Attached files
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
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For the quarterly period ended
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March 31, 2011
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the transition period from
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to
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Commission_File_Number_
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000-50654
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ICON Income Fund Ten, LLC
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(Exact name of registrant as specified in its charter)
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Delaware
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35-2193184
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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100 Fifth Avenue, 4th Floor, New York, New York
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10011
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(Address of principal executive offices)
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(Zip code)
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(212) 418-4700
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(Registrant's telephone number, including area code)
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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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
[ ] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,’’ “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
Number of outstanding shares of limited liability company interests of the registrant on May 6, 2011 is 148,211.
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Table of Contents
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(A Delaware Limited Liability Company)
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Consolidated Balance Sheets
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Assets
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March 31,
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||||||||
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2011
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December 31,
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(unaudited)
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2010
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Current assets:
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Cash and cash equivalents
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$ | 3,797,674 | $ | 2,740,590 | ||||
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Current portion of net investment in finance leases
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- | 616,088 | ||||||
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Current portion of notes receivable
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623,294 | - | ||||||
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Service contracts receivable
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361,118 | 441,742 | ||||||
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Equipment held for sale
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23,393 | 23,393 | ||||||
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Other current assets
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674,299 | 845,417 | ||||||
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Total current assets
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5,479,778 | 4,667,230 | ||||||
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Non-current assets:
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Net investment in finance leases, less current portion
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37,041,918 | 35,901,863 | ||||||
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Leased equipment at cost (less accumulated depreciation of
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$916,104 and $900,124, respectively)
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2,135 | 18,115 | ||||||
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Fixed assets (less accumulated depreciation of
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$4,444,466 and $3,909,365, respectively)
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2,522,162 | 2,804,715 | ||||||
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Notes receivable, less current portion
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335,799 | - | ||||||
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Investments in joint ventures
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17,928,821 | 24,531,251 | ||||||
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Investments in unguaranteed residual values
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- | 128,368 | ||||||
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Other non-current assets, net
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48,453 | 83,213 | ||||||
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Total non-current assets
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57,879,288 | 63,467,525 | ||||||
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Total Assets
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$ | 63,359,066 | $ | 68,134,755 | ||||
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Liabilities and Equity
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Current liabilities:
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Due to Manager and affiliates
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$ | 117,363 | $ | 171,156 | ||||
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Accrued expenses and other current liabilities
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1,841,164 | 2,023,237 | ||||||
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Total Liabilities
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1,958,527 | 2,194,393 | ||||||
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Commitments and contingencies (Note 10)
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Equity:
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Members' Equity:
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Additional Members
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62,913,980 | 68,395,072 | ||||||
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Manager
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(676,937 | ) | (621,572 | ) | ||||
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Accumulated other comprehensive loss
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(1,732,312 | ) | (1,964,780 | ) | ||||
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Total Members' Equity
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60,504,731 | 65,808,720 | ||||||
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Noncontrolling Interests
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895,808 | 131,642 | ||||||
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Total Equity
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61,400,539 | 65,940,362 | ||||||
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Total Liabilities and Equity
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$ | 63,359,066 | $ | 68,134,755 | ||||
See accompanying notes to consolidated financial statements.
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(A Delaware Limited Liability Company)
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Consolidated Statements of Operations
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(unaudited)
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Three Months Ended March 31,
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2011
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2010
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Revenue:
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Rental income
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$ | 160,197 | $ | 2,139,836 | ||||
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Finance income
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1,520,305 | 1,344,221 | ||||||
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Servicing income
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1,248,347 | 1,489,289 | ||||||
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(Loss) income from investments in joint ventures
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(4,509,963 | ) | 695,302 | |||||
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Net gain on sales of equipment and unguaranteed residual values
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588,889 | 194,607 | ||||||
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Interest and other income
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95,837 | 39,582 | ||||||
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Total revenue
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(896,388 | ) | 5,902,837 | |||||
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Expenses:
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Management fees - Manager
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125,094 | 229,085 | ||||||
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Administrative expense reimbursements - Manager
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167,363 | 195,927 | ||||||
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General and administrative
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1,943,538 | 1,500,109 | ||||||
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Interest
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6,348 | 8,578 | ||||||
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Depreciation and amortization
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402,508 | 1,657,130 | ||||||
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Total expenses
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2,644,851 | 3,590,829 | ||||||
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Net (loss) income
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(3,541,239 | ) | 2,312,008 | |||||
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Less: Net income attributable to noncontrolling interests
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36,032 | 103,181 | ||||||
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Net (loss) income attributable to Fund Ten
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$ | (3,577,271 | ) | $ | 2,208,827 | |||
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Net (loss) income attributable to Fund Ten allocable to:
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Additional Members
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$ | (3,541,498 | ) | $ | 2,186,739 | |||
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Manager
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(35,773 | ) | 22,088 | |||||
| $ | (3,577,271 | ) | $ | 2,208,827 | ||||
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Weighted average number of additional
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shares of limited liability company interests outstanding
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148,211 | 148,211 | ||||||
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Net (loss) income attributable to Fund Ten per weighted
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average additional share of limited liability company interests outstanding
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$ | (23.89 | ) | $ | 14.75 | |||
See accompanying notes to consolidated financial statements.
