UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2004
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
Commission File Number 33-94458
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ICON Cash Flow Partners L.P. Seven
(Exact name of registrant as specified in its charter)
Delaware 13-3835387
- -------------------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 Fifth Avenue, 10th floor, New York, New York 10011
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 418-4700
-----------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: Units of limited partnership interests
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) [ ] Yes [X] No
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last day of the registrant's most recently completed second fiscal quarter:
Not applicable. There is no established market for units of the registrant.
Table of Contents
Item
PART I
1. Business 3-6
2. Properties 7
3. Legal Proceedings 7
4. Submission of Matters to a Vote of Security Holders 7
PART II
5. Market for the Registrant's Securities and Related Security Holder Matters 8
6. Selected Consolidated Financial Data 9
7. General Partner's Discussion and Analysis of Financial Condition and
Results of Operations 10
7A. Qualitative and Quantitative Disclosures About Market Risk 22
8. Consolidated Financial Statements 23
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 50
9A. Controls and Procedures 50
9B. Other Information 50
PART III
10. Directors and Executive Officers of the Registrant's General Partner 50
11. Executive Compensation 51
12. Security Ownership of Certain Beneficial Owners and Management 52
13. Certain Relationships and Related Transactions 52
14. Principal Accountant Fees and Services 52
PART IV
15. Exhibits, Financial Statement Schedules 53
SIGNATURES 54
Certifications 55-58
2
PART I
Item 1. Business
General Development of Business
ICON Cash Flow Partners L.P. Seven (the "Partnership") was formed on May
23, 1995 as a Delaware limited partnership. When used in this report, the terms
"we" "us" and "our" refers to the Partnership.
Our maximum offering was $100,000,000 and we commenced business operations
on our initial closing date, January 19, 1996 with the admission of 26,367.95
limited partnership units at $100 per unit representing $2,636,795 of capital
contributions. Between January 20, 1996 and September 16, 1998 (the final
closing date) 973,628.86 additional units were admitted representing $97,362,886
of capital contributions bringing the total admission to 999,996.81 limited
partnership units aggregating $99,999,681 in capital contributions. From 1997
through 2004, we redeemed 12,449.00 limited partnership units leaving 987,547.81
limited partnership units outstanding at December 31, 2004.
Our General Partner is ICON Capital Corp. (the "General Partner"), a
Connecticut corporation. The General Partner manages and controls the business
affairs of our equipment leases and financing transactions under the terms of a
management agreement with us.
Segment Information
We have only one operating segment: the business of acquiring equipment
subject to leases with companies that we believe to be creditworthy.
Narrative Description of Business
We are an equipment leasing income fund. Our principal investment objective
is to obtain the maximum economic return from our investments for the benefit of
our partners. To achieve this objective we have: (i) acquired a diversified
portfolio of equipment leases and financing transactions; (ii) made monthly cash
distributions to our partners commencing with each partner's admission, (iii)
re-invested substantially all undistributed cash from operations and cash from
sales of equipment and financing transactions during the reinvestment period;
and (iv) commenced the disposition period and begun to sell our investments and
distribute the cash from sales of such investments to our partners.
Our reinvestment period ended on November 9, 2002. During the disposition
period, we have and will continue to distribute substantially all distributable
cash from operations and equipment sales to the partners and continue the
orderly termination of our operations and affairs. We will not invest in any
additional finance or lease transactions during the disposition period.
At December 31, 2004 and 2003, we had total assets of $13,849,239 and
$52,063,556, respectively. During the year ended December 31, 2004, our total
revenue was $2,677,226, which was derived principally from two leases which
accounted for approximately 48% of our rental revenue. We incurred a net loss
for the year ended December 31, 2004 of $10,242,220. For the year ended December
31, 2003, our total revenue was $1,576,532, which was derived principally from
three leases which accounted for approximately 41% of our rental revenue. We
incurred a net loss for the year ended December 31, 2003 of $17,300,236. For the
year ended December 31, 2002, our total revenue was $8,326,025, which was
derived principally from three leases which accounted for approximately 61% of
our rental revenue. We incurred a net loss for the year ended December 31, 2002
of $3,661,408.
We have no direct employees. The General Partner has full and exclusive
control over our management and operations.
3
Our Competition
The equipment leasing industry is highly competitive. When seeking leasing
transactions for acquisition or sale, we compete with leasing companies,
manufacturers that lease their products directly, equipment brokers and dealers
and financial institutions, including commercial banks and insurance companies.
Many competitors are larger than us and have greater financial resources than we
do.
Lease Transactions
During the years ended December 31, 2004 and 2003 we did not purchase any
additional equipment. We entered into the following lease modifications,
assignments and sales for the years ended December 31, 2004 and 2003, as
follows:
Sale of CSK Auto Lease
During June 2004, we sold equipment which had been on lease to CSK Auto,
Inc. CSK Auto, Inc. had made 60 scheduled payments totaling approximately
$138,000. We recognized a gain of approximately $10,000 on this sale.
Sale of 1979 McDonnell Douglas DC-10-30 Aircraft
We had an ownership interest in a DC-10-30 aircraft subject to a lease with
Federal Express Corporation which expired on July 2, 2004. The aircraft was
subject to non-recourse debt which had a balloon payment of approximately
$9,600,000 due at lease end. As required by the loan agreement, we entered into
a residual value insurance agreement (the "Residual Insurance Agreement") with
an unrelated third party. Under the terms of the Residual Insurance Agreement,
the insurer was required to pay the insured amount to the lender at the
expiration of the lease if the balloon payment was not made by us at lease end.
We were unable to make the required balloon payment when due nor were we able to
successfully refinance the debt. As a result, the insurer, pursuant to the terms
of the Residual Insurance Agreement, notified us of their intention to pay the
insured amount of $10,200,000 at lease end, resulting in title of the aircraft
transferring to the insurer. As a result, we received proceeds of $520,293, net
of the $9,679,707 paid to the non-recourse lender at lease end.
Sale of Boeing 767-300ER Aircraft
During July 2004, one of our joint ventures, ICON Aircraft 24846 LLC, sold
its only asset, a Boeing 767-300ER, which resulted in a realized net loss of
approximately $601,800, of which our share was approximately $12,000. The
General Partner had determined that it was in the best interest of ICON Aircraft
24846 LLC and its members to sell the Boeing 767-300ER aircraft to BTM Capital
Corp., the lender, for an amount equal to the then outstanding debt balance. The
decision to sell the aircraft was based, in part, on the following factors: (i)
the aircraft's current fair market value was estimated to be between $24,000,000
and $27,000,000 and the balance of the outstanding debt was $34,500,000; (ii)
any new lease for the aircraft would have required an additional $850,000 in
equity (at a minimum) in order to reconfigure the aircraft and upgrade the
engines; and (iii) if we were to continue to remarket the aircraft, the lender
would have required interest only payments of approximately $100,000 per month
until the aircraft was re-leased.
Lease Modification of 1976 McDonnell Douglas DC-10-30
We have an ownership interest in a 1976 McDonnell Douglas DC-10-30 (the
"Aircraft") on lease with World Airways, Inc. The lease was on a
"power-by-the-hour" basis until December 2004. Effective September 1, 2004, this
lease was modified to a fixed rental of $50,000 per month plus maintenance
reserves and the term was extended through September 2006. Aviation Investors,
Inc. ("Aviation"), an unrelated third party, who was the seller in the
acquisition of the Aircraft, has a Residual Sharing Agreement (the "Agreement")
in which Aviation is entitled to receive 50% of all residual proceeds of the
aircraft. Residual proceeds includes gross proceeds from any of the following;
sale, lease, renewal lease or extension or financing or refinancing of the
Aircraft and casualty payments. Such gross proceeds may be reduced, but not
below zero, for recovery expenses, remarketing expenses, any reasonable
out-of-pocket costs incurred by us and an amount calculated to provide us with a
consistent rate of return, as defined in the Agreement. Additionally, Aviation
has a management agreement with us to manage the operations of and to remarket
the Aircraft for sale or lease. For this service Aviation receives a monthly
management fee of $10,667.
There is a maintenance reserve of approximately $1,843,000 at December 31,
2004. If the maintenance reserves are not fully utilized any remaining monies
will be divided between the us and Aviation as stipulated in the Agreement.
4
Sale of Supply Vessels
We were the sole owner of five marine supply vessels originally on charter
to affiliates of Seacor Marine, Inc. (the "Vessels"). These Vessels were subject
to outstanding non-recourse debt with Fleet Capital Corp. ("Fleet"). During
September 2003, Fleet took control of the Vessels and commenced remarketing
efforts under the terms of their financing agreement with us. On May 12, 2004,
Fleet sold the Vessels, which resulted in aggregate sale proceeds of $3,580,000.
At the time of sale, the outstanding non-recourse debt relating to the Vessels
was $7,138,369; therefore all proceeds from the sale were used repay the
outstanding non-recourse notes. As a result of the sale of the Vessels, we
recorded a loss on lease termination of approximately $623,000, which
represented the Vessels net book value at that time.
We were the sole owner of two marine vessels originally on charter to
affiliates of Seacor Smit, Inc. These vessels were not subject to any
outstanding debt. On September 20, 2004 and again on October 10, 2004,
respectively, we sold the Gulf Pearl and Gulf Wind supply vessels, respectively,
to Gulf Ocean Marine Services, Inc. The sale price for each vessel was $500,000.
We realized a net loss of $790,420 from the sale of the vessel sold on September
20, 2004, which is included in gain (loss) on disposal of assets for the year
ended December 31, 2004 and we realized a net loss of $790,420 on the vessel
sold on October 10, 2004. We recorded as impairment loss for this amount in the
third quarter of 2004.
Sale of AZ3 Lease
During October 2004, title passed on material handling equipment on lease
to AZ3 after they made their final renewal lease payment in conjunction with a
lease which expired in July, 2002. We realized a net loss of approximately
$25,000.
