aggregate amount paid by each Borrower reflects its allocable share of the
aggregate obligations under the line of credit agreement. The Borrowers'
obligations to each other under the Contribution Agreement are collateralized by
a subordinate lien on the assets of each participating Borrower.
Effective March 8, 2005, the Borrowers entered into a Seventh Amendment to
the Loan and Security Agreement with Comerica Bank. This Agreement releases ICON
Cash Flow Partners L.P. Seven from all of its obligations under the Loan and
Security Agreement dated as of May 30, 2002. As such, ICON Cash Flow Partners
L.P. Seven is no longer a party to the $17,500,000 line of credit.
Aggregate borrowings by all Funds under the line of credit agreement
amounted to $11,830,000 at March 31, 2005. We currently have no borrowings under
this line.
22
Distributions
We pay monthly distributions to our members beginning with the first month
after the additional members' admission through the termination of the operating
period, which we anticipate will be during April 2010. For the three months
ended March 31, 2005, we paid distributions of $2,448,959 to additional members
and $24,737 to the Manager.
Commitments
At March 31, 2005 we are party to non-recourse loan agreements. The lender
has security interests in equipment relating to the non-recourse debt and an
assignment of the rental payments under the leases. If the lessee were to
default on the non-recourse debt the equipment would be returned to the lender
in extinguishment of the non-recourse debt.
At March 31, 2005 we had a material commitment to purchase 8,762 bedside
entertainment communication terminals subject to lease with Premier Telecom
Contracts Limited for approximately $24,000,000. The lessee is one of four
companies in the United Kingdom to receive the right to install and operate the
equipment in the hospitals, and the lessee anticipates it will have the
exclusive right to install and operate the equipment in fifteen hospitals by
December 2006.
Risks and Uncertainties
At March 31, 2005, except as noted above in the Business Overview section
and listed below, we believe there were no known trends or demands, commitments,
events or uncertainties which are likely to have a material effect on our
liquidity.
Set forth below and elsewhere in this report and in other documents we file
with the Securities and Exchange Commission are risks and uncertainties that
could cause our actual results to differ materially from the results
contemplated by the forward-looking statements contained in this report and
other periodic statements we make, including, but not limited to, the following:
o Some states and countries require relatively burdensome processes to
repossess and sell equipment subject to a defaulted debt. In the event
repossession is required, there is no assurance that we will be able to
quickly repossess the asset and remarket it.
o The current market is improving for wide-body freighters, such as our 1979
McDonnell Douglas DC-10-30F, but the market is still soft. It is expected
that there may be a gradual improvement during 2005 and full recovery for
freighter aircraft by lease termination. While the market for these
aircraft is cyclical, there can be no assurance that it will recover by
lease termination. Failure of the market to recover significantly may
result in our inability to realize our investment in the residuals of the
1979 McDonnell Douglas DC-10-30F aircraft currently on lease to FedEx.
o As a result of the computer hardware market's cyclical behavior and its
focus on the consumer, all hardware manufacturers are vulnerable to market
down turns. Regardless of the product being offered, the intrinsic
boom-bust nature of the technology sector challenges hardware companies to
constantly try to improve and/or create innovative hardware, aggressively
pushing the incumbent equipment into obsolescence. There is no assurance
that we will be able to locate a willing buyer or lessee for our assets, or
if one is located, that the buyer or lessee will pay a price for the asset
at least equal to the appraised value.
23
o Our operations are subject to the jurisdiction of a number of federal
agencies, including the Federal Aviation Administration. New regulatory
rulings may negatively impact our financial results and the economic value
of our assets.
o Our results are exposed to foreign exchange rate fluctuations as the rental
payments are converted from the local currency into United States currency.
