UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2005
-------------------------------------------------
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
for the transition period from _____________________ to ________________________
Commission File Number 33-94458
---------------------------------------------------------
ICON Cash Flow Partners L.P. Seven
(Exact name of registrant as specified in its charter)
Delaware 13-3835387
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
100 Fifth Avenue, New York, New York 10011-1505
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(212) 418-4700
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [x] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). [ ] Yes [x] No
ICON Cash Flow Partners L.P. Seven
Index
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 2005 (Unaudited)
and December 31, 2004 3-4
Consolidated Statements of Operations for the three months ended
March 31, 2005 and 2004 (Unaudited) 5
Consolidated Statement of Changes in Partners' Equity for the three
months ended March 31, 2005 (Unaudited) 6
Consolidated Statements of Cash Flows for the three months ended March
31, 2005 and 2004 (Unaudited) 7-8
Notes to Consolidated Financial Statements (Unaudited) 9-16
Item 2. General Partner's Discussion and Analysis of Financial Condition and
Results of Operations 17-24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters To A Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits 26
Signatures 27
Certifications 28-31
2
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Consolidated Balance Sheets
ASSETS
(Unaudited)
March 31 December 31
2005 2004
---- ----
Cash and cash equivalents $ 27,868 $ 96,364
------------- --------------
Investments in finance leases:
Minimum rents receivable - 1,117,499
Unearned income - (5,934)
------------- --------------
Net investments in finance leases - 1,111,565
------------- --------------
Investments in operating leases:
Equipment, at cost 2,565,000 2,565,000
Accumulated depreciation (972,195) (833,310)
------------- --------------
Net investments in operating leases 1,592,805 1,731,690
-------------- --------------
Equipment held for sale 1,441,644 1,776,131
Investment in estimated unguaranteed residual values 4,686,758 4,686,758
Investments in joint ventures 4,060,248 3,813,458
Due from General Partner and affiliates 40,445 190,301
Other assets, net 339,003 442,972
------------- --------------
Total assets $ 12,188,771 $ 13,849,239
============== ==============
See accompanying notes to consolidated financial statements.
3
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Consolidated Balance Sheets (continued)
LIABILITIES AND PARTNERS' EQUITY
(Unaudited)
March 31 December 31
2005 2004
---- ----
Notes and accrued interest payable - recourse $ 5,751,009 $ 8,174,001
Due to General Partner and affiliates 166,522 341,323
Security deposits, deferred credits and other payables 14,036 155,487
Minority interest 15,928 17,316
---------------- ------------------
Total liabilities 5,947,495 8,688,127
---------------- ------------------
Commitments and contingencies
Partners' equity:
General Partner (786,493) (797,295)
Limited Partners; 987,547.81 units outstanding, $100 per
unit original issue price 7,027,769 5,958,407
---------------- ------------------
Total partners' equity 6,241,276 5,161,112
---------------- ------------------
Total liabilities and partners' equity $ 12,188,771 $ 13,849,239
================ ==================
See accompanying notes to consolidated financial statements.
4
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Consolidated Statements of Operations
Three Months Ended March 31,
(Unaudited)
2005 2004
---- ----
Revenue:
Rental income $ 150,000 $ 105,624
Finance income 1,928 3,848
Net income from leveraged leases - 700,619
Income from investments in joint ventures 506,171 346,482
Gain on transfer of investment in joint venture 1,171,786 -
Interest and other income 17,169 409
---------------- ---------------------
Total revenue 1,847,054 1,156,982
---------------- ---------------------
Expenses:
Impairment loss 300,000 4,700,000
Depreciation 138,885 1,518,259
Interest 117,402 404,064
Management fees 75,000 -
General and administrative 109,511 242,197
Management fees - general partner - 377,792
Administrative expense reimbursement -
General Partner - 122,256
Amortization of initial direct costs 26,731 31,384
Minority interest (639) (679)
---------------- ----------------------
Total expenses 766,890 7,395,273
---------------- ---------------------
Net income (loss) $ 1,080,164 $ (6,238,291)
================ ======================
Net income (loss) allocable to:
Limited Partners $ 1,069,362 $ (6,175,908)
General Partners 10,802 (62,383)
---------------- ----------------------
$ 1,080,164 $ (6,238,291)
================ ======================
Weighted average number of limited partnership
units outstanding 987,548 987,548
================ =====================
Net income (loss) per weighted average limited
partnership unit $ 1.08 $ (6.25)
================= =====================
See accompanying notes to consolidated financial statements.
5
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Consolidated Statement of Changes in Partners' Equity
Three Months Ended March 31, 2005
(Unaudited)
Total
Limited General Partners'
Partners Partner Equity
-------- ------- ------
Balance, January 1, 2005 5,958,407 (797,295) 5,161,112
Net income 1,069,362 10,802 1,080,164
--------------- --------------- -------------
Balance, March 31, 2005 $ 7,027,769 $ (786,493) $ 6,241,276
=============== ================= ==============
See accompanying notes to consolidated financial statements.
