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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 333-37504
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ICON Income Fund Eight B L.P.
(Exact name of registrant as specified in its charter)
Delaware 13-4101114
- -------------------------------------------- ---------------------------
(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 3-5
2. Properties 6
3. Legal Proceedings 6
4. Submission of Matters to a Vote of Security Holders 6
PART II
5. Market for the Registrant's Securities and Related Security Holder Matters 7
6. Selected Consolidated Financial Data 8
7. General Partner's Discussion and Analysis of Financial Condition and
Results of Operations 9-22
7A. Qualitative and Quantitative Disclosures About Market Risk 22
8. Consolidated Financial Statements 23-46
9. Changes in and Disagreements with Accountants on Accounting and Financial 47
Disclosure
9A. Controls and Procedures 47
9B. Other Information 47
PART III
10. Directors and Executive Officers of the Registrant's General Partner 48-49
11. Executive Compensation 49
12. Security Ownership of Certain Beneficial Owners and Management 49
13. Certain Relationships and Related Transactions 49
14. Principal Accounting Fees and Services 49
PART IV
15. Exhibits, Financial Statement Schedules 50
SIGNATURES 51
Certifications 52-55
2
PART I
Item 1. Business
General Development of Business
ICON Income Fund Eight B L.P. (the "Partnership'") was formed on February
7, 2000 as a Delaware limited partnership. When used in this report, the terms
"we" "us" and "our" refers to the Partnership.
Our maximum offering was $75,000,000 and we commenced business operations
on our initial closing date, June 14, 2000, with the admission of 15,815.51
limited partnership units at $100 per unit representing $1,581,551 of capital
contributions. Between June 15, 2000 and October 17, 2001, (the final closing
date) 734,184.49 additional limited partnership units were admitted bringing the
total admission to 750,000 limited partnership units aggregating $75,000,000 in
capital contributions. From 2001 through 2004, we redeemed 6,720.66 limited
partnership units leaving 743,279.34 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) when we start our disposition period, we will sell our investments and
distribute the cash from sales of such investments to our partners.
Our reinvestment period is anticipated to end on October 16, 2006. However,
we may extend the reinvestment period for an additional three years, at our
discretion. During the disposition period, we 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. 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. 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.
At December 31, 2004 and 2003, we had total assets of $119,147,022 and
$180,747,120, respectively. During the year ended December 31, 2004, our total
revenue was $21,591,797, which included two leases which accounted for
approximately 50% of our total rental revenue. We incurred a net loss for the
year ended December 31, 2004 of $4,609,006. For the year ended December 31,
2003, our total revenue was $25,150,087 which included two leases which
accounted for approximately 43% of our total rental revenue. We incurred a net
loss for the year ended December 31, 2003, of $5,181,209. For the year ended
December 31, 2002, our total revenue was $25,467,361 which included two leases
which accounted for approximately 37% of our total rental revenue. We incurred a
net loss for the year ended December 31, 2002 of $136,897.
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 year ended December 31, 2004 we did not purchase any additional
equipment. During the year ended December 31, 2003 we did not invest
individually in any equipment lease transactions but did enter into one joint
venture. We entered into the following lease modifications, assignments and
sales for the year ended December 31, 2004, and the one joint venture for the
year ended December 31, 2003, as follows:
Sale of Boeing 767-300ER Aircraft
During July 2004, one of our majority owned subsidiaries, ICON Aircraft
24846 LLC, sold its only asset, a Boeing 767-300ER aircraft, which resulted in a
realized net loss of approximately $601,800. The General Partner determined that
it was in the best interests 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.
Assignment of Interest in ICON Cheyenne LLC
On September 23, 2004, ICON Cash Flow Partners L.P. Seven ("L.P. Seven")
assigned 9.04% of its interest in ICON Cheyenne LLC ("ICON Cheyenne") to us for
$204,384, thereby increasing our ownership in ICON Cheyenne to 96.73%. This
assignment was made in order for L.P. Seven to repay its outstanding debt
obligation to us 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 L.P.
Seven's proportionate fair value of L.P. Seven's interest in ICON Cheyenne at
September 23, 2004. The fair value was determined using discounted cash flow
projections for ICON Cheyenne's portfolio.
Sale of Petsmart Equipment
During October 2004, our lease with Petsmart, Inc. expired. Petsmart, Inc.
purchased all of the equipment, which consisted of conveyer systems, frames,
racks, carousels and forklifts, for the equipment's fair value, of $1,300,000.
We recognized a gain on this transaction of approximately $820,000.
4
Assignments of Rowan Cash Flow
On November 24, 2004, L.P. Seven assigned 3.24% of its interest in the
profits, losses and future cash flows of a mobile offshore drilling rig, subject
to a lease with Rowan Companies, Inc. to us for $810,000. This assignment was
made in order for L.P. Seven to repay its outstanding debt obligation to us 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 L.P. Seven's proportionate
fair value of L.P. Seven's 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, L.P. Seven assigned 2.69% of its interest in the
profits, losses and future cash flows of a mobile offshore drilling rig, subject
to a lease with Rowan Companies, Inc. to us for $672,992, increasing our
ownership interest to 5.93%. This assignment was made in order for L.P. Seven to
repay its outstanding debt obligation to us 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 L.P. Seven's proportionate fair value of L.P.
Seven's 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.
Kenilworth and SPK Exchange
On December 1, 2004, we transferred our entire 5% ownership interest in
ICON/Kenilworth, LLC ("Kenilworth"), a 25 MW co-generation facility on lease to
Schering-Plough to an affiliate, ICON Income Fund Nine, LLC, ("Fund Nine") in
exchange for Fund Nine's 25.87% ownership interest in ICON SPK 2023-A LLC ("SPK
2023"). We entered into this exchange to reduce our New Jersey State income tax
obligations. The General Partner believes it is in our best interest to no
longer have any ownership interest in equipment held in New Jersey. After the
exchange, we have a 74.87% ownership interest in SPK 2023 and have no ownership
interest in Kenilworth. The fair value of Kenilworth was determined using an
independent third party appraisal and the General Partner determined that fair
value for SPK 2023 approximated its net book value based upon the General
Partners knowledge of equipment leases held by SPK 2023.
Cathay Pacific Aircraft Lease Extension
We have entered into negotiations with Cathay Pacific Airways Limited
("Cathay") regarding a possible lease extension. The initial term of all
equipment on lease to Cathay is scheduled to expire on March 31, 2006.
McDonnell Douglas DC10-30F aircraft
During 2003 we and Fund Nine formed a joint venture, ICON Aircraft 47820
LLC, for the purpose of acquiring an investment in a McDonnell Douglas DC10-30F
aircraft on lease to Federal Express Corporation, with an expiration date of
March 31, 2007. This lease may be renewed for up to five years thereafter. Our
portion of the purchase price was approximately $24,405,000 comprised of
approximately $2,615,000 in cash and approximately $21,790,000 of non-recourse
debt. We have a 90% ownership interest in this joint venture.
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.
5
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. No material legal
proceedings are currently pending against us or against any of our assets,
except as discussed below.
K-Mart Corporation Bankruptcy
On January 22, 2002, K-Mart Corporation ("K-Mart") and its affiliate
debtors filed a voluntary petition in the United States Bankruptcy Court for the
Eastern District of Illinois seeking relief under Chapter 11 of the United
States Bankruptcy Code. We are the lessor of 179 Noritsu Optical/Digital photo
processing mini-labs located at K-Mart retail locations throughout the country.
We have been negotiating with K-Mart and we are currently hopeful that we
will be able to enter into a stipulation agreement with K-Mart in the near
future wherein K-Mart would affirm four of the five equipment schedules covering
the Noritsu mini-labs they have on lease with us. As part of the settlement,
K-Mart would also agree to reimburse us for approximately $200,000 in overdue
property tax payments. Although K-Mart emerged from bankruptcy last year, the
Bankruptcy Court has retained jurisdiction over this matter. K-Mart is current
in their payments to us on the remainder of the leased equipment.
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 of 2004.
6
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 2,819
We do not, in the normal course of business, pay dividends. We do pay
monthly distributions to our partners beginning with their admission to the
Partnership through the termination of the reinvestment period, which is
anticipated to be October 16, 2006. For the years ended December 31, 2004, 2003
and 2002, we paid distributions to our limited partners totaling $5,955,151,
$7,008,299 and $8,056,975, respectively. For the years ended December 31, 2004,
2003 and 2002, we paid distributions to our general partner totaling $60,155,
$70,347 and $81,384, respectively.
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
of 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 is deemed to be
$51.67 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 $51.67
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. Our limited partnership interests are not
publicly traded nor is there currently a market for our limited partnership
units. It is unlikely that any such market will develop.
