UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2004
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
Commission File Number 33-94458
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ICON Cash Flow Partners L.P. Seven
(Exact name of registrant as specified in its charter)
Delaware 13-3835387
- -------------------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 Fifth Avenue, 10th floor, New York, New York 10011
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 418-4700
-----------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: Units of limited partnership interests
Indicate by check mark 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [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
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last day of the registrant's most recently completed second fiscal quarter:
Not applicable. There is no established market for units of the registrant.
Table of Contents
Item
PART I
1. Business 3-6
2. Properties 7
3. Legal Proceedings 7
4. Submission of Matters to a Vote of Security Holders 7
PART II
5. Market for the Registrant's Securities and Related Security Holder Matters 8
6. Selected Consolidated Financial Data 9
7. General Partner's Discussion and Analysis of Financial Condition and
Results of Operations 10
7A. Qualitative and Quantitative Disclosures About Market Risk 22
8. Consolidated Financial Statements 23
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 50
9A. Controls and Procedures 50
9B. Other Information 50
PART III
10. Directors and Executive Officers of the Registrant's General Partner 50
11. Executive Compensation 51
12. Security Ownership of Certain Beneficial Owners and Management 52
13. Certain Relationships and Related Transactions 52
14. Principal Accountant Fees and Services 52
PART IV
15. Exhibits, Financial Statement Schedules 53
SIGNATURES 54
Certifications 55-58
2
PART I
Item 1. Business
General Development of Business
ICON Cash Flow Partners L.P. Seven (the "Partnership") was formed on May
23, 1995 as a Delaware limited partnership. When used in this report, the terms
"we" "us" and "our" refers to the Partnership.
Our maximum offering was $100,000,000 and we commenced business operations
on our initial closing date, January 19, 1996 with the admission of 26,367.95
limited partnership units at $100 per unit representing $2,636,795 of capital
contributions. Between January 20, 1996 and September 16, 1998 (the final
closing date) 973,628.86 additional units were admitted representing $97,362,886
of capital contributions bringing the total admission to 999,996.81 limited
partnership units aggregating $99,999,681 in capital contributions. From 1997
through 2004, we redeemed 12,449.00 limited partnership units leaving 987,547.81
limited partnership units outstanding at December 31, 2004.
Our General Partner is ICON Capital Corp. (the "General Partner"), a
Connecticut corporation. The General Partner manages and controls the business
affairs of our equipment leases and financing transactions under the terms of a
management agreement with us.
Segment Information
We have only one operating segment: the business of acquiring equipment
subject to leases with companies that we believe to be creditworthy.
Narrative Description of Business
We are an equipment leasing income fund. Our principal investment objective
is to obtain the maximum economic return from our investments for the benefit of
our partners. To achieve this objective we have: (i) acquired a diversified
portfolio of equipment leases and financing transactions; (ii) made monthly cash
distributions to our partners commencing with each partner's admission, (iii)
re-invested substantially all undistributed cash from operations and cash from
sales of equipment and financing transactions during the reinvestment period;
and (iv) commenced the disposition period and begun to sell our investments and
distribute the cash from sales of such investments to our partners.
Our reinvestment period ended on November 9, 2002. During the disposition
period, we have and will continue to distribute substantially all distributable
cash from operations and equipment sales to the partners and continue the
orderly termination of our operations and affairs. We will not invest in any
additional finance or lease transactions during the disposition period.
At December 31, 2004 and 2003, we had total assets of $13,849,239 and
$52,063,556, respectively. During the year ended December 31, 2004, our total
revenue was $2,677,226, which was derived principally from two leases which
accounted for approximately 48% of our rental revenue. We incurred a net loss
for the year ended December 31, 2004 of $10,242,220. For the year ended December
31, 2003, our total revenue was $1,576,532, which was derived principally from
three leases which accounted for approximately 41% of our rental revenue. We
incurred a net loss for the year ended December 31, 2003 of $17,300,236. For the
year ended December 31, 2002, our total revenue was $8,326,025, which was
derived principally from three leases which accounted for approximately 61% of
our rental revenue. We incurred a net loss for the year ended December 31, 2002
of $3,661,408.
We have no direct employees. The General Partner has full and exclusive
control over our management and operations.
3
Our Competition
The equipment leasing industry is highly competitive. When seeking leasing
transactions for acquisition or sale, 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.
Lease Transactions
During the years ended December 31, 2004 and 2003 we did not purchase any
additional equipment. We entered into the following lease modifications,
assignments and sales for the years ended December 31, 2004 and 2003, as
follows:
Sale of CSK Auto Lease
During June 2004, we sold equipment which had been on lease to CSK Auto,
Inc. CSK Auto, Inc. had made 60 scheduled payments totaling approximately
$138,000. We recognized a gain of approximately $10,000 on this sale.
Sale of 1979 McDonnell Douglas DC-10-30 Aircraft
We had an ownership interest in a DC-10-30 aircraft subject to a lease with
Federal Express Corporation which expired on July 2, 2004. The aircraft was
subject to non-recourse debt which had a balloon payment of approximately
$9,600,000 due at lease end. As required by the loan agreement, we entered into
a residual value insurance agreement (the "Residual Insurance Agreement") with
an unrelated third party. Under the terms of the Residual Insurance Agreement,
the insurer was required to pay the insured amount to the lender at the
expiration of the lease if the balloon payment was not made by us at lease end.
We were unable to make the required balloon payment when due nor were we able to
successfully refinance the debt. As a result, the insurer, pursuant to the terms
of the Residual Insurance Agreement, notified us of their intention to pay the
insured amount of $10,200,000 at lease end, resulting in title of the aircraft
transferring to the insurer. As a result, we received proceeds of $520,293, net
of the $9,679,707 paid to the non-recourse lender at lease end.
Sale of Boeing 767-300ER Aircraft
During July 2004, one of our joint ventures, ICON Aircraft 24846 LLC, sold
its only asset, a Boeing 767-300ER, which resulted in a realized net loss of
approximately $601,800, of which our share was approximately $12,000. The
General Partner had determined that it was in the best interest of ICON Aircraft
24846 LLC and its members to sell the Boeing 767-300ER aircraft to BTM Capital
Corp., the lender, for an amount equal to the then outstanding debt balance. The
decision to sell the aircraft was based, in part, on the following factors: (i)
the aircraft's current fair market value was estimated to be between $24,000,000
and $27,000,000 and the balance of the outstanding debt was $34,500,000; (ii)
any new lease for the aircraft would have required an additional $850,000 in
equity (at a minimum) in order to reconfigure the aircraft and upgrade the
engines; and (iii) if we were to continue to remarket the aircraft, the lender
would have required interest only payments of approximately $100,000 per month
until the aircraft was re-leased.
Lease Modification of 1976 McDonnell Douglas DC-10-30
We have an ownership interest in a 1976 McDonnell Douglas DC-10-30 (the
"Aircraft") on lease with World Airways, Inc. The lease was on a
"power-by-the-hour" basis until December 2004. Effective September 1, 2004, this
lease was modified to a fixed rental of $50,000 per month plus maintenance
reserves and the term was extended through September 2006. Aviation Investors,
Inc. ("Aviation"), an unrelated third party, who was the seller in the
acquisition of the Aircraft, has a Residual Sharing Agreement (the "Agreement")
in which Aviation is entitled to receive 50% of all residual proceeds of the
aircraft. Residual proceeds includes gross proceeds from any of the following;
sale, lease, renewal lease or extension or financing or refinancing of the
Aircraft and casualty payments. Such gross proceeds may be reduced, but not
below zero, for recovery expenses, remarketing expenses, any reasonable
out-of-pocket costs incurred by us and an amount calculated to provide us with a
consistent rate of return, as defined in the Agreement. Additionally, Aviation
has a management agreement with us to manage the operations of and to remarket
the Aircraft for sale or lease. For this service Aviation receives a monthly
management fee of $10,667.
There is a maintenance reserve of approximately $1,843,000 at December 31,
2004. If the maintenance reserves are not fully utilized any remaining monies
will be divided between the us and Aviation as stipulated in the Agreement.
4
Sale of Supply Vessels
We were the sole owner of five marine supply vessels originally on charter
to affiliates of Seacor Marine, Inc. (the "Vessels"). These Vessels were subject
to outstanding non-recourse debt with Fleet Capital Corp. ("Fleet"). During
September 2003, Fleet took control of the Vessels and commenced remarketing
efforts under the terms of their financing agreement with us. On May 12, 2004,
Fleet sold the Vessels, which resulted in aggregate sale proceeds of $3,580,000.
At the time of sale, the outstanding non-recourse debt relating to the Vessels
was $7,138,369; therefore all proceeds from the sale were used repay the
outstanding non-recourse notes. As a result of the sale of the Vessels, we
recorded a loss on lease termination of approximately $623,000, which
represented the Vessels net book value at that time.
We were the sole owner of two marine vessels originally on charter to
affiliates of Seacor Smit, Inc. These vessels were not subject to any
outstanding debt. On September 20, 2004 and again on October 10, 2004,
respectively, we sold the Gulf Pearl and Gulf Wind supply vessels, respectively,
to Gulf Ocean Marine Services, Inc. The sale price for each vessel was $500,000.
We realized a net loss of $790,420 from the sale of the vessel sold on September
20, 2004, which is included in gain (loss) on disposal of assets for the year
ended December 31, 2004 and we realized a net loss of $790,420 on the vessel
sold on October 10, 2004. We recorded as impairment loss for this amount in the
third quarter of 2004.
Sale of AZ3 Lease
During October 2004, title passed on material handling equipment on lease
to AZ3 after they made their final renewal lease payment in conjunction with a
lease which expired in July, 2002. We realized a net loss of approximately
$25,000.
Assignment of Interest in ICON Cheyenne
On September 23, 2004, we assigned 9.04% of our interest in ICON Cheyenne
LLC ("ICON Cheyenne") to ICON Income Fund Eight B L.P. ("Fund Eight B") for
$204,384, thereby decreasing our ownership in ICON Cheyenne to 1.27%. This
assignment was made in order for us to repay our outstanding debt obligation to
Fund Eight B as required by the Contribution Agreement, which is more fully
explained elsewhere in this document (See Financing and Borrowings located in
the Liquidity and Capital Resources section). This amount represented our
proportionate fair value of our interest in ICON Cheyenne at September 23, 2004.
The fair value was determined using discounted cash flow projections for ICON
Cheyenne's portfolio.
Assignment of Interest in ICON/Boardman Facility
On September 24, 2004, we assigned our entire .5025% ownership interest in
ICON BF to ICON Income Fund Eight A L.P. ("Fund Eight A") for $65,325, thereby
increasing Fund Eight A's ownership in ICON BF to 99.4975%. This assignment was
made in order for us to repay our outstanding debt obligation to Fund Eight A as
required by the Contribution Agreement, which is more fully explained elsewhere
in this document (Refer to Financing and Borrowings located in Liquidity and
Capital Resources section). This amount represented our fair value of L.P.
Seven's interest in ICON BF at September 24, 2004. This amount was determined to
represent the fair value of ICON BF based upon the expected net proceeds from
the sale of the coal handling facility.
Assignments of Rowan Cash Flow
On November 24, 2004, we assigned .8% of our interest in the profits,
losses and future cash flows of a mobile offshore drilling rig, subject to a
lease with Rowan Companies, Inc. to Fund Eight A for $200,000. This assignment
was made in order for us to repay our outstanding debt obligation to Fund Eight
A as required by the Contribution Agreement, which is more fully explained
elsewhere in this document (See Financing and Borrowings located in the
Liquidity and Capital Resources section). This amount represented our
proportionate fair value of our interest in the mobile offshore drilling rig at
November 24, 2004. The fair value of the mobile offshore drilling rig was
determined using an independent third party appraisal and cash flow analysis.
On November 24, 2004, we assigned 3.24% of our interest in the profits,
losses and future cash flows of a mobile offshore drilling rig, subject to a
lease with Rowan Companies, Inc. to ICON Income Fund Eight B L.P. ("Fund Eight
B") for $810,000. This assignment was made in order for us to repay our
outstanding debt obligation as required by the Contribution Agreement, which is
more fully explained elsewhere in this document (See Financing and Borrowings
located in the Liquidity and Capital Resources section). This amount represented
our proportionate fair value of our interest in the mobile offshore drilling rig
at November 24, 2004. The fair value of the mobile offshore drilling rig was
determined using an independent third party appraisal and cash flow analysis.
5
On February 23, 2005, we assigned 2.69% of our interest in the profits,
losses and future cash flows of a mobile offshore drilling rig, subject to a
lease with Rowan Companies, Inc. to Fund Eight B for $672,992, increasing Fund
Eight B's ownership interest to 5.93%. This assignment was made in order for us
to repay our outstanding debt obligation to Fund Eight B as required by the
Contribution Agreement, which is more fully explained elsewhere in this document
(See Financing and Borrowings located in the Liquidity and Capital Resources
section). This amount represented our proportionate fair value of our interest
in the mobile offshore drilling rig at February 23, 2005. The fair value of the
mobile offshore drilling rig was determined using an independent third party
appraisal and cash flow analysis.
On November 24, 2004, we assigned 2.6% of our interest in the profits,
losses and future cash flows of a mobile offshore drilling rig, subject to a
lease with Rowan Companies, Inc. to ICON Income Fund Nine ("Fund Nine") for
$650,000. This assignment was made in order for us to repay our outstanding debt
obligation to Fund Nine as required by the Contribution Agreement, which is more
fully explained elsewhere in this document (See Financing and Borrowings located
in the Liquidity and Capital Resources section). This amount represented our
proportionate fair value of our interest in the mobile offshore drilling rig at
November 24, 2004. The fair value of the mobile offshore drilling rig was
determined using an independent third party appraisal and cash flow analysis.
On February 23, 2005, we assigned 3.02% of our interest in the profits,
losses and future cash flows of a mobile offshore drilling rig, subject to a
lease with Rowan Companies, Inc. to Fund Nine for $755,000, increasing Fund
Nine's ownership interest to 5.62%. This assignment was made in order for us to
repay our outstanding debt obligation to Fund Nine as required by the
Contribution Agreement, which is more fully explained elsewhere in this document
(See Financing and Borrowings located in the Liquidity and Capital Resources
section). This amount represented our proportionate fair value of our interest
in the mobile offshore drilling rig at February 23, 2005. The fair value of the
mobile offshore drilling rig was determined using an independent third party
appraisal and cash flow analysis.
Assignment of Sodium Chlorate Production Facility
On March 28, 2005, we assigned our entire 50% ownership interest in EKA
Chemicals, Inc. to Fund Nine for $745,000. This assignment was made in order for
us to repay our outstanding debt obligation to Fund Nine as required by the
Contribution Agreement, which is more fully explained elsewhere in this document
(Refer to Financing and Borrowings located in Liquidity and Capital Resources).
This amount represented our fair value of our interest in EKA Chemicals, Inc. on
March 28, 2005. This amount was determined to represent the fair value of EKA
Chemicals, Inc. based upon the expected future cash flows.
We disposed of equipment that was on lease after lease expiration in 2003,
for a net gain of $120,524.
Available Information
Our Annual Reports on Form 10-K and our most recent Quarterly Reports on
Form 10-Q and amendments to those reports, if any, are available free of charge
on our internet website at http://www.iconcapital.com as soon as reasonably
practicable after such reports are electronically filed with or furnished to the
Securities and Exchange Commission. This information is also available on the
Securities and Exchange Commission's website, at http://www.sec.gov.
6
Item 2. Properties
We neither own nor lease office space or any other real property in our
business at the present time.
Item 3. 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.
Fleet Capital Corp Litigation
In August 2004, Fleet Capital Corp. ("Fleet") commenced an action against
us for unspecified damages, alleging that we breached our obligations owed to
Fleet under certain Performance Guaranties we entered into in connection with
non-recourse loans made by Fleet. The loans were made to our wholly-owned
subsidiaries when these entities entered into a transaction to acquire supply
tug vessels on charter with affiliates of SEACOR Smit Inc. We and our
subsidiaries have counterclaimed, alleging, among other things, that Fleet has
breached its covenant of good faith and fair dealing. The action is currently
pending in the Supreme Court of the State of New York, New York County and the
parties are currently in the process of discovery. It is not possible at this
early stage to determine the likelihood of the outcome, but management intends
to vigorously defend this claim.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter 2004.