6
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Consolidated Statements of Cash Flows
Three Months Ended March 31,
(Unaudited)
2005 2004
---- ----
Cash flows from operating activities
Net income (loss) $ 1,080,164 $ (6,238,291)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Interest expense on non-recourse financing paid directly
to lenders by lessees 77,153 241,585
Amortization of initial direct costs 26,731 31,384
Impairment loss 300,000 4,700,000
Depreciation 138,885 1,518,259
Net income from leveraged leases - (700,619)
Income from investments in joint ventures (506,171) (346,482)
Gain on transfer of investment in joint venture (1,171,786) -
Minority interest (639) (679)
Changes in operating assets and liabilities:
Collection of principal - non-financed receivables 366,650 328,274
Other assets - 164,509
Security deposits, deferred credits and other payables (141,451) (169)
Due from/to General Partner and affiliates, net (24,944) 78,692
-------------------- ------------------
Net cash provided by (used in) operating activities 144,592 (223,537)
-------------------- ------------------
Cash flows from investing activities:
Proceeds from sales of equipment 34,487 20,867
-------------------- -----------------
Distributions received from joint ventures 3,175 543,628
-------------------- ------------------
Net cash provided by investing activities 37,662 564,495
-------------------- ------------------
Cash flows from financing activities:
Principal payments on notes payable - recourse (2,422,992) (554,228)
Loans and advances from affiliates 2,172,992 -
Distributions to minority interest in joint venture (750) -
--------------------- ------------------
Net cash used in financing activities (250,750) (554,228)
--------------------- ------------------
Net decrease in cash and cash equivalents (68,496) (213,270)
Cash and cash equivalents, beginning of the year 96,364 301,256
-------------------- ------------------
Cash and cash equivalents, end of the year $ 27,868 $ $87,986
=================== ===================
See accompanying notes to consolidated financial statements.
7
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Consolidated Statements of Cash Flows
Three Months Ended March 31,
(Unaudited)
2005 2004
---- ----
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 40,249 $ 162,479
============ ===========
Supplemental disclosure of non-cash investing and financing activities:
Principal and interest on finance lease paid directly to lenders by lessees $ - $ 5,674,044
============ ===========
Transfer of investment in operating leases, net of accumulated
depreciation , to equipment held for sale or lease $ - $ 2,327,558
============ ===========
Transfer of investment in finance leases to investment in operating leases $ - $ 2,565,000
============ ===========
Joint venture interests assigned to affiliates in exchange
for amounts owed $ 1,427,992 $ -
============= ===========
Assignment of finance lease interest in exchange for amounts owed $ 745,000 $ -
============= ============
Recourse debt paid by affiliates $ 2,172,992 $ -
============= ===========
See accompanying notes to consolidated financial statements.
8
ICON Cash Flow Partners L.P. Seven
Notes To Consolidated Financial Statements
March 31, 2005
(Unaudited)
(1) Basis of Presentation
The accompanying consolidated financial statements of ICON Cash Flow
Partners L.P. Seven (the "Partnership") have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission for Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) considered necessary for a fair presentation have
been included. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes included in the
Partnership's 2004 Annual Report on Form 10-K. The results for the interim
period are not necessarily indicative of the results for the full year.
The consolidated financial statements include the accounts of the
Partnership and its majority owned subsidiary. All 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 investments are 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.
(2) Organization
The Partnership was formed on May 23, 1995 as a Delaware limited
partnership. The Partnership is engaged in one business segment, the business of
acquiring equipment subject to leases. The Partnership is currently in the
process of selling its remaining assets in the ordinary course of its business,
a time frame called the disposition period.
The Partnership's reinvestment period ended on November 9, 2002 and the
Partnership commenced its disposition period. During the disposition period, the
Partnership has and will continue to utilize available cash to pay its
liabilities; distribute substantially all remaining cash, if any, from
operations and equipment sales to the partners; and 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 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 on their outstanding adjusted capital contribution
account. After such time, the distributions will be allocated 90% to the limited
partners and 10% to the General Partner.
9
ICON Cash Flow Partners L.P. Seven
Notes To Consolidated Financial Statements
March 31, 2005
(Unaudited)
(2) Organization - continued
Certain reclassifications have been made to the accompanying consolidated
financial statements for the three months ended March 31, 2004 to conform to the
current period presentation.
(3) Joint Ventures
The Partnership and its affiliates, entities managed and controlled by the
General Partner, formed five 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 is 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 Aircraft is leased to World Airways, Inc. Effective September
1, 2004, the lease was modified to a fixed rental of $50,000 per month plus
maintenance reserves and the term has been extended through September 2006. The
Partnership and Series E contributed 99% and 1% of the cash required for such
acquisition, respectively. LLC III acquired the Aircraft, assuming non-recourse
debt and utilizing contributions received from the Partnership and Series E. LLC
III has since fully repaid the non-recourse debt secured by the Aircraft.