7
Item 6. Selected Consolidated Financial Data
The selected consolidated 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 $ 21,591,797 $ 25,150,087 $25,467,361 $20,231,996 $ 742,302
============= ============ =========== =========== ==========
Net (loss) income $ (4,609,006) $ (5,181,209) $ (136,897) $ 820,109 $ 291,236
============= ============ =========== =========== ==========
Net (loss) income allocable to limited partners $ (4,562,916) $ (5,129,397) $ (135,528) $ 811,908 $ 288,324
============= ============ =========== =========== ==========
Net (loss) income allocable to general partner $ (46,090) $ (51,812) $ (1,369) $ 8,201 $ 2,912
============= ============ =========== =========== ==========
Weighted average number of limited
partnership units outstanding 744,463 747,189 749,475 502,536 132,049
============= ============ =========== =========== ==========
Net (loss) income per weighted average
limited partnership unit $ (6.13) $ (6.86) $ (0.18) $ 1.62 $ 2.18
============= ============ =========== =========== ==========
Distributions to limited partners $ 5,955,151 $ 7,008,299 $ 8,056,975 $ 4,932,964 $ 536,708
============= ============ =========== =========== ==========
Distributions per weighted average
limited partner unit $ 8.00 $ 9.38 $ 10.75 $ 9.82 $ 4.06
============= ============ =========== =========== ==========
Distributions to the general partner $ 60,155 $ 70,347 $ 81,384 $ 49,845 $ 5,228
============= ============ =========== =========== ==========
December 31,
-----------------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Total assets $119,147,022 $180,747,120 $189,408,747 $143,918,696 $88,108,178
============ ============ ============ ============ ===========
Notes payable $ 86,305,022 $134,938,722 $133,631,339 $ 79,752,204 $67,497,834
============ ============ ============ ============ ===========
Members' equity $ 29,597,291 $ 40,363,969 $ 52,820,395 $ 61,212,600 $18,764,181
============ ============ ============ ============ ===========
8
Item 7. General Partner'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 February 7, 2000 which began
active operations on June 14, 2000. We primarily engage in the business of
acquiring equipment subject to lease and, to a lesser degree, acquiring
ownership rights to items of leased equipment at lease expiration. Some of our
equipment leases are acquired for cash and are expected to provide current cash
flow, which we refer to as "income" leases. The majority of the purchase price
of our other equipment leases will be borrowed, so these leases will generate
little or no current cash flow because substantially all of the rental payments
received from a lessee will be paid to a lender. For these "growth" leases, we
anticipate that the future value of the leased equipment will exceed the cash
portion of the purchase price paid for the equipment. We are currently in our
"reinvestment" phase, wherein we seek to purchase equipment from time to time
through October 2006.
Capital Resources and Liquidity
We initially invested most of the net proceeds from our offering in items
of equipment subject to a lease. Additionally, additional investments have been
made with the cash generated from our initial investments to the extent that
cash has not been needed for expenses, reserves and distributions to investors.
The investment in additional equipment in this manner is called "reinvestment."
We anticipate purchasing equipment from time to time until five years from the
date we completed the offering of limited partnership interests. That time frame
is called the "reinvestment period," which we may extend for an additional three
years, at our discretion. After the "reinvestment period," we will then sell 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. 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.
Accordingly, an investor should expect to hold his units for at least 10 years
from the time he invests.
9
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:
Air Transportation Industry:
o We have a 90% interest in a McDonnell Douglas DC-10-30F aircraft on lease
with Federal Express Corporation with an expiration date of March 31, 2007.
This lease may be renewed for up to five years thereafter. Our portion of
the purchase price was approximately $24,405,000 comprised of approximately
$2,615,000 in cash and approximately $21,790,000 of non-recourse debt.
o We have a 100% interest in one Airbus A340-313X aircraft and a 50% interest
in a second Airbus A340-313X aircraft, both on lease to Cathay with
expiration dates of March 31, 2006. We have entered into preliminary
negotiations with Cathay regarding possible lease extensions. The purchase
price of the first aircraft was approximately $76,467,000 comprised of
$4,250,000 in cash and approximately $72,217,000 of non-recourse debt. Our
portion of the purchase price of the second aircraft was approximately
$38,125,000 comprised of approximately $2,125,000 in cash and approximately
$36,000,000 of non-recourse debt.
o We have a 100% interest in five aircraft engines on lease to TWA, LLC, a
subsidiary of American Airlines. The lease is scheduled to expire on May
28, 2008. The aggregate purchase price was $5,950,000 in cash.
o We have a 100% interest in one flight simulator on lease to British
Aerospace, Inc. ("BAE"). The lease will expire on March 27, 2006, at which
time BAE may renew the lease for two additional terms of one year each. The
purchase price was approximately $12,892,000 comprised of approximately
$2,062,000 in cash and $10,830,000 of non-recourse debt.
Information Technology Industry
o We have a 100% interest in five schedules consisting of 179 Noritsu
Optical/Digital photo processing mini-labs subject to lease with K-Mart.
The lease expiration dates range between April 30, 2006 and January 31,
2007. The aggregate purchase price for the equipment was approximately
$18,234,000 comprised of approximately $682,000 in cash and approximately
$17,552,000 of non-recourse debt.
On January 22, 2002, K-Mart and its affiliate debtors filed a voluntary
petition in the United States Bankruptcy Court for the Eastern District of
Illinois seeking relief under Chapter 11 of the United States Bankruptcy
Code. We have been negotiating with K-Mart and we are currently hopeful
that we will be able to enter into a stipulation agreement with K-Mart in
the near future wherein K-Mart would affirm four of the five equipment
lease schedules covering the Noritsu mini-labs they have on lease with us.
As part of the settlement, K-Mart would also agree to reimburse us for
approximately $200,000 in overdue property tax payments. Although K-Mart
emerged from bankruptcy last year, the Bankruptcy Court has retained
jurisdiction over this matter. K-Mart is current in their payments to us on
the remaining four equipment lease schedules.
Other Equipment
o We have a 96.73% interest in ICON Cheyenne. ICON Cheyenne is a joint
venture which holds an equipment portfolio consisting of various equipment
leases, including 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.
Our portion of the purchase price was approximately $29,706,000 comprised
of approximately $11,401,000 in cash and approximately $18,305,000 of
non-recourse debt.
Substantially all of our recurring operating cash flows are generated from
the operations of the "income" leases in our portfolio. On a monthly basis, we
deduct the expenses related to the recurring operations of the portfolio from
such revenues and assess the amount of the remaining cash flows that will be
required to fund known or anticipated re-leasing costs and equipment management
costs. Any residual operating cash flows are considered available for
distribution to the partners and paid monthly (up until the disposition period).
10
Portfolio Activity
Sale of Boeing Aircraft
During July 2004, one of our majority owned subsidiaries, ICON Aircraft
24846 LLC, sold its only asset, a Boeing 767-300ER aircraft which resulted in a
realized net loss of approximately $601,800. The General Partner determined that
it was in the best interests 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.
Assignment of Interest in ICON Cheyenne LLC
On September 23, 2004, L.P. Seven assigned 9.04% of its interest in ICON
Cheyenne to us for $204,384, thereby increasing our ownership in ICON Cheyenne
to 96.73%. This assignment was made in order for L.P. Seven to repay its
outstanding debt obligation to us 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 L.P. Seven's proportionate fair value of L.P. Seven's interest in
ICON Cheyenne at September 23, 2004. The fair value was determined using
discounted cash flow projections for ICON Cheyenne's portfolio.
Sale of Petsmart Equipment
During October 2004, our lease with Petsmart, Inc. expired. Petsmart, Inc.
purchased all of the equipment, which consisted of conveyer systems, frames,
racks, carousels and forklifts, for the equipment's fair value, of $1,300,000.
We recognized a gain on this transaction of approximately $820,000.
Assignments of Rowan Cash Flow
On November 24, 2004, L.P. Seven assigned 3.24% of its interest in the
profits, losses and future cash flows of a mobile offshore drilling rig, subject
to a lease with Rowan Companies, Inc. to us for $810,000. This assignment was
made in order for L.P. Seven to repay its outstanding debt obligation to us 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 L.P. Seven's proportionate
fair value of L.P. Seven's 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, L.P. Seven assigned 2.69% of its interest in the
profits, losses and future cash flows of a mobile offshore drilling rig, subject
to a lease with Rowan Companies, Inc. to us for $672,992, increasing our
ownership interest to 5.93%. This assignment was made in order for L.P. Seven to
repay its outstanding debt obligation to us 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 L.P. Seven's proportionate fair value of L.P.
Seven's 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.
Kenilworth and SPK Exchange
On December 1, 2004, we transferred our entire 5% ownership interest in
Kenilworth, a 25 MW co-generation facility on lease to Schering-Plough to an
affiliate, Fund Nine in exchange for Fund Nine's 25.87% ownership interest in
SPK 2023. We entered into this exchange to reduce our New Jersey State income
tax obligations. The General Partner believes it is in our best interest to no
longer have any ownership interest in equipment held in New Jersey. After the
exchange, we have a 74.87% ownership interest in SPK 2023 and have no ownership
interest in Kenilworth. The fair value of Kenilworth was determined using an
independent third party appraisal and the General Partner determined that fair
value for SPK 2023 approximated its net book value based upon the General
Partners knowledge of equipment leases held by SPK 2023.
11
Cathay Pacific Aircraft Lease Extension
We have entered into negotiations with Cathay regarding a possible lease
extension. The initial term of all equipment on lease to Cathay is scheduled to
expire on March 31, 2006.
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 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.
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 especially with
the recent increases in the price of gasoline and the fare wars within the
domestic air transportation industry. 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
to be even less than suggested by recent appraisals.
Information Technology Industry
As a result of the cyclical behavior of the information technology industry
and its focus on the consumer, all manufacturers are vulnerable to market down
turns. Regardless of the product being offered, the intrinsic boom-bust nature
of the technology sector challenges companies to constantly try to improve
and/or create innovative changes in their products, aggressively pushing the
incumbent equipment into obsolescence. There is no assurance that we will be
able to locate a willing buyer or lessee for our assets, or if one is located,
that the buyer or lessee will pay a price for the asset at least equal to the
appraised value.
12
Inability to Remarket Assets
The market for some of our assets is not very liquid. If current equipment
lessees choose not to renew their leases or purchase other equipment upon
expiration of the existing 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.
13
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.
14
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 $ 21,591,797 $25,150,087 $(3,558,290)
============= =========== ===========
Rental income $ 19,602,860 $21,965,472 $(2,362,612)
Finance income $ 1,134,039 $ 2,013,276 $ (879,237)
Net (loss) gain on sale of equipment $ (53,385) $ 798,490 $ (851,875)
Income from investments in joint ventures $ 430,029 $ 341,992 $ 88,037
Gain from investments in unguaranteed residual values $ 347,317 $ - $ 347,317
Interest and other income $ 130,937 $ 30,857 $ 100,080
Revenues for 2004 decreased by $3,558,290, or 14.1%, as compared to 2003.