Assignment of Interest in ICON Cheyenne
On September 23, 2004, we assigned 9.04% of our interest in ICON Cheyenne
LLC ("ICON Cheyenne") to ICON Income Fund Eight B L.P. ("Fund Eight B") for
$204,384, thereby decreasing our ownership in ICON Cheyenne to 1.27%. This
assignment was made in order for us to repay our outstanding debt obligation to
Fund Eight B as required by the Contribution Agreement, which is more fully
explained elsewhere in this document (See Financing and Borrowings located in
the Liquidity and Capital Resources section). This amount represented our
proportionate fair value of our interest in ICON Cheyenne at September 23, 2004.
The fair value was determined using discounted cash flow projections for ICON
Cheyenne's portfolio.
Assignment of Interest in ICON/Boardman Facility
On September 24, 2004, we assigned our entire .5025% ownership interest in
ICON BF to ICON Income Fund Eight A L.P. ("Fund Eight A") for $65,325, thereby
increasing Fund Eight A's ownership in ICON BF to 99.4975%. This assignment was
made in order for us to repay our outstanding debt obligation to Fund Eight A as
required by the Contribution Agreement, which is more fully explained elsewhere
in this document (Refer to Financing and Borrowings located in Liquidity and
Capital Resources section). This amount represented our fair value of L.P.
Seven's interest in ICON BF at September 24, 2004. This amount was determined to
represent the fair value of ICON BF based upon the expected net proceeds from
the sale of the coal handling facility.
Assignments of Rowan Cash Flow
On November 24, 2004, we assigned .8% of our interest in the profits,
losses and future cash flows of a mobile offshore drilling rig, subject to a
lease with Rowan Companies, Inc. to Fund Eight A for $200,000. This assignment
was made in order for us to repay our outstanding debt obligation to Fund Eight
A as required by the Contribution Agreement, which is more fully explained
elsewhere in this document (See Financing and Borrowings located in the
Liquidity and Capital Resources section). This amount represented our
proportionate fair value of our interest in the mobile offshore drilling rig at
November 24, 2004. The fair value of the mobile offshore drilling rig was
determined using an independent third party appraisal and cash flow analysis.
On November 24, 2004, we assigned 3.24% of our interest in the profits,
losses and future cash flows of a mobile offshore drilling rig, subject to a
lease with Rowan Companies, Inc. to ICON Income Fund Eight B L.P. ("Fund Eight
B") for $810,000. This assignment was made in order for us to repay our
outstanding debt obligation as required by the Contribution Agreement, which is
more fully explained elsewhere in this document (See Financing and Borrowings
located in the Liquidity and Capital Resources section). This amount represented
our proportionate fair value of our interest in the mobile offshore drilling rig
at November 24, 2004. The fair value of the mobile offshore drilling rig was
determined using an independent third party appraisal and cash flow analysis.
5
On February 23, 2005, we assigned 2.69% of our interest in the profits,
losses and future cash flows of a mobile offshore drilling rig, subject to a
lease with Rowan Companies, Inc. to Fund Eight B for $672,992, increasing Fund
Eight B's ownership interest to 5.93%. This assignment was made in order for us
to repay our outstanding debt obligation to Fund Eight B as required by the
Contribution Agreement, which is more fully explained elsewhere in this document
(See Financing and Borrowings located in the Liquidity and Capital Resources
section). This amount represented our proportionate fair value of our interest
in the mobile offshore drilling rig at February 23, 2005. The fair value of the
mobile offshore drilling rig was determined using an independent third party
appraisal and cash flow analysis.
On November 24, 2004, we assigned 2.6% of our interest in the profits,
losses and future cash flows of a mobile offshore drilling rig, subject to a
lease with Rowan Companies, Inc. to ICON Income Fund Nine ("Fund Nine") for
$650,000. This assignment was made in order for us to repay our outstanding debt
obligation to Fund Nine as required by the Contribution Agreement, which is more
fully explained elsewhere in this document (See Financing and Borrowings located
in the Liquidity and Capital Resources section). This amount represented our
proportionate fair value of our interest in the mobile offshore drilling rig at
November 24, 2004. The fair value of the mobile offshore drilling rig was
determined using an independent third party appraisal and cash flow analysis.
On February 23, 2005, we assigned 3.02% of our interest in the profits,
losses and future cash flows of a mobile offshore drilling rig, subject to a
lease with Rowan Companies, Inc. to Fund Nine for $755,000, increasing Fund
Nine's ownership interest to 5.62%. This assignment was made in order for us to
repay our outstanding debt obligation to Fund Nine as required by the
Contribution Agreement, which is more fully explained elsewhere in this document
(See Financing and Borrowings located in the Liquidity and Capital Resources
section). This amount represented our proportionate fair value of our interest
in the mobile offshore drilling rig at February 23, 2005. The fair value of the
mobile offshore drilling rig was determined using an independent third party
appraisal and cash flow analysis.
Assignment of Sodium Chlorate Production Facility
On March 28, 2005, we assigned our entire 50% ownership interest in EKA
Chemicals, Inc. to Fund Nine for $745,000. This assignment was made in order for
us to repay our outstanding debt obligation to Fund Nine as required by the
Contribution Agreement, which is more fully explained elsewhere in this document
(Refer to Financing and Borrowings located in Liquidity and Capital Resources).
This amount represented our fair value of our interest in EKA Chemicals, Inc. on
March 28, 2005. This amount was determined to represent the fair value of EKA
Chemicals, Inc. based upon the expected future cash flows.
We disposed of equipment that was on lease after lease expiration in 2003,
for a net gain of $120,524.
Available Information
Our Annual Reports on Form 10-K and our most recent Quarterly Reports on
Form 10-Q and amendments to those reports, if any, are available free of charge
on our internet website at http://www.iconcapital.com as soon as reasonably
practicable after such reports are electronically filed with or furnished to the
Securities and Exchange Commission. This information is also available on the
Securities and Exchange Commission's website, at http://www.sec.gov.
6
Item 2. Properties
We neither own nor lease office space or any other real property in our
business at the present time.
Item 3. Legal Proceedings
In the ordinary course of conducting our business, there may be certain
claims, suits, and complaints filed against us. In the opinion of management,
the outcome of such matters, if any, will not have a material impact on our
consolidated financial position or results of operations.
Fleet Capital Corp Litigation
In August 2004, Fleet Capital Corp. ("Fleet") commenced an action against
us for unspecified damages, alleging that we breached our obligations owed to
Fleet under certain Performance Guaranties we entered into in connection with
non-recourse loans made by Fleet. The loans were made to our wholly-owned
subsidiaries when these entities entered into a transaction to acquire supply
tug vessels on charter with affiliates of SEACOR Smit Inc. We and our
subsidiaries have counterclaimed, alleging, among other things, that Fleet has
breached its covenant of good faith and fair dealing. The action is currently
pending in the Supreme Court of the State of New York, New York County and the
parties are currently in the process of discovery. It is not possible at this
early stage to determine the likelihood of the outcome, but management intends
to vigorously defend this claim.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter 2004.
7
PART II
Item 5. Market for the Registrant's Securities and Related Security Holder
Matters
Our limited partnership interests are not publicly traded nor is there
currently a market for our limited partnership interests. It is unlikely that
any such market will develop.
Number of Equity Security Holders
Title of Class as of March 18, 2005
- --------------------------- ---------------------------------------
General Partner 1
Limited Partner 4,584
We do not, in the normal course of business, pay dividends. For the year
ended December 31, 2004, we did not pay distributions to our partners.
Historically, we paid monthly distributions to our partners beginning with their
admission through the termination of the reinvestment period, which was November
9, 2002. For the years ended December 31, 2003 and 2002, we paid distributions
of $1,645,916 and $10,129,308, respectively, to our limited partners. For the
years ended December 31, 2003 and 2002, we paid distributions of $16,627 and
$102,316, respectively, to our General Partner.
Our reinvestment period ended on November 9, 2002. During the disposition
period, we have and will continue to distribute substantially all distributable
cash from operations and equipment sales to the partners and begin the orderly
termination of its operations and affairs. We have not and will not invest in
any additional new finance or lease transactions during the disposition period.
In order for National Association of Securities Dealers ("NASD") members
and their associated persons to have participated in the offering and sale of
interests in limited partnership units (the "Units") pursuant to the fourth
offering or to participate in any future offering of our Units, we are required
pursuant to NASD Rule 2710(c)(6) to disclose in each annual report distributed
to our limited partners a per unit estimated value of our Units, the method by
which we developed the estimated value and the date used to develop the
estimated value. In addition, our General Partner must prepare annual statements
our estimated Unit values to assist fiduciaries of retirement plans subject to
the annual reporting requirements of Employee Retirement Income Security Act
("ERISA") in the preparation of their reports relating to an investment in our
Units. For these purposes, the estimated value of our Units shall be deemed to
be $15.08 per Unit at September 30, 2004.
This estimate was based on the amount of remaining undiscounted lease
payments on our existing leases, the booked estimated residual values of the
equipment held by us upon the termination of those leases and our cash on hand.
From this amount we then subtracted our total debt outstanding and then divided
that sum by the total number of Units outstanding. This valuation was based
solely on the General Partner's perception of market conditions and the types
and amounts of our assets. No independent valuation was sought. However, as set
forth below, there is no significant public trading market for our Units at this
time, and there can be no assurance that limited partners could receive $15.08
per Unit if such a market did exist and they sold their Units or that they will
be able to receive such amount for their Units in the future. The foregoing
valuation was performed solely for the ERISA and NASD purposes described above.
There is no market for our Units, and, accordingly, this value does not
represent an estimate of the amount a limited partner would receive if he were
to seek to sell his Units. Furthermore, there can be no assurance as to the
amount we may actually receive if and when we seek to liquidate our assets or
the amount of lease payments and equipment disposition proceeds we will actually
receive over our remaining term.