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(A Delaware Limited Liability Company)
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Consolidated Statement of Changes in Equity
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Members' Equity
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Additional Shares
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of Limited Liability
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Accumulated
Other |
Total
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Company Interests
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Additional
Members |
Manager
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Comprehensive
Loss |
Members'
Equity |
Noncontrolling
Interests |
Total
Equity |
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Balance, December 31, 2010
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148,211 | $ | 68,395,072 | $ | (621,572 | ) | $ | (1,964,780 | ) | $ | 65,808,720 | $ | 131,642 | $ | 65,940,362 | |||||||||||||
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Comprehensive income:
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Net (loss) income
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- | (3,541,498 | ) | (35,773 | ) | - | (3,577,271 | ) | 36,032 | (3,541,239 | ) | |||||||||||||||||
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Change in valuation of interest
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rate swap contracts
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- | - | - | 90,447 | 90,447 | - | 90,447 | |||||||||||||||||||||
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Currency translation adjustments
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- | - | - | 142,021 | 142,021 | - | 142,021 | |||||||||||||||||||||
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Total comprehensive income
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232,468 | (3,344,803 | ) | 36,032 | (3,308,771 | ) | ||||||||||||||||||||||
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Stock based compensation in subsidiary
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- | 221,553 | 2,238 | - | 223,791 | 74,597 | 298,388 | |||||||||||||||||||||
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Investment by noncontrolling interest in subsidiary
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- | (611,132 | ) | (6,173 | ) | - | (617,305 | ) | 775,944 | 158,639 | ||||||||||||||||||
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Cash distributions
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- | (1,550,015 | ) | (15,657 | ) | - | (1,565,672 | ) | (122,407 | ) | (1,688,079 | ) | ||||||||||||||||
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Balance, March 31, 2010 (unaudited)
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148,211 | $ | 62,913,980 | $ | (676,937 | ) | $ | (1,732,312 | ) | $ | 60,504,731 | $ | 895,808 | $ | 61,400,539 | |||||||||||||
See accompanying notes to consolidated financial statements.
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(A Delaware Limited Liability Company)
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Consolidated Statements of Cash Flows
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(unaudited)
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Three Months Ended March 31,
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2011
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2010
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Cash flows from operating activities:
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Net (loss) income
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$ | (3,541,239 | ) | $ | 2,312,008 | |||
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Adjustments to reconcile net (loss) income to net cash
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provided by operating activities:
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Finance income
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(1,520,305 | ) | (1,344,221 | ) | ||||
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Loss (income) from investments in joint ventures
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4,509,963 | (695,302 | ) | |||||
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Net gain on sales of equipment and unguaranteed residual values
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(588,889 | ) | (194,607 | ) | ||||
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Depreciation and amortization
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402,508 | 1,657,130 | ||||||
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Stock based compensation
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298,388 | - | ||||||
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Loss on financial instruments
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2,740 | 1,789 | ||||||
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Changes in operating assets and liabilities:
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Collection of finance leases
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996,338 | 378,900 | ||||||
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Service contracts receivable
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45,699 | (31,884 | ) | |||||
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Other assets, net
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822,161 | (17,370 | ) | |||||
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Deferred revenue
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- | 14,630 | ||||||
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Due to/from Manager and affiliates, net
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(54,332 | ) | (7,414 | ) | ||||
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Accrued expenses and other current liabilities
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(191,809 | ) | (153,416 | ) | ||||
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Distributions from joint ventures
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363,440 | 182,341 | ||||||
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Net cash provided by operating activities
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1,544,663 | 2,102,584 | ||||||
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Cash flows from investing activities:
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Proceeds from sales of equipment and unguaranteed residual values
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128,368 | 455,140 | ||||||
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Repayments of note receivable
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247,072 | - | ||||||
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Purchase of equipment
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- | (3,236 | ) | |||||
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Distributions received from joint ventures in excess of profits
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568,060 | 860,075 | ||||||
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Net cash provided by investing activities
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943,500 | 1,311,979 | ||||||
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Cash flows from financing activities:
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Proceeds from revolving line of credit, recourse
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- | 700,000 | ||||||
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Repayments of revolving line of credit, recourse
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- | (100,000 | ) | |||||
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Proceeds from sale of subsidiary shares
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158,639 | - | ||||||
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Cash distributions to members
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(1,565,672 | ) | (3,218,731 | ) | ||||
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Distributions to noncontrolling interests
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(122,407 | ) | (418,868 | ) | ||||
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Net cash used in financing activities
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(1,529,440 | ) | (3,037,599 | ) | ||||
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Effects of exchange rates on cash and cash equivalents
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98,361 | (60,210 | ) | |||||
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Net increase in cash and cash equivalents
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1,057,084 | 316,754 | ||||||
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Cash and cash equivalents, beginning of the period
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2,740,590 | 2,428,058 | ||||||
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Cash and cash equivalents, end of the period
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$ | 3,797,674 | $ | 2,744,812 | ||||
See accompanying notes to consolidated financial statements.
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ICON Income Fund Ten, LLC
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(A Delaware Limited Liability Company)
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Consolidated Statements of Cash Flows
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(unaudited)
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Three Months Ended March 31,
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2011
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2010
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Supplemental disclosure of non-cash investing and financing activities:
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Transfer from leased equipment at cost to net investment in finance leases
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$ | - | $ | 2,440,135 | ||||
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Exchange of investment in joint venture for notes receivable
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$ | 1,251,414 | $ | - | ||||
See accompanying notes to consolidated financial statements.