The decrease in revenue is due primarily to a decrease in rental income that
resulted from the termination of equipment on lease by one of our consolidated
joint ventures, ICON Aircraft 24846. We received no rental income from this
joint venture in 2004 while we received six months of rental income in 2003. The
decrease in finance income resulted primarily from the termination of two leases
to CSK Auto in November 2003. The increase in loss on sales of equipment was due
primarily to a greater number of leases being terminated in ICON Cheyenne in
2004 at losses as compared to 2003. Partially offsetting the decrease in revenue
was a gain from the investment in unguaranteed residual value in the WH Smith
and Summit portfolio of residuals in 2004. There were no corresponding gains in
2003.
15
Expenses for 2004 and 2003 are summarized as follows:
Years Ended December 31,
2004 2003 Change
---- ---- ------
Total expenses $ 26,200,803 $ 30,331,296 $ (4,130,493)
================= =============== =============
Depreciation $ 14,629,044 $ 16,896,463 $ (2,267,419)
Interest $ 5,688,282 $ 7,486,199 $ (1,797,917)
Management fees - General Partner $ 1,500,347 $ 2,008,870 $ (508,523)
Administrative expense reimburesement -
General Partner $ 862,030 $ 936,605 $ (74,575)
Aircraft maintenance $ 171,180 $ 745,872 $ (574,692)
General and administrative $ 1,188,050 $ 1,277,570 $ (89,520)
Amortization of initial direct costs $ 120,099 $ 229,278 $ (109,179)
Bad debt expense $ 411,742 $ - $ 411,742
Impairment loss $ 1,801,788 $ 900,000 $ 901,788
Minority interest $ (171,759) $ (149,561) $ (22,198)
Expenses for 2004 decreased by $4,130,493 or 14%, over 2003. The overall
decrease in expenses is due primarily to decreases in depreciation expense that
resulted from the termination of equipment on lease by one of our joint
ventures, ICON Aircraft 24846. In 2004 we reclassified certain equipment that is
now held for sale or lease and ceased recording depreciation expense. We
recorded depreciation on these assets during 2003. Interest expense decreased
due to the sale of equipment in ICON Aircraft 24846, which in turn retired the
outstanding debt associated with the lease. The decrease in management fees -
General Partner and administrative expense reimbursements - General Partner was
due to terminations of leases that reduced the rentals that such fees are based
on. Aircraft maintenance decreased due to the sale of the ICON Aircraft 24846
aircraft. Partially offsetting the decrease in expenses was an increase in
impairment loss based upon our determination that the lease end value of some of
our equipment is less then we previously estimated. The increase in provision
for bad debts was recorded on one of the leases included our portfolio of K-Mart
leases due to ongoing legal problems with this one K-Mart lease.
16
Net Loss
As a result of the foregoing factors, net loss for the years ended December
31, 2004 and 2003 was $4,609,006 and $5,181,209, respectively. The net loss per
weighted average number of limited partnership units outstanding was $6.13 and
$6.86, for the years ended December 31, 2004 and 2003, respectively.
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 $ 25,150,087 $ 25,467,361 $ (317,274)
================ ============== =============
Rental income $ 21,965,472 $ 22,003,284 $ (37,812)
Finance income $ 2,013,276 $ 2,743,775 $ (730,499)
Net gain on sale of equipment $ 798,490 $ 275,489 $ 523,001
Income from investments in joint ventures $ 341,992 $ 381,606 $ (39,614)
Interest and other income $ 30,857 $ 63,207 $ (32,350)
Revenues for 2003 decreased by $317,274, or 1%, as compared to 2002. The
decrease in finance income resulted from the continued collection of minimum
lease rentals reducing the investment balance outstanding on which such revenues
are based. Net gain on sale of equipment increased due to the sale of equipment
in the fourth quarter of the 2003 for which there was no corresponding sale in
2002.
Expenses for 2003 and 2002 are summarized as follows:
Years Ended December 31,
2003 2002 Change
---- ---- ------
Total expenses $ 30,331,296 $ 25,604,258 $ 4,727,038
================ =============== ==============
Depreciation $ 16,896,463 $ 14,171,054 $ 2,725,409
Interest $ 7,486,199 $ 7,249,407 $ 236,792
Management fees - General Partner $ 2,008,870 $ 2,137,679 $ (128,809)
Administrative expense reimbursement -
General Partner $ 936,605 $ 966,832 $ (30,227)
Aircraft maintenance $ 745,872 $ - $ 745,872
General and administrative $ 1,277,570 $ 580,106 $ 697,464
Amortization of initial direct costs $ 229,278 $ 288,917 $ (59,639)
Impairment loss $ 900,000 $ - $ 900,000
Minority interest $ (149,561) $ 210,263 $ (359,824)
17
Expenses for 2003 increased by $4,727,038, or 18%, over 2002. The primary
reason for the increase in expenses was due to depreciation expense which was a
result of additional investments in operating leases made subsequent to the
2002. Interest expense increased due to additional non-recourse debt associated
with the additional investments. The decrease in management fees - General
Partner was due to the overall decrease in the average size of our lease
portfolio in one of the our joint ventures in 2003 as compared to 2002. General
and administrative expenses, as well as, aircraft maintenance increased due to
increased marketing activities and maintenance associated with the Boeing
767-300 ER aircraft that was previously leased to Scandinavian Airline Systems.
An impairment loss of $900,000 was recorded on operating equipment held in one
of our joint ventures during 2003.
Net Loss
As a result of the foregoing factors, net loss for the years ended December
31, 2003 and 2002 was $5,181,209 and $136,897, respectively. The net loss per
weighted average number of limited Partnership units outstanding was $6.86 and
$0.18, for the year ended December 31, 2003 and 2002, respectively.
d. Liquidity and Capital Resources
Sources of Cash
We believe that with the cash we have currently available, cash being
generated from our leases, cash distributions from our joint ventures and
proceeds from equipment sales, we have sufficient cash to continue our
operations into the foreseeable future.
Our main sources of cash during 2004 and 2003, was from investing
activities. Our primary sources of cash during 2004, were generated from the
sales of equipment and unguaranteed residual values of approximately $4,900,000
and $757,000, respectively, and cash distributions from our joint ventures of
approximately $925,000. Our primary sources of cash during 2003 were as follows;
the sales of equipment and unguaranteed residual values of approximately
$4,359,000 and $1,933,000, respectively, cash distributions from our joint
ventures of approximately $1,245,000 and equipment sales advances of
approximately $1,361,000.
Our primarily cash outflows during 2004 and 2003 was from financing
activities. Our primary cash outflow for both 2004 and 2003 was cash
distributions to partners and repayment of borrowings. Our cash outflow relating
to distributions to partners for 2004 and 2003 was approximately, $6,015,000 and
$7,079,000, respectively. Our cash outflows relating to the repayment of
borrowings for 2004 and 2003 was approximately $768,000 and $5,579,000,
respectively. Additionally during 2004 and 2003 we had cash outflows from
investing activities relating to the loans and advances to an affiliate of
approximately $1,020,000 and investments in operating leases of approximately
$3,077,000, respectively.
During 2004 and 2003 we borrowed $1,920,000 and $2,000,000 from our line of
credit. We have amounts available to borrow, if necessary, under our line of
credit agreement with Comerica Bank.
18
Financings and Borrowings
We have non-recourse notes payable which are being paid directly to the
lenders by the lessees and accrue interest at rates ranging from 4.035% per year
to 10.05% per year. The outstanding balances of our non-recourse notes payable
at December 31, 2004 and 2003 was $83,080,022 and $132,938,722, respectively.
During the year ended December 31, 2004 we retired $34,491,632 of non-recourse
note payable related to the sale of a Boeing 767-300ER aircraft.
We and certain of our affiliates, specifically; L.P. Seven, ICON Income
Fund Eight A L.P. and Fund Nine (collectively, the "Initial Funds"), were
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. The 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, we together with
certain of our affiliates: L.P. Seven, ICON Income Fund Eight A L.P., Fund Nine,
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 participating Fund. In order to facilitate Fund Ten's addition to
the Contribution Agreement, the Initial 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.
During 2004 and 2005, we paid Comerica Bank a portion of the outstanding
obligations of L.P. Seven. As required under the terms of the Contribution
Agreement, L.P. Seven was required to promptly repay us the amounts we have paid
on L.P. Seven's behalf. Since L.P. Seven did not have sufficient liquidity to
repay us, L.P. Seven assigned to us interests in certain joint venture
investments as full repayment of monies due to us.
19
On September 23, 2004, L.P. Seven assigned 9.04% of its interest in ICON
Cheyenne to us for $204,384, thereby increasing our ownership in ICON Cheyenne
to 96.73%. This amount represented L.P. Seven's proportionate fair value of L.P.
Seven's interest in ICON Cheyenne at September 23, 2004. The fair value was
determined using discounted cash flow projections for ICON Cheyenne's portfolio.
On November 24, 2004, L.P. Seven assigned 3.24% of its interest in the
profits, losses and future cash flows of a mobile offshore drilling rig, subject
to a lease with Rowan Companies, Inc. to us for $810,000. This amount
represented L.P. Seven's proportionate fair value of L.P. Seven's 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.
On February 23, 2005, L.P. Seven assigned 2.69% of its interest in the
profits, losses and future cash flows of a mobile offshore drilling rig, subject
to a lease with Rowan Companies, Inc. to us for $672,992, increasing our
ownership interest to 5.93%. This amount represented L.P. Seven's proportionate
fair value of L.P. Seven's 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.
Effective March 8, 2005, the Initial Funds and ICON Income Fund Ten, LLC
entered into a Seventh Amendment to the Loan and Security Agreement with
Comerica Bank. This Agreement released ICON Cash Flow Partners L.P. Seven from
all of its obligations under the Loan and Security Agreement dated as of May 30,
2002. As such, ICON Cash Flow Partners L.P. Seven is no longer a party to the
$17,500,000 line of credit.
Aggregate borrowings by all Funds under the line of credit agreement
amounted to $10,272,992 at December 31, 2004. We currently have $3,225,000 of
borrowings under this line of credit.