Aviation Investors, Inc. ("Aviation"), an unrelated third party, who was
also a party to the acquisition of the Aircraft, has entered into a Residual
Sharing Agreement (the "Agreement") with the Partnership in which Aviation is
entitled to receive a portion of all residual proceeds generated from the
Aircraft. Residual proceeds include gross proceeds from the sale, lease, renewal
lease or extension or financing or refinancing of the Aircraft. The gross
proceeds may be reduced, but not below zero, for recovery expenses, remarketing
expenses, and any reasonable out-of-pocket costs incurred by LLC III.
Additionally, Aviation has also entered into a management agreement with LLC III
to manage the operations of and to remarket the Aircraft for sale or lease.
Under the terms of the management agreement Aviation is entitled to receive a
monthly management fee of $10,667. For the quarter ended March 31, 2005, LLC III
incurred $75,000 relating to management fees and residual sharing costs.
The four joint ventures described below are 50% or less 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.
10
ICON Cash Flow Partners L.P. Seven
Notes To Consolidated Financial Statements
March 31, 2005
(Unaudited)
(3) Joint Ventures - continued
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 March 31, 2005, 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. The General Partner is in the process of
liquidating 1997-A.
Information as to the unaudited results of operations of 1997-A are
summarized below:
Three Months Ended
March 31,
2005 2004
------------- -------------
Net loss $ (11,256) $ (28,530)
============= =============
Partnership's share of net loss $ (2,247) $ (5,696)
============== =============
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") and contributed and assigned cash,
equipment leases, finance receivables and equipment residuals to 1997-B for the
purpose of securitizing their cash flow collections. At March 31, 2005, the
Partnership, Series E and L.P. Six own 16.67%, 75.00% and 8.33% interests,
respectively, in 1997-B. The General Partner is in the process of liquidating
1997-B.
Information as to the unaudited results of operations of 1997-B is
summarized below:
Three Months Ended
March 31,
2005 2004
------------- -------------
Net income $ - $ 207,614
============= =============
Partnership's share of net income $ - $ 34,609
============= =============
Distributions $ - $ 206,128
============= =============
Partnership's share of distributions $ - $ 34,362
============= =============
ICON Cheyenne LLC
The Partnership and three affiliates, ICON Cash Flow Partners L.P. Six
("L.P. Six"), ICON Income Fund Eight A L.P. ("Fund Eight A") and ICON Income
Fund Eight B L.P. ("Fund Eight B") formed ICON Cheyenne LLC ("ICON Cheyenne")
for the purpose of acquiring and managing a portfolio of equipment leases
consisting of over the road rolling stock, manufacturing equipment and materials
handling equipment. The original transaction involved acquiring from Cheyenne
Leasing Company a portfolio of 119 leases, of which 27 remain active, with
expiration dates ranging between March 2005 and October 2006. At March 31, 2005,
the Partnership, L.P. Six, Fund Eight A and Fund Eight B had ownership interests
of 1.27%, 1.00%, 1.00%, and 96.73%, respectively, in ICON Cheyenne.
11
ICON Cash Flow Partners L.P. Seven
Notes To Consolidated Financial Statements
March 31, 2005
(Unaudited)
(3) Joint Ventures - continued
Information as to the unaudited results of operations of ICON Cheyenne
is summarized below:
Three Months Ended
March 31,
2005 2004
------------- -------------
Net loss $ (210,527) $ (301,068)
============= =============
Partnership's share of net loss $ (2,673) $ (31,040)
============= =============
Distributions $ 250,000 $ 2,900,000
============= =============
Partnership's share of distributions $ 3,175 $ 298,990
============= =============
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 100% of the Class C limited partner interest giving the Partnership a
50% ownership interest in North Sea. 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 the
General Partner.
As discussed in Note 7, 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. During the quarter ended March 31, 2005 the Partnership entered
into the following transactions as repayment for amounts paid to Comerica Bank
under the terms of the Contribution Agreement: (i) during February 2005, the
assignment of 2.69% of the Partnership's interest in the profits, losses and
cash flows of North Sea valued at $672,992 to Fund Eight B and (ii) during
February 2005, the assignment of 3.02% of the Partnership's interest in the
profits, losses and cash flows of North Sea valued at $755,000 to ICON Income
Fund Nine LLC ("Fund Nine"). The Partnership realized a gain from these
assignments of approximately $1,172,000 which is included in income from
investments in joint ventures in the accompanying consolidated statements of
operations at March 31, 2005.
The Partnership has guaranteed an amount equal to the difference between
the stipulated loss value provided for in the financing and the loan balance.
The maximum amount for which the Partnership is contingently liable at March 31,
2005 under this guarantee was approximately $45,000.
Information as to the unaudited results of operations of North Sea is
summarized below:
Three Months Ended
March 31,
2005 2004
------------- -------------
Net income $ 814,998 $ 728,923
============= =============
Partnership's share of net income $ 372,685 $ 364,461
============= =============
12
ICON Cash Flow Partners L.P. Seven
Notes To Consolidated Financial Statements
March 31, 2005
(Unaudited)
(4) Related Party Transactions
The Partnership also had a net payable of $126,077 due to the General
Partner and affiliates at March 31, 2005. The Partnership owed the General
Partner $128,551 for management fees and administrative expense reimbursements
from prior periods.