8
Item 6. Selected Consolidated Financial Data
The selected financial data should be read in conjunction with the
consolidated financial statements and related notes included in Item 8,
Financial Statements and Supplemental Data contained elsewhere in this report.
Year Ended December 31,
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Total revenue $ 2,677,226 $ 1,576,532 $ 8,326,025 $ 9,159,492 $14,713,736
============== ============ =========== =========== ===========
Net (loss) income (a) $ (10,242,221) $(17,300,236) $(3,661,408) $(1,477,016) $ 1,293,261
============== ============ =========== =========== ===========
Net (loss) income allocable
to limited partners $ (10,139,799) $(17,127,234) $(3,624,794) $(1,462,246) $1,280,328
============== ============ =========== =========== ==========
Net (loss) income allocable to general partner $ (102,422) $ (173,002) $ (36,614) $ (14,770) $ 12,933
============== ============ =========== =========== ===========
Weighted average number of limited
partnership units outstanding 987,548 987,548 988,099 989,112 989,929
============== ============ =========== =========== ===========
Net (loss) income per weighted average
limited partnership unit $ (10.27) $ (17.34) $ (3.67) $ (1.48) $ 1.29
============== ============ =========== =========== ===========
Distributions to limited partners $ - $ 1,645,916 $10,129,308 $10,632,716 $10,641,411
============== ============ ============ =========== ===========
Distributions per weighted average
limited partner unit $ - $ 1.67 $ 10.25 $ 10.75 $ 10.75
============== ============ =========== =========== ===========
Distributions to the general partner $ - $ 16,627 $ 102,316 $ 100,023 $ 107,493
============== ============ =========== =========== ===========
December 31,
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Total assets $13,849,239 $52,063,556 $74,009,003 $104,334,907 $130,936,301
=========== =========== =========== ============ ============
Notes payable $8,174,001 $36,156,703 $38,769,665 $50,984,856 $81,889,191
========== =========== =========== =========== ============
Partners' equity $5,161,112 $15,403,333 $34,366,112 $48,294,920 $60,551,684
========== =========== ============ =========== ===========
(a) During the years ended December 31, 2004, 2003 and 2002 we recorded
impairment loss provisions of $7,861,680 $7,850,000 and $350,000 or $7.96, $7.95
and $0.35 per weighted average limited partnership unit, respectively.
9
Item 7. Manager's Discussion and Analysis of Financial Condition and Results of
Operations
Forward-Looking Information - Certain statements within this document may
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are identified by
words such as "anticipate," "believe," "estimate," "expects," "intend,"
"predict" or "project" and similar expressions. This information may involve
risks and uncertainties that could cause actual results to differ materially
from the forward-looking statements. We believe that the expectations reflected
in such forward-looking statements are based on reasonable assumptions. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Any such forward-looking
statements are subject to risks and uncertainties and our future results of
operations could differ materially from historical results or current
expectations. Some of these risks are discussed in this report, and include,
without limitation, fluctuations in oil and gas prices; level of fleet additions
by competitors and industry overcapacity; changing customer demands for
aircraft; acts of terrorism; unsettled political conditions, war, civil unrest
and governmental actions, and environmental and labor laws. Our actual results
could differ materially from those anticipated by such forward-looking
statements due to a number of factors, some of which may be beyond our control,
including, without limitation:
o changes in our industry, interest rates or the general economy;
o the degree and nature of our competition;
o availability of qualified personnel;
o cash flows from operating activities may be less than our current level of
expenses and debt obligations; o the financial condition of lessees; and o
lessee defaults.
a. Overview
We are an equipment leasing business formed on May 23, 1995 which began
active operations on January 19, 1996. We were primarily engaged in the business
of acquiring equipment subject to lease and, to a lesser degree, acquiring
ownership rights to items of leased equipment at lease expiration. Some of our
equipment leases were acquired for cash and are provided current cash flow,
which we refer to as "income" leases. The majority of the purchase price of our
other equipment leases was borrowed, so these leases generated little or no
current cash flow because substantially all of the rental payments received from
a lessee were paid to a lender. For these "growth" leases, we anticipate that
the future value of the leased equipment will exceed the cash portion of the
purchase price paid for the equipment. We are currently in our disposition
period, wherein we are seeking to sell our assets in the ordinary course of
business.
Capital Resources and Liquidity
We invested most of the net proceeds from our offering in items of
equipment subject to a lease. After the net offering proceeds were invested,
additional investments were made with the cash generated from our initial
investments to the extent that the cash was not needed for expenses, reserves
and distributions to investors. The investment in additional equipment in this
manner is called "reinvestment." After the "reinvestment period," we began
selling our assets in the ordinary course of business during a time frame called
the "disposition period." If we believe it would benefit investors to reinvest
our cash flow in equipment during the disposition period, we may do so, but we
will not receive any additional fees in connection with such reinvestments. Our
goal is to complete the disposition period in three years after the end of the
reinvestment period, but it may take longer to do so.
Our reinvestment period ended on November 9, 2002. During the disposition
period, we have and will continue to distribute substantially all distributable
cash from operations and equipment sales to the partners and begin the orderly
termination of its operations and affairs. We have not and will not invest in
any additional finance or lease transactions during the disposition period.
Our current portfolio, which we hold either directly or through joint
venture investments with affiliates and others, consists primarily of the
following equipment subject to lease:
10
Energy Industry:
o We have a 43.36% interest in a mobile offshore drilling rig subject to
lease with Rowan Companies, Inc. The lease will expire on March 15, 2008.
The purchase price was approximately $14,726,000, consisting of
approximately $12,325,000 in cash and approximately $2,401,000 of
non-recourse debt.
During 2004, we entered into the following assignments regarding the mobile
offshore drilling rig to repay certain of our affiliates for amounts paid
on our behalf under the Contribution Agreement; (i) during November 2004,
we assigned .8% of our interest in the profits, losses and cash flows
valued at $200,000 to Fund Eight A, (ii) during November 2004, we assigned
3.24% of our interest in the profits, losses and cash flows valued at
$810,000 to Fund Eight B and (iii) during November 2004, we assigned 2.6%
of our interest in the profits, losses and cash flows valued at $650,000 to
Fund Nine.
During 2005, we entered into two additional assignments relating to
repayment of payments made on our behalf under the Contribution Agreement;
(i) during February 2005, we assigned 2.69% of our interest in the profits,
losses and cash flows valued at $672,992 to Fund Eight B and (ii) during
February 2005, we assigned 3.02% of our interest in the profits, losses and
cash flows valued at $755,000 to Fund Nine.
Chemical Industry:
o We had a 50% interest in a sodium chlorate production facility subject to
lease with EKA Chemicals, Inc which was accounted for as a finance lease.
The lease will expire in July 2006, at which time title in the facility
will pass to EKA Chemicals, Inc. The purchase price was approximately
$3,859,000, consisting of approximately $2,806,000 in cash and
approximately $1,053,000 of non-recourse debt.
During March 2005, in order to repay our affiliates for amounts paid on our
behalf under the Contribution Agreement; we assigned our entire 50%
interest in EKA Chemicals, Inc.'s facility valued at $745,000 to ICON
Income Fund Nine LLC.
Air Transportation Industry:
o We have a 99% interest in a 1976 McDonnell Douglas DC-10-30F aircraft
subject to lease with World Airways, Inc. The lease was on a
"power-by-the-hour" basis until December 2004. Effective September 1, 2004,
this lease was modified to a fixed rental of $50,000 per month plus
maintenance reserves and the term was extended through September 2006. The
purchase price was approximately $11,430,000 consisting of approximately
$2,120,000 in cash and approximately $9,310,000 of non-recourse debt. We
have since fully repaid the non-recourse debt. Aviation Investors, Inc.
("Aviation"), an unrelated third party, who was a party to the acquisition
of the Aircraft, has a Residual Sharing Agreement (the "Agreement") in
which Aviation is entitled to receive 50% of all residual proceeds of the
aircraft. Residual proceeds includes gross proceeds from any of the
following; sale, lease, renewal lease or extension or financing or
refinancing of the Aircraft and casualty payments. Such gross proceeds may
be reduced, but not below zero, for recovery expenses, remarketing
expenses, and any reasonable out-of-pocket costs incurred by us.
Additionally, Aviation has a management agreement with us to manage the
operations of and to remarket the Aircraft for sale or lease. For this
service Aviation receives a monthly management fee of $10,667.
There is a maintenance reserve of approximately $1,843,000 at December 31,
2004. If the maintenance reserves are not fully utilized any remaining
monies will be divided between the us and Aviation as stipulated in the
Agreement.
o We have an investment in the unguaranteed residual values of three Boeing
737-300 aircraft currently on lease to Continental Airlines, Inc. On July
31, 1997, we acquired an option to purchase these aircraft and paid
$412,500 per aircraft for an aggregate purchase price of $1,237,500. In
addition, we assumed recourse debt in the amount of $3,612,092 with
interest accruing at 8.5% per year which matured on November 27, 2003. The
strike price for each aircraft at maturity was $5,375,000. Prior to the
aircraft leases expiring, Continental expressed a desire to extend each of
the leases for two years. Due to market conditions and in order to
accommodate the lease extensions, it was in our best interest to terminate
the option agreement. We agreed to restructure the recourse debt with a new
maturity date of November 27, 2006. As a result of the restructuring, we
were required to prepay $500,000 of interest that would accrue on the new
recourse debt and the option to purchase the aircraft would be converted
into an interest in the unguaranteed residual values of the three aircraft.
11
Substantially all of our recurring operating revenues are generated from
the operations of the single-investor leases in our portfolio. On a monthly
basis, we deduct the expenses related to the recurring operations of the
portfolio from such revenues and assess the amount of the remaining cash flows
that will be required to fund known or anticipated re-leasing costs and
equipment management costs. Below is a review of our portfolio activity during
the twelve months ended December 31, 2004.