Distributions
We pay monthly distributions to our limited partners beginning with the
first month after the limited partners' admission through the termination of the
operating period, which we anticipate will be October 16, 2006. We paid
distributions to limited partners for the years ended December 31, 2004, 2003
and 2002 of $5,955,151, $7,008,299 and $8,056,925, respectively. We paid
distributions to General Partner for the years ended December 31, 2004, 2003 and
2002 of $60,155, $70,347 and $81,384 ,respectively.
20
Commitments
At December 31, 2004 we are parties to both recourse and non-recourse debt.
The lenders have security interests in equipment relating to the non-recourse
debt and an assignment of the rental payments under the leases. If the lessee
were to default on the non-recourse debt the equipment would be returned to the
lender in extinguishment of the non-recourse debt. The recourse debt relates to
the Comerica Bank line of credit which is more fully discussed in the financings
and borrowings section above. Principal maturities of our notes payable consist
of the following at December 31, 2004:
Year Ending
December 31,
2005 $ 22,016,909
2006 61,403,259
2007 2,884,854
---------------
$ 86,305,022
===============
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 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 The market for 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 October 2006. Failure of the market to recover
significantly may result in our inability to realize our investment in the
residuals of the aircraft in the Partnership's portfolio.
o The Partnership's operations are subject to the jurisdiction of a number of
federal agencies, including the FAA. New regulatory rulings may negatively
impact the Partnership's financial results and economic value of its
assets.
o As a result of the cyclical behavior in the information technology industry
and its focus on the consumer, all manufacturers are vulnerable to market
down turns. Regardless of the product being offered, the intrinsic
boom-bust nature of the technology sector challenges companies to
constantly try to improve and/or create innovative changes in their
products, aggressively pushing the incumbent equipment into obsolescence.
There is no assurance that we will be able to locate a willing buyer or
lessee for our assets, or if one is located, that the buyer or lessee will
pay a price for the asset at least equal to the appraised value.
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 competitors are larger than us and have greater
financial resources than we do.
21
e. Inflation and Interest Rates
The potential effects of inflation on us are difficult to predict. If the
general economy experiences significant rates of inflation, however, it could
affect us in a number of ways. We do not currently have or expect to have rent
escalation clauses tied to inflation in our leases. The anticipated residual
values to be realized upon the sale or re-lease of equipment upon lease
terminations (and thus the overall cash flow from our leases) may be expected to
increase with inflation as the cost of similar new and used equipment increases.
If interest rates increase significantly, the lease rates that we can
obtain on future leases may be expected to increase as the cost of capital is a
significant factor in the pricing of lease financing. Leases already in place,
for the most part, would not be affected by changes in interest rates.
Item 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. Consolidated Financial Statements and Supplementary Data
Index to Financial Statements 24
Report of Independent Registered Public Accounting Firm 25-26
Consolidated Balance Sheets at December 31, 2004 and 2003 27
Consolidated Statements of Operations for the Years Ended
December 31, 2004, 2003 and 2002 28
Consolidated Statement of Changes in Partners' Equity
for the Years Ended December 31, 2002, 2003 and 2004 29-30
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002 31-46
Notes to Consolidated Financial Statements
23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheets of ICON Income
Fund Eight B L.P. (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 Income
Fund Eight B L.P. 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.
/s/ Hays & Company LLP
April 8, 2005
New York, New York
24
ICON Income Fund Eight B L.P.
(A Delaware Limited Partnership)
Consolidated Balance Sheets
December 31,
ASSETS
2004 2003
---- ----
Cash and cash equivalents $ 1,249,480 $ 1,760,803
---------------- -------------------
Investments in finance leases:
Minimum rents receivable 10,440,930 15,192,886
Estimated unguaranteed residual values 1,227,902 1,737,662
Initial direct costs, net 74,841 194,985
Unearned income (840,885) (1,974,924)
Allowance for doubtful accounts (411,742) -
----------------- ------------------
Net investments in finance leases 10,491,046 15,150,609
---------------- -------------------
Investments in operating leases:
Equipment, at cost 138,085,569 148,112,061
Accumulated depreciation (39,597,336) (31,289,197)
----------------- --------------------
Net investments in operating leases 98,488,233 116,822,864
---------------- -------------------
Equipment held for sale or lease, net - 36,741,848
Investments in joint ventures 5,308,848 6,382,227
Due from affiliates 14,071 167,170
Investment in unguaranteed residual values - 409,586
Investment in option, at cost 2,100,000 2,100,000
Other assets, net 1,495,344 1,212,013
----------------- -------------------
Total assets $ 119,147,022 $ 180,747,120
================ ===================
See accompanying notes to consolidated financial statements.
25
ICON Income Fund Eight B L.P.
(A Delaware Limited Partnership)
Consolidated Balance Sheets
December 31,
LIABILITIES AND PARTNERS' EQUITY
2004 2003
---- ----
Notes payable - non-recourse $ 83,080,022 $ 132,938,722
Notes payable - recourse 3,225,000 2,000,000
Due to affiliates 169,543 98,203
Deferred rental income 1,036,168 1,255,076
Equipment sales advances 72,600 1,361,506
Security deposits and other liabilities 1,145,673 1,377,023
Minority interest 820,725 1,352,621
----------------- ------------------
Total liabilities 89,549,731 140,383,151
----------------- ------------------
Commitments and contingencies
Partners' equity:
General partner (354,117) (247,872)
Limited partners: 743,279.34 and 745,491.39 units
outstanding, $100 per unit original issue price 29,951,408 40,611,841
----------------- ------------------
Total partners' equity 29,597,291 40,363,969
----------------- ------------------
Total liabilities and partners' equity $ 119,147,022 $ 180,747,120
================= =================
See accompanying notes to consolidated financial statements.
26
ICON Income Fund Eight B L.P.
(A Delaware Limited Partnership)
Consolidated Statements of Operations
Years Ended December 31,
2004 2003 2002
---- ---- -----
Revenue:
Rental income $ 19,602,860 $ 21,965,472 $ 22,003,284
Finance income 1,134,039 2,013,276 2,743,775
Net (loss) gain on sales of equipment (53,385) 798,490 275,489
Income from sale of investments in joint ventures 430,029 341,992 381,606
Gain from sale of investment in unguaranteed residual values 347,317 - -
Interest and other income 130,937 30,857 63,207
--------------- ------------- -----------
Total revenue 21,591,797 25,150,087 25,467,361
-------------- ------------- -----------
Expenses:
Depreciation 14,629,044 16,896,463 14,171,054
Interest 5,688,282 7,486,199 7,249,407
Management fees - General Partner 1,500,347 2,008,870 2,137,679
Administrative expense reimbursements - General Partner 862,030 936,605 966,832
Aircraft maintenance 171,180 745,872 -
General and administrative 1,188,050 1,277,570 580,106
Amortization of initial direct costs 120,099 229,278 288,917
Bad debt expense 411,742 - -
Impairment loss 1,801,788 900,000 -
Minority interest (171,759) (149,561) 210,263
---------------- ------------- ----------
Total expenses 26,200,803 30,331,296 25,604,258
--------------- ------------- ----------
Net loss $ (4,609,006) $ (5,181,209) $ (136,897)
=============== ============ ===========
Net loss allocable to:
Limited Partners $ (4,562,916) $ (5,129,397) $ (135,528)
General Partners (46,090) (51,812) (1,369)
---------------- ------------- ------------
$ (4,609,006) $ (5,181,209) $ (136,897)
=============== ============ ===========
Weighted average number of limited partnership
units outstanding 744,463 747,189 749,475
=============== ============= ===========
Net loss per weighted average limited
partnership unit $ (6.13) $ (6.86) $ (0.18)
=============== ============= ===========
See accompanying notes to consolidated financial statements.
27
ICON Income Fund Eight B L.P.
(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 $ 61,255,560 $ (42,960) $ 61,212,600
Limited partnership units redemmed
(1,554.15 units) (116,949) - (116,949)
Cash distributions to partners $ 10.75 $ - (8,056,975) (81,384) (8,138,359)
Net loss (135,528) (1,369) (136,897)
---------------- ------------- ------------
Balance, December 31, 2002 52,946,108 (125,713) 52,820,395
Limited partnership units redemmed
(2,954.46 units) (196,571) - (196,571)
Cash distributions to partners $ 9.38 $ - (7,008,299) (70,347) (7,078,646)
Net loss (5,129,397) (51,812) (5,181,209)
---------------- ------------- ------------
Balance, December 31, 2003 40,611,841 (247,872) 40,363,969
Limited partnership units redemmed
(2,212.05 units) (142,366) - (142,366)
Cash distributions to partners $ 8.00 $ - (5,955,151) (60,155) (6,015,306)
Net loss (4,562,916) (46,090) (4,609,006)
---------------- ------------- ------------
Balance, December 31, 2004 $ 29,951,408 $ (354,117) $ 29,597,291
=============== ============= ============
See accompanying notes to consolidated financial statements.
28
ICON Income Fund Eight B L.P.