On March 28, 2005, the Partnership assigned its entire 50% finance lease
interest in assets leased to EKA Chemicals, Inc. to Fund Nine for $745,000. This
assignment was made in order for the Partnership to repay its outstanding debt
obligation to Fund Nine as required by the Contribution Agreement. This amount
represented the Partnership's fair value of its 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 undiscounted cash flows.
Prior to July 1, 2004, in accordance with the terms of the Management
Agreement between, the Partnership paid the General Partner 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
voluntary decided to waive its right to future management fees and
administrative expense reimbursements.
Fees and other expenses paid or accrued by the Partnership to the General
Partner or its affiliates were as follows:
Three Months Ended
March 31,
2005 2004
------------- -------------
Management fees $ - $ 377,792
Administrative expense reimbursements - 122,256
------------- -------------
Total $ - $ 500,048
============= =============
(5) Equipment Held for Sale
The Partnership was the sole owner of one marine vessel originally on
charter to affiliates of Seacor Smit, Inc. The vessel was not subject to
outstanding debt with a lender. On May 18, 2005 the Partnership entered into a
Memorandum of Agreement (the "Agreement") with Jettco Marine Transportation,
Inc., an unaffiliated third party, for the sale of the Janson Graham supply
vessel. The sale occurred simultaneously with the execution of the Agreement.
The sale price was $200,000 and the Partnership recognized an impairment charge
of $300,000 which is included in the accompanying consolidated statements of
operations for the three months ended March 31, 2005.
13
ICON Cash Flow Partners L.P. Seven
Notes To Consolidated Financial Statements
March 31, 2005
(Unaudited)
(6) Investment in Estimated Unguaranteed Residual Values
The Partnership entered into an agreement in which it has an investment in
the unguaranteed residual values of three Boeing 737-300 aircraft valued at
$4,686,758. Additionally, the Partnership has a recourse promissory note of
$5,571,009 related to this investment at March 31, 2005. If any, or all, of the
aircraft are sold prior to the maturity date of the recourse promissory note on
November 27, 2006, then the Partnership may have all or a portion of the
outstanding balance of the recourse promissory note forgiven, depending upon the
total sales proceeds. If the aircraft are sold after the maturity date of the
recourse promissory note, then the Partnership would be entitled to receive
one-third of the net proceeds in excess of the net book value of aircraft, as
defined by 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.
(7) Line of Credit Agreement
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, 6.75% at March
31, 2005). Under the terms of the line of credit agreement, the Initial Funds
may borrow from Comerica Bank with all borrowings to be jointly and severally
collateralized by (i) cash and (ii) the present values of certain rents
receivable and equipment owned by the Initial Funds. Effective August 5, 2004,
the line of credit agreement was amended to add ICON Income Fund Ten LLC ("Fund
Ten") as a borrower. The Initial Funds and Fund Ten are collectively referred to
as the Borrowers. On December 6, 2004, the Loan and Security Agreement 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 and (ii) 50% of the net worth of such Borrower. The
Contribution Agreement provides that, in the event a Borrower is required to pay
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.
14
ICON Cash Flow Partners L.P. Seven
Notes To Consolidated Financial Statements
March 31, 2005
(Unaudited)
(7) Line of Credit Agreement - continued
During 2005, certain of the Borrowers paid Comerica Bank a portion of the
Partnership's outstanding obligations. As required under the terms of the
Contribution Agreement, the Partnership was required to promptly repay the
Borrowers the amounts paid on its behalf. Since the Partnership did not have
sufficient liquidity to repay the Borrowers, the Partnership assigned interests
in certain of its joint venture investments and finance lease investments as
full repayment of amounts due to them, as follows: (i) during February 2005, the
assignment of 2.69% of the Partnership's interest in the profits, losses and
cash flows of North Sea valued at $672,992 to Fund Eight B; (ii) during February
2005, the assignment of 3.02% of the Partnership's interest in the profits,
losses and cash flows of North Sea valued at $755,000 to Fund Nine; and (iii)
the assignment of the Partnership's entire finance lease interest in a sodium
chloride plant valued at $745,000 to Nine LLC.
Effective March 8, 2005, the Initial Funds and Fund Ten entered into a
Seventh Amendment to the Loan and Security Agreement with Comerica Bank. This
Agreement releases the Partnership from all of its rights and obligations under
the Loan and Security Agreement dated as of May 30, 2002. As such, the
Partnership is no longer a party to the $17,500,000 line of credit.
(8) Contingencies
In August 2004, Fleet Capital Corporation ("Fleet") filed an action in New
York State Supreme Court, New York County, seeking to recover monies it alleges
that the Partnership owes it under certain Performance Guaranties against the
Partnership entered into in connection with certain non-recourse loans made by
Fleet to certain entities which were wholly-owned subsidiaries of the
Partnership. These loans were made in connection with the Partnership's
acquisition of five (5) marine vessels formerly on charter to affiliates of
SEACOR Marine and SEACOR Offshore, Inc. While the Partnership believes Fleet's
action is without merit and is vigorously defending such action, it 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. The Partnership has not
accrued any potential loss from this action as the action is in the 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
action. Discovery is continuing and the parties have agreed to participate in
non-binding mediation in an attempt to amicably settle this matter.