Portfolio Activity
Sale of Boeing 767-300ER Aircraft
During July 2004, one of our joint ventures, ICON Aircraft 24846 LLC, sold
its only asset, a Boeing 767-300ER, which resulted in a realized net loss of
approximately $601,800, of which our share was approximately $12,000. The
General Partner had determined that it was in the best interest of ICON Aircraft
24846 LLC and its members to sell the Boeing 767-300ER aircraft to BTM Capital
Corp., the lender, for an amount equal to the then outstanding debt balance. The
decision to sell the aircraft was based, in part, on the following factors: (i)
the aircraft's current fair market value was estimated to be between $24,000,000
and $27,000,000 and the balance of the outstanding debt was $34,500,000; (ii)
any new lease for the aircraft would have required an additional $850,000 in
equity (at a minimum) in order to reconfigure the aircraft and upgrade the
engines; and (iii) if we were to continue to remarket the aircraft, the lender
would have required interest only payments of approximately $100,000 per month
until the aircraft was re-leased.
Sale of Federal Express DC-10-30 Aircraft
We had an ownership interest in a DC-10-30 aircraft subject to a lease with
Federal Express Corporation which expired on July 2, 2004. The aircraft was
subject to non-recourse debt which had a balloon payment of approximately
$9,600,000 due at lease end. As required by the loan agreement, we entered into
a residual value insurance agreement (the "Residual Insurance Agreement") with
an unrelated third party. Under the Residual Insurance Agreement, the insurer
was required to pay the insured amount to the lender at the expiration of the
lease if the balloon payment was not made by us. Due to the downturn in the
marketplace for this type of Aircraft, we were unable to sell the Aircraft for
sufficient proceeds to repay the outstanding debt and therefore, we were unable
to make the required balloon payment when due nor were we able to successfully
refinance the debt. As a result, pursuant to the terms of the Residual Insurance
Agreement, the insurer notified us of its intention to pay the insured amount of
$10,200,000 at lease end, resulting in title of the Aircraft transferring to the
insurer and we lost our entire ownership interest in the Aircraft. As a result,
we received net proceeds of $520,293, after $9,679,707 was paid to the
non-recourse lender.
Sale of Supply Vessels
We were the sole owner of five marine supply vessels originally on charter
to affiliates of Seacor Marine, Inc. (the "Vessels"). These Vessels were subject
to outstanding non-recourse debt with Fleet Capital Corp. ("Fleet"). During
September 2003, Fleet took control of the Vessels and commenced remarketing
efforts under the terms of their financing agreement with us. On May 12, 2004,
Fleet sold the Vessels, which resulted in aggregate sale proceeds of $3,580,000.
At the time of sale, the outstanding non-recourse debt relating to the Vessels
was $7,138,369; therefore all proceeds from the sale were used repay the
outstanding non-recourse notes. As a result of the sale of the Vessels, we
recorded a loss on lease termination of approximately $623,000, which
represented the Vessels net book value at that time.
We were the sole owner of three marine vessels originally on charter to
affiliates of Seacor Smit, Inc. These vessels were not subject to outstanding
debt. On September 20, 2004 and again on October 10, 2004, respectively, we sold
the Gulf Pearl and Gulf Wind supply tug vessels, respectively, to Gulf Ocean
Marine Services, Inc. The sale price for each vessel was $500,000. We realized a
loss of $790,420 on the vessel sold on September 20, 2004, which was included in
gain (loss) on disposal of assets for the year ended December 31, 2004 and we
realized a loss of $790,420 on the vessel sold on October 10, 2004 which was
recorded as an impairment loss for year ended December 31, 2004.
Sales of Other Equipment.
During June 2004, we sold equipment which had been on lease to CSK Auto,
Inc. CSK Auto, Inc. had made 60 scheduled payments totaling approximately
$138,000. We recognized a gain of approximately $10,000 on this sale.
During October 2004, title passed on material handling equipment on lease
to AZ3 after they made their final renewal lease payment in conjunction with a
lease which expired in July, 2002. We realized a net loss of approximately
$25,000.
12
Assignment of Sodium Chlorate Production Facility
We had a 50% interest in a sodium chlorate production facility subject to
lease with EKA Chemicals, Inc. The lease will expire in July 2006, at which time
title in the equipment will pass to EKA Chemicals, Inc. There are two remaining
semi-annual rent payments during July 2005 and January 2006 totaling $745,000.
We received a rental payment during January 2005 in the amount of $372,500.
During March 2005, in order to repay ICON Income Fund Nine LLC for amounts
paid on our behalf under the terms of the Contribution Agreement; we assigned
our entire 50% interest in the facility on lease to EKA Chemicals, Inc. valued
at $745,000 to ICON Income Fund Nine LLC.
Status of Current Portfolio
Mobile Off-Shore Drilling Rig
We have a 43.36% ownership interest in a mobile off-shore drilling rig
referred to as a jack-up oil rig. Currently these jack-up oil rigs are in demand
which is evidenced by their utilization rate which currently is over 90%.
Together with the current high price of oil (which is anticipated to continue in
the near future), and the high day rates that these rigs are currently
commanding, we continue to be optimistic that we will be able to find a buyer at
a satisfactory price for this piece of equipment or negotiate a lease renewal
with Rowan Company's Inc.
McDonnell Douglas DC-10-30F aircraft
We currently own a 1976 McDonnell Douglas DC-10-30F aircraft subject to
lease with World Airways, Inc. The original lease expired on April 30, 2003.
Effective May 1, 2003, the Aircraft was leased to World Airways, Inc. on a
"power-by-the-hour" until December 31, 2004. Effective September 1, 2004, this
lease was modified to a fixed rental of $50,000 per month plus maintenance
reserves and the term was extended through September 2006. Aviation Investors,
Inc. ("Aviation"), an unrelated third party, who was a party to the acquisition
of the Aircraft, has a Residual Sharing Agreement (the "Agreement") in which
Aviation is entitled to receive 50% of all residual proceeds from the Aircraft.
Residual proceeds include gross proceeds from any of the following: sale, lease,
renewal lease or extension or financing or refinancing of the Aircraft and
casualty payments. The gross proceeds may be reduced, but not below zero, for
recovery expenses, remarketing expenses, and any reasonable out-of-pocket costs
incurred us. Additionally, Aviation has a management agreement with us to manage
the operations of and to remarket the Aircraft for sale or lease. For this
service Aviation receives a monthly management fee of $10,667.
There is a maintenance reserve of approximately $1,843,000 at December 31,
2004. If the maintenance reserves are not fully utilized any remaining monies
will be divided between the us and Aviation as stipulated in the Agreement.
Supply Vessel
We are still working to sell or remarket the third, and final, of our
supply vessels that were formerly on charter to SEACOR Smit, Inc. The ability to
sell at a favorable price is largely contingent on industry factors, as
discussed below. During December 2004, we recorded an impairment loss on this
asset based upon the current market.
Boeing 737 and Airbus A310 rotables
We currently own 65 Boeing 737 rotables and 58 Airbus A310 rotables, which
were formerly on lease to Sabena Technics. Aircraft rotables are replacement
spare parts that are held in inventory by an airline. In aggregate, the sales of
these parts should generate between $2,000,000 and $3,000,000 of additional
proceeds for us. Subject to other risk factors described herein, we believe the
values to be relatively steady. The Boeing 737-300 is the most popular aircraft
ever built. The A310 rotables can be used on either A310-200s or A310-300s which
are being used by over 60 operators world-wide.
13
Three 737-300 aircraft residuals
We have an investment in the unguaranteed residual values of three aircraft
which are currently on lease to Continental Airlines, Inc. On July 31, 1997, we
acquired an option to purchase these aircraft and paid $412,500 per aircraft for
an aggregate purchase price of $1,237,500. In addition, we assumed recourse debt
in the amount of $3,612,092 with interest accruing at 8.5% per year which
matured on November 27, 2003. The strike price for each aircraft at maturity was
$5,375,000. Prior to the aircraft leases expiring, Continental expressed a
desire to extend each of the leases for two years. Due to market conditions and
in order to accommodate the lease extensions, it was in our best interest to
terminate the option agreement. We agreed to restructure the recourse debt with
a new maturity date of November 27, 2006. As a result of the restructuring, we
were required to prepay $500,000 of interest that would accrue on the new
recourse debt and the option to purchase the aircraft would be converted into an
interest in the unguaranteed residual value.
These so-called "Current Generation" Boeing narrowbody aircraft were
amongst those whose values were initially hardest hit by the tragic events of
September 11, 2001. The current market remains volatile, and the industry is
currently on the downside of a business cycle. We are optimistic that the
industry will rebound within the next two to three years. The three 1985 vintage
Boeing aircraft each have approximately 15 years of useful life remaining, are
Stage III compliant, and are widely used in the marketplace. We anticipate
Continental Airlines, Inc. will either renew the current leases, as they did in
2003, or agree to a favorable buyout when the current leases expire. As for the
related recourse debt, we are not required to commence interest only payments
until December 31, 2005. We remain hopeful that when these aircraft are sold,
all or substantially all of our recourse debt will be repaid from the proceeds,
but there can be no assurance that this will be the case. A sale of the aircraft
before November 2006 for a low sales price would result in our being required to
repay the remaining balance of the recourse debt in November 2006. However, we
have no control over when a potential sale would occur or the potential selling
price.
Economic and Industry Factors
Our results continue to be impacted by a number of factors influencing the
United States of America's economy, as well as, the equipment leasing industry
some of which are discussed below.