5
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
March 31, 2011
(unaudited)
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(1)
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Basis of Presentation and Consolidation
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The accompanying consolidated financial statements of ICON Income Fund Ten, LLC (the “LLC”) have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission for Quarterly Reports on Form 10-Q. In the opinion of the manager of the LLC, ICON Capital Corp., a Delaware corporation (the “Manager”), all adjustments 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 Annual Report on Form 10-K for the year ended December 31, 2010. 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 and other controlled entities. All intercompany accounts and transactions have been eliminated in consolidation. In joint ventures where the LLC has majority ownership, the financial condition and results of operations of the joint venture are consolidated. Noncontrolling interest represents the minority owner’s proportionate share of its equity in the joint venture. The noncontrolling interest is adjusted for the minority owner’s share of the earnings, losses, investments and distributions of the joint venture.
The LLC accounts for its noncontrolling interests in joint ventures where the LLC has influence over financial and operational matters, generally 50% or less ownership interest, under the equity method of accounting. In such cases, the LLC’s original investments are recorded at cost and adjusted for its share of earnings, losses and distributions. The LLC accounts for investments in joint ventures where the LLC has virtually no influence over financial and operational matters using the cost method of accounting. In such cases, the LLC’s original investments are recorded at cost and any distributions received are recorded as revenue. All of the LLC’s investments in joint ventures are subject to its impairment review policy.
Recent Accounting Pronouncements
There are no recent accounting pronouncements that had or are expected to have a significant impact on the LLC’s consolidated financial statements.
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(2)
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Net Investment in Finance Leases
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Net investment in finance leases consisted of the following:
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March 31,
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December 31,
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2011
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2010
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Minimum rents receivable, net
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$ | 53,906,090 | $ | 54,902,428 | ||||
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Estimated residual values
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7,300,000 | 7,300,000 | ||||||
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Unearned income
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(24,164,172 | ) | (25,684,477 | ) | ||||
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Net investment in finance leases
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37,041,918 | 36,517,951 | ||||||
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Less: Current portion of net investment in finance leases
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- | 616,088 | ||||||
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Net investment in finance leases, less current portion
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$ | 37,041,918 | $ | 35,901,863 | ||||
Telecommunications Equipment
On March 31, 2011, at the expiration of the leases and in accordance with their terms, a joint venture owned 79.31% by the LLC and 20.69% by ICON Income Fund Eight A L.P. Liquidating Trust, an entity also managed by the Manager, sold telecommunications equipment subject to leases with Global Crossing Telecommunications, Inc. (“Global Crossing”) to Global Crossing for the aggregate purchase price of $5.
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ICON Income Fund Ten, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
March 31, 2011
(unaudited)
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(3)
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Notes Receivable
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Effective January 1, 2011, the LLC exchanged its 12.25% ownership interest in a joint venture, for notes receivable from Northern Capital Associates, which were previously owned by the joint venture. The aggregate principal balance of the notes was approximately $1,237,000, which accrue interest at rates ranging from 9.47% to 9.895% and mature between December 15, 2011 and February 15, 2013. No gain or loss was recorded as a result of this transaction. Upon completion of the exchange, the joint venture was terminated.
Credit Quality of Notes Receivable and Allowance for Credit Losses
The Manager weighs all credit decisions on a combination of external credit ratings as well as internal credit evaluations of all potential borrowers. A potential borrower’s credit application is analyzed using those credit ratings as well as the potential borrower’s financial statements and other financial data deemed relevant.
The LLC’s notes receivable are limited in number. Accordingly, the LLC does not aggregate notes receivable into portfolio segments or classes. Due to the limited number of notes receivable, the LLC is able to estimate the allowance for credit losses based on a detailed analysis of each note receivable as opposed to using portfolio based metrics and allowance for credit losses. Notes are analyzed quarterly and categorized as either performing or nonperforming based on payment history. If a note becomes non-performing due to a borrower’s missed scheduled payments or failed financial covenants, the Manager analyzes whether a reserve should be established or the note should be restructured. Such events are specifically disclosed in the discussion of each note held. As of March 31, 2011, the Manager determined that no allowance for credit losses was required.
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(4)
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Investments in Joint Ventures
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ICON Mayon, LLC
On June 26, 2007, the LLC and ICON Leasing Fund Twelve, LLC (“Fund Twelve”), formed a joint venture, with ownership interests of 49% and 51%, respectively. The joint venture purchased a 98,507 deadweight ton Aframax product tanker, the Mayon Spirit, from an affiliate of Teekay Corporation (“Teekay”), which was bareboat chartered back to Teekay for a term of 48 months. As a result of recent negotiations to remarket certain vessels during the three months ended March 31, 2011, the Manager reviewed the LLC’s investment in the joint venture and determined that the net book value of the vessel under lease exceeded the fair value. As a result, the joint venture recognized a non-cash impairment charge of approximately $11,291,000, of which the LLC’s share was approximately $5,532,000.
The results of operations of the joint venture are summarized below:
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Three Months Ended March 31,
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2011
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2010
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Revenue
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$ | 1,549,555 | $ | 1,557,439 | ||||
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Net (loss) income
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$ | (10,560,060 | ) | $ | 564,237 | |||
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LLC's share of net (loss) income
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$ | (5,155,603 | ) | $ | 295,302 | |||
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(5)
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Revolving Line of Credit, Recourse
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As of March 31, 2011, the LLC and certain entities managed by the Manager (collectively, the “Borrowers”) were party to a Commercial Loan Agreement, as amended (the “Prior Loan Agreement”), with California Bank & Trust (“CB&T”). At March 31, 2011, there were no obligations outstanding under the Prior Loan Agreement and the Borrowers were in compliance with all covenants under the Prior Loan Agreement. As of May 10, 2011, the Prior Loan Agreement was terminated.