(9) Recent Accounting Pronouncements
On June 1, 2005 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 154 "Accounting Changes and Error
Corrections" ("SFAS 154") which replaces Accounting Principles Board Opinion No.
20, "Accounting Changes" ("APB 20") and SFAS No. 3, "Reporting Accounting
Changes in Interim Financial Statements," and changes the requirements for the
accounting for and reporting of a change in accounting principle. SFAS 154
requires retrospective application to prior periods' financial statements of a
voluntary change in accounting principle unless it is impracticable. APB 20
previously required that most voluntary changes in accounting principle be
recognized by including in net income of the period of the change the cumulative
effect of changing to the new accounting principle. The Partnership does not
expect the adoption of SFAS 154 to have an impact on its consolidated financial
position or results of operations.
15
ICON Cash Flow Partners L.P. Seven
Notes To Consolidated Financial Statements
March 31, 2005
(Unaudited)
(9) Recent Accounting Pronouncements - 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.
16
Item 2. General Partner's Discussion and Analysis of Financial Condition and
Results of Operation
The following is a discussion of our results of operations and current
financial position. This discussion should be read in conjunction with our
unaudited consolidated financial statements and related notes included elsewhere
in this report and the audited consolidated financial statements and related
notes included in our Annual Report on Form 10-K for the year ended December 31,
2004.
As used in this quarterly report on Form 10-Q, references to "we," "us,"
"our" or similar terms include ICON Cash Flow Partners L.P. Seven and its
consolidated subsidiary.
Forward-Looking Information - Certain statements within this Form 10-Q may
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are identified by
words such as "anticipate," "believe," "estimate," "expects," "intend,"
"predict" or "project" and similar expressions. This information may involve
risks and uncertainties that could cause actual results to differ materially
from the forward-looking statements. We believe that the expectations reflected
in such forward-looking statements are based on reasonable assumptions. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Any such forward-looking
statements are subject to risks and uncertainties and our future results of
operations could differ materially from historical results or current
expectations. Some of these risks are discussed in this report, and include,
without limitation, fluctuations in oil and gas prices; level of fleet additions
by competitors and industry overcapacity; changing customer demands for
aircraft; acts of terrorism; unsettled political conditions, war, civil unrest
and governmental actions, and environmental and labor laws. Our actual results
could differ materially from those anticipated by such forward-looking
statements due to a number of factors, some of which may be beyond our control,
including, without limitation:
o changes in our industry, interest rates or the general economy;
o the degree and nature of our competition;
o availability of qualified personnel;
o cash flows from operating activities may be less than our current level of
expenses and debt obligations;
o the financial condition of lessees; and
o lessee defaults.
Business Overview
We are an equipment leasing business formed on 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 provided current cash flow, which we
refer to as "income" leases. The majority of the purchase price of our other
equipment leases was financed, 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.
17
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 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 the
General Partner will not receive any additional fees in connection with such
reinvestments. Since November 10, 2002, we have been in our disposition period,
wherein we are seeking to sell our assets in the ordinary course of business.
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.
Our current portfolio, which we hold either directly or through joint
venture investments with affiliates and others, consists primarily of:
Mobile Offshore Drilling Rig
We currently have a 37.65% interest in a mobile offshore drilling rig
subject to lease with Rowan Companies, Inc., which has a monthly rental of
approximately $436,000 that is paid semi-annually and expires on March 15, 2008.
We originally acquired 100% of the Class C limited partner interest giving us a
50% ownership interest in the mobile offshore drilling rig. The original
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 assigned 6.64% of our interest in the profits, losses and cash flows of
the mobile offshore drilling rig to several of our affiliates as repayment under
the terms of the Contribution Agreement with Comerica Bank (See financings and
borrowing located in Liquidity and Capital Resources Section).
Sodium Chlorate Production Facility
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 required semi-annual payments during July and January of $372,500 and
expires 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.
Air Transportation Industry:
1976 McDonnell Douglas DC-10-30F aircraft
We have a 99% interest in a 1976 McDonnell Douglas DC-10-30F aircraft
subject to lease with World Airways, Inc. 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. The 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.
Three 737-300 aircraft residuals
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.
18
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.
Aircraft Rotables
We currently own rotables for Boeing 737 and Airbus A310 aircraft. Aircraft
rotables are replacement spare parts that are held in inventory by an airline.
The A310 rotables can be used on either A310-200s or A310-300s which are being
used by over 60 operators world-wide. These rotables were formerly on lease to
Sabena Technics and are currently off lease and in the process of being
remarketed, for sale.
2005 Portfolio Activity
Mobile Offshore Drilling Rig
During 2005, in order to repay our affiliates for amounts paid on our
behalf under the Contribution Agreement we entered into the following two
assignments; (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.