United States Economy
The economy of the United States of America appears to be recovering, and
the leasing industry's outlook for the foreseeable future is encouraging. We
foresee an increase in capital spending by corporations through 2007 which
should increase the pool of available leases, and to that end, we believe there
will be more opportunities in this market. Nonetheless, a key obstacle still
facing the leasing industry is the continued low interest rate environment,
which reduces leasing volume inasmuch as customers are more prone to purchase
than lease. Other factors which may negatively affect the leasing industry are
the proposed legal and regulatory changes that may affect tax benefits of
leasing and the continued misperception by potential lessees, stemming from
Enron, WorldCom and others, that leasing should not play a central role as a
financing alternative. However, as economic growth continues and interest rates
inevitably begin to rise over time, we are optimistic that more lessees will
return to the marketplace.
Energy Industry
The energy industry, which affects our mobile shore oil drilling rig and
supply vessel, is highly cyclical and dependent on numerous factors, including
the current level of exploration and development of offshore oil areas. Despite
the current high prices of oil, oil companies are reluctant to make the capital
investment necessary in shelf drilling, as the high energy prices are perceived
as being temporary by oil companies. This will affect the resale value of our
remaining supply vessel.
Exploration and drilling activities are influenced by a number of factors,
including the current and anticipated future prices of oil and natural gas, the
expenditures by oil and gas companies for exploration and development and the
availability of drilling rigs. In addition, demand for drilling services remains
dependent on a variety of political and economic factors that are also beyond
our control, including worldwide demand for oil and natural gas driven by
economic activity, the ability of the Organization of Petroleum Exporting
Countries ("OPEC") to set and maintain production levels and pricing, the level
of production of non-OPEC countries and the policies of various governments
regarding exploration and development of their oil and natural gas reserves.
The current market for mobile off-shore drilling rigs referred to as
jack-up oil rigs appears to in be improving. Currently these jack-up oil rigs
are in demand which is evidenced by their utilization rate which currently is
over 90%. Together with the current high price of oil (which is anticipated to
continue in the near future), and the high day rates that these rigs are
currently commanding, we continue to be optimistic that we will be able to find
a buyer at a satisfactory price for this piece of equipment or negotiate a lease
renewal with Rowan Company's Inc.
14
Domestic Air Transportation Industry
The domestic aircraft leasing industry has been on the downside of a
business cycle and continues to remain there. This has resulted in depressed
sales prices for assets such as our aircraft interests. It does not appear that
the industry will recover significantly in the very near future with the recent
increases in the price of gasoline and the fare wars within the domestic air
transportation industry, although we are optimistic that a recovery will occur
within two to three years time. However, a further weakening of the industry
could cause the proceeds realized from the future sale of our aircraft and its
rotables to be even less than suggested by recent appraisals.
Inability to Remarket Assets
The market for some of our assets, such as the mobile off-shore oil rig, is
not very liquid. If current equipment lessees choose not to renew their leases
or purchase other equipment upon expiration of the lease, we will need to
remarket the equipment. There is no assurance that we will be able to locate a
willing buyer or lessee for our assets, or if one is located, that the buyer or
lessee will pay a price for the asset at least equal to the appraised value.
Critical Accounting Policies
An appreciation of our critical accounting policies is necessary to
understand our financial results. These policies may require the General Partner
to make difficult and subjective judgments regarding uncertainties, and as a
result, such estimates may significantly impact our financial results. The
precision of these estimates and the likelihood of future changes depend on a
number of underlying variables and a range of possible outcomes. We applied our
critical accounting policies and estimation methods consistently in all periods
presented. We consider the following accounting policies to be critical to our
business:
o Lease classification and revenue recognition
o Asset impairments
o Depreciation
Lease Classification and Revenue Recognition
The equipment we lease to third parties is classified either as a finance
lease, a leveraged lease, or an operating lease, which is determined based upon
the terms of each lease. Initial direct costs are capitalized and amortized over
the term of the related lease for both a finance lease and a leveraged lease.
For an operating lease, the initial direct costs are included as a component of
the cost of the equipment and depreciated.
For finance leases, we record, at lease inception, the total minimum lease
payments receivable from the lessee, the estimated unguaranteed residual value
of the equipment at lease termination, the initial direct costs related to the
lease and the related unearned income. Unearned income represents the difference
between the sum of the minimum lease payments receivable plus the estimated
unguaranteed residual minus the cost of the leased equipment. Unearned income is
recognized as finance income ratably over the term of the lease.
For leveraged leases, we record, at lease inception, our net investment in
the equipment which consists of the minimum lease payments receivable, the
estimated unguaranteed residual value of the equipment at lease termination and
the initial direct costs related to the lease, net of the unearned income and
principal and interest on the related non-recourse debt. Unearned income is
recognized as income over the life of the lease at a constant rate of return on
the positive net investment.
For operating leases, income is recorded as rental income and is recognized
on the straight line method over the lease term.
Our General Partner has an Investment Committee that approves each new
equipment acquisition. As part of their process, the Investment Committee
determines the residual value to be used once the acquisition has been approved.
The factors considered in determining the residual value include, but are not
limited to, the creditworthiness of the potential lessee, the type of equipment
being considered, how the equipment is integrated into the potential lessees
business, the length of the lease and industry in which the potential lessee
operates. Residual values are reviewed in accordance with our policy to review
all significant assets in our portfolio.
15
Asset Impairments
The significant assets in our asset portfolio are periodically reviewed, at
least annually, by management, to determine whether events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. Management uses qualified third party appraisers to assist in the
review process. An impairment loss will be recognized if the carrying amount of
a long-lived asset is not recoverable and exceeds its fair value. In such
circumstances, we will estimate the future cash flows (undiscounted and without
interest charges) expected to result from the use of the asset and its eventual
disposition. Future cash flows are the cash inflows expected to be generated by
an asset less the cash outflows expected to be necessary to obtain those
inflows. An impairment loss will be measured as the amount by which the carrying
amount of a long-lived asset exceeds its fair value.
The events or changes in circumstances which generally indicate that an
asset may be impaired are (i) the estimated fair value of the underlying
equipment is less than our carrying value or (ii) the lessee is experiencing
financial difficulties and it does not appear likely that the estimated proceeds
from the disposition of the asset will be sufficient to satisfy the remaining
obligation to the lender and our residual position in the asset. Generally in
the latter situation, the residual position relates to equipment subject to
third party notes payable where the lessee remits their rental payments directly
to the lender and we do not recover our residual position until the note payable
is repaid in full.
Depreciation
We record depreciation expense on equipment classified as an operating
lease. In order to calculate depreciation, we first determine the depreciable
equipment cost, which is the cost less estimated residual value. The estimated
residual value is our estimate of the value of the equipment at lease
termination. The estimated residual value is reviewed annually, by management,
to determine whether an impairment charge may be required. Management uses
qualified third party appraisers to assist in the review process. Depreciation
expense is recorded ratably over the term of the related lease.
New Accounting Pronouncements
During December 2004, the FASB issued SFAS No. 153 "Exchanges of
Nonmonetary Assets--an amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153
is based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. The guidance in
Opinion 29, however, included certain exceptions to that principle. This
Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges
of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. SFAS 153
is effective for nonmonetary exchanges occurring in fiscal periods beginning
after June 15, 2005. We do not expect the adoption of SFAS 153 to have an impact
on our financial position or results of operations.
Management does not believe that any recently issued, but not yet effective
accounting pronouncements, if currently adopted, would have a material effect on
the accompanying consolidated financial statements.
b. Results of Operations for the Years Ended December 31, 2004 ("2004") and
2003 ("2003")
Revenue for 2004 and 2003 are summarized as follows:
Years Ended December 31,
2004 2003 Change
----- ---- ------
Total revenue $ 2,677,226 $ 1,576,532 $ 1,100,694
=================== ================== ================
Rental income $ 439,685 $ 1,365,201 $ (925,516)
Finance income $ 13,467 $ 82,070 $ (68,603)
Net income from leveraged leases $ 1,078,481 $ (1,488,462) $ 2,566,943
Income from investments in joint ventures $ 2,840,420 $ 1,241,857 $ 1,598,563
Net gain (loss) on sales of equipmemt $ (1,738,180) $ 120,524 $ (1,858,704)
Interest and other income $ 43,353 $ 255,342 $ (211,989)
16
Our total revenue in 2004 increased by $1,100,694 or 69.8%, as compared to
2003. The increase in net income from the leveraged lease was due an impairment
loss of $3,400,000 in 2003 which was netted against net income from leverage
lease as compared to an impairment loss of $4,700,000 in 2004 which is
classified as an expense for reporting purposes. The decrease in rental income
is due to the fact that we are in our disposition period. As leases expire we
remove the underlying equipment from operating to equipment held for sale or
lease and locate buyer for the equipment. The increase in income from
investments in joint ventures was due primarily to increased gains incurred by
the ICON Receivables 1997-B L.L.C. ("1997-B") joint venture and North Sea
Limited Partnership which had a gain of approximately $1,397,000 and offset by
losses incurred by the ICON Cheyenne joint venture. The increase in loss on
disposal of assets in 2004 was due to the disposal of the two leases during the
year for which there were minimal disposals during the 2003.
Expenses for 2004 and 2003 are summarized as follows:
Years Ended December 31,
2004 2003 Change
----- ----- ------
Total expenses $ 12,919,447 $ 18,876,768 $ (5,957,321)
=================== ================ =============
Provision for impairment loss $ 7,861,680 $ 7,850,000 $ 11,680
Depreciation $ 2,675,064 $ 5,795,265 $ (3,120,201)
Interest $ 1,104,016 $ 2,682,524 $ (1,578,508)
Vessel maintenance $ 49,641 $ 763,485 $ (713,844)
General and administrative $ 705,550 $ 790,717 $ (85,167)
Management fees - general partner $ 387,287 $ 595,157 $ (207,870)
Administrative expense reimburesement -
General Partner $ 154,958 $ 242,909 $ (87,951)
Reversal of provision for bad debts $ (134,391) $ - $ (134,391)
Amortization of initial direct costs $ 117,781 $ 184,089 $ (66,308)
Minority interest $ (2,139) $ (27,378) $ 25,239
Our total expenses for 2004 decreased by $5,957,322 or 31.6%, over 2003.