7
ICON Income Fund Ten, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
March 31, 2011
(unaudited)
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(6)
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Transactions with Related Parties
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The Manager performs certain services relating to the management of the LLC’s equipment leasing and other financing activities. Such services include, but are not limited to, the collection of lease payments from the lessees of the equipment or loan payments from borrowers, re-leasing services in connection with equipment that is off-lease, inspections of the equipment, liaising with and general supervision of lessees and borrowers to ensure 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.
Administrative expense reimbursements were costs incurred by the Manager or its affiliates that were necessary to the LLC’s operations. These costs included the Manager’s and its affiliates’ legal, accounting, investor relations and operations personnel costs, as well as professional fees and other costs that were charged to the LLC based upon the percentage of time such personnel dedicated to the LLC. Excluded were salaries and related costs, office rent, travel expenses and other administrative costs incurred by individuals with a controlling interest in the Manager.
Fees and other expenses paid or accrued by the LLC to the Manager or its affiliates were as follows:
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Three Months Ended March 31,
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Entity
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Capacity
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Description
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2011
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2010
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ICON Capital Corp.
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Manager
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Management fees (1)
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$ | 125,094 | $ | 229,085 | ||||||
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ICON Capital Corp.
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Manager
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Administrative expense reimbursements (1)
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167,363 | 195,927 | ||||||||
| $ | 292,457 | $ | 425,012 | |||||||||
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(1) Amount charged directly to operations.
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At March 31, 2011, the LLC had an obligation of $117,363 due to the Manager and affiliates, for administrative expense reimbursements.
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(7)
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Derivative Financial Instruments
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The LLC 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 its non-recourse long-term debt. The LLC enters into these instruments only for hedging underlying exposures. The LLC does 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 the LLC believes that these are effective economic hedges.
The LLC accounts for derivative financial instruments in accordance with the accounting pronouncements that established accounting and reporting standards for derivative financial instruments. These accounting pronouncements require the LLC to recognize all derivatives as either assets or liabilities on the consolidated balance sheets and measure those instruments at fair value. The LLC recognizes the fair value of all derivatives as either assets or liabilities on the consolidated balance sheets and changes in the fair value of such instruments are recognized immediately in earnings unless certain accounting criteria established by the accounting pronouncements are met.
8
ICON Income Fund Ten, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
March 31, 2011
(unaudited)
|
(7)
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Derivative Financial Instruments - continued
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These criteria demonstrate that the derivative is expected to be highly effective at offsetting changes in the fair value or expected cash flows of the underlying exposure at both the inception of the hedging relationship and on an ongoing basis and include an evaluation of the counterparty risk and the impact, if any, on the effectiveness of the derivative. If these criteria are met, which the LLC must document and assess at inception and on an ongoing basis, the LLC recognizes the changes in fair value of such instruments in accumulated other comprehensive income (loss) (“AOCI”), 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.
Interest Rate Risk
Interest rate derivatives are used to add stability to interest expense and to manage exposure to interest rate movements on the LLC’s variable non-recourse debt. The strategy to accomplish this objective is to match the projected future cash flows with the underlying debt service. Interest rate swaps designated as cash flow hedges involve the receipt of floating-rate interest payments from counterparty in exchange for the LLC or joint ventures making fixed interest rate payments over the life of the agreements without exchange of the underlying notional amount.
As of March 31, 2011, the LLC had interests through joint ventures in three floating-to-fixed interest rate swaps relating to ICON Eagle Corona Holdings, LLC (“ICON Corona Holdings”), ICON Eagle Carina Holdings, LLC (“ICON Carina Holdings”) and ICON Mayon designated and qualifying as cash flow hedges with an aggregate notional amount of $38,840,227. These interest rate swaps have maturity dates ranging from July 25, 2011 to November 14, 2013.
For these derivatives, the LLC records its interest in the gain or loss from the effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges in AOCI and such gain or loss is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings and is recorded as a component of income (loss) from investments in joint ventures. During the three months ended March 31, 2011, the joint ventures recorded no hedge ineffectiveness in earnings.
The table below presents the effect of the LLC’s derivative financial instruments designated as cash flow hedging instruments on the consolidated statements of operations for the three months ended March 31, 2011 and 2010:
|
Three Months Ended March 31, 2011
|
|||||||||
|
Amount of Gain (Loss)
|
Location of Gain (Loss)
|
||||||||
|
Recognized
|
Reclassified
|
Gain (Loss) Reclassified
|
|||||||
|
in AOCI on Derivative
|
from AOCI into Income
|
from AOCI into Income
|
|||||||
|
Derivatives
|
(Effective Portion)
|
(Effective Portion)
|
(Effective Portion)
|
||||||
|
Interest rate swaps
|
$ | (6,522 | ) |
Interest expense
|
$ | (96,969 | ) | ||
|
Three Months Ended March 31, 2010
|
|||||||||
|
Amount of Gain (Loss)
|
Location of Gain (Loss)
|
||||||||
|
Recognized
|
Reclassified
|
Gain (Loss) Reclassified
|
|||||||
|
in AOCI on Derivative
|
from AOCI into Income
|
from AOCI into Income
|
|||||||
|
Derivatives
|
(Effective Portion)
|
(Effective Portion)
|
(Effective Portion)
|
||||||
|
Interest rate swaps
|
$ | (160,522 | ) |
Interest expense
|
$ | (123,756 | ) | ||
9
ICON Income Fund Ten, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
March 31, 2011
(unaudited)
|
(7)
|
Derivative Financial Instruments - continued
|
At March 31, 2011, the total unrealized loss recorded to AOCI related to the joint ventures’ interest in the change in fair value of these interest rate swaps was approximately $251,000.