7
PART II
Item 5. Market for the Registrant's Securities and Related Security Holder
Matters
Our limited partnership interests are not publicly traded nor is there
currently a market for our limited partnership interests. It is unlikely that
any such market will develop.
Number of Equity Security Holders
Title of Class as of March 18, 2005
- --------------------------- ---------------------------------------
General Partner 1
Limited Partner 4,584
We do not, in the normal course of business, pay dividends. For the year
ended December 31, 2004, we did not pay distributions to our partners.
Historically, we paid monthly distributions to our partners beginning with their
admission through the termination of the reinvestment period, which was November
9, 2002. For the years ended December 31, 2003 and 2002, we paid distributions
of $1,645,916 and $10,129,308, respectively, to our limited partners. For the
years ended December 31, 2003 and 2002, we paid distributions of $16,627 and
$102,316, respectively, to our General Partner.
Our reinvestment period ended on November 9, 2002. During the disposition
period, we have and will continue to distribute substantially all distributable
cash from operations and equipment sales to the partners and begin the orderly
termination of its operations and affairs. We have not and will not invest in
any additional new finance or lease transactions during the disposition period.
In order for National Association of Securities Dealers ("NASD") members
and their associated persons to have participated in the offering and sale of
interests in limited partnership units (the "Units") pursuant to the fourth
offering or to participate in any future offering of our Units, we are required
pursuant to NASD Rule 2710(c)(6) to disclose in each annual report distributed
to our limited partners a per unit estimated value of our Units, the method by
which we developed the estimated value and the date used to develop the
estimated value. In addition, our General Partner must prepare annual statements
our estimated Unit values to assist fiduciaries of retirement plans subject to
the annual reporting requirements of Employee Retirement Income Security Act
("ERISA") in the preparation of their reports relating to an investment in our
Units. For these purposes, the estimated value of our Units shall be deemed to
be $15.08 per Unit at September 30, 2004.
This estimate was based on the amount of remaining undiscounted lease
payments on our existing leases, the booked estimated residual values of the
equipment held by us upon the termination of those leases and our cash on hand.
From this amount we then subtracted our total debt outstanding and then divided
that sum by the total number of Units outstanding. This valuation was based
solely on the General Partner's perception of market conditions and the types
and amounts of our assets. No independent valuation was sought. However, as set
forth below, there is no significant public trading market for our Units at this
time, and there can be no assurance that limited partners could receive $15.08
per Unit if such a market did exist and they sold their Units or that they will
be able to receive such amount for their Units in the future. The foregoing
valuation was performed solely for the ERISA and NASD purposes described above.
There is no market for our Units, and, accordingly, this value does not
represent an estimate of the amount a limited partner would receive if he were
to seek to sell his Units. Furthermore, there can be no assurance as to the
amount we may actually receive if and when we seek to liquidate our assets or
the amount of lease payments and equipment disposition proceeds we will actually
receive over our remaining term.
8
Item 6. Selected Consolidated Financial Data
The selected financial data should be read in conjunction with the
consolidated financial statements and related notes included in Item 8,
Financial Statements and Supplemental Data contained elsewhere in this report.
Year Ended December 31,
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Total revenue $ 2,677,226 $ 1,576,532 $ 8,326,025 $ 9,159,492 $14,713,736
============== ============ =========== =========== ===========
Net (loss) income (a) $ (10,242,221) $(17,300,236) $(3,661,408) $(1,477,016) $ 1,293,261
============== ============ =========== =========== ===========
Net (loss) income allocable
to limited partners $ (10,139,799) $(17,127,234) $(3,624,794) $(1,462,246) $1,280,328
============== ============ =========== =========== ==========
Net (loss) income allocable to general partner $ (102,422) $ (173,002) $ (36,614) $ (14,770) $ 12,933
============== ============ =========== =========== ===========
Weighted average number of limited
partnership units outstanding 987,548 987,548 988,099 989,112 989,929
============== ============ =========== =========== ===========
Net (loss) income per weighted average
limited partnership unit $ (10.27) $ (17.34) $ (3.67) $ (1.48) $ 1.29
============== ============ =========== =========== ===========
Distributions to limited partners $ - $ 1,645,916 $10,129,308 $10,632,716 $10,641,411
============== ============ ============ =========== ===========
Distributions per weighted average
limited partner unit $ - $ 1.67 $ 10.25 $ 10.75 $ 10.75
============== ============ =========== =========== ===========
Distributions to the general partner $ - $ 16,627 $ 102,316 $ 100,023 $ 107,493
============== ============ =========== =========== ===========
December 31,
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Total assets $13,849,239 $52,063,556 $74,009,003 $104,334,907 $130,936,301
=========== =========== =========== ============ ============
Notes payable $8,174,001 $36,156,703 $38,769,665 $50,984,856 $81,889,191
========== =========== =========== =========== ============
Partners' equity $5,161,112 $15,403,333 $34,366,112 $48,294,920 $60,551,684
========== =========== ============ =========== ===========
(a) During the years ended December 31, 2004, 2003 and 2002 we recorded
impairment loss provisions of $7,861,680 $7,850,000 and $350,000 or $7.96, $7.95
and $0.35 per weighted average limited partnership unit, respectively.
9
Item 7. Manager's Discussion and Analysis of Financial Condition and Results of
Operations
Forward-Looking Information - Certain statements within this document 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.
a. Overview
We are an equipment leasing business formed on May 23, 1995 which began
active operations on January 19, 1996. We were primarily engaged 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 were acquired for cash and are provided current cash flow,
which we refer to as "income" leases. The majority of the purchase price of our
other equipment leases was borrowed, so these leases generated little or no
current cash flow because substantially all of the rental payments received from
a lessee were 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. We are currently in our disposition
period, wherein we are seeking to sell our assets in the ordinary course of
business.
Capital Resources and Liquidity
We invested most of the net proceeds from our offering in items of
equipment subject to a lease. After the net offering proceeds were invested,
additional investments were made with the cash generated from our initial
investments to the extent that the cash was not needed for expenses, reserves
and distributions to investors. The investment in additional equipment in this
manner is called "reinvestment." After the "reinvestment period," we began
selling our assets in the ordinary course of business during a time frame called
the "disposition period." If we believe it would benefit investors to reinvest
our cash flow in equipment during the disposition period, we may do so, but we
will not receive any additional fees in connection with such reinvestments. Our
goal is to complete the disposition period in three years after the end of the
reinvestment period, but it may take longer to do so.
Our reinvestment period ended on November 9, 2002. During the disposition
period, we have and will continue to distribute substantially all distributable
cash from operations and equipment sales to the partners and begin the orderly
termination of its operations and affairs. We have not and will not invest in
any additional finance or lease transactions during the disposition period.
Our current portfolio, which we hold either directly or through joint
venture investments with affiliates and others, consists primarily of the
following equipment subject to lease:
10
Energy Industry:
o We have a 43.36% interest in a mobile offshore drilling rig subject to
lease with Rowan Companies, Inc. The lease will expire on March 15, 2008.
The purchase price was approximately $14,726,000, consisting of
approximately $12,325,000 in cash and approximately $2,401,000 of
non-recourse debt.
During 2004, we entered into the following assignments regarding the mobile
offshore drilling rig to repay certain of our affiliates for amounts paid
on our behalf under the Contribution Agreement; (i) during November 2004,
we assigned .8% of our interest in the profits, losses and cash flows
valued at $200,000 to Fund Eight A, (ii) during November 2004, we assigned
3.24% of our interest in the profits, losses and cash flows valued at
$810,000 to Fund Eight B and (iii) during November 2004, we assigned 2.6%
of our interest in the profits, losses and cash flows valued at $650,000 to
Fund Nine.
During 2005, we entered into two additional assignments relating to
repayment of payments made on our behalf under the Contribution Agreement;
(i) during February 2005, we assigned 2.69% of our interest in the profits,
losses and cash flows valued at $672,992 to Fund Eight B and (ii) during
February 2005, we assigned 3.02% of our interest in the profits, losses and
cash flows valued at $755,000 to Fund Nine.
Chemical Industry:
o We had a 50% interest in a sodium chlorate production facility subject to
lease with EKA Chemicals, Inc which was accounted for as a finance lease.
The lease will expire in July 2006, at which time title in the facility
will pass to EKA Chemicals, Inc. The purchase price was approximately
$3,859,000, consisting of approximately $2,806,000 in cash and
approximately $1,053,000 of non-recourse debt.
During March 2005, in order to repay our affiliates for amounts paid on our
behalf under the Contribution Agreement; we assigned our entire 50%
interest in EKA Chemicals, Inc.'s facility valued at $745,000 to ICON
Income Fund Nine LLC.
Air Transportation Industry:
o We have a 99% interest in a 1976 McDonnell Douglas DC-10-30F aircraft
subject to lease with World Airways, Inc. The lease was on a
"power-by-the-hour" basis until December 2004. Effective September 1, 2004,
this lease was modified to a fixed rental of $50,000 per month plus
maintenance reserves and the term was extended through September 2006. The
purchase price was approximately $11,430,000 consisting of approximately
$2,120,000 in cash and approximately $9,310,000 of non-recourse debt. We
have since fully repaid the non-recourse debt. Aviation Investors, Inc.
("Aviation"), an unrelated third party, who was a party to the acquisition
of the Aircraft, has a Residual Sharing Agreement (the "Agreement") in
which Aviation is entitled to receive 50% of all residual proceeds of the
aircraft. Residual proceeds includes gross proceeds from any of the
following; sale, lease, renewal lease or extension or financing or
refinancing of the Aircraft and casualty payments. Such gross proceeds may
be reduced, but not below zero, for recovery expenses, remarketing
expenses, and any reasonable out-of-pocket costs incurred by us.
Additionally, Aviation has a management agreement with us to manage the
operations of and to remarket the Aircraft for sale or lease. For this
service Aviation receives a monthly management fee of $10,667.
There is a maintenance reserve of approximately $1,843,000 at December 31,
2004. If the maintenance reserves are not fully utilized any remaining
monies will be divided between the us and Aviation as stipulated in the
Agreement.
o We have an investment in the unguaranteed residual values of three Boeing
737-300 aircraft currently on lease to Continental Airlines, Inc. On July
31, 1997, we acquired an option to purchase these aircraft and paid
$412,500 per aircraft for an aggregate purchase price of $1,237,500. In
addition, we assumed recourse debt in the amount of $3,612,092 with
interest accruing at 8.5% per year which matured on November 27, 2003. The
strike price for each aircraft at maturity was $5,375,000. Prior to the
aircraft leases expiring, Continental expressed a desire to extend each of
the leases for two years. Due to market conditions and in order to
accommodate the lease extensions, it was in our best interest to terminate
the option agreement. We agreed to restructure the recourse debt with a new
maturity date of November 27, 2006. As a result of the restructuring, we
were required to prepay $500,000 of interest that would accrue on the new
recourse debt and the option to purchase the aircraft would be converted
into an interest in the unguaranteed residual values of the three aircraft.
11
Substantially all of our recurring operating revenues are generated from
the operations of the single-investor 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 or anticipated re-leasing costs and
equipment management costs. Below is a review of our portfolio activity during
the twelve months ended December 31, 2004.
Portfolio Activity
Sale of Boeing 767-300ER Aircraft
During July 2004, one of our joint ventures, ICON Aircraft 24846 LLC, sold
its only asset, a Boeing 767-300ER, which resulted in a realized net loss of
approximately $601,800, of which our share was approximately $12,000. The
General Partner had determined that it was in the best interest of ICON Aircraft
24846 LLC and its members to sell the Boeing 767-300ER aircraft to BTM Capital
Corp., the lender, for an amount equal to the then outstanding debt balance. The
decision to sell the aircraft was based, in part, on the following factors: (i)
the aircraft's current fair market value was estimated to be between $24,000,000
and $27,000,000 and the balance of the outstanding debt was $34,500,000; (ii)
any new lease for the aircraft would have required an additional $850,000 in
equity (at a minimum) in order to reconfigure the aircraft and upgrade the
engines; and (iii) if we were to continue to remarket the aircraft, the lender
would have required interest only payments of approximately $100,000 per month
until the aircraft was re-leased.
Sale of Federal Express DC-10-30 Aircraft
We had an ownership interest in a DC-10-30 aircraft subject to a lease with
Federal Express Corporation which expired on July 2, 2004. The aircraft was
subject to non-recourse debt which had a balloon payment of approximately
$9,600,000 due at lease end. As required by the loan agreement, we entered into
a residual value insurance agreement (the "Residual Insurance Agreement") with
an unrelated third party. Under the Residual Insurance Agreement, the insurer
was required to pay the insured amount to the lender at the expiration of the
lease if the balloon payment was not made by us. Due to the downturn in the
marketplace for this type of Aircraft, we were unable to sell the Aircraft for
sufficient proceeds to repay the outstanding debt and therefore, we were unable
to make the required balloon payment when due nor were we able to successfully
refinance the debt. As a result, pursuant to the terms of the Residual Insurance
Agreement, the insurer notified us of its intention to pay the insured amount of
$10,200,000 at lease end, resulting in title of the Aircraft transferring to the
insurer and we lost our entire ownership interest in the Aircraft. As a result,
we received net proceeds of $520,293, after $9,679,707 was paid to the
non-recourse lender.
Sale of Supply Vessels
We were the sole owner of five marine supply vessels originally on charter
to affiliates of Seacor Marine, Inc. (the "Vessels"). These Vessels were subject
to outstanding non-recourse debt with Fleet Capital Corp. ("Fleet"). During
September 2003, Fleet took control of the Vessels and commenced remarketing
efforts under the terms of their financing agreement with us. On May 12, 2004,
Fleet sold the Vessels, which resulted in aggregate sale proceeds of $3,580,000.
At the time of sale, the outstanding non-recourse debt relating to the Vessels
was $7,138,369; therefore all proceeds from the sale were used repay the
outstanding non-recourse notes. As a result of the sale of the Vessels, we
recorded a loss on lease termination of approximately $623,000, which
represented the Vessels net book value at that time.
We were the sole owner of three marine vessels originally on charter to
affiliates of Seacor Smit, Inc. These vessels were not subject to outstanding
debt. On September 20, 2004 and again on October 10, 2004, respectively, we sold
the Gulf Pearl and Gulf Wind supply tug vessels, respectively, to Gulf Ocean
Marine Services, Inc. The sale price for each vessel was $500,000. We realized a
loss of $790,420 on the vessel sold on September 20, 2004, which was included in
gain (loss) on disposal of assets for the year ended December 31, 2004 and we
realized a loss of $790,420 on the vessel sold on October 10, 2004 which was
recorded as an impairment loss for year ended December 31, 2004.
Sales of Other Equipment.
During June 2004, we sold equipment which had been on lease to CSK Auto,
Inc. CSK Auto, Inc. had made 60 scheduled payments totaling approximately
$138,000. We recognized a gain of approximately $10,000 on this sale.
During October 2004, title passed on material handling equipment on lease
to AZ3 after they made their final renewal lease payment in conjunction with a
lease which expired in July, 2002. We realized a net loss of approximately
$25,000.
12
Assignment of Sodium Chlorate Production Facility
We had a 50% interest in a sodium chlorate production facility subject to
lease with EKA Chemicals, Inc. The lease will expire in July 2006, at which time
title in the equipment will pass to EKA Chemicals, Inc. There are two remaining
semi-annual rent payments during July 2005 and January 2006 totaling $745,000.
We received a rental payment during January 2005 in the amount of $372,500.
During March 2005, in order to repay ICON Income Fund Nine LLC for amounts
paid on our behalf under the terms of the Contribution Agreement; we assigned
our entire 50% interest in the facility on lease to EKA Chemicals, Inc. valued
at $745,000 to ICON Income Fund Nine LLC.
Status of Current Portfolio
Mobile Off-Shore Drilling Rig
We have a 43.36% ownership interest in a mobile off-shore drilling rig
referred to as a jack-up oil rig. Currently these jack-up oil rigs are in demand
which is evidenced by their utilization rate which currently is over 90%.
Together with the current high price of oil (which is anticipated to continue in
the near future), and the high day rates that these rigs are currently
commanding, we continue to be optimistic that we will be able to find a buyer at
a satisfactory price for this piece of equipment or negotiate a lease renewal
with Rowan Company's Inc.
McDonnell Douglas DC-10-30F aircraft
We currently own a 1976 McDonnell Douglas DC-10-30F aircraft subject to
lease with World Airways, Inc. The original lease expired on April 30, 2003.