The decrease in provision for impairment loss was due to our recording
impairment on five supply vessels during 2003 as compared to two vessels during
2004. The decrease in depreciation expense was due primarily to the termination
of the five marine supply vessel leases during 2004. We had a full year of
depreciation in 2003 while in 2004 we had six months of depreciation relating to
these leases. The decrease in interest expense was due to a decrease in the
average debt outstanding from 2004 to 2003. This decrease is primarily as a
result of several factors; the extinguishment of debt associated with lease
terminations and debt extinguishment related to the sale of the Federal Express
Corporation equipment. The decrease in vessel maintenance in 2004 was due to the
storage and remarketing costs associated with the off-lease vessels during 2003
for which there were minimal costs in 2004. The decrease in general and
administrative expenses was due to reductions in storage and maintenance and
insurance expense during 2004 versus 2003 as a result of reduced payments under
the supply vessel leases. Effective July 1, 2004, the General Partner agreed to
no longer charge us management fees and administrative expense reimbursements.
These fees were charged in prior quarters.
Net Loss
As a result of the factors discussed above, the net loss for 2004 and 2003
was $10,242,221 and $17,300,236, respectively. The net loss per weighted average
limited partnership unit outstanding was $10.27 and $17.34 for 2004 and 2003,
respectively
17
c. Results of Operations for the Years Ended December 31, 2003 ("2003") and
2002 ("2002")
Revenue for 2003 and 2002 are summarized as follows:
Years Ended December 31,
2003 2002 Change
---- ---- -------
Total revenue $ 1,576,532 $ 8,326,025 $ (6,749,493)
=================== ================= =================
Rental income $ 1,365,201 $ 2,528,092 $ (1,162,891)
Finance income $ 82,070 $ 906,012 $ (823,942)
Net income from leveraged leases $ (1,488,462) $ 1,986,808 $ (3,475,270)
Income from investments in joint ventures $ 1,241,857 $ 1,453,617 $ (211,760)
Net gain on sales of equipment $ 120,524 $ 1,311,735 $ (1,191,211)
Interest and other income $ 255,342 $ 139,761 $ 115,581
Our total revenue 2003 decreased $6,749,493 or 81.1% as compared to 2002.
The decrease in net income from the leveraged lease was due to an impairment
loss of $3,400,000, taken on the aircraft under the leveraged lease, due to
reduction in the original estimated salvage value based upon a current
appraisal. The decrease in rental income was due to equipment coming off lease
during 2003 as earning no rental income while there is a full years of income in
2002. The decrease in finance income resulted primarily from a decrease in the
average size of our lease portfolio from 2002 to 2003. The decrease in income
from investment in joint ventures was due to net losses in the operations of
several of the joint ventures in 2003 which we had an interest in. The decrease
in gain on sales of equipment was due to a sale of equipment in the third
quarter of 2002 whereas no similar sale occurred in 2003.
Expenses for 2003 and 2002 are summarized as follows:
Years Ended December 31,
2003 2002 Change
---- ---- ------
Total expenses $ 18,876,768 $ 11,987,433 $ 6,889,335
=================== ============== ==============
Provision for impairment loss $ 7,850,000 $ 350,000 $ 7,500,000
Depreciation $ 5,795,265 $ 4,769,652 $ 1,025,613
Interest $ 2,682,524 $ 3,515,642 $ (833,118)
Vessel maintenance $ 763,485 $ 351,386 $ 412,099
General and administrative $ 790,717 $ 1,215,877 $ (425,160)
Management fees - general partner $ 595,157 $ 975,642 $ (380,485)
Administrative expense reimburesement -
General Partner $ 242,909 $ 419,784 $ (176,875)
Amortization of initial direct costs $ 184,089 $ 384,612 $ (200,523)
Minority interest $ (27,378) $ 4,838 $ (32,216)
Total expenses 2003 increased by $6,889,335 or 57.5% as compared to 2002.
The provision for impairment loss increased due to a decrease in the value of
our equipment held for sale or lease thereby requiring an impairment to be
recorded during 2003. The impairment loss was much smaller in 2002. The increase
in depreciation expense was due primarily due to the reclassification in 2003
from equipment from finance leases or investment in leveraged leases to
operating leases. The decrease in interest expense was due to a decrease in the
average debt outstanding from 2002 to 2003. The increase in vessel maintenance
was due to the storage and remarketing costs associated with the off-lease
vessels during 2003. The decreases in management fees - General Partner and
administrative expense reimbursement - General Partner resulted from the overall
decrease in the average size of our lease portfolio during 2003 and therefore
our costs were reduced. The decrease in amortization of initial direct costs
resulted from the decrease in the average size of our finance lease portfolio
during 2003.
Net Loss
As a result of the foregoing factors, net loss for the years ended December
31, 2003 and 2002 was $17,300,236 and $3,661,408, respectively. The net loss per
weighted average number of limited partnership unit outstanding was $17.34 and
$3.67, for the years ended December 31, 2003 and 2002, respectively.
18
d. Liquidity and Capital Resources
Sources of Cash
We believe that with the cash we have currently available, cash being
generated from our remaining leases and the proceeds from our equipment sales,
we have sufficient cash to continue our limited operations while we continue our
disposition period.
Our main sources of cash during 2004 and 2003, was from investing
activities. Our primary sources of cash during 2004, was generated from the
sales of equipment of approximately $3,542,000, cash distributions from our
joint ventures of approximately $959,000 and proceeds from the sale of interests
in joint ventures of approximately $500,000. Our primary sources of cash during
2003, was generated from the sales of equipment of approximately $1,051,000 and
cash distributions from our joint ventures of approximately $671,000.
Our primary cash outflows during 2004 and 2003, was from financing
activities. Our primary cash outflow for 2004 was principal repayments on
recourse debt of approximately $5,446,000. Our primary cash outflow in 2003 was
cash distributions to partners of approximately $1,663,000 and principal
repayments on recourse debt of $454,000.
Reduction in Note Payable
At December 31, 2003 we owed $1,750,000 to ICON Cash Flow Partners, L.P.,
Series D ("Series D") relating to a leveraged lease transaction entered into
during 1997. During 2004 we repaid a total of $1,253,625 to Series D.
Additionally, we recorded forgiveness of debt income of $496,375 for the year
ended December 31, 2004.
Financings and Borrowings
We have one recourse notes payable at December 31, 2004 totaling
$5,751,009. This recourse note payable is due on November 27, 2006, accrues
interest at 5.0% per year and requires monthly interest only payments beginning
December 31, 2005. We were required to prepay $500,000 of interest which is
being amortized into operations as interest expense through the date monthly
interest payments begin in 2005.
We and certain of our affiliates, specifically ICON Income Fund Eight A
L.P.; ICON Income Fund Eight B L.P. and ICON Income Fund Nine, LLC
(collectively, the "Initial Funds"), are parties to a Loan and Security
Agreement dated as of May 30, 2002, as amended (the "Loan Agreement"). Under the
terms of the Loan Agreement, the Initial Funds may borrow money from Comerica
Bank with all borrowings to be jointly and severally collateralized by (i) cash
and (ii) the present values of certain rents receivable and equipment owned by
the Initial Funds. Such Loan Agreement, effective August 5, 2004, was amended to
add ICON Income Fund Ten LLC ("Fund Ten") as a borrower to the Loan Agreement.
On December 6, 2004, the Initial Funds and Fund Ten entered into a Sixth
Amendment to the Loan and Security Agreement with Comerica Bank wherein the
maturity date of the loan was extended from December 31, 2004 to December 30,
2005. The Loan and Security Agreement provides for a joint and several line of
credit of up to $17,500,000 collateralized by the present value of rents
receivable and equipment owned by the borrowers.
In connection with the Loan Agreement, the Initial Funds previously entered
into a Contribution Agreement dated as of May 30, 2002, as amended (the
"Contribution Agreement"). Pursuant to the Contribution Agreement, the Initial
Funds agreed to restrictions on the amount and the terms of their respective
borrowings under the Loan Agreement in order to minimize the unlikely risk that
a Fund would not be able to repay its allocable portion of the outstanding
revolving loan obligation at any time, including restrictions on any Fund
borrowing in excess of the lesser of (A) an amount each Fund could reasonably
expect to repay in one year out of its projected free cash flow, or (B) the
greater of (i) the Borrowing Base (as defined in the line of credit agreement)
as applied to such Fund, and (ii) 50% of the net worth of such Fund. The
Contribution Agreement provides that, in the event a Fund pays an amount under
the agreement in excess of its allocable share of the obligation under the
agreement whether by reason of an Event of Default or otherwise, the other Funds
will promptly make a contribution payment to such Fund in such amount that the
aggregate amount paid by each Fund reflects its allocable share of the aggregate
obligations under the agreement. The Initial Funds' obligations to each other
under the Contribution Agreement are collateralized by a subordinate lien on the
assets of each Fund. In order to facilitate Fund Ten's addition to the
Contribution Agreement, the Funds entered into a Second Amended and Restated
Contribution Agreement effective as of August 5, 2004. The Second Amended and
Restated Contribution Agreement contained substantially identical terms and
limitations as did the original Contribution Agreement.
Effective March 8, 2005, the Initial Funds and the LLC entered into a
Seventh Amendment to the Loan and Security Agreement with Comerica Bank. This
Agreement releases ICON Cash Flow Partners L.P. Seven from all of its
obligations under the Loan and Security Agreement dated as of May 30, 2002. As
such, ICON Cash Flow Partners L.P. Seven is no longer a party to the $17,500,000
line of credit.