During the twelve months ending March 31, 2012, the LLC estimates that approximately $211,000 will be reclassified from AOCI to income (loss) from investments in joint ventures.
Non-designated Derivatives
As of March 31, 2011, warrants are the only derivatives that the LLC holds for purposes other than hedging. All changes in the fair value of the warrants are recorded directly in earnings.
The table below presents the fair value of the LLC’s derivative financial instruments and their classification within the LLC’s consolidated balance sheets as of March 31, 2011 and December 31, 2010:
|
Asset Derivatives
|
|||||||||
|
March 30,
|
December 31,
|
||||||||
|
2011
|
2010
|
||||||||
|
Balance Sheet Location
|
Fair Value
|
Fair Value
|
|||||||
|
Derivatives not designated as hedging instruments:
|
|||||||||
|
Warrants
|
Other non-current assets
|
$ | 67,929 | $ | 70,669 | ||||
The LLC’s derivative financial instruments not designated as hedging instruments generated a net loss recorded in general and administrative expense on the consolidated statements of operations for the three months ended March 31, 2011 and 2010 of $2,740 and $1,789. The net loss recorded for the three months ended March 31, 2011 and 2010 was comprised of an unrealized loss relating to warrants.
Derivative Risks
The LLC manages exposure to possible defaults on derivative financial instruments by monitoring the concentration of risk that the LLC has with any individual bank and through the use of minimum credit quality standards for all counterparties. The LLC does not require collateral or other security in relation to derivative financial instruments. Since it is the LLC’s policy to enter into derivative contracts with banks of internationally acknowledged standing only, the LLC considers the counterparty risk to be remote.
|
(8)
|
Accumulated Other Comprehensive Loss
|
AOCI included accumulated unrealized losses on derivative financial instruments of joint ventures and currency translation adjustments of $251,103 and $1,481,209, respectively, at March 31, 2011 and accumulated unrealized losses on derivative financial instruments of joint ventures and currency translation adjustments of $341,550 and $1,623,230, respectively, at December 31, 2010.
Total comprehensive (loss) income for the three months ended March 31, 2011 and 2010 was ($3,308,771) and $1,994,128, respectively.
10
ICON Income Fund Ten, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
March 31, 2011
(unaudited)
|
(9)
|
Stock Based Compensation
|
In January 2011, the LLC sold 25% of Pretel Group Limited (“Pretel”) to its new Chief Executive Officer for £100,000. This sale consisted of 100,000 class B Pretel shares (“Pretel Shares”) representing 25% of the voting and earning rights of Pretel, including 25% of the existing equity at the close of the sale. The difference of approximately £750,000 between the fair market value of the Pretel Shares on the date of the sale and the amount paid will be charged to compensation expense ratably during 2011, with a corresponding credit to equity. For the three months ended March 31, 2011, the LLC charged £187,500 (approximately $298,000) to compensation expense related to the Pretel Shares.
|
(10)
|
Commitments and Contingencies
|
At the time the LLC acquires or divests of its interest in an equipment lease or other financing transaction, the LLC may, under very limited circumstances, agree to indemnify the seller or buyer for specific contingent liabilities. The Manager believes that any liability that may arise as a result of any such indemnification obligations will not have a material adverse effect on the consolidated financial condition of the LLC taken as a whole.
In connection with certain acquisitions, certain joint ventures maintain restricted cash accounts with certain banks. The aforementioned cash amounts are presented within investments in joint ventures in the LLC’s consolidated balance sheets as of March 31, 2011 and December 31, 2010.
The LLC has entered into certain residual sharing and remarketing agreements with various third parties. In connection with these agreements, residual proceeds received in excess of specific amounts will be shared with these third parties based on specific formulas. The obligation related to these agreements is recorded at fair value. There were no liabilities recorded as of March 31, 2011 and December 31, 2010.
The following is a discussion of our current financial position and results of operations. This discussion should be read together with our unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2010. This discussion should also be read in conjunction with the disclosures below regarding “Forward-Looking Statements” and the “Risk Factors” set forth in Item 1A of Part II of this Quarterly Report on Form 10-Q.
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 subsidiaries.
Forward-Looking Statements
Certain statements within this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). These statements are being made pursuant to the PSLRA, with the intention of obtaining the benefits of the “safe harbor” provisions of the PSLRA, and, other than as required by law, we assume no obligation to update or supplement such statements. Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. You can identify these statements by the use of words such as “may,” “will,” “could,” “anticipate,” “believe,” “estimate,” “expect,” “continue,” “further,” “plan,” “seek,” “intend,” “predict” or “project” and variations of these words or comparable words or phrases of similar meaning. These forward-looking statements reflect our current beliefs and expectations with respect to future events and are based on assumptions and are subject to risks and uncertainties and other factors outside our control that may cause actual results to differ materially from those projected. We undertake no obligation to update publicly or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
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 were primarily engaged in the business of purchasing equipment and leasing or servicing it to third parties, equipment financing, acquiring equipment subject to lease and, to a lesser degree, acquiring ownership rights to items of leased equipment at lease expiration.