(A Delaware Limited Partnership)
Consolidated Statements of Cash Flows
Years Ended December 31,
Increase (decrease) in cash and cash equivalents 2004 2003 2002
---- ---- ----
Cash flows from operating activities
Net loss $(4,609,006) $ (5,181,209) $ (136,897)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Rental income paid directly to lenders by lessees (18,082,778) (20,680,057) (19,268,406)
Interest expense on non-recourse financing
paid directly to lenders by lessees 4,956,594 5,987,533 6,822,451
Depreciation 14,629,044 16,896,463 14,171,054
Finance income paid directly to lenders by lessees (799,636) (1,087,564) (1,351,387)
Net loss (gain) on sales of equipment 53,385 (798,490) (275,489)
Amortization of initial direct costs 120,099 229,278 288,917
Impairment loss 1,801,788 900,000 -
Bad debt expense 411,742 - -
Income from investments in joint ventures (430,029) (341,992) (381,606)
Minority interest (171,759) (149,561) 210,263
Changes in operating assets and liabilities:
Collection of principal - non-financed receivables 1,589,028 1,853,879 2,438,584
Due from affiliates 153,099 (163,638) 224,167
Other assets (283,331) 165,400 1,537,853
Due to affiliates 71,340 (125,964) 82,651
Deferred rental income 378,328 175,090 534,840
Security deposits and other liabilities (231,350) 513,964 (406,544)
----------- ------------- --------------
Net cash (used in) provided by operating activities (443,442) (1,806,868) 4,490,451
----------- ------------ --------------
Cash flows from investing activities:
Proceeds from sales of equipment 4,900,377 4,358,594 1,938,170
Equipment sales advances 12,600 1,361,506 402,926
Initial direct costs paid - - (2,242,352)
Receipt of cash held in escrow - - 13,723,196
Cash investment in operating leases - (3,076,564) (4,250,000)
Cash investment in joint venture - - (4,516,929)
Loans and advances to affiliate (1,020,000) - -
Proceeds from sale of investment
in unguaranteed residual values 756,901 1,933,003 63,539
Distributions received from joint ventures 925,111 1,245,127 1,252,443
----------- ------------- --------------
Net cash provided by investing activities 5,574,989 5,821,666 6,370,993
----------- ---------- --------------
Cash flows from financing activities:
Cash distributions to partners (6,015,306) (7,078,646) (8,138,359)
Proceeds from non-recourse borrowings - - 3,593,693
Proceeds from recourse borrowings 1,920,000 2,000,000 -
Repayments of non-recourse borrowings (73,046) (5,179,053) (325,850)
Repayments of recourse borrowings (695,000) (400,000) (2,500,000)
Redemption of limited partnership units (142,366) (196,571) (116,949)
Distributions to minority interest in joint venture (660,232) (288,269) (559,605)
Minority interest contribution, net 23,080 389,518 -
----------- ------------- --------------
Net cash used in financing activities (5,642,870) (10,753,021) (8,047,070)
------------ ------------- --------------
Net (decrease) increase in cash and cash equivalents (511,323) (6,738,223) 2,814,374
Cash and cash equivalents, beginning of the year 1,760,803 8,499,026 5,684,652
----------- ------------- --------------
Cash and cash equivalents, end of the year $ 1,249,480 $ 1,760,803 $ 8,499,026
=========== ============= ==============
See accompanying notes to consolidated financial statements.
29
ICON Income Fund Eight B L.P.
(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 $ 731,688 $ 1,298,666 $ 426,925
============ ============ ===========
Supplemental disclosure of non-cash investing and financing activities:
Non-cash portion of equipment purchased with non-recourse debt $ - $ 24,211,080 $ 70,495,058
============ ============ ===========
Principal and interest paid directly to lenders by lessees $ 20,250,616 $ 25,312,177 $ 24,206,217
============ ============ ============
Notes payable - non-recourse retired with sale of equipment $ 34,491,632 $ - $ -
============ ============ ============
Transfer of investment in operating leases, net of accumulated
depreciation , to equipment held for sale or lease $ - $ 36,430,179 $ 1,211,669
============ ============ ============
Joint venture interests acquired from affiliate in exchange
for amounts owed $ 1,014,384 $ - $ -
============ ============ ===========
See accompanying notes to consolidated financial statements.
30
ICON Income Fund Eight B L.P.
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(1) Organization
ICON Income Fund Eight B L.P. (the "Partnership") is an equipment leasing
business formed in the State of Delaware on February 7, 2000. The Partnership is
primarily engaged in the business of acquiring equipment subject to leases.
The Partnership's principal investment objective is to obtain the maximum
economic return from its investments for the benefit of its partners. To achieve
this objective the Partnership has: (i) acquired a diversified portfolio of
equipment leases and financing transactions; (ii) made monthly cash
distributions to its partners commencing with each partner's admission through
the reinvestment period, which the Partnership anticipates ending on October 16,
2006, (iii) re-invested substantially all undistributed cash from operations and
cash from sales of equipment and financing transactions during the reinvestment
period; and (iv) when the Partnership starts its disposition period, sell our
investments and distribute the cash from sales of such investments to our
partners.
The Partnership's maximum offering was $75,000,000. The Partnership
commenced business operations on its initial closing date, June 14, 2000, with
the admission of 15,815.51 limited partnership units at $100 per unit
representing $1,581,551 of capital contributions. Between June 15, 2000 and
October 17, 2001, the final closing date, 734,184.49 additional units were
admitted representing $73,418,449 of capital contributions bringing the total
admission to 750,000 units totaling $75,000,000 in capital contributions.
Between the date of the final closing and December 31, 2004, the Partnership
redeemed 6,720.66 limited partnership units leaving 743,279.34 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 their adjusted capital contribution account to zero and receive, in
addition, other distributions and allocations which would provide an 8% per
annum cumulative return on their outstanding adjusted capital contribution
account. After such time, distributions will be allocated 90% to the limited
partners and 10% to the General Partner.
(2) Summary of Significant Accounting Policies
Consolidation and Minority Interest
The consolidated financial statements include the accounts of the
Partnership and its majority owned subsidiaries. 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.
31
ICON Income Fund Eight B L.P.
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(2) Summary of Significant Accounting Policies - continued
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 have a concentrated risk associated with the air
transportation industry, the Partnership does not believe this represents a
problem for the Partnership.
Allowance for Doubtful Accounts
The Partnership estimates collectibility of receivables 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
Investments in 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.
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.
32
ICON Income Fund Eight B L.P.
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(2) Summary of Significant Accounting Policies - continued
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.
Equipment Held for Sale or Lease
Equipment held for sale or lease is recorded at the lower of cost or fair
value expected to be realized upon sale or lease and consists of equipment
previously leased to end users which has been returned to the Partnership
following lease expiration.
Estimated Unguaranteed Residual Values
The Partnership carries its estimated unguaranteed residual values at the
estimated recovered cost at lease termination. The value is equal to or
less than market value, and is subject to the Partnership's policy relating
to impairment review.
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.
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 over the term of the lease using the
effective interest rate method.
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 rental income is the difference between
the timing of the cash payments and the rentals recognized on a straight line
basis.
33
ICON Income Fund Eight B L.P.
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(2) Summary of Significant Accounting Policies - continued
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 non-recourse notes payable
at December 31, 2004 is approximately $79,029,000.
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 consolidated financial statements.
Reclassifications
Certain reclassifications have been made to the accompanying consolidated
financial statements in prior years to conform to the current presentation.
34
ICON Income Fund Eight B L.P.
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(3) Joint Ventures
The Partnership and its affiliates, entities also 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 four joint ventures described below are majority owned and
consolidated with the Partnership.
ICON Cheyenne LLC
The Partnership and three affiliates, ICON Cash Flow Partners L.P. Six
("L.P. Six"), ICON Cash Flow Partners L.P. Seven ("L.P. Seven") and ICON Income
Fund Eight A L.P. ("Fund Eight A") 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.
On September 23, 2004, L.P. Seven assigned 9.04% of its interest in ICON
Cheyenne to the Partnership for $204,384, thereby increasing the Partnership's
ownership in ICON Cheyenne to 96.73%. This assignment was made in order for L.P.
Seven to repay its outstanding debt obligation to the Partnership as required by
the Contribution Agreement (See Note 10). This amount represented L.P. Seven's
proportionate fair value of L.P. Seven's interest in ICON Cheyenne at September
23, 2004. The fair value was determined using discounted cash flow projections
for ICON Cheyenne's portfolio.
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.
ICON Aircraft 24846 LLC
The Partnership and two affiliates, L.P. Seven and Fund Eight A 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, L.P. Seven and Fund Eight A had ownership interests of
96.0%, 2.0% and 2.0%, respectively, in ICON Aircraft 24846.
35
ICON Income Fund Eight B L.P.
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(3) Joint Ventures - continued
The aircraft was sold on July 29, 2004 and ICON Aircraft 24846 recognized
an impairment loss on the sale of approximately $601,800. 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.
ICON Aircraft 47820 LLC
The Partnership and an affiliate, ICON Income Fund Nine LLC, ("Fund Nine"),
formed, ICON Aircraft 47820 LLC ("ICON 47820") for the purpose of acquiring an
investment in a McDonnell Douglas DC 10-30F aircraft on lease to Federal Express
Corporation ("FedEx"). The aircraft owned by ICON 47820 was acquired with cash
and the assumption of non-recourse debt. The Partnership and Fund Nine have
ownership interests of 90% and 10%, respectively, in ICON 47820. The lender has
a security interest in the aircraft and an assignment of the rental payments
under the lease. The lease is scheduled to expire in March 2007, at which time
the final lease payment of $2,916,523 will be used to repay the remaining
balance of the outstanding non-recourse debt. The outstanding balance of the
non-recourse debt secured by this aircraft, at December 31, 2004, was
$13,877,166.
ICON SPK 2023-A, LLC
The Partnership and an affiliate, Fund Nine, formed ICON SPK 2023-A LLC
("SPK 2023-A") for the purpose of acquiring and managing a portfolio of
equipment leases consisting of material handling, telecommunication and computer
equipment. The original transaction involved acquiring a portfolio of 32 leases,
of which 17 remain active with lease expiration dates at various dates through
April 2008.
On December 1, 2004, Fund Nine transferred 25.87% of its ownership interest
in SPK 2023-A with the Partnership for the Partnership's entire 5% ownership
interest in ICON/Kenilworth LLC (See below). The Partnership and Fund Nine
entered into this transaction in order to minimize the New Jersey State income
tax obligations of the Partnership. After the exchange, the Partnership has a
74.87% ownership interest in SPK 2023-A and has no ownership interest in
ICON/Kenilworth LLC. The General Partner computed the fair value of the
ICON/Kenilworth LLC interest and the SPK 2023-A interest based upon their
knowledge of current market conditions and a recent appraisal received for
ICON/Kenilworth LLC.
The four 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.
36
ICON Income Fund Eight B L.P.