19
During 2004 and 2005, certain of the Borrowers paid Comerica Bank a portion
of our outstanding obligations. As required under the terms of the Contribution
Agreement, we were required to promptly repay these Borrowers the amounts paid
on our behalf. Since we did not have sufficient liquidity to repay these
Borrowers, we assigned to them interests in certain of our joint venture
investments as full repayment of monies due to them.
During September 2004, we assigned our entire .5025% interest in ICON BF
valued at $65,325 to Fund Eight A L.P and we assigned 9.04% of our interest in
ICON Cheyenne valued at $204,384 to Fund Eight B L.P., (iii) during November
2004, the assignment of 3.24% of our interest in the profits, losses and cash
flows of North Sea (Connecticut) Limited Partnership valued at $810,000 to ICON
Income Fund Eight B L.P., (iv) during November 2004, the assignment of 2.6% of
our interest in the profits, losses and cash flows of North Sea (Connecticut)
Limited Partnership valued at $650,000 to ICON Income Fund Nine LLC and (v)
during November 2004, the assignment of .8% of our interest in the profits,
losses and cash flows of North Sea (Connecticut) Limited Partnership valued at
$200,000 to ICON Income Fund Eight A L.P.
During 2005, we entered into three additional transactions relating to
repayment of advances made on our behalf under the Contribution Agreement; (i)
during February 2005, the assignment of 2.69% of our interest in the profits,
losses and cash flows of North Sea (Connecticut) Limited Partnership valued at
$672,992 to ICON Income Fund Eight B L.P.; (ii) during February 2005, an
assignment of 3.02% of our interest in the profits, losses and cash flows of
North Sea (Connecticut) Limited Partnership valued at $755,000 to ICON Income
Fund Nine LLC; and (iii) an assignment of our entire 50% interest in a sodium
chloride plant valued at $745,000 to ICON Income Fund Nine LLC.
Aggregate borrowings by the Borrowers under the Loan Agreement amounted to
$10,272,992 at December 31, 2004. At December 31, 2004, we had $2,422,992 of
borrowings under this line. During March 2005 we repaid all amounts outstanding
on our behalf under this line of credit.
Distributions
Our reinvestment period ended on November 9, 2002, and the disposition
period commenced. During the disposition period, we have and will continue to
distribute substantially all distributable cash from operations and equipment
sales to the partners and continue the orderly termination of our operations and
affairs. We have not and will not invest in any additional finance or lease
transactions during the disposition period.
We do not, in the normal course of business, pay dividends. For the year
ended December 31, 2004, we did not pay distributions to our partners.
Historically, we paid monthly distributions to our partners beginning with their
admission through the termination of the reinvestment period, which was November
9, 2002. For the years ended December 31, 2003 and 2002, we paid distributions
of $1,645,916 and $10,129,308, respectively, to our limited partners. For the
years ended December 31, 2003 and 2002, we paid distributions of $16,627 and
$102,316, respectively, to our General Partner.
Commitments
At December 31, 2004, we have total recourse debt outstanding totaling
$8,174,001, of which $5,751,009 relates to a note payable and $2,422,992 relates
to the Comerica Bank line of credit. Principal maturities of our notes payable
consisted of the following at December 31, 2004:
Year Ending
December 31,
2005 $ 2,422,992
2006 5,751,009
-------------
Total $ 8,174,001
=============
20
Risks and Uncertainties
At December 31, 2004, except as noted above in the Overview section and
listed below in the Risk Factors section, and to the best of our knowledge,
there were no known trends or demands, commitments, events or uncertainties
which are likely to have a material effect on our liquidity.
Set forth below and elsewhere in this report and in other documents we file
with the Securities and Exchange Commission are risks and uncertainties that
could cause our actual results to differ materially from the results
contemplated by the forward-looking statements contained in this report and
other periodic statements we make, including but not limited to, the following:
o There is a depressed market for supply vessels of the type, age and
condition which have affected the value of our remaining supply vessel. We
believe this will continue to negatively impact our ability to remarket
this vessel.
o We may face difficulty remarketing the aircraft rotables. Aircraft rotables
are replacement spare parts that are held in inventory by an airline. We
own rotables for both the Boeing 737-300 aircraft and the Airbus aircraft.
We believe that over time we will be able to remarket these rotables, but
the aircraft industry has been in an overall down cycle and we may face
difficulty in remarketing these assets.
o The market for Boeing 737-300 aircraft is currently depressed due to an
overabundance of aircraft on the market resulting from the overall downturn
in the aviation industry following the tragic events of September 11, 2001.
While the market for these aircraft is cyclical, there can be no assurance
that market will recover by November, 2006. Failure of the market to
recover significantly may result in our inability to realize our investment
in the residuals of the three aircraft currently on lease to Continental
Airlines, Inc.
o Our operations are subject to the jurisdiction of a number of federal
agencies, including the Federal Aviation Administration. New regulatory
rulings may negatively impact our financial results and the economic value
of our assets.
o The litigation involving Fleet may require us to spend a potentially
significant amount of money on professional fees which may in turn affect
our ability to make distributions.
o The equipment leasing industry is highly competitive. When seeking leasing
transactions for acquisition or sale, we compete with leasing companies,
manufacturers that lease their products directly, equipment brokers and
dealers and financial institutions, including commercial banks and
insurance companies. Many of our competitors are larger than us and have
greater financial recourse than we do.
d. Inflation and Interest Rates
The potential effects of inflation on us are difficult to predict. If the
general economy experiences significant rates of inflation, however, it could
affect us in a number of ways. We do not currently have or expect to have rent
escalation clauses tied to inflation in our leases. The anticipated residual
values to be realized upon the sale or re-lease of equipment upon lease
terminations (and thus the overall cash flow from our leases) may be expected to
increase with inflation as the cost of similar new and used equipment increases.
If interest rates increase significantly, the lease rates that we can
obtain on future leases may be expected to increase as the cost of capital is a
significant factor in the pricing of lease financing. Leases already in place,
for the most part, would not be affected by changes in interest rates.
21
Item 7A. Qualitative and Quantitative Disclosures About Market Risk
We, like most other companies, are exposed to certain market risks, which
includes changes in interest rates and the demand for equipment (and the related
residuals) owned by us. We believe to the best of our knowledge that our
exposure to other market risks, including foreign currency exchange rate risk,
commodity risk and equity price risk, are insignificant, at this time, to both
our financial position and our results of operations.
In general, we manage our exposure to interest rate risk by obtaining fixed
rate debt. The fixed rate debt is structured so as to match the cash flows
required to service the debt to the payment streams under fixed rate lease
receivables. The payments under the leases are assigned to the lenders in
satisfaction of the debt. We may finance leases with a floating interest rate
and we are therefore exposed to interest rate risk until fixed rate financing is
arranged.
22
Item 8. Financial Statements and Supplementary Information
Report of Independent Registered Public Accounting Firm 24
Consolidated Balance Sheets at December 31, 2004 and 2003 25-26
Consolidated Statements of Operations for the Years Ended
December 31, 2004, 2003 and 2002 27
Consolidated Statement of Changes in Partners' Equity for the Years Ended
December 31, 2002, 2003 and 2004 28
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002 29-30
Notes to Consolidated Financial Statements 31-49
23
The Partners
ICON Cash Flow Partners L.P. Seven
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheets of ICON Cash Flow
Partners L.P. Seven (a Delaware limited partnership) and subsidiaries as of
December 31, 2004 and 2003 and the related consolidated statements of
operations, changes in partners' equity and cash flows for each of the three
years in the period ended December 31, 2004. These consolidated financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ICON Cash Flow
Partners L.P. Seven and subsidiaries as of December 31, 2004 and 2003 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 1, the Partnership's reinvestment period ended November 9,
2002 and its disposition commenced. During the disposition period the
Partnership will distribute substantially all distributable cash from operations
and equipment sales to the partners and begin the orderly termination of its
operations and affairs.
