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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commissions file number 333-84730
LEASE EQUITY APPRECIATION FUND I, L.P.
(Exact name of registrant as specified in its charter)
Delaware 68-0492247
(State of Organization) (I.R.S. Employer Identification No.)
110 S. Poplar Street, Suite 101
Wilmington, Delaware 19801
(Address of principal executive offices) (Zip Code)
(215) 574-1636
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report.)
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. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
LEASE EQUITY APPRECIATION FUND I, L.P.
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
PAGE
-------
PART I FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2005 and
December 31, 2004 (Audited).......................................... 3
Consolidated Statements of Operations
Three Months Ended March 31, 2005 and 2004........................... 4
Consolidated Statement of Partners' Capital and Comprehensive Income
For the Three Months Ended March 31, 2005............................ 5
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2005 and 2004................... 6
Notes to Consolidated Financial Statements - March 31, 2005............... 7 - 17
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 18 - 22
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk................ 23
ITEM 4. Controls and Procedures................................................... 23
PART II OTHER INFORMATION
ITEM 6. Exhibits.................................................................. 24
SIGNATURES............................................................................... 25
2
PART I. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
LEASE EQUITY APPRECIATION FUND I, L.P.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2005 2004
------------- -------------
(Unaudited) (Audited)
ASSETS
Cash .............................................................. $ 3,060,788 $ 2,310,880
Restricted cash ................................................... 2,759,754 7,642,227
Due from lockbox .................................................. 340,454 531,558
Accounts receivable ............................................... 121,274 56,837
Direct financing leases and notes, net ............................ 91,053,613 53,150,659
Assets subject to operating leases, net of accumulated
depreciation of $515,438 and $316,084............................. 2,447,249 1,569,754
Fair value of interest rate swap .................................. 157,870 -
Other assets ...................................................... 865,691 836,441
------------- -------------
$ 100,806,693 $ 66,098,356
============= =============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Debt ............................................................ $ 87,583,244 $ 51,461,671
Accounts payable and accrued expenses ........................... 570,403 840,118
Due to related parties, net ..................................... 161,586 955,361
Fair value of interest rate swap ................................ - 52,141
------------- -------------
Total liabilities ............................................. 88,315,503 53,309,291
PARTNERS' CAPITAL ................................................. 12,491,460 12,789,065
------------- -------------
$ 100,806,693 $ 66,098,356
============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
3
LEASE EQUITY APPRECIATION FUND I, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
------------------------------
2005 2004
------------- -------------
Interest and rental income ........................................ $ 1,439,329 $ 624,824
Interest expense .................................................. 832,793 374,216
------------- -------------
Net interest and rental income .................................. 606,536 250,608
Provision for credit losses ....................................... 240,450 10,000
------------- -------------
366,086 240,608
Other income ...................................................... 70,769 61,168
------------- -------------
Operating income ................................................ 436,855 301,776
------------- -------------
Administrative expenses reimbursed to related party ............... 140,261 216,515
General and administrative ........................................ 105,237 43,997
Management fee to related party ................................... 154,239 80,340
Depreciation ...................................................... 202,522 53,512
------------- -------------
602,259 394,364
------------- -------------
Net loss ........................................................ $ (165,404) $ (92,588)
============= =============
Weighted average number of limited partnership units outstanding
during the period ................................................ 171,746 98,898
============= =============
Net loss per weighted average limited partnership unit -
basic and diluted ................................................ $ (0.95) $ (0.93)
============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
4
LEASE EQUITY APPRECIATION FUND I, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2005
(UNAUDITED)
GENERAL ACCUMULATED
PARTNER LIMITED PARTNERS OTHER PARTNERS' COMPREHENSIVE
------------- ----------------------------- COMPREHENSIVE CAPITAL (LOSS) INCOME
AMOUNT UNITS AMOUNT (LOSS) INCOME TOTAL TOTAL
------------- ------------- ------------- ------------- ------------- -------------
Balance, January 1, 2005 .. $ (20,021) 171,746 $ 12,861,227 $ (52,141) $ 12,789,065 $ -
Cash distributions ...... (3,422) - (338,790) - (342,212) -
Net loss ................ (1,654) - (163,750) - (165,404) (165,404)
Unrealized gain on
hedging derivative ..... - - - 210,011 210,011 210,011
------------- ------------- ------------- ------------- ------------- -------------
Balance, March 31, 2005 ... $ (25,097) 171,746 $ 12,358,687 $ 157,870 $ 12,491,460 $ 44,607
============= ============= ============= ============= ============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
5
LEASE EQUITY APPRECIATION FUND I, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------------