Our Manager manages and controls our business affairs, including, but not limited to, our equipment leases and other financing transactions, pursuant to the terms of our LLC's amended and restated operating agreement (the “LLC Agreement”). We completed our operating period on April 30, 2010 and entered our liquidation period effective May 1, 2010. During our liquidation period, we are selling and will continue to sell our assets in the ordinary course of business. As we sell our assets, both rental income and finance income will decrease over time, as will expenses related to our assets, such as depreciation and amortization expense. As leased equipment is sold, we will incur gains or losses on these sales. We will continue to liquidate our assets during this period and we expect to see a reduction in revenue and expenses accordingly.
Recent Significant Transactions
We engaged in the following significant transactions since December 31, 2010:
Notes Receivable
Effective January 1, 2011, we exchanged our 12.25% ownership interest in a joint venture, for notes receivable from Northern Capital Associates, which were previously owned by the joint venture. The aggregate principal balance of the notes was approximately $1,237,000, which accrue interest at rates ranging from 9.47% to 9.895% and mature between December 15, 2011 and February 15, 2013. No gain or loss was recorded as a result of this transaction. Upon completion of the exchange, the joint venture was terminated.
Telecommunications Equipment
On January 3, 2011, at the expiration of the lease and in accordance with its terms, a joint venture in which we have a 45% ownership interest sold telecommunications equipment subject to lease with Global Crossing to Global Crossing for approximately $2,077,000. Our share of the gain was approximately $351,000, which is included in income from investments in joint ventures.
On March 31, 2011, at the expiration of the leases and in accordance with their terms, a joint venture owned 79.31% by us and 20.69% by ICON Income Fund Eight A L.P. Liquidating Trust, sold telecommunications equipment subject to leases with Global Crossing to Global Crossing for the aggregate purchase price of $5.
Sale of Noncontolling Interest
Effective January 17, 2011 the LLC sold a 25% interest in Pretel to its new CEO for £100,000.
Recent Accounting Pronouncements
There are no recent accounting pronouncements that had or are expected to have a significant impact on our consolidated financial statements.
Results of Operations for the Three Months Ended March 31, 2011 (the “2011 Quarter”) and 2010 (the “2010 Quarter”)
Revenue for the 2011 Quarter and the 2010 Quarter is summarized as follows:
|
Three Months Ended March 31,
|
||||||||||||
|
2011
|
2010
|
Change
|
||||||||||
|
Rental income
|
$ | 160,197 | $ | 2,139,836 | $ | (1,979,639 | ) | |||||
|
Finance income
|
1,520,305 | 1,344,221 | 176,084 | |||||||||
|
Servicing income
|
1,248,347 | 1,489,289 | (240,942 | ) | ||||||||
|
(Loss) income from investments in joint ventures
|
(4,509,963 | ) | 695,302 | (5,205,265 | ) | |||||||
|
Net gain on sales of equipment and unguaranteed residual values
|
588,889 | 194,607 | 394,282 | |||||||||
|
Interest and other income
|
95,837 | 39,582 | 56,255 | |||||||||
|
Total revenue
|
$ | (896,388 | ) | $ | 5,902,837 | $ | (6,799,225 | ) | ||||
Total revenue for the 2011 Quarter decreased $6,799,225, or 115.2%, as compared to the 2010 Quarter. The decrease in total revenue was primarily due to the loss from investments in joint ventures from our 49% ownership interest in a joint venture which recognized an impairment loss of approximately $11,291,000 in the 2011 Quarter, of which our share was approximately $5,532,000. Rental income decreased resulting primarily from the sale of the majority of our remaining leased equipment at cost subsequent to March 31, 2010, as well as the reclassification of our lease with Global Crossing from an operating lease to a finance lease effective March 17, 2010. Servicing income, which relates to Pretel, decreased due to a decline in usage of certain equipment in hospitals. These decreases were partially offset by an increase in our net gain on sales of equipment and unguaranteed residual values primarily due to the sale of a portion of Pretel’s inventory assets.
Expenses for the 2011 Quarter and the 2010 Quarter are summarized as follows:
|
Three Months Ended March 31,
|
||||||||||||
|
2011
|
2010
|
Change
|
||||||||||
|
Management fees - Manager
|
$ | 125,094 | $ | 229,085 | $ | (103,991 | ) | |||||
|
Administrative expense reimbursements - Manager
|
167,363 | 195,927 | (28,564 | ) | ||||||||
|
General and administrative
|
1,943,538 | 1,500,109 | 443,429 | |||||||||
|
Interest
|
6,348 | 8,578 | (2,230 | ) | ||||||||
|
Depreciation and amortization
|
402,508 | 1,657,130 | (1,254,622 | ) | ||||||||
|
Total expenses
|
$ | 2,644,851 | $ | 3,590,829 | $ | (945,978 | ) | |||||
Total expenses for the 2011 Quarter decreased $945,978, or 26.3%, as compared to the 2010 Quarter. Depreciation and amortization expense decreased due to the reclassification of our lease with Global Crossing from an operating lease to a finance lease effective March 17, 2010, as well as the sale of the majority of the remaining leased equipment at cost subsequent to March 31, 2010, at which time we ceased recording depreciation expense on those assets. This was partially offset by general and administrative expense increasing largely due to Pretel’s compensation expenses related to the hiring of a new CEO in the fourth quarter of 2010.
Noncontrolling Interests
Net income attributable to noncontrolling interests decreased $67,149, from $103,181 in the 2010 Quarter to $36,032 in the 2011 Quarter. This decrease was primarily attributable to the sale of assets on lease to Global Crossing. This was partially offset by income attributable to the noncontrolling interest in Pretel as a result of the sale of the Pretel Shares.