Effective May 1, 2003, the Aircraft was leased to World Airways, Inc. on a
"power-by-the-hour" until December 31, 2004. Effective September 1, 2004, this
lease was modified to a fixed rental of $50,000 per month plus maintenance
reserves and the term was extended through September 2006. Aviation Investors,
Inc. ("Aviation"), an unrelated third party, who was a party to the acquisition
of the Aircraft, has a Residual Sharing Agreement (the "Agreement") in which
Aviation is entitled to receive 50% of all residual proceeds from the Aircraft.
Residual proceeds include gross proceeds from any of the following: sale, lease,
renewal lease or extension or financing or refinancing of the Aircraft and
casualty payments. The gross proceeds may be reduced, but not below zero, for
recovery expenses, remarketing expenses, and any reasonable out-of-pocket costs
incurred us. Additionally, Aviation has a management agreement with us to manage
the operations of and to remarket the Aircraft for sale or lease. For this
service Aviation receives a monthly management fee of $10,667.
There is a maintenance reserve of approximately $1,843,000 at December 31,
2004. If the maintenance reserves are not fully utilized any remaining monies
will be divided between the us and Aviation as stipulated in the Agreement.
Supply Vessel
We are still working to sell or remarket the third, and final, of our
supply vessels that were formerly on charter to SEACOR Smit, Inc. The ability to
sell at a favorable price is largely contingent on industry factors, as
discussed below. During December 2004, we recorded an impairment loss on this
asset based upon the current market.
Boeing 737 and Airbus A310 rotables
We currently own 65 Boeing 737 rotables and 58 Airbus A310 rotables, which
were formerly on lease to Sabena Technics. Aircraft rotables are replacement
spare parts that are held in inventory by an airline. In aggregate, the sales of
these parts should generate between $2,000,000 and $3,000,000 of additional
proceeds for us. Subject to other risk factors described herein, we believe the
values to be relatively steady. The Boeing 737-300 is the most popular aircraft
ever built. The A310 rotables can be used on either A310-200s or A310-300s which
are being used by over 60 operators world-wide.
13
Three 737-300 aircraft residuals
We have an investment in the unguaranteed residual values of three aircraft
which are currently on lease to Continental Airlines, Inc. On July 31, 1997, we
acquired an option to purchase these aircraft and paid $412,500 per aircraft for
an aggregate purchase price of $1,237,500. In addition, we assumed recourse debt
in the amount of $3,612,092 with interest accruing at 8.5% per year which
matured on November 27, 2003. The strike price for each aircraft at maturity was
$5,375,000. Prior to the aircraft leases expiring, Continental expressed a
desire to extend each of the leases for two years. Due to market conditions and
in order to accommodate the lease extensions, it was in our best interest to
terminate the option agreement. We agreed to restructure the recourse debt with
a new maturity date of November 27, 2006. As a result of the restructuring, we
were required to prepay $500,000 of interest that would accrue on the new
recourse debt and the option to purchase the aircraft would be converted into an
interest in the unguaranteed residual value.
These so-called "Current Generation" Boeing narrowbody aircraft were
amongst those whose values were initially hardest hit by the tragic events of
September 11, 2001. The current market remains volatile, and the industry is
currently on the downside of a business cycle. We are optimistic that the
industry will rebound within the next two to three years. The three 1985 vintage
Boeing aircraft each have approximately 15 years of useful life remaining, are
Stage III compliant, and are widely used in the marketplace. We anticipate
Continental Airlines, Inc. will either renew the current leases, as they did in
2003, or agree to a favorable buyout when the current leases expire. As for the
related recourse debt, we are not required to commence interest only payments
until December 31, 2005. We remain hopeful that when these aircraft are sold,
all or substantially all of our recourse debt will be repaid from the proceeds,
but there can be no assurance that this will be the case. A sale of the aircraft
before November 2006 for a low sales price would result in our being required to
repay the remaining balance of the recourse debt in November 2006. However, we
have no control over when a potential sale would occur or the potential selling
price.
Economic and Industry Factors
Our results 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.
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.
Energy Industry
The energy industry, which affects our mobile shore oil drilling rig and
supply vessel, is highly cyclical and dependent on numerous factors, including
the current level of exploration and development of offshore oil areas. Despite
the current high prices of oil, oil companies are reluctant to make the capital
investment necessary in shelf drilling, as the high energy prices are perceived
as being temporary by oil companies. This will affect the resale value of our
remaining supply vessel.
Exploration and drilling activities are influenced by a number of factors,
including the current and anticipated future prices of oil and natural gas, the
expenditures by oil and gas companies for exploration and development and the
availability of drilling rigs. In addition, demand for drilling services remains
dependent on a variety of political and economic factors that are also beyond
our control, including worldwide demand for oil and natural gas driven by
economic activity, the ability of the Organization of Petroleum Exporting
Countries ("OPEC") to set and maintain production levels and pricing, the level
of production of non-OPEC countries and the policies of various governments
regarding exploration and development of their oil and natural gas reserves.
The current market for mobile off-shore drilling rigs referred to as
jack-up oil rigs appears to in be improving. Currently these jack-up oil rigs
are in demand which is evidenced by their utilization rate which currently is
over 90%. Together with the current high price of oil (which is anticipated to
continue in the near future), and the high day rates that these rigs are
currently commanding, we continue to be optimistic that we will be able to find
a buyer at a satisfactory price for this piece of equipment or negotiate a lease
renewal with Rowan Company's Inc.
14
Domestic Air Transportation Industry
The domestic aircraft leasing industry has been on the downside of a
business cycle and continues to remain there. This has resulted in depressed
sales prices for assets such as our aircraft interests. It does not appear that
the industry will recover significantly in the very near future with the recent
increases in the price of gasoline and the fare wars within the domestic air
transportation industry, although we are optimistic that a recovery will occur
within two to three years time. However, a further weakening of the industry
could cause the proceeds realized from the future sale of our aircraft and its
rotables to be even less than suggested by recent appraisals.
Inability to Remarket Assets
The market for some of our assets, such as the mobile off-shore oil rig, is
not very liquid. If current equipment lessees choose not to renew their leases
or purchase other 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 General Partner
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
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 General Partner has an Investment Committee that approves each new
equipment acquisition. As part of their process, the Investment Committee
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 in accordance with our policy to review
all significant assets in our portfolio.
15
Asset Impairments
The significant assets in our asset 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 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 cash 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 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 where the lessee remits their rental payments directly
to the lender and we do not recover our residual position until the note payable
is repaid in full.
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
During December 2004, the FASB issued SFAS No. 153 "Exchanges of
Nonmonetary Assets--an amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153
is based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. The guidance in
Opinion 29, however, included certain exceptions to that principle. This
Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges
of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. SFAS 153
is effective for nonmonetary exchanges occurring in fiscal periods beginning
after June 15, 2005. We do not expect the adoption of SFAS 153 to have an impact
on our 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.
b. Results of Operations for the Years Ended December 31, 2004 ("2004") and
2003 ("2003")
Revenue for 2004 and 2003 are summarized as follows:
Years Ended December 31,
2004 2003 Change
----- ---- ------
Total revenue $ 2,677,226 $ 1,576,532 $ 1,100,694
=================== ================== ================
Rental income $ 439,685 $ 1,365,201 $ (925,516)
Finance income $ 13,467 $ 82,070 $ (68,603)
Net income from leveraged leases $ 1,078,481 $ (1,488,462) $ 2,566,943
Income from investments in joint ventures $ 2,840,420 $ 1,241,857 $ 1,598,563
Net gain (loss) on sales of equipmemt $ (1,738,180) $ 120,524 $ (1,858,704)
Interest and other income $ 43,353 $ 255,342 $ (211,989)
16
Our total revenue in 2004 increased by $1,100,694 or 69.8%, as compared to
2003. The increase in net income from the leveraged lease was due an impairment
loss of $3,400,000 in 2003 which was netted against net income from leverage
lease as compared to an impairment loss of $4,700,000 in 2004 which is
classified as an expense for reporting purposes. The decrease in rental income
is due to the fact that we are in our disposition period. As leases expire we
remove the underlying equipment from operating to equipment held for sale or
lease and locate buyer for the equipment. The increase in income from
investments in joint ventures was due primarily to increased gains incurred by
the ICON Receivables 1997-B L.L.C. ("1997-B") joint venture and North Sea
Limited Partnership which had a gain of approximately $1,397,000 and offset by
losses incurred by the ICON Cheyenne joint venture. The increase in loss on
disposal of assets in 2004 was due to the disposal of the two leases during the
year for which there were minimal disposals during the 2003.
Expenses for 2004 and 2003 are summarized as follows:
Years Ended December 31,
2004 2003 Change
----- ----- ------
Total expenses $ 12,919,447 $ 18,876,768 $ (5,957,321)
=================== ================ =============
Provision for impairment loss $ 7,861,680 $ 7,850,000 $ 11,680
Depreciation $ 2,675,064 $ 5,795,265 $ (3,120,201)
Interest $ 1,104,016 $ 2,682,524 $ (1,578,508)
Vessel maintenance $ 49,641 $ 763,485 $ (713,844)
General and administrative $ 705,550 $ 790,717 $ (85,167)
Management fees - general partner $ 387,287 $ 595,157 $ (207,870)
Administrative expense reimburesement -
General Partner $ 154,958 $ 242,909 $ (87,951)
Reversal of provision for bad debts $ (134,391) $ - $ (134,391)
Amortization of initial direct costs $ 117,781 $ 184,089 $ (66,308)
Minority interest $ (2,139) $ (27,378) $ 25,239
Our total expenses for 2004 decreased by $5,957,322 or 31.6%, over 2003.
The decrease in provision for impairment loss was due to our recording
impairment on five supply vessels during 2003 as compared to two vessels during
2004. The decrease in depreciation expense was due primarily to the termination
of the five marine supply vessel leases during 2004. We had a full year of
depreciation in 2003 while in 2004 we had six months of depreciation relating to
these leases. The decrease in interest expense was due to a decrease in the
average debt outstanding from 2004 to 2003. This decrease is primarily as a
result of several factors; the extinguishment of debt associated with lease
terminations and debt extinguishment related to the sale of the Federal Express
Corporation equipment. The decrease in vessel maintenance in 2004 was due to the
storage and remarketing costs associated with the off-lease vessels during 2003
for which there were minimal costs in 2004. The decrease in general and
administrative expenses was due to reductions in storage and maintenance and
insurance expense during 2004 versus 2003 as a result of reduced payments under
the supply vessel leases. Effective July 1, 2004, the General Partner agreed to
no longer charge us management fees and administrative expense reimbursements.
These fees were charged in prior quarters.
Net Loss
As a result of the factors discussed above, the net loss for 2004 and 2003
was $10,242,221 and $17,300,236, respectively. The net loss per weighted average
limited partnership unit outstanding was $10.27 and $17.34 for 2004 and 2003,
respectively
17
c. Results of Operations for the Years Ended December 31, 2003 ("2003") and
2002 ("2002")
Revenue for 2003 and 2002 are summarized as follows:
Years Ended December 31,
2003 2002 Change
---- ---- -------
Total revenue $ 1,576,532 $ 8,326,025 $ (6,749,493)
=================== ================= =================
Rental income $ 1,365,201 $ 2,528,092 $ (1,162,891)
Finance income $ 82,070 $ 906,012 $ (823,942)
Net income from leveraged leases $ (1,488,462) $ 1,986,808 $ (3,475,270)
Income from investments in joint ventures $ 1,241,857 $ 1,453,617 $ (211,760)
Net gain on sales of equipment $ 120,524 $ 1,311,735 $ (1,191,211)
Interest and other income $ 255,342 $ 139,761 $ 115,581
Our total revenue 2003 decreased $6,749,493 or 81.1% as compared to 2002.
The decrease in net income from the leveraged lease was due to an impairment
loss of $3,400,000, taken on the aircraft under the leveraged lease, due to
reduction in the original estimated salvage value based upon a current
appraisal. The decrease in rental income was due to equipment coming off lease
during 2003 as earning no rental income while there is a full years of income in
2002. The decrease in finance income resulted primarily from a decrease in the
average size of our lease portfolio from 2002 to 2003. The decrease in income
from investment in joint ventures was due to net losses in the operations of
several of the joint ventures in 2003 which we had an interest in. The decrease
in gain on sales of equipment was due to a sale of equipment in the third
quarter of 2002 whereas no similar sale occurred in 2003.
Expenses for 2003 and 2002 are summarized as follows:
Years Ended December 31,
2003 2002 Change
---- ---- ------
Total expenses $ 18,876,768 $ 11,987,433 $ 6,889,335
=================== ============== ==============
Provision for impairment loss $ 7,850,000 $ 350,000 $ 7,500,000
Depreciation $ 5,795,265 $ 4,769,652 $ 1,025,613
Interest $ 2,682,524 $ 3,515,642 $ (833,118)
Vessel maintenance $ 763,485 $ 351,386 $ 412,099
General and administrative $ 790,717 $ 1,215,877 $ (425,160)
Management fees - general partner $ 595,157 $ 975,642 $ (380,485)
Administrative expense reimburesement -
General Partner $ 242,909 $ 419,784 $ (176,875)
Amortization of initial direct costs $ 184,089 $ 384,612 $ (200,523)
Minority interest $ (27,378) $ 4,838 $ (32,216)
Total expenses 2003 increased by $6,889,335 or 57.5% as compared to 2002.
The provision for impairment loss increased due to a decrease in the value of
our equipment held for sale or lease thereby requiring an impairment to be
recorded during 2003. The impairment loss was much smaller in 2002. The increase
in depreciation expense was due primarily due to the reclassification in 2003
from equipment from finance leases or investment in leveraged leases to
operating leases. The decrease in interest expense was due to a decrease in the
average debt outstanding from 2002 to 2003. The increase in vessel maintenance
was due to the storage and remarketing costs associated with the off-lease
vessels during 2003. The decreases in management fees - General Partner and
administrative expense reimbursement - General Partner resulted from the overall
decrease in the average size of our lease portfolio during 2003 and therefore
our costs were reduced. The decrease in amortization of initial direct costs
resulted from the decrease in the average size of our finance lease portfolio
during 2003.
Net Loss
As a result of the foregoing factors, net loss for the years ended December
31, 2003 and 2002 was $17,300,236 and $3,661,408, respectively. The net loss per
weighted average number of limited partnership unit outstanding was $17.34 and
$3.67, for the years ended December 31, 2003 and 2002, respectively.
18
d. Liquidity and Capital Resources
Sources of Cash
We believe that with the cash we have currently available, cash being
generated from our remaining leases and the proceeds from our equipment sales,
we have sufficient cash to continue our limited operations while we continue our
disposition period.
Our main sources of cash during 2004 and 2003, was from investing
activities. Our primary sources of cash during 2004, was generated from the
sales of equipment of approximately $3,542,000, cash distributions from our
joint ventures of approximately $959,000 and proceeds from the sale of interests
in joint ventures of approximately $500,000. Our primary sources of cash during
2003, was generated from the sales of equipment of approximately $1,051,000 and
cash distributions from our joint ventures of approximately $671,000.
Our primary cash outflows during 2004 and 2003, was from financing
activities. Our primary cash outflow for 2004 was principal repayments on
recourse debt of approximately $5,446,000. Our primary cash outflow in 2003 was
cash distributions to partners of approximately $1,663,000 and principal
repayments on recourse debt of $454,000.
Reduction in Note Payable
At December 31, 2003 we owed $1,750,000 to ICON Cash Flow Partners, L.P.,
Series D ("Series D") relating to a leveraged lease transaction entered into
during 1997. During 2004 we repaid a total of $1,253,625 to Series D.
Additionally, we recorded forgiveness of debt income of $496,375 for the year
ended December 31, 2004.
Financings and Borrowings
We have one recourse notes payable at December 31, 2004 totaling
$5,751,009. This recourse note payable is due on November 27, 2006, accrues
interest at 5.0% per year and requires monthly interest only payments beginning
December 31, 2005. We were required to prepay $500,000 of interest which is
being amortized into operations as interest expense through the date monthly
interest payments begin in 2005.
We and certain of our affiliates, specifically ICON Income Fund Eight A
L.P.; ICON Income Fund Eight B L.P. and ICON Income Fund Nine, LLC
(collectively, the "Initial Funds"), are parties to a Loan and Security
Agreement dated as of May 30, 2002, as amended (the "Loan Agreement"). Under the
terms of the Loan 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. Such Loan Agreement, effective August 5, 2004, was amended to
add ICON Income Fund Ten LLC ("Fund Ten") as a borrower to the Loan Agreement.