Sodium Chlorate Production Facility
During March 2005, in order to repay our affiliates for amounts paid on our
behalf under the Contribution Agreement; we assigned our entire 50% finance
lease interest in EKA Chemicals, Inc.'s facility valued at $745,000 to ICON
Income Fund Nine LLC.
Supply Vessel
On May 18, 2005 we entered into a Memorandum of Agreement (the "Agreement")
with Jettco Marine Transportation, Inc., an unaffiliated third party, for the
sale of the "Janson Graham" supply vessel (the Vessel"). The sale occurred
simultaneously with the execution of the Agreement. The sales price was $200,000
in cash. For the three months ended March 31, 2005 we recorded an impairment
loss of $300,000.
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.
19
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 the General Partner of
North Sea 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.
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 fuel 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 payment 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.
20
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 for potential impairment in accordance
with our policy to review all significant assets in our portfolio.
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
On June 1, 2005 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 154 "Accounting Changes and Error
Corrections" ("SFAS 154") which replaces Accounting Principles Board Opinion No.
20, "Accounting Changes" ("APB 20") and SFAS No. 3, "Reporting Accounting
Changes in Interim Financial Statements," and changes the requirements for the
accounting for and reporting of a change in accounting principle. SFAS 154
requires retrospective application to prior periods' financial statements of a
voluntary change in accounting principle unless it is impracticable. APB 20
previously required that most voluntary changes in accounting principle be
recognized by including in net income of the period of the change the cumulative
effect of changing to the new accounting principle.
Management does not believe that any recently issued, but not yet effective
accounting pronouncements, if currently adopted, would have a material effect on
the accompanying consolidated financial statements.
21
Results of Operations for the Three Months Ended March 31, 2005 (the "2005
Quarter") and 2004 (the 2004 Quarter")
Since November 10, 2002, we have been in our disposition period and are in
the process of selling our assets in the ordinary course of business. At March
31, 2005 we have several remaining assets. As such, rental income and finance
income will decrease over time as will expenses related to our assets such as
depreciation. Additionally, interest expense should decrease as we reach the
expiration of leases that were financed and we fully repay the debt. Since we
are in the process of selling our remaining assets we will be recording gains
and losses on the sales of equipment.
Revenues for the 2005 Quarter and the 2004 Quarter are summarized as
follows:
Three Months Ended March 31,
2005 2004 Change
Total revenue $ 1,847,054 $ 1,156,982 $ 690,072
================= ============= =============
Rental income $ 150,000 $ 105,624 $ 44,376
Finance income $ 1,928 $ 3,848 $ (1,920)
Net income from leveraged leases $ - $ 700,619 $ (700,619)
Income from investments in joint ventures $ 506,171 $ 346,482 $ 159,689
Gain on transfer of investment in joint venture $ 1,171,786 $ - $ 1,171,786
Interest and other income $ 17,169 $ 409 $ 16,760
Revenue for the 2005 Quarter increased $690,072 or 59.6%, over the 2004
Quarter. The increase in income is derived primarily from our investments in
joint ventures. During the 2005 we assigned a total of 5.71% of our interest in
one of joint ventures to two affiliates which created a gain of approximately
$1,172,000.
Expenses for the 2005 Quarter and the 2004 Quarter are summarized as
follows:
Three Months Ended March 31,
2005 2004 Change
Total expenses $ 766,890 $ 7,395,273 $ (6,628,383)
=================== ================ ===============
Provision for impairment loss $ 300,000 $ 4,700,000 $ (4,400,000)
Depreciation $ 138,885 $ 1,518,259 $ (1,379,374)
Interest $ 117,402 $ 404,064 $ (286,662)
Management fees $ 75,000 $ - $ 75,000
General and administrative $ 109,511 $ 242,197 $ (132,686)
Management fees - general partner $ - $ 377,792 $ (377,792)
Administrative expense reimbursement -
General Partner $ - $ 122,256 $ (122,256)
Amortization of initial direct costs $ 26,731 $ 31,384 $ (4,653)
Minority interest $ (639) $ (679) $ 40
Our total expenses for the 2005 Quarter decreased by $6,628,383 or 89.6%,
over the 2004 Quarter. The decrease is primarily due to a decrease in impairment
loss between the periods. During the 2005 Quarter we recorded an impairment loss
on our final supply vessel of $300,000 and during the 2004 Quarter we recorded
an impairment loss on our DC-10-30 aircraft which was subsequently sold during
July 2004. The decrease in general and administrative expenses was due to
reductions in storage and maintenance and insurance expense in the 2005 Quarter
versus the 2004 Quarter as a result of termination of most of the Seacor Smit
and Seacor Marine leases. Effective July 1, 2004 the General Partner agreed to
no longer charge the Partnership management fees and administrative expense
reimbursements. These fees were charged in the 2004 quarter.