Net Income Attributable to Fund Ten
As a result of the foregoing factors, net (loss) income attributable to us for the 2011 Quarter and the 2010 Quarter was (3,577,271) and $2,208,827, respectively. Net (loss) income attributable to us per weighted average additional share of limited liability company interests (“Share”) outstanding for the 2011 Quarter and the 2010 Quarter was ($23.89) and $14.75, respectively.
Financial Condition
This section discusses the major balance sheet variances at March 31, 2011 compared to December 31, 2010.
Total Assets
Total assets decreased $4,775,689, from $68,134,755 at December 31, 2010 to $63,359,066 at March 31, 2011. The decrease was primarily due to a decrease in our investments in joint ventures resulting from our 49% ownership interest in a joint venture which recognized an impairment loss of approximately $11,291,000 in the 2011 Quarter, of which our share was approximately $5,532,000. The decrease is also attributable to the depreciation and amortization of assets during the 2011 Quarter. This decrease was partially offset by a gain on sale of a portion of Pretel’s assets and the gain on sale of telecommunication equipment to Global Crossing in January 2011. The decrease was also offset by an increase due to the appreciation of our finance leases, resulting from the finance income accrued during the year exceeding the cash collected.
Current Assets
Current assets increased $812,548, from $4,667,230 at December 31, 2010 to $5,479,778 at March 31, 2011. The increase was primarily due to distributions received from a joint venture owned 45% by us, which sold telecommunication equipment on January 3, 2011. The increase is also attributable to the restructuring of ICON Northern Leasing, resulting in our investment in a joint venture being exchanged for a note receivable, the current portion of which was $623,294 as of March 31, 2011. This increase was partially offset by a decrease in the current portion of net investment in finance leases, as ICON Global Crossing’s leases expired on March 31, 2011.
Total Liabilities
Total liabilities decreased $235,866, from $2,194,393 at December 31, 2010 to $1,958,527 at March 31, 2011. The decrease was primarily due to a payment of the accrued taxes of ICON Global Crossing II, as the remaining liabilities are being settled after the sale of the assets that were on lease to Global Crossing.
Equity
Equity decreased $4,539,823, from $65,940,362 at December 31, 2010 to $61,400,539 at March 31, 2011. The decrease was the result of our net loss and distributions paid to our members and noncontrolling interests.
Liquidity and Capital Resources
Summary
At March 31, 2011 and December 31, 2010, we had cash and cash equivalents of $3,797,674 and $2,740,590, respectively. During our liquidation period, which we entered May 1, 2010, our main sources of liquidity have been and are expected to continue to be the collection of rentals pursuant to our non-leveraged operating and finance leases and proceeds from sales of equipment and our main use of liquidity has been and is expected to continue to be distributions to our members.
Cash and cash equivalents include cash in banks and highly liquid investments with original maturity dates of three months or less. Our cash and cash equivalents are held principally at one financial institution and at times may exceed insured limits. We have placed these funds in a high quality institution in order to minimize risk relating to exceeding insured limits.
On May 1, 2010, we entered our liquidation period. During this period, we anticipate that cash generated by our investing activities will become a more significant source of our liquidity as we begin to sell assets in the normal course of business. We believe that cash generated from the expected results of our operations will be sufficient to finance our liquidity requirements for the foreseeable future, including distributions to our members, general and administrative expense, management fees and administrative expense reimbursements. We anticipate that our liquidity requirements for the remaining life of the fund will be financed by the expected results of our operations, as well as cash received from our investments at maturity.
We anticipate being able to meet our liquidity requirements into the foreseeable future. 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’ businesses that are beyond our control.
Pursuant to the terms of our offering, we established a cash reserve in the amount of 1.0% of the gross offering proceeds. As of March 31, 2011, the cash reserve was $1,449,945.
Cash Flows
Operating Activities
Cash provided by operating activities decreased $557,921, from $2,102,584 in the 2010 Quarter to $1,544,663 in the 2011 Quarter. The decrease was primarily due to a decrease in rental income resulting from the sale of equipment previously on lease to Global Crossing, MW Texas Die Casting, Inc. and Cerion MPI, LLC. This decrease was partially offset by an increase in distributions from joint ventures.
Investing Activities
Cash provided by investing activities decreased $368,479, from $1,311,979 in the 2010 Quarter to $943,500 in the 2011 Quarter. The decrease was primarily due to our receipt of net proceeds of approximately $128,000 during the 2011 Quarter from the sale of equipment and unguaranteed residual values as compared to approximately $455,000 in the 2010 Quarter. In addition, distributions received from our joint ventures in excess of profits decreased to approximately $568,000 during the 2011 Quarter, as compared to approximately $860,000 during the 2010 Quarter.
Financing Activities
Cash used in financing activities decreased $1,508,159, from $3,037,599 in the 2010 Quarter to $1,529,440 in the 2011 Quarter. The change was due to a decrease in cash distributions to members and noncontrolling interests totaling approximately $1,950,000. This was partially offset by the decrease in net proceeds from our revolving line of credit, recourse of $600,000.
Distributions
We, at our Manager’s discretion, paid monthly distributions to each of our additional members and noncontrolling interests beginning the first month after each such member’s admission and the commencement of our joint venture operations, respectively, through April 30, 2010, the end of our operating period. During the 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 and other income from our investments. We paid distributions of $15,657, $1,550,015 and $122,407 to our Manager, additional members and noncontrolling interests, respectively, during the 2011 Quarter.