On December 6, 2004, the Initial Funds and Fund Ten entered into a Sixth
Amendment to the Loan and Security Agreement with Comerica Bank wherein the
maturity date of the loan was extended from December 31, 2004 to December 30,
2005. The Loan and Security Agreement provides for a joint and several line of
credit of up to $17,500,000 collateralized by the present value of rents
receivable and equipment owned by the borrowers.
In connection with the Loan 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 Fund. In order to facilitate Fund Ten'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 contained substantially identical terms and
limitations as did the original Contribution Agreement.
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.
19
During 2004 and 2005, certain of the Borrowers paid Comerica Bank a portion
of our outstanding obligations. As required under the terms of the Contribution
Agreement, we were required to promptly repay these Borrowers the amounts paid
on our behalf. Since we did not have sufficient liquidity to repay these
Borrowers, we assigned to them interests in certain of our joint venture
investments as full repayment of monies due to them.
During September 2004, we assigned our entire .5025% interest in ICON BF
valued at $65,325 to Fund Eight A L.P and we assigned 9.04% of our interest in
ICON Cheyenne valued at $204,384 to Fund Eight B L.P., (iii) during November
2004, the assignment of 3.24% of our interest in the profits, losses and cash
flows of North Sea (Connecticut) Limited Partnership valued at $810,000 to ICON
Income Fund Eight B L.P., (iv) during November 2004, the assignment of 2.6% of
our interest in the profits, losses and cash flows of North Sea (Connecticut)
Limited Partnership valued at $650,000 to ICON Income Fund Nine LLC and (v)
during November 2004, the assignment of .8% of our interest in the profits,
losses and cash flows of North Sea (Connecticut) Limited Partnership valued at
$200,000 to ICON Income Fund Eight A L.P.
During 2005, we entered into three additional transactions relating to
repayment of advances made on our behalf under the Contribution Agreement; (i)
during February 2005, the assignment of 2.69% of our interest in the profits,
losses and cash flows of North Sea (Connecticut) Limited Partnership valued at
$672,992 to ICON Income Fund Eight B L.P.; (ii) during February 2005, an
assignment of 3.02% of our interest in the profits, losses and cash flows of
North Sea (Connecticut) Limited Partnership valued at $755,000 to ICON Income
Fund Nine LLC; and (iii) an assignment of our entire 50% interest in a sodium
chloride plant valued at $745,000 to ICON Income Fund Nine LLC.
Aggregate borrowings by the Borrowers under the Loan Agreement amounted to
$10,272,992 at December 31, 2004. At December 31, 2004, we had $2,422,992 of
borrowings under this line. During March 2005 we repaid all amounts outstanding
on our behalf under this line of credit.
Distributions
Our reinvestment period ended on November 9, 2002, and the disposition
period commenced. During the disposition period, we have and will continue to
distribute substantially all distributable cash from operations and equipment
sales to the partners and continue the orderly termination of our operations and
affairs. We have not and will not invest in any additional finance or lease
transactions during the disposition period.
We do not, in the normal course of business, pay dividends. For the year
ended December 31, 2004, we did not pay distributions to our partners.
Historically, we paid monthly distributions to our partners beginning with their
admission through the termination of the reinvestment period, which was November
9, 2002. For the years ended December 31, 2003 and 2002, we paid distributions
of $1,645,916 and $10,129,308, respectively, to our limited partners. For the
years ended December 31, 2003 and 2002, we paid distributions of $16,627 and
$102,316, respectively, to our General Partner.
Commitments
At December 31, 2004, we have total recourse debt outstanding totaling
$8,174,001, of which $5,751,009 relates to a note payable and $2,422,992 relates
to the Comerica Bank line of credit. Principal maturities of our notes payable
consisted of the following at December 31, 2004:
Year Ending
December 31,
2005 $ 2,422,992
2006 5,751,009
-------------
Total $ 8,174,001
=============
20
Risks and Uncertainties
At December 31, 2004, except as noted above in the Overview section and
listed below in the Risk Factors section, and to the best of our knowledge,
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 There is a depressed market for supply vessels of the type, age and
condition which have affected the value of our remaining supply vessel. We
believe this will continue to negatively impact our ability to remarket
this vessel.
o We may face difficulty remarketing the aircraft rotables. Aircraft rotables
are replacement spare parts that are held in inventory by an airline. We
own rotables for both the Boeing 737-300 aircraft and the Airbus aircraft.
We believe that over time we will be able to remarket these rotables, but
the aircraft industry has been in an overall down cycle and we may face
difficulty in remarketing these assets.
o The market for Boeing 737-300 aircraft is currently depressed due to an
overabundance of aircraft on the market resulting from the overall downturn
in the aviation industry following the tragic events of September 11, 2001.
While the market for these aircraft is cyclical, there can be no assurance
that market will recover by November, 2006. Failure of the market to
recover significantly may result in our inability to realize our investment
in the residuals of the three aircraft currently on lease to Continental
Airlines, Inc.
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 The litigation involving Fleet may require us to spend a potentially
significant amount of money on professional fees which may in turn affect
our ability to make distributions.
o The equipment leasing industry is highly competitive. When seeking leasing
transactions for acquisition or sale, 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 of our competitors are larger than us and have
greater financial recourse than we do.
d. 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.
21
Item 7A. 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 to the best of our knowledge 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.
22
Item 8. Financial Statements and Supplementary Information
Report of Independent Registered Public Accounting Firm 24
Consolidated Balance Sheets at December 31, 2004 and 2003 25-26
Consolidated Statements of Operations for the Years Ended
December 31, 2004, 2003 and 2002 27
Consolidated Statement of Changes in Partners' Equity for the Years Ended
December 31, 2002, 2003 and 2004 28
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002 29-30
Notes to Consolidated Financial Statements 31-49
23
The Partners
ICON Cash Flow Partners L.P. Seven
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheets of ICON Cash Flow
Partners L.P. Seven (a Delaware limited partnership) and subsidiaries as of
December 31, 2004 and 2003 and the related consolidated statements of
operations, changes in partners' equity and cash flows for each of the three
years in the period ended December 31, 2004. These consolidated financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ICON Cash Flow
Partners L.P. Seven and subsidiaries as of December 31, 2004 and 2003 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 1, the Partnership's reinvestment period ended November 9,
2002 and its disposition commenced. During the disposition period the
Partnership will distribute substantially all distributable cash from operations
and equipment sales to the partners and begin the orderly termination of its
operations and affairs.
/s/ Hays & Company LLP
March 16, 2005
New York, New York
24
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Consolidated Balance Sheets
December 31,
ASSETS
2004 2003
---- ----
Cash and cash equivalents $ 96,364 $ 301,256
------------ -------------
Investments in finance leases:
Minimum rents receivable 1,117,499 2,022,310
Estimated unguaranteed residual values - 70,903
Initial direct costs, net - 1,299
Unearned income (5,934) (55,036)
Allowance for doubtful accounts - (239,516)
------------ ---------------
Net investments in finance leases 1,111,565 1,799,960
------------- --------------
Investments in operating leases:
Equipment, at cost 2,565,000 6,352,370
Accumulated depreciation (833,310) (1,614,224)
-------------- --------------
Net investments in operating leases 1,731,690 4,738,146
------------- --------------
Equipment held for sale 1,776,131 15,569,831
Net investment in leveraged lease - 19,631,879
Investment in estimated unguaranteed residual values 4,686,758 4,686,758
Investments in joint ventures 3,813,458 4,000,169
Due from affiliates 190,301 369,071
Other assets, net 442,972 966,486
------------- --------------
Total assets $ 13,849,239 $ 52,063,556
============= =============
See accompanying notes to consolidated financial statements
25
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Consolidated Balance Sheets (continued)
December 31,
LIABILITIES AND PARTNERS' EQUITY
2004 2003
---- ----
Notes payable - non-recourse $ - $ 22,129,648
Notes and accrued interest payable - recourse 8,174,001 14,027,055
Due to affiliates 341,323 51,522
Security deposits, deferred credits and other payables 155,487 429,127
Minority interest 17,316 22,871
-------------- ---------------
Total liabilities 8,688,127 36,660,223
-------------- ---------------
Commitments and contigencies
Partners' equity:
General partner (797,295) (694,873)
Limited partners; 987,547.81 units outstanding, $100 per
unit original issue price 5,958,407 16,098,206
-------------- --------------
Total partners' equity 5,161,112 15,403,333
-------------- --------------
Total liabilities and partners' equity $ 13,849,239 $ 52,063,556
============= ==============
See accompanying notes to consolidated financial statements
26
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Consolidated Statements of Operations
Years Ended December 31,
2004 2003 2002
---- ---- -----
Revenue:
Rental income $ 439,685 $ 1,365,201 $ 2,528,092
Finance income 13,467 82,070 906,012
Net income (loss) from leveraged leases 1,078,481 (1,488,462) 1,986,808
Income from investments in joint ventures 2,840,420 1,241,857 1,453,617
(Loss) gain on disposal of assets (1,738,180) 120,524 1,311,735
Interest and other income 43,353 255,342 139,761
--------------------- ---------------- -------------------
Total revenue 2,677,226 1,576,532 8,326,025
--------------------- ---------------- -------------------
Expenses:
Impairment loss 7,861,680 7,850,000 350,000
Depreciation 2,675,064 5,795,265 4,769,652
Interest 1,104,016 2,682,524 3,515,642
Vessel maintenance 49,641 763,485 351,386
General and administrative 705,550 790,717 1,215,877
Management fees - general partner 387,287 595,157 975,642
Administrative expense reimbursement -
General Partner 154,958 242,909 419,784
Reversal of provision for bad debts (134,391) - -
Amortization of initial direct costs 117,781 184,089 384,612
Minority interest (2,139) (27,378) 4,838
--------------------- ---------------- -------------------
Total expenses 12,919,447 18,876,768 11,987,433
--------------------- --------------- -------------------
Net loss $ (10,242,221) $ (17,300,236) $ (3,661,408)
===================== ================ ===================
Net loss allocable to:
Limited Partners $ (10,139,799) $ (17,127,234) $ (3,624,794)
General Partners (102,422) (173,002) (36,614)
--------------------- ---------------- -------------------
$ (10,242,221) $ (17,300,236) $ (3,661,408)
===================== ================ ===================
Weighted average number of limited partnership
units outstanding 987,548 987,548 988,099
======================= ================ ===================
Net loss per weighted average limited
partnership unit $ (10.27) $ (17.34) $ (3.67)
====================== =============== ===================
See accompanying notes to consolidated financial statements
27
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Consolidated Statement of Changes in Partners' Equity
Years Ended December 31, 2002, 2003 and 2004
Limited Partner Distributions
(Per weighted average unit) Total
Return of Investment Limited General Partners'
Capital Income Partners Partner Equity
------- ------ -------- ------- ------
Balance, January 1, 2002 $ 48,661,234 $ (366,314) $48,294,920
Limited partnership units redeemed
(1,101 units) (35,776) - (35,776)
Cash distributions to partners $10.25 $ - (10,129,308) (102,316) (10,231,624)
Net loss (3,624,794) (36,614) (3,661,408)
------------ ------------ -----------
Balance, December 31, 2002 34,871,356 (505,244) 34,366,112
Cash distributions to partners $1.67 $ - (1,645,916) (16,627) (1,662,543)
Net loss (17,127,234) (173,002) (17,300,236)
------------- ------------ -----------
Balance, December 31, 2003 16,098,206 (694,873) 15,403,333
Net loss (10,139,799) (102,422) (10,242,221)
------------- ------------ -----------
Balance, December 31, 2004 $ 5,958,407 $ (797,295) $ 5,161,112
============ ============= ===========
See accompanying notes to consolidated financial statements
28
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Consolidated Statements of Cash Flows
Years Ended December 31,
2004 2003 2002
----- ---- ----
Cash flows from operating activities
Net loss $(10,242,221) $ (17,300,236) $ (3,661,408)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Rental income paid directly to lenders by lessees - (674,894) (2,528,092)
Reversal of provision for doubtful accounts (134,391) - -
Interest expense on non-recourse financing paid directly
to lenders by lessees 484,264 1,676,212 2,536,757
Finance income portion of receivable paid directly
to lenders by lessees - - (568,035)
Loss (gain) on disposal of assets 1,738,180 (120,524) (2,711,735)
Amortization of initial direct costs 117,781 184,089 384,612
Provision for impairment loss 7,861,680 7,850,000 1,750,000
Depreciation 2,675,064 5,795,265 4,769,652
Net (income) loss from leveraged leases (1,078,481) 1,488,462 (1,986,808)
Income from investments in joint ventures (2,840,420) (1,241,857) (1,453,617)
Minority interest (2,139) (27,378) 4,838
Changes in operating assets and liabilities:
Collection of principal - non-financed receivables 688,395 1,385,804 3,449,559
Other assets 523,514 283,049 650,162
Security deposits, deferred credits and other payables (273,640) (235,565) (446,136)
Due from/to General Partner and affiliates, net 1,095,881 (311,633) (3,901,765)
---------------------- ---------------- ----------------------
Net cash provided by (used in) operating activities 613,467 (1,249,206) (3,712,016)
---------------------- ---------------- ----------------------
Cash flows from investing activities:
Contributions to investments in joint venture (11,540) - -
Proceeds from sales of equipment 1,548,754 1,050,865 6,184,106
Distributions received from joint ventures 958,915 671,137 1,288,983
--------------------- --------------- ----------
Net cash provided by investing activities 2,496,129 1,722,002 7,473,089
--------------------- -------------- ---------
Cash flows from financing activities:
Cash distributions to partners - (1,662,543) (10,231,624)
Proceeds from notes payable - recourse - 690,000 10,800,439
Principal payments on notes payable - recourse (5,446,072) (453,901) (5,120,036)
Loans and advances from affiliates 2,135,000 - -
Principal payments on notes payable - non-recourse - - (250,000)
Redemption of limited partnership units - - (35,776)
Distribution to minority interest in joint venture (3,416) (3,043) -
---------------------- ---------------- --------------------
Net cash used in financing activities (3,314,488) (1,429,487) (4,836,997)
---------------------- ---------------- ---------------------
Net decrease in cash and cash equivalents (204,892) (956,691) (1,075,924)
Cash and cash equivalents, beginning of the year 301,256 1,257,947 2,333,871
--------------------- --------------- ---------------------
Cash and cash equivalents, end of the year $ 96,364 $ 301,256 $ 1,257,947
===================== ============== =====================
See accompanying notes to consolidated financial statements
29
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Consolidated Statements of Cash Flows
Years Ended December 31,
2004 2003 2002
---- ---- ----
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 319,541 $ 1,006,312 $ 978,885
===================== ============== ==============
Supplemental disclosure of non-cash investing and financing activities:
Principal and interest on finance lease paid directly
to lenders by lessees $ 5,766,418 $ 4,397,927 $ 2,269,884
===================== ============== ==============
Notes payable - non-recourse relinquished
with sale of equipment $ 16,847,494 $ - $ -
===================== ============== ==============
Transfer of investment in operating leases,
net of accumulated depreciation ,
to equipment held for sale or lease $ 2,450,916 $ 10,389,766 $ 3,258,314
===================== ============== ==============
Transfer of investment in finance leases
to investment in operating leases $ - $ 2,565,000 $ 9,647,253
===================== ============== ==============
Transfer of investment in operating leases
to equipment held for sale $ 2,327,558 $ - $ -
===================== ============== ==============
Joint venture interests assigned to affiliates in exchange
for amounts owed $ 1,876,000 $ - $ -
===================== ============== ==============
Recourse debt paid by affiliates $ 1,253,625 $ - $ -
===================== ============== ==============
See accompanying notes to consolidated financial statements
30
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(1) Organization
ICON Cash Flow Partners L.P. Seven (the "Partnership") is an equipment
leasing business formed in the State of Delaware on May 23, 1995. The
Partnership is engaged in one business segment, the business of acquiring
equipment subject to leases.
The principal objective of the Partnership is to obtain the maximum
economic return from its investments for the benefit of its partners. To achieve
this objective, the Partnership: (i) acquired a diversified portfolio of leases
and financing transactions; (ii) made monthly cash distributions to its partners
commencing with each partner's admission to the Partnership, continuing through
the reinvestment period, which ended on November 9, 2002; (iii) re-invested
substantially all undistributed cash from operations and cash from sales of
equipment and financing transactions during the reinvestment period; and (iv) is
selling the Partnership's investments and is distributing the cash from sales of
such investments to its partners during the disposition period.