As exchange rates vary, revenue and other operating results, when
converted, may differ materially from expectations. We are also subject to
gains and losses on foreign currency transactions, which could vary based
on fluctuations in exchange rates and the timing of the transactions and
their settlement.
o The equipment leasing industry is highly competitive. When seeking leasing
transactions for acquisition, we compete with leasing companies,
manufacturers that lease their products directly, equipment brokers and
dealers and financial institutions, including commercial banks and
insurance companies. Many competitors are larger than us and have greater
financial resources than we do.
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
terminations (and thus the overall cash flow from our leases) may be expected to
increase with inflation as the cost of similar new and used equipment increases.
If interest rates increase significantly, the lease rates that we can
obtain on future leases may be expected to increase as the cost of capital is a
significant factor in the pricing of lease financing. Leases already in place,
for the most part, would not be affected by changes in interest rates.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
We, like most other companies, are exposed to certain market risks, which
includes changes in interest rates and the demand for equipment (and the related
residuals) 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.
In general, we manage our exposure to interest rate risk by obtaining fixed
rate debt. The fixed rate debt is structured so as to match the cash flows
required to service the debt to the payment streams under fixed rate lease
receivables. The payments under the leases are assigned to the lenders in
satisfaction of the debt. We may finance leases with a floating interest rate
and we are therefore exposed to interest rate risk until fixed rate financing is
arranged or we enter into interest rate swaps.
To hedge our interest rate risk on our floating rate debt, we entered into
three interest rate swap contracts that effectively convert the underlying
floating interest rates to a fixed interest rate. In general, these swap
agreements eliminate our interest rate risk associated with variable interest
rate borrowings. However, we are exposed to and manage credit risk associated
with the counterparty to the swap agreement by dealing only with institutions we
consider financially sound.
24
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
We carried out an evaluation, under the supervision and with the
participation of management of ICON Capital Corp., our Manager, including the
Chief Executive Officer and the Principal Financial and Accounting Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report pursuant to the
Securities Exchange Act of 1934. Based upon the evaluation, except as noted
below, the Chief Executive Officer and the Principal Financial and Accounting
Officer concluded that our disclosure controls and procedures were effective.
While evaluating our disclosure controls and procedures we recognized that
greater internal controls were needed to aid in a more efficient closing of our
financial statements, thereby requiring additional skilled accounting staff.
Towards the end of the third quarter of 2004, the Company hired a new senior
vice president of accounting and the Company is in the process of seeking
additional accounting staff in order to better effectuate the Company's internal
controls. We will continue to evaluate our disclosure controls and procedures to
determine their effectiveness and adequacy and will take the steps necessary, in
our opinion, to ensure the adequacy of the Company's disclosure controls and
procedures.
In designing and evaluating our disclosure controls and procedures, we
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 disclosure
controls and procedures have been designed to meet reasonable assurance
standards. Disclosure controls and procedures cannot detect or prevent all error
and fraud. Some inherent limitations in disclosure controls and procedures
include costs of implementation, faulty decision-making, simple error and
mistake. Additionally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based, in part, upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
anticipated and unanticipated future conditions. Over time, controls may become
inadequate because of changes in conditions, or the degree of compliance with
established policies or procedures.
Our Manager's Chief Executive Officer and Principal Financial and
Accounting Officer have determined that no weakness in disclosure controls and
procedures had any material effect on the accuracy and completeness of the
Company's financial reporting and disclosure included in this report.
25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of conducting our business, there may be certain
claims, suits and complaints filed against us. In the opinion of management, the
outcome of such matters, if any, will not have a material impact on our
consolidated financial position or results of operations. No material legal
proceedings are currently pending against us or against any of our assets.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
first quarter 2005.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
31.1 Certification of Chairman and Chief Executive Officer.
31.2 Certification of Executive Vice President and Principal Financial and
Accounting Officer.
32.1 Certification of Chairman and Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification of Executive Vice President and Principal Financial and
Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
26
SIGNATURES
Pursuant to the requirements 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 Income Fund Ten, LLC (Registrant) By
its Manager, ICON Capital Corp.