Net Loss
As a result of the factors discussed above, the net income (loss) for the
2005 Quarter and the 2004 Quarter was $1,080,164 and $(6,238,291), respectively.
The net income (loss) per weighted average limited partnership unit outstanding
was $1.08 and $(6.25) for the 2005 Quarter and the 2004 Quarter, respectively.
22
Liquidity and Capital Resources
Sources of Cash
We believe that with the cash we have currently available and from cash
being generated from our lease, sales proceeds, and our distributions we receive
from our joint ventures we will have sufficient cash to continue our operations
through our liquidation period, which we believe should end in approximately
another six to twelve months. During the quarter ended March 31, 2005 we
received additional cash of approximately $2,173,000 through advances from
affiliates. These funds were used to repay our recourse debt to Comerica Bank.
We do not anticipate requiring additional advances from affiliates in the
future.
Our primary use of cash during the quarter ended March 31, 2005 was the
repayment of our recourse debt of approximately $2,423,000.
Financings and Borrowings
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"), entered into a $17,500,000 line of credit
agreement with Comerica Bank as of May 30, 2002, as amended. Interest accrues on
all outstanding balances, at an interest rate equal to the Comerica Bank base
interest rate plus 1% (together is 6.75% at March 31, 2005). Under the terms of
the line of credit agreement, the Initial Funds may borrow from Comerica Bank
with all borrowings to be jointly and severally collateralized by (i) cash and
(ii) the present values of certain rents receivable and equipment owned by the
Initial Funds. Effective August 5, 2004, the line of credit agreement was
amended to add Fund Ten as a borrower. The Initial Funds and Fund Ten are
collectively referred to as the Borrowers. The line of credit agreement expires
on December 30, 2005.
The Initial Funds entered into a Contribution Agreement, dated May 30,
2002, as subsequently amended to include 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 and (ii) 50% of the net worth of such Borrower. The
Contribution Agreement provides that, in the event a Borrower is required to pay
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 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 the Borrowers the amounts paid on
our behalf. Since we did not have sufficient liquidity to repay the Borrowers,
we assigned to them interests in certain of our joint venture investments as
full repayment of monies due to them.
During 2005, we entered into three 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 Fund Eight B; (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 Fund Nine; and (iii) an assignment of
our entire 50% interest in a sodium chloride plant valued at $745,000 to Fund
Nine.
Effective March 8, 2005, the Initial Funds and Fund Ten entered into a
Seventh Amendment to the Loan and Security Agreement with Comerica Bank. This
Agreement releases us from all of our rights and obligations under the Loan and
Security Agreement dated as of May 30, 2002. As such, we are no longer a party
to the $17,500,000 line of credit.
23
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. Historically,
we paid monthly distributions to our partners beginning with their admission to
the Partnership through the termination of the reinvestment period, which was
November 9, 2002. For the three months ended March 31, 2005 and 2004 we did not
pay any distributions.
Commitments
At March 31, 2005, we have total recourse debt outstanding totaling
$5,751,009 which relates to our investment in the unguaranteed residual values
of three Boeing 737-300 aircraft. If any, or all, of the aircraft are sold prior
to the maturity date of the recourse promissory note, November 27, 2006, then we
may have all or a portion of the outstanding balance of the recourse debt
forgiven, depending upon the total sales proceeds. If the aircraft are sold
after the maturity date of the recourse debt, then we would be entitled to
receive one-third of the net proceeds in excess of the net book value of
aircraft, as defined by the agreement. In addition, we are required to repay a
portion of the recourse debt with 50% of the sales proceeds from any of its
assets which are not subject to senior secured debt.
Risks and Uncertainties
At March 31, 2005, except as noted above in the Business 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 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.
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.
24
Item 3. Qualitative and Quantitative Disclosures About Market Risk
We, like most other companies, are exposed to certain market risks, which
includes changes in interest rates and the demand for equipment (and the related
residuals) owned by us. We believe 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.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
We carried out an evaluation, under the supervision and with the
participation of management of ICON Capital Corp., our General Partner,
including the Chief Executive Officer and the Principal Financial and Accounting
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the period covered by this report
pursuant to the Securities Exchange Act of 1934. Based upon the evaluation,
except as noted below, the Chief Executive Officer and the Principal Financial
and Accounting Officer concluded that our disclosure controls and procedures
were effective.
While evaluating our disclosure controls and procedures we recognized that
greater internal controls were needed to aid in a more efficient closing of our
financial statements, thereby requiring additional skilled accounting staff.
Towards the end of the third quarter of 2004, the Company hired a new senior
vice president of accounting and the Company is in the process of seeking
additional accounting staff in order to better effectuate the Company's internal
controls. We will continue to evaluate our disclosure controls and procedures to
determine their effectiveness and adequacy and will take the steps necessary, in
our opinion, to ensure the adequacy of the Company's disclosure controls and
procedures.