The Partnership's reinvestment period ended November 9, 2000 and the
Partnership commenced its disposition period. During the disposition period the
Partnership is distributing substantially all distributable cash from operations
and equipment sales to the partners and will continue the orderly termination of
its operations and affairs. The Partnership will not invest in any additional
finance or lease transactions during the disposition period.
The Partnership's maximum offering was $100,000,000. Operations commenced
on the Partnership's initial closing date, January 19, 1996 with the admission
of 26,367.95 limited partnership units at $100 per unit representing $2,636,795
of capital contributions. From January 20, 1996 through September 16, 1998 (the
final closing date) 973,628.86 additional units were admitted representing
$97,362,886 of capital contributions bringing the total admission to 999,996.81
units aggregating $99,999,681 in capital contributions. The Partnership redeemed
12,449.00 limited partnership units during the years 1997 through 2004, leaving
987,547.81 limited partnership units outstanding at December 31, 2004.
The General Partner of the Partnership is ICON Capital Corp. (the "General
Partner"), a Connecticut corporation. The General Partner manages and controls
the business affairs of the Partnership's equipment leases and financing
transactions under the terms of a management agreement with the Partnership.
Additionally, the General Partner has a 1% ownership interest in the
Partnership.
Profits, losses, cash distributions and disposition proceeds are allocated
99% to the limited partners and 1% to the General Partner until each limited
partner has received cash distributions and disposition proceeds sufficient to
reduce its adjusted capital contribution account to zero and receive, in
addition, other distributions and allocations which would provide a 10% per
annum cumulative return, compounded daily, on its outstanding adjusted capital
contribution account. After such time, the distributions will be allocated 90%
to the limited partners and 10% to the General Partner.
31
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(2) Summary of Significant Accounting Policies
Consolidation and Minority Interest
The consolidated financial statements include the accounts of the
Partnership and its majority owned subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation. The Partnership
accounts for its interests in minority owned joint ventures under the equity
method of accounting. In such cases, the Partnership's original investment is
recorded at cost and adjusted for its share of earnings, losses and
distributions. In joint ventures where the Partnership'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.
Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and highly liquid
investments with original maturity dates of three months or less.
Concentration of Credit Risk
Concentrations of credit risk with respect to lessees are dispersed across
different industry segments within the United States of America and throughout
the world; accordingly, the Partnership is exposed to business and economic
risk. Although the Partnership does not currently foresee a concentrated credit
risk associated with its lessees, lease payments are dependent upon the
financial stability of the segments in which they operate.
Allowance for Doubtful Accounts
The Partnership estimates collectibility of minimum rents receivable by
analyzing historical bad debts, lessee concentrations and credit worthiness and
current economic trends when evaluating the adequacy of the allowance for
doubtful accounts. The Partnership records an allowance for doubtful accounts
when the analysis indicates that the probability of full collection is unlikely.
Investments in Operating Leases
Operating leases are stated at cost less accumulated depreciation.
Depreciation is being provided for using the straight-line method over the term
of the related equipment lease to its estimated residual value at lease end.
Upon final disposition of the equipment, the cost and related accumulated
depreciation will be removed from the accounts and the resulting profit or loss
will be reflected in the consolidated statement of operations. Revenues from
operating leases are recognized on a straight line basis over the lives of the
related leases.
Equipment Held for Sale
Equipment held for sale is recorded at the lower of cost or fair value
expected to be realized upon sale and consists of equipment previously leased to
end users which has been returned to the Partnership following lease expiration.
32
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(2) Summary of Significant Accounting Policies - continued
Investment in Estimated Unguaranteed Residual Values
The Partnership carries its investment in estimated unguaranteed residual
values at cost. The Partnership reviews its investments in estimated
unguaranteed residual values in accordance with its policy on asset impairments.
Asset Impairments
The Partnership's asset portfolio is periodically reviewed, at least
annually, to determine whether events or changes in circumstances indicate that
the carrying value of an asset may not be recoverable. An impairment loss will
be recognized if the carrying amount of a long-lived asset is not recoverable
and exceeds its fair value. In such circumstances, the Partnership 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 cash 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 its carrying value or (ii) the lessee is experiencing
financial difficulties and it does not appear likely that the estimated proceeds
from the disposition of the asset will be sufficient to satisfy the remaining
obligation to the 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 where the lessee remits their rental payments directly
to the lender and the Partnership did not recover its residual position until
the note payable is repaid in full.
Redemption of Limited Partnership Units
The Partnership may, at its discretion, redeem units from a limited number
of its limited partners, in any one year, as defined in the partnership
agreement. The redemption amounts are calculated following the specified
redemption formula in accordance with the partnership agreement. Redeemed units
have no voting rights and do not share in distributions. Redeemed limited
partnership units are accounted for as a reduction from partners' equity.
Per Unit Data
Net income (loss) and distributions per unit are based upon the weighted
average number of units outstanding during the period.
Revenue Recognition
The partnership leases equipment to third parties which may be classified
as either a finance 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 a finance lease. For an operating lease, the
initial direct costs are included as a component of the cost of the equipment
and depreciated.
33
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(2) Summary of Significant Accounting Policies - continued
For finance leases, the Partnership records, at lease inception, the total
minimum lease payments receivable from the lessee, the estimated unguaranteed
residual value of the equipment at lease termination, the initial direct costs
related to the lease and the related unearned income. Unearned income represents
the difference between the sum of the minimum lease payments receivable plus the
estimated unguaranteed residual minus the cost of the leased equipment. Unearned
income is recognized as finance income ratably over the term of the lease.
For operating leases, rental income is recognized on the straight line
method over the lease term. Billed and uncollected operating lease receivables
are included in other assets. Deferred income is the difference between the
timing of the cash payments and the income recognized on a straight line basis.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures
About Fair Values of Financial Instruments," requires disclosures about the fair
value of financial instruments, except for lease related assets and liabilities.
Separate disclosure of fair value information at December 31, 2004 and 2003 with
respect to the Partnership's assets and liabilities is not separately provided
since (i) SFAS No. 107 does not require fair value disclosures of lease
arrangements and (ii) the carrying value of financial assets, other than lease
related investments, and the recorded value of payables approximates market
value. The estimated fair value of the Partnership's recourse notes payable at
December 31, 2004 is approximately $7,529,000.
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Significant estimates primarily include
the allowance for doubtful accounts and unguaranteed residual values. In
addition, management is required to disclose contingent assets and contingent
liabilities. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In December 2004, SFAS Statement No. 153 "Exchanges of Nonmonetary
Assets--an amendment of APB Opinion No. 29" was issued. SFAS 153 is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. The guidance in Opinion 29, however,
included certain exceptions to that principle. SFAS 153 amends Opinion 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. SFAS 153 is effective for nonmonetary
exchanges occurring in fiscal periods beginning after June 15, 2005. The
Partnership has not entered into any nonmonetary transactions: therefore, SFAS
153 did not have an impact on our financial position, results of operations or
cash flows.
34
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(2) Summary of Significant Accounting Policies - continued
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.
Reclassifications
Certain reclassifications have been made to the accompanying consolidated
financial statements for prior years in order to conform to the current year
presentation.
(3) Joint Ventures
The Partnership and its affiliates, entities managed and controlled by the
General Partner, formed eight joint ventures, discussed below, for the purpose
of acquiring and managing various assets. The Partnership and these affiliates
have substantially identical investment objectives and participate on the same
terms and conditions. The Partnership and the other joint venturers have a right
of first refusal to purchase the equipment, on a pro-rata basis, if any of the
other joint venturers desire to sell their interests in the equipment or joint
venture.
The joint venture described below is majority owned and consolidated with
the Partnership.
ICON Cash Flow Partners L.L.C. III
The Partnership and an affiliate, ICON Cash Flow Partners, L.P., Series E
("Series E") formed, ICON Cash Flow Partners L.L.C. III, ("LLC III") for the
purpose of acquiring and managing a 1976 McDonnell Douglas DC-10-30 (the
"Aircraft"). The original lease expired on April 30, 2003. Effective May 1,
2003, the Aircraft was leased to World Airways, Inc. on a "power-by-the-hour"
until December 31, 2004. Effective September 1, 2004, this lease was modified to
a fixed rental of $50,000 per month plus maintenance reserves and the term was
extended through September 2006. Aviation Investors, Inc. ("Aviation"), an
unrelated third party, who was the seller in the acquisition of the Aircraft,
has a Residual Sharing Agreement (the "Agreement") in which Aviation is entitled
to receive 50% of all excess residual proceeds from the Aircraft as defined.
Residual proceeds include gross proceeds from any of the following: sale, lease,
renewal lease or extension or financing or refinancing of the Aircraft and
casualty payments. The gross proceeds may be reduced, but not below zero, for
recovery expenses, remarketing expenses, any reasonable out-of-pocket costs
incurred by the Partnership and an amount calculated to provide the Partnership
with a consistent rate of return, as defined in the Agreement. Additionally,
Aviation has a management agreement with the Partnership to manage the
operations of and to remarket the Aircraft for sale or lease. For this service
Aviation receives a monthly management fee of $10,667. LLC III acquired the
Aircraft, assuming non-recourse debt and utilizing contributions received from
the Partnership and Series E. The Partnership and Series E contributed 99% and
1% of the cash required for such acquisition, respectively. LLC III has since
fully repaid the non-recourse debt secured by the Aircraft.
There is a maintenance reserve of approximately $1,843,000 at December 31,
2004. If the maintenance reserves are not fully utilized any remaining monies
will be divided between the Partnership and Aviation as stipulated in the
Agreement.
35
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(3) Joint Ventures - continued
The seven joint ventures described below are minority owned by the
Partnership and are accounted for under the equity method, whereby the
Partnership's original investment was recorded at cost and is adjusted by its
share of earnings, losses and distributions of the joint ventures.
ICON Receivables 1997-A L.L.C.
The Partnership and three affiliates, ICON Cash Flow Partners, L.P., Series
D ("Series D"), Series E and ICON Cash Flow Partners L.P. Six ("L.P. Six")
contributed and assigned equipment leases, finance receivables and equipment
residuals to ICON Receivables 1997-A LLC ("1997-A") for the purpose of
securitizing their cash flow collections. At December 31, 2004, the Partnership,
Series D, Series E and L.P. Six own interests of 19.97%, 17.81%, 31.19%, and
31.03%, respectively, in 1997-A.
At December 31, 2004, 1997-A's operations have been liquidated as the note
holders have been fully repaid for their investment in 1997-A and the remaining
receivables relating to the securitizations totaling $345,152, due from an
affiliate of the General Partner relating to lease receivables, were written-off
as uncollectible. The remaining cash is being reserved to pay for potential
property tax; sales tax and other liabilities, if any.
Information as to the financial position and results of operations of
1997-A at December 31, 2004 and 2003 and for the years ended December 31, 2004
and 2003 are summarized below:
December 31,
2004 2003
------------- -------------
Assets $ 107,229 $ 810,802
============= =============
Liabilities $ 62,005 $ 595,106
============= =============
Equity $ 45,224 $ 215,696
============= =============
Partnership's share of equity $ 9,045 $ 43,080
============= =============
Years Ended December 31,
2004 2003
------------- -------------
Net loss $ (170,469) $ (88,676)
============ =============
Partnership's share of net loss $ (34,035) $ (17,704)
============= =============
ICON Receivables 1997-B L.L.C.
The Partnership and two affiliates, Series E and L.P. Six, formed ICON
Receivables 1997-B L.L.C. ("1997-B") contributed and assigned equipment leases,
finance receivables and equipment residuals to 1997-B for the purpose of
securitizing their cash flow collections. The Partnership, Series E and L.P. Six
each contributed cash, equipment leases and residuals to 1997-B and own 16.67%,
75.00% and 8.33% interests, respectively, in 1997-B.
At December 31, 2004, 1997-B's operations have been liquidated as the note
holders have been repaid for most of their investment in 1997-B. The remaining
cash is being reserved to pay for potential property tax; sales tax and other
liabilities, if any.
36
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(3) Joint Ventures - continued
Information as to the financial position and results of operations of
1997-B at December 31, 2004 and 2003 and for the years ended December 31, 2004
and 2003 are summarized below:
December 31,
2004 2003
------------- -------------
Assets $ 38,558 $ 1,756,597
============= =============
Liabilities $ 38,558 $ 1,681,931
============= =============
Equity $ - $ 74,666
============= =============
Partnership's share of equity $ - $ 12,448
============= =============
Years Ended December 31,
2004 2003
------------- -------------
Net income (loss) $ 131,462 $ (341,507)
============= =============
Partnership's share of net loss $ 21,915 $ (56,929)
============= =============
Distributions $ 206,128 $ -
============= =============
Partnership's share of distributions $ 34,362 $ -
============= =============
ICON/Boardman Facility LLC
The Partnership and two affiliates, L.P. Six and ICON Income Fund Eight A
L.P. ("Fund Eight A"), formed ICON/Boardman Facility LLC ("ICON BF") for the
purpose of acquiring a coal handling facility on lease with Portland General
Electric ("PGE"), a utility company. Prior to September 24, 2004, the
Partnership, L.P. Six and Fund Eight A owned interests of .5025%, .5025% and
98.995%, respectively, in ICON BF.
As discussed in Note 10, in connection with the Comerica Bank Loan and
Security Agreement, the Partnership entered into a Contribution Agreement with
Fund Eight A, ICON Income Fund Eight B L.P. ("Fund Eight B"), ICON Income Fund
Nine, LLC ("Fund Nine") and ICON Income Fund Ten, LLC ("Fund Ten") (each a
"Borrower" and collectively, "the Borrowers") which requires a Borrower to repay
another Borrowers obligations to Comerica Bank as long as the repaid amounts are
promptly reimbursed to the paying Borrower. Effective September 24, 2004, the
Partnership assigned its entire .5025% interest in ICON BF to Fund Eight A for
$65,325 to partially satisfy its obligations to Fund Eight A under the
Contribution Agreement. This amount was determined to represent the fair value
of the Partnership's interest in ICON BF based upon the expected net proceeds
from the sale of the coal handling facility.
The General Partner is currently in negotiations with PGE for their
purchase of the coal handling facility from ICON BF. The sale is expected to be
completed during 2005 with PGE acquiring ownership of the coal handling
facility.
Information as to the financial position and results of operations of ICON
BF at December 31, 2004 and 2003 and for the years ended December 31, 2004 and
2003 are summarized below:
37
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(3) Joint Ventures - continued
December 31,
2004 2003
------------- -------------
Assets $ 19,193,175 $ 21,366,282
============= =============
Liabilities $ 10,904,912 $ 7,314,376
============= =============
Equity $ 8,288,263 $ 14,051,906
============= =============
Partnership's share of
equity/assigned on 9/24/04 $ - $ 70,611
============= =============
Years Ended December 31,
2004 2003
------------- -------------
Net income $ 1,481,386 $ 1,442,100
============= =============
Partnership's share of net income $ 5,804 $ 7,247
============= =============
Distributions $ 7,245,027 $ -
============= =============
Partnership's share of distributions $ 36,406 $ -
============= =============
Assignment of ownership interest $ 40,009 $ -
============= =============
ICON/AIC Trust
The Partnership and two affiliates, L.P. Six and Fund Eight A, formed
ICON/AIC Trust ("AIC Trust") for the purpose of owning and managing a portfolio
of leases for equipment located in England. On December 28, 2001, AIC Trust sold
its remaining leases, subject to the related debt, in exchange for a note
receivable of (pound)2,575,000 ($3,744,822 converted at the exchange rate in
effect at December 31, 2001) which was payable in six installments through June
2004. In July 2004, the final installment on the note was collected by AIC Trust
and distributed to its beneficiaries. On September 30, 2004, AIC Trust was
dissolved. The Partnership, L.P. Six and Fund Eight A owned a 30.76%, 25.51% and
43.73% interest, respectively, in AIC Trust.
The Partnership recognized an additional $129,646 of foreign currency
translation gains from this transaction which is included in income from
investments in joint ventures in the accompanying consolidated statements of
operations.