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(3) Joint Ventures - continued
ICON Aircraft 126, LLC
The Partnership and an affiliate, Fund Nine, formed ICON Aircraft 126 LLC
("ICON 126") for the purpose of acquiring all of the outstanding shares of Delta
Aircraft Leasing Limited ("D.A.L."), a Cayman Islands registered company, which
owns, through an Owner Trust, an Airbus A340-313X aircraft which is on lease to
Cathay Pacific through March 2006. The Partnership and Fund Nine each have
ownership interests of 50% in ICON 126. ICON 126 consolidates the financial
position and operations of D.A.L. in its financial statements.
The aircraft is subject to non-recourse debt provided by unaffiliated
lenders. The outstanding balance of the non-recourse debt secured by this
aircraft at December 31, 2004 was $58,587,566.
Information as to the financial position and results of operations of ICON
126 at December 31, 2004 and 2003 and for the years ended December 31, 2004 and
2003 are summarized below:
December 31,
2004 2003
------------- -------------
Assets $ 66,651,934 $ 70,492,181
============= =============
Liabilities $ 58,885,070 $ 63,351,443
============= =============
Equity $ 7,766,864 $ 7,140,738
============= =============
Partnership's share of equity $ 3,883,432 $ 3,570,369
============= =============
Years Ended December 31,
2004 2003
------------- -------------
Net income $ 626,126 $ 406,482
============= =============
Partnership's share of net income $ 313,063 $ 203,240
============= =============
ICON/Kenilworth LLC
The Partnership and an affiliate, Fund Nine formed ICON/Kenilworth LLC
("Kenilworth") for the purpose of acquiring a natural gas-fired 25MW
co-generation facility on lease to Schering-Plough for cash and non-recourse
debt. The base lease for the co-generation facility expired in July 2004 and has
been extended until 2009. The outstanding balance of the non-recourse debt was
fully repaid at the end of the base lease term in July 2004.
Under the terms of the lease extension the lessee's rent is, in part,
contingent upon the price of natural gas. If the price of natural gas is equal
to or greater than $4.50 per mmbtu then the lessee's rent shall be the lesser of
the lessee's excess cash, as defined in the lease or the base renewal rent which
is $250,000 per quarter. If the price of natural gas is equal to $4.00 per mmbtu
but less than $4.50 per mmbtu, then the lessee's rent shall be equal to the base
renewal rent plus the first gas price bonus, as defined in the lease. If the
price of natural gas is less than $4.00 per mmbtu, then the lessee's rent shall
be equal to the base renewal rent plus other incentives and a second gas price
bonus, as defined in the lease. In accordance with accounting principles
generally accepted in the United States of America, Kenilworth will not accrue
contingent rental income until such time as the payment becomes due.
37
ICON Income Fund Eight B L.P.
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(3) Joint Ventures - continued
On December 1, 2004, the Partnership transferred its entire 5% ownership
interest in Kenilworth to an affiliate, Fund Nine (See above).
Information as to the financial position and results of operations of
ICON/Kenilworth LLC at December 31, 2004 and 2003 and for the years ended
December 31, 2004 and 2003 are summarized below:
December 31,
2004 2003
------------- -------------
Assets $ 9,434,526 $ 11,560,675
============= =============
Liabilities $ 249,998 $ 2,168,837
============= =============
Equity $ 9,184,528 $ 9,391,838
============= =============
Partnership's share of equity $ - $ 469,591
============ =============
Years Ended December 31,
2004 2003
------------- -------------
Net (loss) income $ (81,639) $ 863,127
============= =============
Partnership's share of net income (loss) $ 689 $ 43,156
============= =============
Distributions $ 125,671 $ 519,120
============= =============
Partnership's share of distributions $ 6,284 $ 25,956
============= =============
Gain on exchange of equity interests $ 463,996 $ -
============= =============
ICON Aircraft 46835, LLC
The Partnership and an affiliate, Fund Nine, formed ICON Aircraft 46835,
LLC ("ICON 46835") for the purpose of acquiring an investment in a McDonnell
Douglas DC-10-30F aircraft on lease to FedEx. The Partnership and Fund Nine have
ownership interests of 15% and 85%, respectively. ICON 46835 acquired the
aircraft subject to the lease with cash and the assumption of non-recourse debt.
The lender has a security interest in the aircraft and an assignment of the
rental payments under the lease. The lease is scheduled to expire in March 2007,
at which time the final lease payment of $2,708,000 will be used to repay the
remaining outstanding balance of the non-recourse debt. The outstanding balance
of the non-recourse debt at December 31, 2004 was $12,883,336.
Information as to the financial position and results of operations of ICON
46835 at December 31, 2004 and 2003 and for the years ended December 31, 2004
and 2003 is summarized below:
December 31,
2004 2003
------------- -------------
Assets $ 16,229,899 $ 21,113,830
============ =============
Liabilities $ 12,205,100 $ 17,316,827
============ =============
Equity $ 4,024,799 $ 3,797,003
============ =============
Partnership's share of equity $ 603,720 $ 569,551
============ =============
Years Ended December 31,
2004 2003
------------- -------------
Net income $ 227,796 $ 28,542
============= =============
Partnership's share of net income $ 34,169 $ 4,282
============= =============
38
ICON Income Fund Eight B L.P.
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(3) Joint Ventures - continued
North Sea (Connecticut) Limited Partnership
On November 24, 2004, in consideration for a $810,000 obligation payable to
the Partnership, which arose as part of the Comerica Bank Contribution Agreement
(See Note 10), L.P. Seven assigned to the Partnership, a 3.24% interest in the
profits, losses and future cash flows of North Sea (Connecticut) Limited
Partnership ("North Sea"). North Sea owns a 50% interest in a mobile offshore
drilling rig, subject to lease with Rowan Companies, Inc. 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, in consideration for a $672,992 obligation payable to
the Partnership which arose as part of the Comerica Bank Contribution Agreement
(See Note 10), L.P. Seven assigned to the Partnership an additional 2.69%
interest in the profits, losses and future cash flows of North Sea. After this
transaction the Partnership has a 5.93% interest in the profits, losses and
future cash flows of North Sea. The fair value of the mobile offshore drilling
rig was determined using an independent third party appraisal and cash flow
analysis.
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 (deficit) $ (6,664,405) $ (9,735,265)
============ =============
Partnership's share of equity (a) $ 136,576 $ -
============ =============
Years Ended December 31,
2004 2003
------------- -------------
Net income $ 3,070,860 $ 2,743,802
============= =============
Partnership's share of net income $ 4,146 $ -
============= =============
(a) During the year ended December 31, 2002, all equity distributions were
allocated to the co-venturer.
(4) Investments in Finance Leases
The Partnership has an investment in finance leases with Regus Business
Center Corp. ("Regus"), which leases office, telecommunications and computer
equipment from the Partnership as a direct finance lease since August of 2000.
Regus filed for bankruptcy protection under Chapter 11 of the United States
bankruptcy code on January 14, 2003. The Partnership had been negotiating an
amended lease with Regus which was approved when Regus emerged from bankruptcy
protection. Under the revised lease agreement, Regus commenced making payments
at a reduced rental rate, with an extension for 48 months, effective from March
15, 2003. At December 31, 2004, Regus was current on its payments under the
revised lease agreement.
39
ICON Income Fund Eight B L.P.
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(4) Investments in Finance Leases - continued
The Partnership also has an investment in finance leases consisting of 179
Noritsu Optical/Digital photo processing mini-labs subject to lease with K-Mart.
The lease expiration dates range between April 30, 2006 to January 31, 2007.
On January 22, 2002, K-Mart Corporation ("K-Mart") and its affiliate
debtors filed a voluntary petition in the United States Bankruptcy Court for the
Eastern District of Illinois seeking relief under Chapter 11 of the United
States Bankruptcy Code. The Partnership is the lessor of 179 Noritsu
Optical/Digital photo processing mini-labs located at Kmart retail locations
throughout the country.
The General Partner has been negotiating with K-Mart in an attempt to enter
into a stipulation agreement with K-Mart in the near future wherein K-Mart would
affirm four of the five equipment lease schedules covering the Noritsu mini-labs
they have leased from us. As part of the settlement, Kmart would also agree to
reimburse us for approximately $200,000 in overdue property tax payments made by
the Partnership. Although K-Mart emerged from Chapter 11 during 2004, the
Bankruptcy Court has retained jurisdiction over this matter.
While the Partnership expects to prevail in this matter, there is no
certainty of the outcome and therefore the Partnership may be adversely affected
by an unfavorable decision of the Bankruptcy Court. At December 31, 2004, K-Mart
was current on their rental payments for four of the five equipment lease
schedules.
Non-cancelable minimum annual amounts due on finance leases are as
follows at December 31, 2004:
Year Ending
December 31,
2005 $ 6,373,338
2006 3,623,305
2007 444,287
-------------
$ 10,440,930
An allowance for doubtful accounts relating to minimum rents receivable
from K-Mart Corporation consisted of the following at December 31:
2004 2003 2002
------------- ------------- -------------
Balance, beginning of year $ - $ - $ -
Bad debt expense (411,742) - -
------------- ------------- -------------
Balance, end of year $ (411,742) $ - $ -
============ ============= =============
40
ICON Income Fund Eight B L.P.