/s/ Hays & Company LLP
March 16, 2005
New York, New York
24
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Consolidated Balance Sheets
December 31,
ASSETS
2004 2003
---- ----
Cash and cash equivalents $ 96,364 $ 301,256
------------ -------------
Investments in finance leases:
Minimum rents receivable 1,117,499 2,022,310
Estimated unguaranteed residual values - 70,903
Initial direct costs, net - 1,299
Unearned income (5,934) (55,036)
Allowance for doubtful accounts - (239,516)
------------ ---------------
Net investments in finance leases 1,111,565 1,799,960
------------- --------------
Investments in operating leases:
Equipment, at cost 2,565,000 6,352,370
Accumulated depreciation (833,310) (1,614,224)
-------------- --------------
Net investments in operating leases 1,731,690 4,738,146
------------- --------------
Equipment held for sale 1,776,131 15,569,831
Net investment in leveraged lease - 19,631,879
Investment in estimated unguaranteed residual values 4,686,758 4,686,758
Investments in joint ventures 3,813,458 4,000,169
Due from affiliates 190,301 369,071
Other assets, net 442,972 966,486
------------- --------------
Total assets $ 13,849,239 $ 52,063,556
============= =============
See accompanying notes to consolidated financial statements
25
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Consolidated Balance Sheets (continued)
December 31,
LIABILITIES AND PARTNERS' EQUITY
2004 2003
---- ----
Notes payable - non-recourse $ - $ 22,129,648
Notes and accrued interest payable - recourse 8,174,001 14,027,055
Due to affiliates 341,323 51,522
Security deposits, deferred credits and other payables 155,487 429,127
Minority interest 17,316 22,871
-------------- ---------------
Total liabilities 8,688,127 36,660,223
-------------- ---------------
Commitments and contigencies
Partners' equity:
General partner (797,295) (694,873)
Limited partners; 987,547.81 units outstanding, $100 per
unit original issue price 5,958,407 16,098,206
-------------- --------------
Total partners' equity 5,161,112 15,403,333
-------------- --------------
Total liabilities and partners' equity $ 13,849,239 $ 52,063,556
============= ==============
See accompanying notes to consolidated financial statements
26
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Consolidated Statements of Operations
Years Ended December 31,
2004 2003 2002
---- ---- -----
Revenue:
Rental income $ 439,685 $ 1,365,201 $ 2,528,092
Finance income 13,467 82,070 906,012
Net income (loss) from leveraged leases 1,078,481 (1,488,462) 1,986,808
Income from investments in joint ventures 2,840,420 1,241,857 1,453,617
(Loss) gain on disposal of assets (1,738,180) 120,524 1,311,735
Interest and other income 43,353 255,342 139,761
--------------------- ---------------- -------------------
Total revenue 2,677,226 1,576,532 8,326,025
--------------------- ---------------- -------------------
Expenses:
Impairment loss 7,861,680 7,850,000 350,000
Depreciation 2,675,064 5,795,265 4,769,652
Interest 1,104,016 2,682,524 3,515,642
Vessel maintenance 49,641 763,485 351,386
General and administrative 705,550 790,717 1,215,877
Management fees - general partner 387,287 595,157 975,642
Administrative expense reimbursement -
General Partner 154,958 242,909 419,784
Reversal of provision for bad debts (134,391) - -
Amortization of initial direct costs 117,781 184,089 384,612
Minority interest (2,139) (27,378) 4,838
--------------------- ---------------- -------------------
Total expenses 12,919,447 18,876,768 11,987,433
--------------------- --------------- -------------------
Net loss $ (10,242,221) $ (17,300,236) $ (3,661,408)
===================== ================ ===================
Net loss allocable to:
Limited Partners $ (10,139,799) $ (17,127,234) $ (3,624,794)
General Partners (102,422) (173,002) (36,614)
--------------------- ---------------- -------------------
$ (10,242,221) $ (17,300,236) $ (3,661,408)
===================== ================ ===================
Weighted average number of limited partnership
units outstanding 987,548 987,548 988,099
======================= ================ ===================
Net loss per weighted average limited
partnership unit $ (10.27) $ (17.34) $ (3.67)
====================== =============== ===================
See accompanying notes to consolidated financial statements
27
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Consolidated Statement of Changes in Partners' Equity
Years Ended December 31, 2002, 2003 and 2004
Limited Partner Distributions
(Per weighted average unit) Total
Return of Investment Limited General Partners'
Capital Income Partners Partner Equity
------- ------ -------- ------- ------
Balance, January 1, 2002 $ 48,661,234 $ (366,314) $48,294,920
Limited partnership units redeemed
(1,101 units) (35,776) - (35,776)
Cash distributions to partners $10.25 $ - (10,129,308) (102,316) (10,231,624)
Net loss (3,624,794) (36,614) (3,661,408)
------------ ------------ -----------
Balance, December 31, 2002 34,871,356 (505,244) 34,366,112
Cash distributions to partners $1.67 $ - (1,645,916) (16,627) (1,662,543)
Net loss (17,127,234) (173,002) (17,300,236)
------------- ------------ -----------
Balance, December 31, 2003 16,098,206 (694,873) 15,403,333
Net loss (10,139,799) (102,422) (10,242,221)
------------- ------------ -----------
Balance, December 31, 2004 $ 5,958,407 $ (797,295) $ 5,161,112
============ ============= ===========
See accompanying notes to consolidated financial statements
28
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Consolidated Statements of Cash Flows
Years Ended December 31,
2004 2003 2002
----- ---- ----
Cash flows from operating activities
Net loss $(10,242,221) $ (17,300,236) $ (3,661,408)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Rental income paid directly to lenders by lessees - (674,894) (2,528,092)
Reversal of provision for doubtful accounts (134,391) - -
Interest expense on non-recourse financing paid directly
to lenders by lessees 484,264 1,676,212 2,536,757
Finance income portion of receivable paid directly
to lenders by lessees - - (568,035)
Loss (gain) on disposal of assets 1,738,180 (120,524) (2,711,735)
Amortization of initial direct costs 117,781 184,089 384,612
Provision for impairment loss 7,861,680 7,850,000 1,750,000
Depreciation 2,675,064 5,795,265 4,769,652
Net (income) loss from leveraged leases (1,078,481) 1,488,462 (1,986,808)
Income from investments in joint ventures (2,840,420) (1,241,857) (1,453,617)
Minority interest (2,139) (27,378) 4,838
Changes in operating assets and liabilities:
Collection of principal - non-financed receivables 688,395 1,385,804 3,449,559
Other assets 523,514 283,049 650,162
Security deposits, deferred credits and other payables (273,640) (235,565) (446,136)
Due from/to General Partner and affiliates, net 1,095,881 (311,633) (3,901,765)
---------------------- ---------------- ----------------------
Net cash provided by (used in) operating activities 613,467 (1,249,206) (3,712,016)
---------------------- ---------------- ----------------------
Cash flows from investing activities:
Contributions to investments in joint venture (11,540) - -
Proceeds from sales of equipment 1,548,754 1,050,865 6,184,106
Distributions received from joint ventures 958,915 671,137 1,288,983
--------------------- --------------- ----------
Net cash provided by investing activities 2,496,129 1,722,002 7,473,089
--------------------- -------------- ---------
Cash flows from financing activities:
Cash distributions to partners - (1,662,543) (10,231,624)
Proceeds from notes payable - recourse - 690,000 10,800,439
Principal payments on notes payable - recourse (5,446,072) (453,901) (5,120,036)
Loans and advances from affiliates 2,135,000 - -
Principal payments on notes payable - non-recourse - - (250,000)
Redemption of limited partnership units - - (35,776)
Distribution to minority interest in joint venture (3,416) (3,043) -
---------------------- ---------------- --------------------
Net cash used in financing activities (3,314,488) (1,429,487) (4,836,997)
---------------------- ---------------- ---------------------
Net decrease in cash and cash equivalents (204,892) (956,691) (1,075,924)
Cash and cash equivalents, beginning of the year 301,256 1,257,947 2,333,871
--------------------- --------------- ---------------------
Cash and cash equivalents, end of the year $ 96,364 $ 301,256 $ 1,257,947
===================== ============== =====================
See accompanying notes to consolidated financial statements
29
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Consolidated Statements of Cash Flows
Years Ended December 31,
2004 2003 2002
---- ---- ----
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 319,541 $ 1,006,312 $ 978,885
===================== ============== ==============
Supplemental disclosure of non-cash investing and financing activities:
Principal and interest on finance lease paid directly
to lenders by lessees $ 5,766,418 $ 4,397,927 $ 2,269,884
===================== ============== ==============
Notes payable - non-recourse relinquished
with sale of equipment $ 16,847,494 $ - $ -
===================== ============== ==============
Transfer of investment in operating leases,
net of accumulated depreciation ,
to equipment held for sale or lease $ 2,450,916 $ 10,389,766 $ 3,258,314
===================== ============== ==============
Transfer of investment in finance leases
to investment in operating leases $ - $ 2,565,000 $ 9,647,253
===================== ============== ==============
Transfer of investment in operating leases
to equipment held for sale $ 2,327,558 $ - $ -
===================== ============== ==============
Joint venture interests assigned to affiliates in exchange
for amounts owed $ 1,876,000 $ - $ -
===================== ============== ==============
Recourse debt paid by affiliates $ 1,253,625 $ - $ -
===================== ============== ==============
See accompanying notes to consolidated financial statements
30
ICON Cash Flow Partners L.P. Seven
(A Delaware Limited Partnership)
Notes To Consolidated Financial Statements
December 31, 2004 and 2003
(1) Organization
ICON Cash Flow Partners L.P. Seven (the "Partnership") is an equipment
leasing business formed in the State of Delaware on May 23, 1995. The
Partnership is engaged in one business segment, the business of acquiring
equipment subject to leases.
The principal objective of the Partnership is to obtain the maximum
economic return from its investments for the benefit of its partners. To achieve
this objective, the Partnership: (i) acquired a diversified portfolio of leases
and financing transactions; (ii) made monthly cash distributions to its partners
commencing with each partner's admission to the Partnership, continuing through
the reinvestment period, which ended on November 9, 2002; (iii) re-invested
substantially all undistributed cash from operations and cash from sales of
equipment and financing transactions during the reinvestment period; and (iv) is
selling the Partnership's investments and is distributing the cash from sales of
such investments to its partners during the disposition period.
The Partnership's reinvestment period ended November 9, 2000 and the
Partnership commenced its disposition period. During the disposition period the
Partnership is distributing substantially all distributable cash from operations
and equipment sales to the partners and will continue the orderly termination of
its operations and affairs. The Partnership will not invest in any additional
finance or lease transactions during the disposition period.
The Partnership's maximum offering was $100,000,000. Operations commenced
on the Partnership's initial closing date, January 19, 1996 with the admission
of 26,367.95 limited partnership units at $100 per unit representing $2,636,795
of capital contributions. From January 20, 1996 through September 16, 1998 (the
final closing date) 973,628.86 additional units were admitted representing
$97,362,886 of capital contributions bringing the total admission to 999,996.81
units aggregating $99,999,681 in capital contributions. The Partnership redeemed
12,449.00 limited partnership units during the years 1997 through 2004, leaving
987,547.81 limited partnership units outstanding at December 31, 2004.
The General Partner of the Partnership is ICON Capital Corp. (the "General
Partner"), a Connecticut corporation. The General Partner manages and controls
the business affairs of the Partnership's equipment leases and financing
transactions under the terms of a management agreement with the Partnership.
Additionally, the General Partner has a 1% ownership interest in the
Partnership.
Profits, losses, cash distributions and disposition proceeds are allocated
99% to the limited partners and 1% to the General Partner until each limited
partner has received cash distributions and disposition proceeds sufficient to
reduce its adjusted capital contribution account to zero and receive, in
addition, other dist