Information as to the financial position and results of operations of AIC
Trust at December 31, 2004 and 2003 and for the years ended September 30, 2004
and 2003 are summarized below:
December 31,
2004 2003
------------- -------------
Assets $ - $ 1,330,632
============= =============
Liabilities $ - $ -
============= =============
Equity $ - $ 1,330,632
============= =============
Partnership's share of equity $ - $ 409,303
============= =============
Years Ended December 31,
2004 2003
------------- -------------
Net income $ 7,700 $ 37,009
============= =============
Partnership's share of net income $ 2,369 $ 11,384
============= =============
Distributions $ 1,378,141 $ 1,396,948
============= =============
Partnership's share of distributions $ 423,916 $ 429,701
============= =============
38
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(3) Joint Ventures - continued
ICON Aircraft 24846 LLC
The Partnership and two affiliates, Fund Eight A and Fund Eight B, formed,
ICON Aircraft 24846 LLC ("ICON Aircraft 24846") for the purpose of acquiring an
investment in a Boeing 767-300ER aircraft on lease to Scandinavian Airline
Systems. The Partnership, Fund Eight A and Fund Eight B had ownership interests
of 2.0%, 2.0% and 96.0%, respectively in ICON Aircraft 24846.
The aircraft was sold on July 29, 2004 and ICON Aircraft 24846 realized a
net loss on the sale of approximately $601,800, of which our share was
approximately $12,000. The General Partner had determined that it was in the
best interest of ICON Aircraft 24846 and its members to sell the Boeing
767-300ER aircraft to BTM Capital Corp., the lender, for an amount equal to the
then outstanding debt balance. The decision to sell the aircraft was based, in
part, on the following factors: (i) the aircraft's fair market value was
estimated to be between $24,000,000 and $27,000,000 and the balance of the
outstanding debt was $34,500,000; (ii) any new lease for the aircraft would have
required an additional $850,000 in equity (at a minimum) in order to reconfigure
the aircraft and upgrade the engines; and (iii) if the Partnership were to
continue to remarket the aircraft, the lender would have required interest only
payments of approximately $100,000 per month until the aircraft was re-leased.
Information as to the financial position and results of operations of ICON
Aircraft 24846 at December 31, 2004 and 2003 and for the years ended July 29,
2004 and 2003 are summarized below:
December 31,
2004 2003
------------- -------------
Assets $ - $ 36,430,187
============= =============
Liabilities $ - $ 34,493,632
============= =============
Equity $ - $ 1,938,555
============= =============
Partnership's share of equity $ - $ 38,771
============= =============
Years Ended December 31,
2004 2003
------------- -------------
Net loss $ (2,515,576) $ (3,467,329)
============ ============
Partnership's share of net loss $ (50,311) $ (69,347)
============= =============
Contributions $ 577,021 $ 1,649,551
============= =============
Partnership's share of contributions $ 11,540 $ 32,992
============= =============
ICON Cheyenne LLC
The Partnership and three affiliates, L.P. Six, Fund Eight A and Fund Eight
B formed ICON Cheyenne LLC ("ICON Cheyenne"), for the purpose of acquiring and
managing a portfolio of equipment leases. Prior to September 30, 2004 the
Partnership, L.P. Six, Fund Eight A and Fund Eight B had ownership interests of
10.31%, 1.0%, 1.0% and 87.69%, respectively, in ICON Cheyenne.
39
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(3) Joint Ventures - continued
As discussed in Note 10, in connection with the Comerica Bank Loan and
Security Agreement, the Partnership entered into a Contribution Agreement with
the Borrowers which require a Borrower to repay other Borrowers obligations to
Comerica Bank as long as the repaid amounts are promptly reimbursed to the
paying Borrower. As repayment to Fund Eight B for amounts paid to Comerica Bank
under the terms of the Contribution Agreement, effective September 30, 2004, the
Partnership assigned a 9.04% interest in ICON Cheyenne (while retaining a 1.27%
interest) to Fund Eight B for $204,384. This amount was determined to represent
the fair value of the 9.04% interest in ICON Cheyenne. The fair value was
determined using discounted cash flow projections for ICON Cheyenne's lease
portfolio and the fair value approximated book value. Accordingly, no gain or
loss was recognized by the Partnership from this transaction.
The outstanding balance of the non-recourse debt secured by these assets,
at December 31, 2004 was $397,850. The leases expire on various dates through
September 2006.
Information as to the financial position and results of operations of ICON
Cheyenne at December 31, 2004 and 2003 and for the years ended December 31, 2004
and 2003 are summarized below:
December 31,
2004 2003
------------- -------------
Assets $ 1,241,215 $ 10,440,643
============= =============
Liabilities $ 656,923 $ 3,204,090
============= =============
Equity $ 584,292 $ 7,236,553
============= =============
Partnership's share of equity $ 7,420 $ 746,088
============= =============
Years Ended December 31,
2004 2003
------------- -------------
Net loss $ (1,952,262) $ (45,540)
============ =============
Partnership's share of net loss $ (77,419) $ (4,695)
============= ==============
Distributions $ 4,700,001 $ 2,341,759
============= =============
Partnership's share of distributions $ 464,231 $ 241,436
============= =============
Transfer of ownership interest $ 197,018 $ -
============= ============
North Sea (Connecticut) Limited Partnership
The Partnership entered into a joint venture agreement with North Sea
(Connecticut) Limited Partnership ("North Sea"), in which the Partnership
acquired a 50% Class C limited partner interest. North Sea exercised its option
to acquire a drilling rig from the operator and simultaneously leased the
drilling rig back to the operator. The lease was then financed on a non-recourse
basis with a bank, and a portion of the loan proceeds were used to pay for the
exercise price of the option; with the excess loan proceeds of $20,002,567
distributed to the joint venturers ($10,001,284 represented the Partnership's
50% share). The other parties to this joint venture are not affiliates of the
Partnership or its General Partner.
40
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(3) Joint Ventures - continued
As discussed in Note 10, in connection with the Comerica Bank Loan and
Security Agreement, the Partnership entered into a Contribution Agreement with
the Borrowers which require a Borrower to repay other Borrowers obligations to
Comerica Bank as long as the repaid amounts are promptly reimbursed to the
paying Borrower. The Partnership entered into the following transactions as
repayment to Fund Eight A, Fund Eight B and Fund Nine for amounts paid to
Comerica Bank under the terms of the Contribution Agreement (See Note 10). The
Partnership realized a gain from these assignments of approximately $1,397,000
which is included in income from investments in joint ventures in the
accompanying consolidated statements of operations.
During November 2004, the Partnership assigned .8% of its interest in the
profits, losses and cash flows of North Sea valued at $200,000 to Fund Eight A.
During November 2004, the Partnership assigned 3.24% of its interest in the
profits, losses and cash flows of North Sea valued at $810,000 to ICON Income
Fund Eight B. During February 2005, the Partnership assigned an additional 2.69%
of its interest in the profits, losses and cash flows of North Sea valued at
$672,992 to ICON Income Fund Eight B.
During November 2004, the Partnership assigned 2.6% of its interest in the
profits, losses and cash flows of North Sea valued at $650,000 to Fund Nine.
During February 2005, the Partnership assigned an additional 3.02% of its
interest in the profits, losses and cash flows of North Sea valued at $755,000
to Fund Nine.
The Partnership has guaranteed an amount equal to the difference between
the stipulated loss value provided for in the North Sea financing and the
outstanding loan balance. The maximum amount for which the Partnership is
contingently liable at December 31, 2004 under this guarantee was approximately
$58,000.
Information as to the financial position and results of operations of North
Sea at December 31, 2004 and 2003 and for the years ended December 31, 2004 and
2003 are summarized below:
December 31,
2004 2003
------------- -------------
Assets $ 9,174,080 $ 9,839,209
============= =============
Liabilities $ 15,838,485 $ 19,574,474
============= =============
Equity $ (6,664,405) $ (9,735,265)
============ ============
Partnership's share of equity (a) $ 3,935,402 $ 2,679,868
============= =============
Years Ended December 31,
2004 2003
------------- -------------
Net income $ 3,070,860 $ 2,743,802
============= =============
Partnership's share of net income $ 1,526,933 $ 1,371,901
============= =============
Transfer of ownership interest $ 271,400 $ -
============= ============
(a) During the year ended December 31, 2002, all equity distributions were
allocated to the co-venturer.
41
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(4) Investment in Estimated Unguaranteed Residual Values
During July 1997, the Partnership entered into an option to acquire the
residual interests in three Boeing 737-300 aircraft (the "Boeing Aircraft") on
lease to Continental Airlines. In conjunction with re-negotiations during August
2003 the option agreement was terminated. On August 29, 2003 the Partnership
re-negotiated its investment in the unguaranteed residual values of the three
Boeing Aircraft valued at $4,686,758 at December 31, 2004. As part of the
re-negotiation, three recourse promissory notes payable by the Partnership were
converted into a single recourse promissory note payable aggregating $5,751,009.
This single recourse promissory note payable is due on November 27, 2006,
accrues interest at 5.0% per annum and requires monthly interest only payments
beginning December 31, 2005. The Partnership was required to prepay $500,000
which is being amortized into operations as interest expense through the date
monthly interest payments begin in 2005.
If any, or all, of the Boeing Aircraft are sold prior to the maturity date
of the recourse promissory note payable on November 27, 2006, the Partnership
may have all or a portion of the outstanding balance of the recourse promissory
note payable forgiven, depending upon the total sales proceeds. If the Boeing
Aircraft is sold after the maturity date of the recourse promissory note, the
Partnership would be entitled to receive one-third of the net proceeds in excess
of the net book value of Boeing Aircraft, as defined in the agreement. In
addition, the Partnership is required to repay a portion of the recourse
promissory note with 50% of the sales proceeds from any of its assets which are
not subject to senior secured debt. The Partnership has not been required to
make any principal payments to the lender under the terms of the recourse
promissory note through December 31, 2004.
(5) Net Investment in Leveraged Leases
The Partnership had an ownership interest in a McDonnell Douglas DC-10-30F
aircraft (the "Aircraft") subject to a leveraged lease with Federal Express
Corporation which expired on July 2, 2004. The Aircraft was subject to
non-recourse debt which had a balloon payment of approximately $9,600,000 due at
lease end. As required by the terms of the loan agreement, the Partnership
entered into a residual value insurance agreement (the "Residual Insurance
Agreement") with an unrelated third party. Under the Residual Insurance
Agreement, the insurer was required to pay the insured amount to the lender at
the expiration of the lease if the balloon payment was not made by the
Partnership. Due to the downturn in the marketplace for this type of Aircraft,
the Partnership was unable to sell the Aircraft for sufficient proceeds to repay
the outstanding debt and therefore, the Partnership was unable to make the
required balloon payment when due nor was it able to successfully refinance the
debt. As a result, pursuant to the terms of the Residual Insurance Agreement,
the insurer notified the Partnership of its intention to pay the insured amount
of $10,200,000 at lease end, resulting in title of the Aircraft transferring to
the insurer and the Partnership losing its entire ownership interest in the
Aircraft. As a result, the Partnership received net proceeds of $520,293, after
$9,679,707 was paid to the non-recourse lender. The Partnership recorded
impairment losses of $4,700,000 and $3,400,000 for the years ended December 31,
2004 and 2003 and recorded a loss on the disposal of the Aircraft of $106,900
for the year ended December 31, 2004.
42
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(5) Net Investment in Leveraged Leases - continued
December 31,
2004 2003
---- ----
Non-cancelable minimum rents receivable (net of
principal and interest on non-recourse debt) $ - $ 5,810,360
Estimated unguaranteed residual value - 14,900,000
Initial direct costs, net - 29,411
Unearned income - (1,107,892)
------- ------------
$ - $ 19,631,879
======= =============
(6) Investments in Finance Leases
At December 31, 2004, the Partnership is the lessor of a finance lease
transaction in a sodium chlorate production facility with EKA Chemicals, Inc.
The lease expires during July 2006, at which time title to the equipment will
pass to EKA Chemicals, Inc. At December 31, 2004 the Partnership's entire
minimum rents receivable relates to this lease. The Partnership received
$372,500 during January 2005.
During March 2005 the Partnership assigned its entire 50% interest in EKA
Chemicals, Inc. valued at $745,000 to Fund Nine for amounts paid on the
Partnership's behalf under the terms of the Contribution Agreement (Note 10).
The allowance for doubtful accounts relating to finance lease
receivables and financings consists of the following:
2004 2003 2002
------------- ------------- -------------
Balance, beginning of year $ (239,516) $ (289,301) $ (915,985)
Reversal of allowance for doubtful accounts 134,391 - -
Write offs 105,125 49,785 626,684
------------- ------------- -------------
Balance, end of year $ - $ (239,516) $ (289,301)
============= ============ ============
(7) Investments in Operating Leases
As discussed in Note 3, the Partnership and Series E share an ownership
interest in a McDonnell Douglas DC-10-30 aircraft subject to a lease with
Continental Airlines, Inc. which expired in March 2003. The aircraft was then
leased to World Airways, Inc. on April 1, 2003 and the asset was reclassified as
an investment in operating leases at its then book value of $2,565,000.
43
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(7) Investments in Operating Leases - continued
Investments in operating leases are summarized as follows at December 31:
2004 2003 2002
------------- ------------- -------------
Equipment at cost, beginning of year $ 6,352,370 $ 14,195,791 $ 9,678,415
Transfer of investment in leverage leases
and equipment held for sale or lease to
operating leases - 6,352,370 9,647,253
Transfer of operating leases to equipment
held for sale or lease (3,787,370) (14,195,791) (5,129,877)
------------ ------------ ------------
Equipment at cost, end of year 2,565,000 6,352,370 14,195,791
------------- ------------- -------------
Accumulated depreciation, beginning of year (1,614,224) (1,703,583) (895,169)
Accumulated depreciation on transferred
equipment held for sale of lease 1,459,812 5,884,624 3,961,238
Depreciation expense (678,898) (5,795,265) (4,769,652)
------------- ------------ ------------
Accumulated depreciation, end of year (833,310) (1,614,224) (1,703,583)
------------- ------------ ------------ -
Net investment in operating leases, end of year $ 1,731,690 $ 4,738,146 $ 12,492,208
============= ============= =============
Aggregate minimum future rentals receivable from each of the Partnership's
non-cancelable leases discussed above consist of the following at December 31,
2004:
Year Ending
December 31,
2005 $ 600,000
2006 $ 450,000
(8) Equipment Held for Sale
The Partnership was the sole owner of two joint ventures that owned five
(5) marine vessels originally on charter to affiliates of Seacor Marine, Inc.
(the "Vessels"). These Vessels were subject to outstanding non-recourse debt
with Fleet Capital Corp. ("Fleet"). In September 2003, Fleet took control of the
Vessels and commenced remarketing efforts under the terms of their financing
agreement with the Partnership. On May 12, 2004, Fleet sold the Vessels, which
resulted in aggregate sale proceeds of $3,580,000. At the time of sale, the
outstanding non-recourse debt relating to the Vessels was $7,138,369; therefore
all proceeds from the sale were used repay the outstanding non-recourse notes.
As a result of the sale of the Vessels, the Partnership recorded a loss on lease
termination of $622,872, which represented their net book value at that time.
44
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(8) Equipment Held for Sale - continued
In August 2004, Fleet filed an action in New York State Supreme Court, New
York County, seeking to recover damages it alleges that the Partnership owes
under certain Performance Guaranties entered into in connection with the
non-recourse loans made by Fleet. The General Partner believes Fleet's action is
without merit and is vigorously defending this action. The General Partner has
filed a Counterclaim against Fleet seeking to recover damages as a result of
Fleet's breach of its duty of good faith and fair dealing regarding the sales of
the vessels. The Partnership has not accrued any potential loss from this action
as the action is in its early stage of discovery and it is not currently
possible to determine a range or possible range of potential loss, if any, that
may result from the outcome of this uncertainty.
The Partnership is the sole owner of three (3) marine vessels also
originally on charter to affiliates of Seacor Marine, Inc. These vessels are not
subject to outstanding debt with a lender. On September 20, 2004 and again on
October 10, 2004, the Partnership entered into two separate Memorandum's of
Agreement (the "Agreements") with Gulf Ocean Marine Services, Inc., an
unaffiliated third party, for the sale of the Gulf Pearl and Gulf Wind supply
vessels, respectively. The sales occurred simultaneously with the execution of
the Agreements. The sale price for each vessel was $500,000 and the Partnership
recognized a loss on each sale of $790,420. The $790,420 loss on the vessel sold
on September 20, 2004, is included in gain (loss) on disposal of assets in the
accompanying consolidated statements of operations for the year ended December
31, 2004 and $790,420 loss on the vessel sold on October 10, 2004 has been
recorded as an impairment charge in the accompanying consolidated statements of
operations for year ended December 31, 2004. Additionally, the Partnership
recorded an impairment charge of $7,850,000 relating to these vessels during the
year ended December 31, 2003.