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(5) Investments in Operating Leases
The investments in operating leases consisted of the following at December
31:
2004 2003 2002
--------------- ---------------- ---------------
Equipment at cost, beginning of year $ 148,112,061 $ 166,325,943 $ 95,156,568
Equipment acquisitions - 27,287,644 75,263,566
Initial direct costs - 818,629 2,242,352
Equipment assumed from joint venture 4,506,983 - -
Transfer of equipment to held for sale
or lease - (44,515,416) -
Equipment dispositions (13,333,475) (1,804,739) (6,336,543)
-------------- --------------- ---------------
Equipment, end of year 139,285,569 148,112,061 166,325,943
--------------- ---------------- ---------------
Impairments, beginning of year - - -
Impairment loss (1,200,000) - -
--------------- ---------------- ---------------
Impairments, end of year (1,200,000) - -
--------------- ---------------- ---------------
Equipment at cost, end of year 138,085,569 148,112,061 166,325,943
--------------- ---------------- ---------------
Accumulated depreciation, beginning of year (31,289,197) (23,591,192) (11,456,484)
Accumulated depreciation on equipment
dispositions 7,562,450 1,113,221 2,036,346
Accumulated depreciation on equipment
assumed from joint venture (2,578,304) - -
Accumulated depreciation transferred
to held for sale or lease - 8,085,237 -
Depreciation expense (13,292,285) (16,896,463) (14,171,054)
-------------- --------------- --------------
Accumulated depreciation, end of year (39,597,336) (31,289,197) (23,591,192)
--------------- --------------- --------------
Net investment in operating leases, end of year $ 98,488,233 $ 116,822,864 $ 142,734,751
=============== ================ ===============
The management of the Partnership received an appraisal on equipment held
in one of its majority owned joint ventures, which was less than its originally
estimated salvage value. A decision was made to record an impairment loss for
$1,200,000 at December 31, 2004 to more closely approximate the current fair
market value of the equipment.
Non-cancelable minimum annual rentals due from investments operating
leases are as follows at December 31, 2004:
Year Ending
December 31,
2005 $ 18,838,325
2006 $ 8,930,021
2007 $ 3,736,713
2008 $ 319,088
41
ICON Income Fund Eight B L.P.
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(6) Equipment Held for Sale or Lease
Equipment held for sale or lease consisted of a Boeing 767-300ER held in
ICON Aircraft 24846 and manufacturing and production equipment held in ICON
Cheyenne with net book values of $36,430,179 and $311,669 at December 31, 2003,
respectively. The Partnership disposed of the aircraft and equipment during 2004
and recorded an impairment loss of approximately of $601,788 for the year ended
December 31, 2004.
(7) Investment in Unguaranteed Residual Values
During the year ended December 31, 2001, the Partnership acquired residual
interests in a portfolio of technology and other equipment leases for
$2,406,128. Leases in this portfolio have expiration dates through March 2005.
The Partnership has received $756,903, $1,933,003 and $63,539 in proceeds from
sales of these interests for the years ended December 31, 2004, 2003 and 2002.
The Partnership recognized a gain $347,317 from this investment for the year
ended December 31, 2004.
(8) Investment in Option
During the fourth quarter of 2001, the Partnership invested $2,100,000
(including $900,000 in acquisition fees paid to the General Partner) for an
option to purchase a Boeing 737-524 aircraft on lease to a United States based
commercial airline. The purchase price of the option included an 8.5% $400,000
promissory note which was to mature in May 2012. On August 29, 2003, the
promissory note was paid in full with accreted interest.
The exercise price decreases according to a predetermined schedule over the
term of the option from $30 million in 2001 to $9 million in 2012. The option
expires in 2012.
(9) Notes Payable - Non-Recourse
Notes payable - non-recourse are being paid directly to the lenders by the
lessees and accrue interest at rates ranging from 4.035% per annum to 10.05% per
annum. The outstanding balances of the notes payable at December 31, 2004 and
2003 were $83,080,022 and $132,938,722, respectively. During the year ended
December 31, 2004 the Partnership retired $34,491,632 of its non-recourse notes
payable relating to the sale of an aircraft as discussed in Note 3.
Principal maturities of the Partnership's notes payable - non-recourse
consisted of following at December 31, 2004:
Year Ending
December 31,
2005 $ 18,791,909
2006 61,403,259
2007 2,884,854
============
$ 83,080,022
============
42
ICON Income Fund Eight B L.P.
(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,
specifically; L.P. Seven; Fund Eight A L.P. 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 money from Comerica Bank with all
borrowings to be jointly and severally collateralized by (i) cash and (ii) the
present values of certain rents receivable and equipment owned by the Initial
Funds. Effective August 5, 2004, the line of credit agreement was amended to add
ICON Income Fund Ten, LLC ("Fund Ten") as a borrower. The Initial Funds and Fund
Ten are collectively referred to as the Borrower. On December 6, 2004, the Loan
and Security Agreement with Comerica Bank was extended to December 30, 2005.
The Initial Funds previously entered into a Contribution Agreement dated as
of May 30, 2002, as amended to include Fund Ten (the "Contribution Agreement").
In accordance with the terms of 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 Borrower would be unable to repay its allocable portion of its outstanding
obligation at any time, including restrictions on any Borrower borrowing in
excess of the lesser of (a) an amount each Borrower could reasonably expect to
repay in one year from 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 Borrower, and (ii) 50% of the net worth of such Borrower. The Contribution
Agreement also provides that, in the event a Borrower pays an amount under the
agreement in excess of its allocable share of the obligations under the
agreement whether by reason of an Event of Default or otherwise, the other
Borrowers will promptly make a contribution payment to the paying Borrower in
such amount that the aggregate amount paid by each Borrower reflects its
allocable share of the aggregate obligations under the agreement. The Initial
Funds' obligations to each other under the Contribution Agreement are
collateralized by a subordinate lien on the assets of each participating
Borrower. In order to facilitate Fund Ten's addition to the Contribution
Agreement, the Borrowers entered into a Second Amended and Restated Contribution
Agreement effective as of August 5, 2004. The Second Amended and Restated
Contribution Agreement contains substantially identical terms and limitations as
did the original Contribution Agreement.
During 2004 and 2005, the Partnership paid Comerica Bank a portion of the
outstanding obligations of L.P. Seven. As required under the terms of the
Contribution Agreement, L.P. Seven was required to promptly repay the
Partnership for amounts paid on L.P. Seven's behalf. Since L.P. Seven did not
have sufficient liquidity to repay the Partnership, L.P. Seven assigned its
interests in certain joint venture investments as full repayment of monies due
to the Partnership (See Note 3).
At December 31, 2004, the Partnership had $3,225,000 outstanding under the
Loan Agreement. The aggregate borrowing by all Funds under the Loan Agreement
was $10,272,992 at December 31, 2004.
Effective March 8, 2005, the Borrowers and Comerica Bank entered into a
Seventh Amendment to the Loan and Security Agreement. This Agreement releases
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.
43
ICON Income Fund Eight B L.P.
(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 Federal income tax purposes
and as such no provision for income taxes has been recorded by the Partnership
since the liability for such taxes is the responsibility 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 taxes of the partners.
At December 31, 2004, the partners' capital accounts included in the
consolidated financial statements totaled $29,597,291 compared to the partners'
capital accounts for Federal income tax purposes of $25,395,933 (unaudited). The
differences arise primarily from commissions reported as a reduction in the
partners' capital accounts for 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 for financial statement reporting
purposes to the net loss for Federal income tax purposes as follows:
Years Ended December 31,
------------------------------------------------
2004 2003 2002
------------- ------------- -------------
Net loss per consolidated financial statements $(4,609,006) $ (5,181,209) $ (136,897)
Differences due to:
Direct finance leases 4,397,303 5,169,677 (1,203,869)
Depreciation and impairments 9,137,941 5,515,307 (765,632)
Tax loss from joint venture 1,238,676 (5,022,993) 1,053,874
Rent - consolidated joint venture (14,686,229) (14,628,970) (11,871,292)
Interest expense - consolidated joint venture 4,463,799 5,229,339 5,151,595
Loss (gain) on sale of equipment (185,056) (267,320) -
Other 2,375,505 1,260,957 267,647
------------- ------------- -------------
Net Income (loss) for Federal income tax purposes $ 2,132,933 $ (7,925,212) $ (7,504,574)
============= ============= ==============
(12) Limited Partnership Redemptions
The General Partner consented to the Partnership redeeming 2,212.05 and
2,954.46 limited Partnership units for the years ended December 31, 2004, 2003,
respectively. 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
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 and (ii) acquisition fees of 3% calculated based on the gross
value of the transactions. In addition, the General Partner is reimbursed for
administrative expenses incurred in connection with the Partnership's
operations.
44
ICON Income Fund Eight B L.P.
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(13) Transactions with Related Parties - continued
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
------------- ------------- -------------
Acquisition fees $ - $ 736,766 $ 3,498,611
Management fees 1,500,347 2,008,870 2,137,679
Administrative expense
reimbursements 862,030 936,605 966,832
------------- ------------- -------------
$ 2,362,377 $ 3,682,241 $ 6,603,122
============= ============= =============
The Partnership has a net payable in the amount of $155,472 due to the
General Partner and affiliates at December 31, 2004. The Partnership owed the
General Partner $76,895 for unpaid administrative expense reimbursements for the
year ended December 31, 2004. The Partnership owned Fund Nine $92,648 for
advances made during prior years. The Partnership has a net receivable due from
the General Partner and affiliates of $68,967 at December 31, 2003, for its
share of distribution and rental payments received on behalf of the Partnership.
Included in this amount is a payable of $6,650 to the General Partner.
(14) Concentration Risks
The Partnership's cash and cash equivalents are held principally at one
financial institution and at times may exceed insured limits.
The Partnership has approximately 79% of its assets and 84% of its
liabilities concentrated in the airline industry at December 31, 2004.
For the year ended December 31, 2004, the Partnership had three leases that
accounted for 87% of total revenue. For the year ended December 31, 2003, the
Partnership had three leases which accounted for 78% of total revenue. For the
year ended December 31, 2002, the Partnership had three leases that accounted
for 65% of total revenue.
(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 $ 5,018,539 $ 5,302,262 $ 4,641,540 $6,629,456
============ =========== =========== ==========
Net loss allocable to limited partners $ (2,274,941) $(1,535,059) $ (549,486) $ (203,430)
============ =========== =========== ==========
Net loss per weighted average
limited partnership units $ (3.05) $ (2.06) $ (0.74) $ (0.28)
============ =========== =========== ==========
45
ICON Income Fund Eight B L.P.