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................. $ (165,404) $ (92,588)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Loss (gain) on sale of equipment and lease dispositions, net ............ 2,882 (53,889)
Depreciation ............................................................ 202,522 53,512
Amortization of deferred financing costs ................................ 43,160 7,950
Provision for credit losses ............................................. 240,450 10,000
Increase in accounts receivable ......................................... (64,437) (3,606)
(Increase) in other assets .............................................. (62,543) (28,965)
Decrease in accounts payable and accrued expenses ....................... (269,715) (108,003)
Decrease in due from lockbox ............................................ 191,104 124,924
(Decrease) increase in amounts due to/from related parties, net ......... (793,775) 351,918
------------ ------------
Net cash (used in) provided by operating activities ................... (675,756) 261,253
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment under operating leases ......................... (1,080,017) -
Investment in direct financing leases and notes ......................... (43,485,136) (5,967,911)
Proceeds from direct financing leases and notes, net of earned income ... 4,456,737 2,048,653
Security deposits received, net ......................................... 494,661 15,080
Proceeds from sale of equipment and lease dispositions .................. 387,452 812,382
------------ ------------
Net cash used in investing activities ................................. (39,226,303) (3,091,796)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease (increase) in restricted cash .................................. 4,882,473 (118,418)
Increase in deferred financing costs .................................... (9,867) (16,490)
Increase in subscription deposits ....................................... - 105,000
Proceeds from debt ...................................................... 53,109,263 3,678,926
Repayment of debt ....................................................... (16,987,690) (1,397,629)
Limited Partners' capital contribution .................................. - 1,050,857
Partners' distributions paid ............................................ (342,212) (196,249)
Payment of offering costs incurred for the sale of partnership units .... - (136,378)
------------ ------------
Net cash provided by financing activities ............................. 40,651,967 2,969,619
------------ ------------
Increase in cash .......................................................... 749,908 139,076
Cash, beginning of period ................................................. 2,310,880 1,030,394
------------ ------------
Cash, end of period ....................................................... $ 3,060,788 $ 1,169,470
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
6
LEASE EQUITY APPRECIATION FUND I, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS
Lease Equity Appreciation Fund I, L.P. ("Fund"), a Delaware limited
partnership, was formed on January 31, 2002 by LEAF Financial Corporation, a
Delaware corporation ("General Partner"). The General Partner is a wholly owned
subsidiary of Resource Leasing, Inc., which is a wholly owned subsidiary of
Resource America, Inc. Resource America, Inc. is a publicly traded company
(Nasdaq: REXI) operating in the real estate, financial services, energy and
equipment leasing sectors. On March 3, 2003, the Fund satisfied its minimum
offering requirement and commenced operations.
The Fund seeks to acquire a diversified portfolio of equipment to
finance to end users throughout the United States. The Fund also seeks to
acquire existing portfolios of equipment subject to existing financings from
other equipment lessors. The primary objective of the Fund is to generate
regular cash distributions to its partners from its equipment lease portfolio
over the life of the Fund.
As of March 31, 2005 and December 31, 2004, in addition to its 1%
General Partner interest, the General Partner also held a 5% limited partner
interest in the Fund. The Fund will terminate on December 31, 2027, or earlier,
if a dissolution event occurs, as defined in the Limited Partnership Agreement
(the "Partnership Agreement").
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Fund
and its wholly-owned subsidiary, LEAF Fund I, LLC. All intercompany accounts and
transactions have been eliminated in consolidation.
RECLASSIFICATIONS
Certain reclassifications have been made to the March 31, 2004
consolidated financial statements to conform to the March 31, 2005 presentation.
CLASSIFICATION
Management believes that, consistent with the financial statement
presentation of other equipment leasing companies, it is more appropriate to
present the Fund's consolidated balance sheet on a non-classified basis, which
does not segregate assets and liabilities into current and non-current
categories.
7
LEASE EQUITY APPRECIATION FUND I, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
USE OF ESTIMATES
Preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("U.S. GAAP")
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Significant estimates
include the estimated unguaranteed residual values of leased equipment, the
allowance for possible losses and impairment of long-lived assets. Actual
results could differ from those estimates.
Unguaranteed residual value represents the estimated amount to be
received at lease termination from lease extensions or ultimate disposition of
the leased equipment. The estimates of residual values are based upon the Fund's
history with regard to the realization of residuals, available industry data and
the general partner's senior management's experience with respect to comparable
equipment. The estimated residual values are recorded as a component of
investments in leases on a net present value basis. Residual values are reviewed
periodically to determine if the current estimate of the equipment's fair market
value appears to be below its recorded estimate. If required, residual values
are adjusted downward to reflect adjusted estimates of fair market values. In
accordance with U.S. GAAP, upward adjustments to residual values are not
permitted.