In designing and evaluating our disclosure controls and procedures, we
recognized that disclosure controls and procedures, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the disclosure controls and procedures are met. Our disclosure
controls and procedures have been designed to meet reasonable assurance
standards. Disclosure controls and procedures cannot detect or prevent all error
and fraud. Some inherent limitations in disclosure controls and procedures
include costs of implementation, faulty decision-making, simple error and
mistake. Additionally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based, in part, upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
anticipated and unanticipated future conditions. Over time, controls may become
inadequate because of changes in conditions, or the degree of compliance with
established policies or procedures.
Our General Partner's Chief Executive Officer and Principal Financial and
Accounting Officer have determined that no weakness in disclosure controls and
procedures had any material effect on the accuracy and completeness of the
Company's financial reporting and disclosure included in this report.
25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of conducting our business, there may be certain
claims, suits, and complaints filed against us. In the opinion of management,
the outcome of such matters, if any, will not have a material impact on our
consolidated financial position or results of operations. No material legal
proceedings are currently pending against us or against any of our assets,
except as stated below.
In August 2004, Fleet Capital Corporation ("Fleet") filed an action in New
York State Supreme Court, New York County, seeking to recover monies it alleges
that the Partnership owes it under certain Performance Guaranties entered into
in connection with certain non recourse loans made by Fleet to certain entities
which were wholly-owned subsidiaries of the Partnership. These loans were made
in connection with the Partnership's acquisition of five (5) marine vessels
formerly on charter to affiliates of SEACOR Marine and SEACOR Offshore, Inc.
While the Partnership believes Fleet's action is without merit and is vigorously
defending such action, it 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. The Partnership has not accrued any potential loss from this action as
the action is in the 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 this action. Discovery is continuing and the parties have agreed to
participate in non-binding mediation in an attempt to amicably settle this
matter.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters To A Vote Of Security Holders
No matters were submitted to a vote of security holders during the
first quarter 2005.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
31.1 Certification of Chairman and Chief Executive Officer.
31.2 Certification of Executive Vice President and Principal Financial and
Accounting Officer.
32.1 Certification of Chairman and Chief Executive Officer pursuant to 18 U.S.C.
(Section)1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification of Executive Vice President and Principal Financial and
Accounting Officer pursuant to 18 U.S.C. (Section)1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
26
SIGNATURES
Pursuant to the requirements of 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 (Registrant) By its General Partner, ICON
Capital Corp.
Date: July 1, 2005 /s/ Beaufort J.B. Clarke
----------------------------------
Beaufort J.B. Clarke
Chairman, Chief Executive Officer and Director
Date: July 1, 2005 /s/ Thomas W. Martin
----------------------------------
Thomas W. Martin
Executive Vice President and Director
(Principal Financial and Accounting Officer)
27
Exhibit 31.1
Principal Executive Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. ss.1350)
I, Beaufort J.B. Clarke, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ICON Cash Flow Partners
L.P. Seven;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the board of directors of the General Partner
(or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control which are reasonably likely to
materially affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Dated: July 1, 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
28
Exhibit 31.2
Principal Executive Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. ss.1350)
I, Thomas W. Martin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ICON Cash Flow
Partners L.P. Seven;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the board of directors of the General Partner (or
persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control which are reasonably likely to
materially affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Dated: July 1, 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
29
Exhibit 32.1
Principal Executive Officer Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. ss.1350)
I, Beaufort J.B. Clarke, Chairman and Chief Executive Officer of ICON Capital
Corp, the General Partner, in connection with the Quarterly Report of ICON Cash
Flow Partners L.P. Seven (the "Partnership") on Form 10-Q for the quarterly
period ended March 31, 2005, as filed with the Securities and Exchange
Commission on the date hereof (the "Periodic Report") certify, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge
and belief:
(1) the Periodic 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 Periodic Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership.
Dated: July 1, 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
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
The information contained in this Exhibit 32.1 is being furnished and shall not
be deemed "filed" for the purposes of Section 18 of the Securities Exchange Act
of 1934, as amended, or otherwise subject to the liabilities of that section.
The information contained in this Exhibit 32.1 shall not be incorporated by
reference into any registration statement or other document pursuant to the
Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as
amended, except as shall be expressly set forth by specific reference to this
Exhibit 32.1 in such filing.
30
Exhibit 32.2
Principal Executive Officer Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. ss.1350)
I, Thomas W. Martin, Executive Vice President (Principal Financial and
Accounting Officer) of ICON Capital Corp, the General Partner, in connection
with the Quarterly Report of ICON Cash Flow Partners L.P. Seven (the
"Partnership") on Form 10-Q for the quarterly period ended March 31, 2005, as
filed with the Securities and Exchange Commission on the date hereof (the
"Periodic Report") certify, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that to the best of my knowledge and belief:
(1) the Periodic 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 Periodic Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership.
Dated: July 1, 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
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
The information contained in this Exhibit 32.2 is being furnished and shall not
be deemed "filed" for the purposes of Section 18 of the Securities Exchange Act
of 1934, as amended, or otherwise subject to the liabilities of that section.
The information contained in this Exhibit 32.2 shall not be incorporated by
reference into any registration statement or other document pursuant to the
Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as
amended, except as shall be expressly set forth by specific reference to this
Exhibit 32.2 in such filing.
31