Commitments and Contingencies and Off-Balance Sheet Transactions
Commitments and Contingencies
At March 31, 2011, we had no obligations outstanding under the Prior Loan Agreement and the Borrowers were in compliance with all covenants under the Prior Loan Agreement. As of May 10, 2011, the Prior Loan Agreement was terminated.
In connection with certain acquisitions, certain joint ventures maintain restricted cash accounts with certain banks. The aforementioned cash amounts are presented within investments in joint ventures in our consolidated balance sheets as of March 31, 2011 and December 31, 2010.
Off-Balance Sheet Transactions
None.
There are no material changes to the disclosures related to this item since the filing of our Annual Report on Form 10-K for the year ended December 31, 2010.
Evaluation of disclosure controls and procedures
In connection with the preparation of this Quarterly Report on Form 10-Q for the three months ended March 31, 2011, as well as the financial statements for our Manager, our Manager carried out an evaluation, under the supervision and with the participation of the management of our Manager, including its Co-Chief Executive Officers and the Chief Financial Officer, of the effectiveness of the design and operation of our Manager’s disclosure controls and procedures as of the end of the period covered by this report pursuant to the Securities Exchange Act of 1934, as amended. Based on the foregoing evaluation, the Co-Chief Executive Officers and the Chief Financial Officer concluded that our Manager’s disclosure controls and procedures were effective.
In designing and evaluating our Manager’s disclosure controls and procedures, our Manager 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 Manager’s disclosure controls and procedures have been designed to meet reasonable assurance standards. Disclosure controls and procedures cannot detect or prevent all error and fraud. Some inherent limitations in disclosure controls and procedures include costs of implementation, faulty decision-making, simple error and mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all anticipated and unanticipated future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with established policies or procedures.
Evaluation of internal control over financial reporting
There have been no changes in our internal control over financial reporting during the three months ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
In the ordinary course of conducting our business, we may be subject to certain claims, suits and complaints filed against us. In our Manager’s opinion, the outcome of such matters, if any, will not have a material impact on our consolidated financial position, cash flows or results of operations. We are not aware of any material legal proceedings that are currently pending against us or against any of our assets.
There have been no material changes from the risk factors disclosed in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2010.
We did not sell or redeem any Shares during the three months ended March 31, 2011.
Not applicable.
Not applicable.
|
3.1
|
Certificate of Formation of Registrant (Incorporated by reference to Exhibit 3.1 to Registrant’s Registration Statement on Form S-1 filed with the SEC on February 28, 2003 (File No. 333-103503)).
|
|
4.1
|
Amended and Restated Operating Agreement of Registrant (Incorporated by reference to Exhibit 4.1 to Pre-Effective Amendment No. 3 to Registrant’s Registration Statement on Form S-1 filed with the SEC on June 2, 2003 (File No. 333-103503)).
|
|
10.1
|
Commercial Loan Agreement, dated as of August 31, 2005, by and among California Bank & Trust and ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON Income Fund Ten, LLC and ICON Leasing Fund Eleven, LLC (Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated August 31, 2005).
|
|
10.2
|
Loan Modification Agreement, dated as of December 26, 2006, between California Bank & Trust and ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON Income Fund Ten, LLC and ICON Leasing Fund Eleven, LLC (Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated December 26, 2006).
|
|
10.3
|
Loan Modification Agreement, dated as of June 20, 2007, between California Bank & Trust, ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON Income Fund Ten, LLC, ICON Leasing Fund Eleven, LLC and ICON Leasing Fund Twelve, LLC (Incorporated by reference to Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009, filed November 12, 2009).
|
| 10.4 |
Third Loan Modification Agreement, dated as of May 1, 2008, between California Bank & Trust, ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON Income Fund Ten, LLC, ICON Leasing Fund Eleven, LLC and ICON Leasing Fund Twelve, LLC (Incorporated by reference to Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008, filed May 19, 2008).
|
| 10.5 |
Fourth Loan Modification Agreement, dated as of August 12, 2009, between California Bank & Trust, ICON Income Fund Eight B L.P., ICON Income Fund Nine, LLC, ICON Income Fund Ten, LLC, ICON Leasing Fund Eleven, LLC, ICON Leasing Fund Twelve, LLC and ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P. (Incorporated by reference to Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009, filed August 14, 2009).
|
| 10.6 |
Termination of Commercial Loan Agreement, by and among California Bank & Trust and ICON Income Fund Eight B L.P.; ICON Income Fund Nine, LLC; ICON Income Fund Ten, LLC; ICON Leasing Fund Eleven, LLC; ICON Leasing Fund Twelve, LLC; and ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P., dated as of May 10, 2011.
|
|
31.1
|
Rule 13a-14(a)/15d-14(a) Certification of Co-Chief Executive Officer.
|
|
31.2
|
Rule 13a-14(a)/15d-14(a) Certification of Co-Chief Executive Officer.
|
|
31.3
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
|
|
32.1
|
Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32.2
|
Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32.3
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
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: ICON Capital Corp.
(Manager of the Registrant)
May 12, 2011
By: /s/ Michael A. Reisner
Michael A. Reisner
Co-Chief Executive Officer and Co-President
(Co-Principal Executive Officer)
By: /s/ Mark Gatto
Mark Gatto
Co-Chief Executive Officer and Co-President
(Co-Principal Executive Officer)
By: /s/ Anthony J. Branca
Anthony J. Branca
Chief Financial Officer
(Principal Accounting and Financial Officer)
|
21
|