Date: June 30, 2005 /s/ Beaufort J.B. Clarke
---------------------------------------------
Beaufort J.B. Clarke
Chairman, Chief Executive Officer and Director
Date: June 30, 2005 /s/ Thomas W. Martin
----------------------------------------------
Thomas W. Martin
Executive Vice President and Director
(Principal Financial and Accounting Officer)
27
Exhibit 31.1
Principal Executive Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. ss.1350)
I, Beaufort J.B. Clarke, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ICON Income Fund Ten,
LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures as
of the end of the period covered by this quarterly report based on
such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the board of directors of the Manager (or
persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control which are reasonably likely to
materially affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: June 30, 2005
/s/ Beaufort J.B. Clarke
- ----------------------------------
Chairman, Chief Executive Officer and Director
ICON Capital Corp.
Manager of ICON Income Fund Ten, LLC
28
Exhibit 31.2
Principal Executive Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. ss.1350)
I, Thomas W. Martin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ICON Income Fund Ten,
LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures as
of the end of the period covered by this report based on such
evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the board of directors of the Manager (or
persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control which are reasonably likely to
materially affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: June 30, 2005
/s/ Thomas W. Martin
- -----------------------------------
Executive Vice President and Director
(Principal Financial and Accounting Officer)
ICON Capital Corp.
Manager of ICON Income Fund Ten, LLC
29
Exhibit 32.1
Principal Executive Officer Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. ss.1350)
I, Beaufort J.B. Clarke, Chairman and Chief Executive Officer of ICON Capital
Corp., the Manager of ICON Income Fund Ten, LLC, certify, pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, (18 U.S.C. 1350), that, to the best of my
knowledge:
(1) the Quarterly Report on Form 10-Q for the period ended March 31, 2005
(the "Periodic Report") which this statement accompanies fully
complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) the information contained in the Periodic Report fairly presents, in
all material respects, the financial condition and results of
operations of ICON Income Fund Ten, LLC.
Date: June 30, 2005
/s/ Beaufort J.B. Clarke
- -------------------------------------
Chairman, Chief Executive Officer and Director
ICON Capital Corp.
Manager of ICON Income Fund Ten, LLC
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
The information contained in this Exhibit 32.1 is being furnished and shall not
be deemed "filed" for the purposes of Section 18 of the Securities Exchange Act
of 1934, as amended, or otherwise subject to the liabilities of that section.
The information contained in this Exhibit 32.1 shall not be incorporated by
reference into any registration statement or other document pursuant to the
Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as
amended, except as shall be expressly set forth by specific reference to this
Exhibit 32.1 in such filing.
30
Exhibit 32.2
Principal Executive Officer Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. ss.1350)
I, Thomas W. Martin, Executive Vice President (Principal Financial and
Accounting Officer) of ICON Capital Corp., the Manager of ICON Income Fund Ten,
LLC, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, (18
U.S.C. 1350), that, to the best of my knowledge:
(1) the Quarterly Report on Form 10-Q for the period ended March 31, 2005
(the "Periodic Report") which this statement accompanies fully
complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) the information contained in the Periodic Report fairly presents, in
all material respects, the financial condition and results of
operations of ICON Income Fund Ten, LLC.
Date: June 30, 2005
/s/ Thomas W. Martin
- ------------------------------------
Executive Vice President and Director
(Principal Financial and Accounting Officer)
ICON Capital Corp.
Manager of ICON Income Fund Ten, LLC
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
The information contained in this Exhibit 32.2 is being furnished and shall not
be deemed "filed" for the purposes of Section 18 of the Securities Exchange Act
of 1934, as amended, or otherwise subject to the liabilities of that section.
The information contained in this Exhibit 32.2 shall not be incorporated by
reference into any registration statement or other document pursuant to the
Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as
amended, except as shall be expressly set forth by specific reference to this
Exhibit 32.2 in such filing.
31