(9) Notes Payable
Notes payable at December 31, 2004 consists of recourse obligations
totaling $8,174,001. The Partnership has no outstanding non-recourse debt at
December 31, 2004. $5,751,009 of the recourse debt relates to the promissory
note payable to AAR described in Note 4 to the consolidated financial statements
and $2,422,992 relates to the Comerica Bank line of credit described in Note 10
to the consolidated financial statements.
Principal maturities of the Partnership's notes payable consist of
following at December 31, 2004:
Year Ending
December 31,
2005 $ 2,422,992
2006 5,751,009
-------------
$ 8,174,001
45
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(10) Note Payable - Recourse
On May 30, 2002 the Partnership, along with certain of its affiliates; Fund
Eight A, Fund Eight B, and Fund Nine, (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, 6.25% at
December 31, 2004). Under the terms of the line of credit agreement, the Initial
Funds may borrow from Comerica Bank with all borrowings 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 ICON Income Fund Ten, LLC
("Fund Ten") as an additional borrower. The Initial Funds and Fund Ten are
collectively referred to as the Borrowers. On December 6, 2004, the line of
credit with Comerica Bank was extended to December 30, 2005.
The Initial Funds entered into a Contribution Agreement, dated May 30,
2002, as subsequently amended to include Fund Ten, 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 Borrower, 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.
During 2004 and 2005, certain of the Borrowers paid Comerica Bank a portion
of the outstanding obligations of the Partnership. As required under the terms
of the Contribution Agreement, the Partnership was required to promptly repay
these Borrowers amounts for amounts paid on the Partnership's behalf. Since the
Partnership did not have sufficient liquidity to repay these Borrowers, the
Partnership assigned interests in certain joint venture investments as full
repayment of monies due to the Borrowers (See Note 3).
At December 31, 2004, the Partnership had $2,422,992 outstanding under the
Loan Agreement. The aggregate borrowing by all Funds under the Loan Agreement
was $10,272,992 at December 31, 2004. The Partnership fully repaid all amounts
due to Comerica during March 2005.
Effective March 8, 2005, the Borrowers entered into a Seventh Amendment to
the Loan and Security Agreement with Comerica Bank. This Agreement with Comerica
Bank releases the Partnership from all obligations under the Loan and Security
Agreement. As such, the Partnership is no longer a party to the $17,500,000 line
of credit.
46
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(11) Income Taxes (Unaudited)
The Partnership is treated as a partnership for income tax reporting
purposes and as such, no provision for income taxes has been recorded since the
liability for such taxes is that of each of the individual partners rather than
the Partnership. The Partnership's income tax returns are subject to examination
by the Federal and state taxing authorities, and changes, if any could adjust
the individual income tax of the partners.
At December 31, 2004, the partners' capital accounts included in the
consolidated financial statements totaled $5,161,112 compared to the partners'
capital accounts for Federal income tax purposes of $12,001,483 (unaudited). The
differences arise primarily from commissions reported as a reduction in the
partners' capital accounts from financial reporting purposes but not for Federal
income tax purposes, and temporary differences relating to direct finance
leases, depreciation and provision for losses.
The following table reconciles net (loss) income for financial statement
reporting purposes to the loss for Federal income tax purposes as follows:
Years Ended December 31,
------------------------------------------------
2004 2003 2002
--------------- --------------- -------------
Net loss per consolidated financial statements $(10,242,221) $(17,300,236) $ (3,661,408)
Differences due to:
Direct finance leases and financings (838,438) 4,383,859 5,793,149
Depreciation and impairments 8,528,277 4,822,532 (7,892,419)
Recovery of losses (294,127) (2,140,232) -
Loss (gain) on sale of equipment 11,070,836 (122,887) 3,896,215
Other 4,802,180 996,942 (15,377)
--------------- --------------- --------------
Net income (loss) for Federal income
tax purposes $ 13,026,507 $ (9,360,022) $ (1,879,840)
=============== ============== ============
(12) Limited Partnership Redemptions
The General Partner consented to the Partnership redeeming 1,101 units in
2002. There were no redemptions in either 2004 or 2003. The redemption amounts
are calculated according to a specified redemption formula in accordance with
the partnership agreement. Redeemed units have no voting rights and do not share
in distributions. The partnership agreement limits the number of units which can
be redeemed in any one year and redeemed units may not be reissued. Redeemed
limited partnership units are accounted for as a reduction from partners'
equity.
(13) Transactions with Related Parties
At December 31, 2004, the Partnership had a receivable of $150,000 due from
L.P. Six which relates to distributions received by L.P. Six from AIC Trust on
the Partnership's behalf. The Partnership received full payment from L.P. Six
during January 2005.
47
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(13) Transactions with Related Parties - continued
The Partnership owed $2,000,000 to Series D relating to the financing of
the free cash portion, including the proceeds from the sale or disposal of
equipment, relating to a leveraged lease transaction entered into by L.P. Seven.
L.P. Seven exercised its right to prepay a portion of the financing with the
Partnership, and the Partnership prepaid, $250,000 during 2002 and $1,253,625
during 2004. The lease expired July 2004. As a result the Partnership recorded
forgiveness of debt income of $496,375 which is included in interest and other
income in the accompanying consolidated statements of operations for the year
ended December 31, 2004.
The Partnership also had a net payable of $341,323 due to the General
Partner and affiliates at December 31, 2004. The Partnership owed the General
Partner $128,551 for management fees and administrative expense reimbursements.
Additionally, the General Partner advanced $175,000 to the Partnership which the
Partnership used to partially repay the Comerica Bank line of credit. The
Partnership repaid this advance to the General Partner during January 2005
without interest.
As discussed in Notes 3 and 10, the Partnership assigned certain of its
interests in joint ventures and finance leases during 2004 and 2005 to repay its
affiliates for amounts paid by the affiliates under the terms of the
Contribution Agreement.
In accordance with the terms of the management agreement, the Partnership
pays the General Partner (i) management fees ranging from 1% to 7% based on a
percentage of the rentals received either directly by the Partnership or through
joint ventures. In addition, the General Partner is reimbursed for
administrative expenses incurred in connection with the Partnership's
operations. Effective July 1, 2004 the General Partner decided to waive its
right to management fees and administrative expense reimbursements through
December 31, 2004.
Fees and other expenses charged to operations by the Partnership to the
General Partner or its affiliates for the years ended December 31, 2004, 2003
and 2002, respectively, were as follows:
Years Ended December 31,
------------------------------------------------
2004 2003 2002
------------- ------------- -------------
Management fees $ 387,287 $ 595,157 $ 975,642
Administrative expense reimbursements 154,958 242,909 419,784
------------- ------------- -------------
$ 542,245 $ 838,066 $ 1,395,426
============= ============= =============
(14) Concentration Risks
For the year ended December 31, 2004, the Partnership had two leases which
accounted for 53% of total revenue. For the year ended December 31, 2003, the
Partnership had three leases which accounted for 41% of total revenue. For the
year ended December 31, 2002, the Partnership had three leases that accounted
for 61% of total revenue.
The Partnership's cash and cash equivalents are held principally at one
financial institution and at times may exceed insured limits.
48
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(15) Selected Quarterly Financial Data (Unaudited)
The following table is a summary of selected financial data, by quarter,
for the years ended December 31, 2004 and 2003:
Quarters Ended in 2004
--------------------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
Revenue $ 1,156,982 $ 715,162 $ 520,002 $ 285,080
============ =========== ============ ============
Net loss allocable to limited partners $ (6,175,908) $ (928,247) $ (2,698,974) $ (336,670)
============ ============ ============ ============
Net loss per weighted average
limited partnership unit $ (6.25) $ (0.94) $ (2.73) $ (0.35)
============ ============ ============ ============
Quarters Ended in 2003
---------------------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
Revenue $ 985,495 $ 1,033,635 $ 657,964 $ (1,100,562)
============ =========== ============ ============
Net loss allocable to limited partners $(2,181,095) $(1,672,000) $(5,737,694) $ (7,536,445)
============ ============ ============ ============
Net loss per weighted average
limited partnership unit $ (2.21) $ (1.69) $ (5.81) $ (7.63)
============ ============ ============ ============
49
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
During the year ended December 31, 2004 we had no disagreements with our
accountants on any matters of accounting or financial reporting.
Item 9A. Controls and Procedures
We carried out an evaluation, under the supervision and with the
participation of management of ICON Capital Corp., our General Partner,
including the Principal Executive Officer and the Principal Financial 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, the Principal
Executive Officer and the Principal Financial Officer concluded that our
disclosure controls and procedures were effective.
There were no significant changes in our internal control over financial
reporting during our fourth fiscal quarter that have materially affected, or are
likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant's General Partner
Our General Partner, ICON Capital Corp., a Connecticut corporation, was
formed in 1985. The General Partner's principal offices are located at 100 Fifth
Avenue, 10th Floor, New York, New York 10011, and the telephone number is (212)
418-4700. The officers of the General Partner have extensive experience with
transactions involving the acquisition, leasing, financing and disposition of
equipment, including acquiring and disposing of equipment subject to leases and
full financing transactions.
The General Partner is engaged in a broad range of equipment leasing and
financing activities. Through its sales representatives and through various
broker relationships throughout the United States, the General Partner offers a
broad range of equipment leasing services.
The General Partner performs certain functions relating to the management
of our equipment. Such services include the collection of lease payments from
the lessees 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.
Our officers and directors are:
Beaufort J.B. Clarke Chairman, Chief Executive Officer and Director
Paul B. Weiss President and Director
Thomas W. Martin Executive Vice President, Chief Financial Officer
and Director
Michael A. Reisner Senior Vice President and General Counsel
Sean E. Hoel Senior Vice President
Beaufort J. B. Clarke, 58, has been our Chairman, Chief Executive Officer
and Director since August of 1996. He was our President from August of 1996
until December 31, 1998. Prior to his present positions, Mr. Clarke was founder,
President and Chief Executive Officer of Griffin Equity Partners, Inc. (a
purchaser of equipment leasing portfolios) from October 1993 through August
1996. Prior to that, Mr. Clarke was President of Gemini Financial Holdings, Inc.
(an equipment leasing company) from June 1990 through September 1993.
Previously, Mr. Clarke was a Vice President of AT&T Systems Leasing. Mr. Clarke
formerly was an attorney with Shearman and Sterling. Mr. Clarke received a B.A.
degree from the George Washington University and a J.D. degree from the
University of South Carolina. Mr. Clarke has been in the equipment leasing
business, as a business person and lawyer, since 1979.
Paul B. Weiss, 44, has been our President and Director since January 1,
1999. Mr. Weiss was our Director and Executive Vice President responsible for
lease acquisitions from November of 1996 until December 31, 1998. Mr. Weiss
served as Executive Vice President and co-founder of Griffin Equity Partners,
Inc. from October of 1993 through November of 1996. Prior to that, Mr. Weiss was
Senior Vice President of Gemini Financial Holdings, Inc. from 1991 to 1993 and
Vice President of Pegasus Capital Corporation (an equipment leasing company)
from 1988 through 1991. Mr. Weiss received a B.A. in Economics from Connecticut
College. Mr. Weiss has been in the equipment leasing business since 1988.
50
Thomas W. Martin, 51, has been our Executive Vice President, Chief
Financial Officer and Director (and Director, President and Chief Financial
Officer of the dealer-manager as well) since August of 1996. Mr. Martin was the
Executive Vice President, Chief Financial Officer and a co-founder of Griffin
Equity Partners, Inc. from October 1993 to August 1996. Prior to that, Mr.
Martin was Senior Vice President of Gemini Financial Holdings, Inc. from April
1992 to October 1993 and he held the position of Vice President at Chancellor
Corporation (an equipment leasing company) for 7 years. Mr. Martin received a
B.S. degree from the University of New Hampshire. Mr. Martin has been in the
equipment leasing business since 1983.
Michael A. Reisner, Esq., 34, has been our Senior Vice President and
General Counsel since January 2004. Mr. Reisner was our Vice President and
Associate General Counsel from March 2001 until December 2003. Previously, from
1996 to 2001, Mr. Reisner was an attorney with Brodsky Altman & McMahon, LLP in
New York, concentrating on commercial transactions. Mr. Reisner received a J.D.
from New York Law School and a B.A. from the University of Vermont.
Sean E. Hoel, 35, has been our Senior Vice President since June 1999. Mr.
Hoel is responsible for the acquisition of equipment subject to lease. Mr. Hoel
has a Masters Degree in Finance from Seattle University, preceded by Law School
at the University of Oslo, a B.A. in Finance at the University of Wyoming, as
well as three years of military service as a naval officer.
Code of Ethics
The General Partner, on our behalf, has adopted a code of ethics for its
Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer.
The Code of Ethics is available free of charge by requesting it in writing from
our General Partner. The General Partner's address is 100 Fifth Avenue, 10th
Floor, New York, New York 10011.
Item 11. Executive Compensation
We have no directors or officers. The General Partner and its affiliates
were paid or accrued the following compensation and reimbursement for costs and
expenses for the years ended December 31, 2004, 2003 and 2002.
Entity Capacity Compensation 2004 2003 2002
---------------------- ------------------ ------------------------ ----------- ----------- -----------
ICON Capital Corp. General Partner Management fees $ 387,287 $ 595,157 $ 975,642
=========== =========== ===========
ICON Capital Corp. General Partner Administrative fees $ 154,958 $ 242,909 $ 419,784
=========== =========== ===========
The General Partner also has a 1% interest in our profits and
distributions. For the year ended December 31, 2004, we paid no distributions to
the General Partner. We paid distributions to the General Partner of $16,627 and
$102,316, respectively, for the years ended December 31, 2003 and 2002.
Additionally, the General Partner's interest in our net loss was $102,422,
$173,002 and $36,614, respectively, for the years ended December 31, 2004, 2003
and 2002.
51
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) We are a limited partnership and therefore do not have voting shares
of stock. No person of record owns, or is known by us to own
beneficially, more than 5% of any class of our securities.
(b) As of March 31, 2005, Directors and Officers of the General Partner do
not own any of our equity securities.
(c) The General Partner owns our equity securities, as follows; a General
Partner Interest which represents initially a 1% and potentially a 10%
interest in our income, gain and losses. The General Partner owns 100%
of the General Partner Interest.
Item 13. Certain Relationships and Related Transactions
See Item 11 for a discussion of our related party transactions. See Notes 3
and 12 to our consolidated financial statements for a discussion of our related
party activity and investments in joint ventures.
Item 14. Principal Accountant Fees and Services
During the years ended December 31, 2004 and 2003 our auditors provided
audit services relating to our annual report on Form 10-K and our quarterly
reports on Form 10-Q. Additionally, our auditors provided other services in the
form of tax compliance work. Their fees are shown in the table below:
2004 2003
------------- -------------
Audit fees $ 71,500 $ 62,500
Audit related fees - -
Tax fees (for compliance) 15,500 769
------------- -------------
$ 87,000 $ 63,269
============= =============
52
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements - See Part II, Item 8 hereof.
2. Financial Statement Schedule - None.
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set
forth therein is included in the consolidated Financial Statements or
Notes thereto.
3. Exhibits - :
(i) Form of Dealer-Manager Agreement (Incorporated by reference to
Exhibit 1.1 to Form S-1 Registration Statement No. 33-40044 filed with
the Securities and Exchange Commission on April 18, 1991).
(ii) Form of Selling Dealer Agreement (Incorporated by reference to
Exhibit 1.2 to Form S-1 Registration Statement No. 33-40044 filed with
the Securities and Exchange Commission on April 18, 1991).
(iii)Amended and Restated Agreement of Limited Partnership
(Incorporated herein by reference to Exhibit A to Amendment No. 4 to
Form S-1 Registration Statement No. 33-40044 filed with the Securities
and Exchange Commission on August 14, 1991).
(iv) On December 31, 2004, Jeremiah Silkowski, resigned from his
position of Senior Vice President of ICON Capital Corp., the Company's
general partner, so that he may pursue other opportunities
(incorporated by reference to Current Report on Form 8-K, dated
January 6, 2005).
(b) 10.1 Sixth Amendment to the Loan and Security Agreement dated May 30,
2002 as amended.
31.1 Rule 13a-14(a)/15d-14(a) certifications
31.2 Rule 13a-14(a)/15d-14(a) certifications
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.