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(15) Selected Quarterly Financial Data (Unaudited) - continued
Quarters Ended in 2003
--------------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
Revenue $6,335,000 $ 6,170,231 $ 6,076,732 $ 6,568,124
========== =========== ============ ===========
Net loss allocable to limited partners $ (519,554) $(1,679,164) $ (2,305,047) $ (625,632)
========== =========== ============ ===========
Net loss per weighted average
limited partnership units $ (0.69) $ (2.25) $ (3.09) $ (0.83)
========== =========== ============ ===========
46
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.
47
PART III
Item 10. Directors and Executive Officers of the Registrant's General Partner
The General Partner, 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 its 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 manager of our business is the General Partner. 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 the equipment of the Partnership. 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.
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.
48
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 Acquisition fees $ - $ 736,766 $ 3,498,611
============= ============= ==============
ICON Capital Corp. General Partner Management fees $ 1,500,347 $ 2,008,870 $ 2,137,679
============= ============= ==============
ICON Capital Corp. General Partner Administrative fees $ 862,030 $ 936,605 $ 966,832
============= ============= ==============
The General Partner also has a 1% interest in our profits and
distributions. We paid distributions to the General Partner of $60,155, $70,347
and $81,384, respectively, for the years ended December 31, 2004, 2003 and 2002.
Additionally, the General Partner's interest in our net loss was $46,090,
$51,812 and $1,369, respectively, for the years ended December 31, 2004, 2003
and 2002.
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 13 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 $ 64,100 $ 55,000
Audit related fees - -
Tax fees (for compliance) 24,495 2,475
------------- -------------
$ 88,595 $ 57,475
============= =============
49
PART IV
Item 15. Exhibits, 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 - The following exhibits are incorporated herein by reference:
(i) Form of Dealer-Manager Agreement (Incorporated by reference to Exhibit 1.1
to Amendment No. 1 to Form S-1 Registration Statement No. 33-36376 filed with
the Securities and Exchange Commission on November 9, 1993)
(ii) Form of Selling Dealer Agreement (Incorporated by reference to Exhibit 1.2
to Amendment No. 1 to Form S-1 Registration Statement No. 33-36376 filed with
the Securities and Exchange Commission on November 9, 1993)
(iii) Amended and Restated Agreement of Limited Partnership (Incorporated herein
by reference to Exhibit A to Amendment No. 1 to Form S-1 Registration Statement
No. 33-36376 filed with the Securities and Exchange Commission on November 9,
1993)
(iv) Unconsolidated Joint Venture Financial Statements for ICON Receivables 97-A
LLC - at and for the year ended December 31, 2002; ICON/AIC Trust - at and for
the year ended December 31, 2002 and ICON Cheyenne LLC - at and for the year
ended December 31, 2002 incorporated herein by reference to the Form 10-K No.
0-28136.
(v) 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) Reports on Form 8-K None (c) Exhibits
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.
50
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 Income Fund Eight B
L.P. File No. 333-37504 (Registrant) 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 have 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 limited partners and a
copy will be forwarded to the Commission.
51
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 Income Fund Eight B
L.P.;
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 Corporate
Manager (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.
Manager of ICON Income Fund Eight B L.P.
52
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 Income Fund Eight B
L.P.;
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 Corporate
Manager (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.
Manager of ICON Income Fund Eight B L.P
53
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, in
connection with the Annual Report of ICON Income Fund Eight B L.P. (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.
Manager of ICON Income Fund Eight B L.P.
54
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, in connection with the Annual Report of ICON Income Fund Eight
B L.P. (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.
Manager of ICON Income Fund Eight B L.P.
55
ICON Aircraft 126 LLC
(A Delaware Limited Liability Company)
Consolidated Financial Statements
December 31, 2004
(With Independent Auditor's Report Thereon)
ICON Aircraft 126 LLC
Table of Contents
Independent Auditor's Report 1
Consolidated Balance Sheet at December 31, 2004 2
Consolidated Statement of Income and Changes in
Members' Equity for the year ended December 31, 2004 3
Consolidated Statement of Cash Flows for the year ended December 31, 2004 4
Notes to Consolidated Financial Statements 5 - 7
INDEPENDENT AUDITOR'S REPORT
The Partners
ICON Aircraft 126 LLC
We have audited the consolidated balance sheet of ICON Aircraft 126 LLC and
subsidiary as of December 31, 2004, and the related consolidated statements of
income, changes in members' equity, and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based upon our audit.
We conducted our audit 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
audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ICON
Aircraft 126 LLC and subsidiary as of December 31, 2004, and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ Hays & Company LLP
March 14, 2005
New York, New York
1
ICON Aircraft 126 LLC
(A Delaware Limited Liability Company)
Consolidated Balance Sheet
December 31, 2004
ASSETS
Investment in operating lease:
Equipment, at cost $ 77,523,584
Accumulated depreciation (12,116,200)
-----------------
Total investment in operating lease 65,407,384
Other assets 1,244,550
-----------------
Total assets $ 66,651,934
=================
LIABILITIES AND MEMBERS' EQUITY
Notes payable - non-recourse $ 58,587,566
Accrued interest payable 289,474
Other liabilities 8,030
-----------------
Total liabilities 58,885,070
Commitments and contingencies
Members' equity 7,766,864
-----------------
Total liabilities and members' equity $ 66,651,934
=================
See accompanying notes to consolidated financial statements.
2
ICON Aircraft 126 LLC
(A Delaware Limited Liability Company)
Consolidated Statement of Income and Changes in Members' Equity
Year Ended December 31, 2004
Revenue:
Rental income $ 8,340,000
-----------------
Expenses:
Depreciation expense 4,325,287
Interest expense 3,332,187
Amortization of loan origination fees 56,400
-----------------
Total expenses 7,713,874
-----------------
Net income 626,126
Members' equity, beginning of year 7,140,738
-----------------
Members' equity, end of year $ 7,766,864
=================
See accompanying notes to consolidated financial statements.
3
ICON Aircraft 126 LLC
(A Delaware Limited Liability Company)
Consolidated Statement of Cash Flows
Year Ended December 31, 2004
Cash flows from operating activities:
Net income $ 626,126
Adjustments to reconcile net income to
net cash provided by operating activities:
Rental income paid directly to lenders by lessees (8,340,000)
Depreciation expense 4,325,287
Interest expense on non-recourse financing paid directly
to lender by lessee 3,042,713
Accrued interest expense 289,474
Amortization of loan origination fees 56,400
---------------
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 operating lease paid directly to lender by lessee $ 8,340,000
===============
See accompanying notes to consolidated financial statements.
4
ICON Aircraft 126 LLC
(A Delaware Limited Liability Company)
Notes To Consolidate Financial Statements
December 31, 2004
(1) Organization
ICON Aircraft 126 LLC (the "Company") was formed March 4, 2002 as a
Delaware limited liability company. The Company is a joint venture between two
affiliates; ICON Income Fund Eight B L.P. ("Fund Eight B"), and ICON Income Fund
Nine LLC ("Fund Nine"). Fund Eight B and Fund Nine each have a 50% ownership
interest in the Company's profits, losses, cash distributions and distribution
proceeds are allocated equally to Fund Eight B and Fund Nine.
The primary business purpose of the Company was to acquire all of the
outstanding shares of Delta Aircraft Leasing Limited ("D.A.L."), a Cayman
Islands registered company, which owns, through an Owner Trust, an Airbus
A340-313X aircraft which is on lease to Cathay Pacific through March 2006. The
stock was acquired as of March 4, 2002 for a total purchase price of $75,287,782
which was comprised of $4,250,000 in cash and the assumption of $71,037,782 of
non-recourse debt. The lenders have a security interest in the aircraft and an
assignment of the rentals under the lease.
The general partner/Manager of the both the Company's members is ICON
Capital Corp. (the "Manager"), a Connecticut corporation. The Manager manages
and controls the business affairs of the Company's assets under the terms of
separate management agreements with Fund Eight B and Fund Nine. The Company paid
the Manager $2,235,802 in acquisition fees in connection with the acquisition of
the D.A.L. shares.
(2) Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All intercompany accounts and transactions have
been eliminated in consolidation.
Investment 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.
Asset Impairments
The Company'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 Company 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.
5
ICON Aircraft 126 LLC
(A Delaware Limited Liability Company)
Notes To Consolidate Financial Statements
December 31, 2004
(2) Summary of Significant Accounting Policies - continued
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
The Company is taxed as a partnership for Federal income tax reporting
purposes. No provision for income taxes has been recorded since the liability
for such taxes is that of each member rather than the Company. The Company'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
members.
Revenue Recognition
The Company leases its equipment to a single lessee and accounts for this
lease as an operating lease. Initial direct costs of $2,235,802 have been
capitalized as a component of the cost of the equipment and are being
depreciated.
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 Company'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 Company's non-recourse notes payable at
December 31, 2004 is approximately $57,989,000.
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.
6
ICON Aircraft 126 LLC
(A Delaware Limited Liability Company)
Notes To Consolidate Financial Statements
December 31, 2004
(2) Summary of Significant Accounting Policies - continued
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 consolidated financial statements.
(3) Investment in Operating Leases
The Company's sole asset is its investment in an Airbus 340-313Y aircraft
on lease to Cathay Pacific through March 2006. The current lease provides for
annual rents of $8,340,000.
Non-cancelable minimum annual amounts due on the investment in operating
lease is as follows at December 31, 2004:
Year Ending
December 31,
------------------
2005 $ 8,340,000
2006 $ 2,085,000
(4) Note Payable - Non-Recourse
The note payable - non-recourse is being paid directly to the lender by the
lessee, is due during March 2006, with a $52,850,000 balloon payment due at
maturity and accrues interest at 5.39% per annum.
Principal maturities of the Company's note payable - non-recourse consist
of following at December 31, 2004:
Year Ending
December 31,
-------------------
2005 $ 4,713,407
2006 53,874,159
-------------
$ 58,587,566
=============
7