(c) Unconsolidated Joint Venture Financial Statements, See Part II, Item 8,
Note 3.
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ICON Cash Flow Partners L.P. Seven
by its General Partner, ICON Capital Corp.
Date: May 6, 2005 /s/ Beaufort J.B. Clarke
---------------------------------------
Beaufort J.B. Clarke
Chairman, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the
Registrant and in the capacity and on the dates indicated.
ICON Capital Corp.
sole General Partner of the Registrant
Date: May 6, 2005 /s/ Beaufort J.B. Clarke
-----------------------------------------------
Beaufort J.B. Clarke
Chairman, Chief Executive Officer and Director
Date: May 6, 2005 /s/ Paul B. Weiss
-----------------------------------------------
Paul B. Weiss
President and Director
Date: May 6, 2005 /s/ Thomas W. Martin
-----------------------------------------------
Thomas W. Martin
Executive Vice President and Director
(Principal Financial and Accounting Officer)
Supplemental Information to be furnished with reports filed pursuant to
Section 15(d) of the Act by Registrant which has not registered securities
pursuant to Section 12 of the Act.
No annual report or proxy material has been sent to security holders. An
annual report will be sent to the members and a copy will be forwarded to the
Commission.
54
Exhibit 31.1
Principal Executive Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) I, Beaufort J.B. Clarke, certify
that:
1. I have reviewed this annual report on Form 10-K of ICON Cash Flow
Partners L.P. Seven;
2. Based on my knowledge, this annual report does not contain any untrue
statements 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 annual report;
3. Based on my knowledge, the financial statements and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15e and 15d-15e) 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 annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this annual report our
conclusions about the effectiveness of the disclosure controls
and procedures as of the end of the period covered by this annual
report based on such evaluation; and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers 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 General Partner
(or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control, are reasonably likely to materially
affect the Partnership'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
controls over financial reporting.
Dated: May 6, 2005
/s/ Beaufort J.B. Clarke
-----------------------------
Beaufort J. B. Clarke
Chairman and Chief Executive Officer
ICON Capital Corp.
General Partner of ICON Cash Flow Partners L.P. Seven
55
Exhibit 31.2
Principal Executive Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
I, Thomas W. Martin, certify that:
1. I have reviewed this annual report on Form 10-K of ICON Cash Flow Partners
L.P. Seven;
2. Based on my knowledge, this annual report does not contain any untrue
statements 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 annual report;
3. Based on my knowledge, the financial statements and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15e and 15d-15e) 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 annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this annual report our
conclusions about the effectiveness of the disclosure controls
and procedures as of the end of the period covered by this annual
report based on such evaluation; and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers 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 General Partner
(or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control, are reasonably likely to materially
affect the Partnership'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
controls over financial reporting.
Dated: May 6, 2005
/s/ Thomas W. Martin
----------------------------------------
Thomas W. Martin
Executive Vice President
(Principal Financial and Accounting Officer)
ICON Capital Corp.
General Partner of ICON Cash Flow Partners L.P. Seven
56
Exhibit 32.1
Principal Executive Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
I, Beaufort J.B. Clarke, Chairman and Chief Executive Officer of ICON Capital
Corp, the General Partner of the Partnership in connection with the Annual
Report of ICON Cash Flow Partners L.P. Seven (the "Partnership") on Form 10-K
for the year ended December 31, 2004, as filed with the Securities and Exchange
Commission on the date hereof (the "Annual Report") certify, pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and
belief:
(1) the Annual Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and
(2) the information contained in the Annual Report fairly presents, in all
material respects, the financial condition and results of operations of
the Partnership.
Dated: May 6, 2005
/s/ Beaufort J.B. Clarke
------------------------------------------------------
Beaufort J.B. Clarke
Chairman and Chief Executive Officer
ICON Capital Corp.
General Partner of ICON Cash Flow Partners L.P. Seven
57
Exhibit 32.2
Principal Executive Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
I, Thomas W. Martin, Executive Vice President (Principal Financial and
Accounting Officer) of ICON Capital Corp, the General Partner of the Partnership
in connection with the Annual Report of ICON Cash Flow Partners L.P. Seven (the
"Partnership") on Form 10-K for the year ended December 31, 2004, as filed with
the Securities and Exchange Commission on the date hereof (the "Annual Report")
certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the
best of my knowledge and belief:
(1) the Annual Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m);
and
(2) the information contained in the Annual Report fairly presents, in all
material respects, the financial condition and results of operations
of the Partnership.
Dated: May 6, 2005
/s/ Thomas W. Martin
-------------------------------------------------------
Thomas W. Martin
Executive Vice President (Principal
Financial and Accounting Officer)
ICON Capital Corp.
General Partner of ICON Cash Flow Partners L.P. Seven
58
North Sea (Connecticut) Limited Partnership
Financial Statements
Years Ended December 31, 2004 and 2003
(With Independent Auditor's Report Thereon)
North Sea (Connecticut) Limited Partnership
Table of Contents
Independent Auditor's Report 1
Balance Sheets at December 31, 2004 and 2003 2
Statements of Income for the years ended December 31, 2004 and 2003 3
Statement of Changes in Partners' Deficit
for the years ended December 31, 2003 and 2004 4
Statements of Cash Flows for the years ended December 31, 2004 and 2003 5
Notes to Financial Statements 6 - 9
INDEPENDENT AUDITOR'S REPORT
The Partners
North Sea (Connecticut) Limited Partnership
We have audited the balance sheet of North Sea (Connecticut) Limited Partnership
as of December 31, 2004 and 2003, and the related statements of income, changes
in partners' deficit, and cash flows for the years then ended. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based upon
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Partnership's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of North Sea (Connecticut) Limited
Partnership as of December 31, 2004 and 2003, and the results of its operations
and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ Hays & Company LLP
March 16, 2005
New York, New York
1
North Sea (Connecticut) Limited Partnership
Balance Sheets
December 31,
ASSETS
2004 2003
------------- -------------
Rents receivable $ 1,891,991 $ 2,005,794
------------- -------------
Investment in operating lease:
Equipment, at cost 9,740,080 9,740,080
Accumulated depreciation (2,457,991) (1,906,666)
------------ ------------
7,282,089 7,833,414
Total assets $ 9,174,080 $ 9,839,208
============= =============
LIABILITIES AND PARTNERS' DEFICIT
Note payable, non-recourse $ 15,203,571 $ 18,691,946
Accrued interest payable 434,126 533,733
Deferred income 200,788 348,794
------------- -------------
Total liabilities 15,838,485 19,574,473
------------- -------------
Commitments and Contingencies
Partners' deficit
General Partner 48,455 17,746
Limited Partners (6,712,860) (9,753,011)
------------- -------------
Total partners' deficit (6,664,405) (9,735,265)
------------- -------------
Total liabilities and partners' deficit $ 9,174,080 $ 9,839,208
============= =============
See accompanying notes to financial statements.
2
North Sea (Connecticut) Limited Partnership
Statements of Income
Years Ended December 31,
2004 2003
------------- -------------
Revenue
Rental income from operating lease $ 5,121,175 $ 5,121,175
Other income 148,006 148,006
------------- -------------
Total revenue 5,269,181 5,269,181
------------- -------------
Expenses
Interest expense 1,646,996 1,974,054
Depreciation expense 551,325 551,325
------------- -------------
Total expenses 2,198,321 2,525,379
------------- -------------
Net income $ 3,070,860 $ 2,743,802
============= =============
See accompanying notes to financial statements.
3
North Sea (Connecticut) Limited Partnership
Statement of Changes in Partners' Deficit
Years Ended December 31, 2003 and 2004
Class A Class B Class C
General Limited Limited Limited
Partner Partners Partners Partner Total
------- -------- -------- ------- ------
Balance at January 1, 2003 $ (9,692) $ (7,837,627) $ (5,939,715) $ 1,307,967 $ (12,479,067)
Net income 27,438 1,344,463 - 1,371,901 2,743,802
----------- ------------- -------------- ------------- ---------------
Balance at December 31, 2003 17,746 (6,493,164) (5,939,715) 2,679,868 (9,735,265)
Net income 30,709 1,504,721 - 1,535,430 3,070,860
----------- ------------- -------------- ------------- ---------------
Balance at December 31, 2004 $ 48,455 $ (4,988,443) $ (5,939,715) $ 4,215,298 $ (6,664,405)
=========== ============= ============ ============ ===============
See accompanying notes to financial statements.
4
North Sea (Connecticut) Limited Partnership
Statements of Cash Flows
Years Ended December 31,
2004 2003
------------- -------------
Cash flows from operating activities:
Net income $ 3,070,860 $ 2,743,802
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 551,325 551,325
Rental income paid directly to lender by lessee (5,234,978) (5,234,978)
Interest on non-recourse financing paid directly
to lender by lessee 1,746,603 2,064,581
Change in operating assets and liabilities:
Rents receivable 113,803 113,803
Accrued interest payable (99,607) (90,527)
Deferred rental income (148,006) (148,006)
------------- -------------
Net cash provided by operating activities - -
------------- -------------
Net increase in cash - -
Cash, beginning of the year - -
------------- -------------
Cash, end of the year $ - $ -
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ - $ -
============= =============
Supplemental disclosure of non-cash financing activities:
Principal and interest on non-recourse financing
paid directly to lender by lessee $ 5,234,978 $ 5,234,978
============= =============
See accompanying notes to financial statements.
5
North Sea (Connecticut) Limited Partnership
Notes To Financial Statements
Years Ended December 3, 2004 and 2003
(1) Organization
North Sea (Connecticut) Limited Partnership (the "Partnership") was formed
in 1994 when the General Partner contributed cash of $27,750 to the Partnership
and the Class A limited partners contributed a total of $2,747,250.
Subsequently, the Partnership admitted Class B and Class C Limited Partners. In
1994, the Partnership acquired an option for a cost of $2,905,000 to purchase a
mobile drilling rig and related property. In 2000 the Partnership exercised its
option to purchase the mobile oil rig and related property for $6,650,000; paid
legal fees of $185,000 and entered into an operating lease with the user of the
rig.
Under the terms of the partnership agreement the Partnership will terminate
on December 31, 2015, unless terminated earlier as allowed for in the
partnership agreement.
(2) Summary of Significant Accounting Policies
Investment in Operating Leases
Operating leases are stated at cost less accumulated depreciation.
Depreciation is being provided for using the straight-line method over
approximately 17 years. Upon final disposition of the equipment, the cost and
related accumulated depreciation will be removed from the accounts and the
resulting profit or loss will be reflected in the statement of income. Revenues
from operating leases are recognized on a straight line basis over the lives of
the related leases.
Asset Impairments
The Partnership's only asset is periodically reviewed, at least annually,
to determine whether events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. An impairment loss will be
recognized if the carrying amount of a long-lived asset is not recoverable and
exceeds its fair value. In such circumstances, the Partnership 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 future 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 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 where the lessee remits their rental payments directly
to the lender and we do not recover our residual position until the note payable
is repaid in full.
Income Taxes
No provision for income taxes has been made as the liability for such taxes
is that of each of the partners rather than the Partnership. The Partnership's
income tax returns are subject to examination by the federal and state taxing
authorities, and changes, if any, could adjust the individual income taxes of
the partners.
6
North Sea (Connecticut) Limited Partnership
Notes To Financial Statements
Years Ended December 3, 2004 and 2003
(2) Summary of Significant Accounting Policies - continued
Revenue Recognition
The Partnership leases its equipment to a single lessee and accounts for
this lease as an operating lease.
Rental income is recognized on the straight line method over the lease
term. Billed and uncollected operating lease receivables are included in other
assets. Deferred income is the difference between the timing of the cash
payments and the income recognized on a straight line basis.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures
About Fair Values of Financial Instruments," requires disclosures about the fair
value of financial instruments, except for lease related assets and liabilities.
Separate disclosure of fair value information at December 31, 2004 and 2003 with
respect to the Partnership's assets and liabilities is not separately provided
since (i) SFAS No. 107 does not require fair value disclosures of lease
arrangements and (ii) the carrying value of financial assets, other than lease
related investments, and the recorded value of other liabilities approximates
market value. The estimated fair value of the Partnership's notes payable at
December 31, 2004 is approximately $12,488,000.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Significant estimates primarily include
the allowance for doubtful accounts and unguaranteed residual values. In
addition, management is required to disclose contingent assets and contingent
liabilities. Actual results could differ from those estimates.
Recent Accounting Pronouncements
During December 2004, the FASB issued SFAS No. 153 "Exchanges of
Nonmonetary Assets--an amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153
is based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. The guidance in
Opinion 29, however, included certain exceptions to that principle. This
Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges
of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. SFAS 153
is effective for nonmonetary exchanges occurring in fiscal periods beginning
after June 15, 2005. We do not expect the adoption of SFAS 153 to have an impact
on our 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 financial statements.
7
North Sea (Connecticut) Limited Partnership
Notes To Financial Statements
Years Ended December 3, 2004 and 2003
(3) Investment in Operating Lease
The Partnership's sole asset is its investment in a mobile offshore
drilling rig (the "Equipment"), subject to a lease with Rowan Companies, Inc.
through March 2008. The current lease provides for semi-annual rents of
$2,617,489.
The lessee may renewal the lease of the Equipment by providing written
notice, as defined in the lease agreement, for a period of time between one to
five years. Rent will be paid semi-annually and in arrears based upon a formula,
as defined in the lease agreement. At the end of the lease term the lessee has
the option to purchase the Equipment upon written notice, as defined in the
lease agreement. The purchase price is to equal the then fair value of the
mobile offshore drilling rig based upon an appraisal.
Non-cancelable minimum annual amounts due from the operating lease are
as follows:
Year ending
December 31,
2005 $ 5,234,978
2006 5,234,978
2007 5,234,978
2008 2,617,489
---------------
$ 18,322,423
===============
(4) Note Payable
The note payable, accrues interest at an annual rate of 9.79 % and
matures on March 15, 2008 as follows:
Year ending
December 31,
2005 $ 3,838,245
2006 4,223,206
2007 4,646,778
2008 2,495,342
---------------
$ 15,203,571
===============
The lessee pays semi-annual rent directly to the lender to repay the note
payable. The lender has a security interest in the lease, the mobile oil rig and
related property and the scheduled lease payments due under the lease.
8
North Sea (Connecticut) Limited Partnership
Notes To Financial Statements
Years Ended December 3, 2004 and 2003
(5) Deferred Income
In December of 2002, the Partnership received a facilitation fee of
$496,800 from the assignment of the outstanding note payable. The note payable
was assigned from the original lender to the new lender resulting in no change
to the existing structure or terms of the note. The Partnership recorded the
facilitation fee as deferred income and is recognizing the income ratably over
the remaining life of the note, as follows:
Year ending
December 31,
2005 $ 77,333
2006 72,532
2007 42,167
2008 8,756
---------------
$ 200,788
===============
(6) Partners Equity and Distributions
The Partnership allocates its net income among the partners as follows: (i)
to the extent any net loss had been allocated to the General Partner or to the
Class B Limited Partners in any prior year, as defined; net income equal to the
aggregate amount of such unrecovered net loss shall be allocated first to the
General Partner and then to the Class B Limited Partners; and (ii) any remaining
net income shall be allocated to the General Partner, the Class A Limited
Partners and the Class C Limited Partner in proportion to their percentage
interests of 1%, 49% and 50%, respectively. There have been no net losses
allocated to the Class B Limited Partners or the General Partner prior to 2004.
The Partnership allocates its net loss among the partners as follows: (i)
the net loss for each year is allocated among the General Partner, the Class A
Limited Partners and the Class C Limited Partner in proportion to their
percentage interests of 1%, 49% and 50%, respectively, and (ii) the net loss
allocated to any partner with respect to any year shall not exceed the maximum
amount of the net loss that can be so allocated without causing such partner to
have a capital account deficit at the end of such fiscal year. The net loss, as
defined, is then allocated to the Class B Limited Partners until their capital
accounts have been reduced to zero, and thereafter to the General Partner.
The Partnership shall make distributions to the Partners, as follows: (i)
distributions of available cash, as defined, shall be distributed to the General
Partner, the Class B Limited Partners and the Class C Limited Partner, as and
when determined by the General Partner, in accordance with their percentage
interests of 1%, 49% and 50% respectively. Class A Partners are not entitled to
distributions and (ii) upon liquidation each of the aforementioned Partners are
entitled to their percentage distribution interest respectively.
9