The Fund's allowance for possible losses is primarily based on factors
which include the General Partner's historical loss experience, an analysis of
contractual delinquencies, economic conditions and trends, industry statistics
and lease portfolio characteristics. The Fund's policy is to charge off to the
allowance those leases which are in default and for which management has
determined the probability of collection to be remote.
The Fund reviews its long-lived assets for impairment whenever events or
circumstances indicate that the carrying amount of such assets may not be
recoverable. If it is determined that estimated undiscounted future cash flows
derived from long-lived assets will not be sufficient to recover their carrying
amounts, an impairment charge will be recorded if the carrying amount of the
asset exceeds their estimated fair values.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Fund to
concentrations of credit risk consist of excess cash. The Fund deposits its
excess cash in high-quality financial institutions. As of March 31, 2005, the
Fund had deposits at three banks totaling $3,183,564, of which $2,883,564 was
over the insurance limit of the Federal Deposit Insurance Corporation. No losses
have been experienced on such deposits.
8
LEASE EQUITY APPRECIATION FUND I, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
REVENUE RECOGNITION
The Fund's investment in financing assets consists of direct financing
leases, notes and operating leases. Leases are recorded in accordance with
Statement of Financial Accounting Standards No. 13, "Accounting for Leases," and
its various amendments and interpretations.
Direct Financing Leases. Certain of the Fund's lease transactions are
accounted for as direct financing leases (as distinguished from operating
leases). Such leases transfer substantially all benefits and risks of equipment
ownership to the customer. The Fund's investment in direct financing leases and
notes consists of the sum of the total future minimum lease payments receivable
and the estimated unguaranteed residual value of leased equipment, less unearned
finance income. Unearned finance income, which is recognized as revenue over the
term of the financing by the effective interest method, represents the excess of
the total future minimum contracted payments plus the estimated unguaranteed
residual value expected to be realized at the end of the lease term over the
cost of the related equipment. The Fund generally discontinues the recognition
of revenue for direct financing leases for which payments are more than 90 days
past due.
Operating Leases. Leases not meeting any of the criteria to be
classified as direct financing leases are deemed to be operating leases. Under
the accounting for operating leases, the cost of the leased equipment, including
acquisition fees associated with lease placements, is recorded as an asset and
depreciated on a straight-line basis over the equipment's estimated useful life,
generally up to seven years. Rental income consists primarily of monthly
periodic rentals due under the terms of the leases. The Fund recognizes rental
income on a straight line basis. Generally, during the lease terms of existing
operating leases, the Fund will not recover all of the undepreciated cost and
related expenses of its rental equipment and, therefore, it is prepared to
remarket the equipment in future years. The Fund's policy is to review, on a
quarterly basis, the expected economic life of its rental equipment in order to
determine the recoverability of its undepreciated cost. In accordance with U.S.
GAAP, the Fund writes down its rental equipment to its estimated net realizable
value when it is probable that its carrying amount exceeds such value and the
excess can be reasonably estimated; gains are only recognized upon actual sale
of the rental equipment. There were no write-downs of equipment during the three
month periods ended March 31, 2005 and 2004.
Fees from delinquent payments are recognized when received and are
included in other income.
INCOME TAXES
Federal and state income tax laws provide that the income or losses of
the Fund are reportable by the Partners on their individual income tax returns.
Accordingly, no provision for such taxes has been made in the accompanying
financial statements.
9
LEASE EQUITY APPRECIATION FUND I, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the three months ended March 31, 2005 and 2004, the Fund paid
interest of $723,192 and $381,066, respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Fund accounts for its derivative instruments and hedging activities
in accordance with Statement of Financial Accounting Standard 149 ("SFAS 149"),
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities."
SFAS 149 clarifies and amends SFAS No. 133 ("SFAS 133"), "Accounting for
Derivative Financial Instruments and Hedging Activities" for implementation
issues raised by constituents and includes the conclusions reached by the FASB
on certain FASB Staff Implementation Issues.
TRANSFERS OF FINANCIAL ASSETS
In connection with establishing its revolving line of credit with WestLB
AG, the Fund formed a bankruptcy remote special purpose entity through which the
financing is arranged. Under SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," the Fund's
transfers of assets to the special purpose entity do not qualify for sales
accounting treatment due to certain call provisions that the Fund maintains.
Accordingly, assets and related debt of the special purpose entity are included
in the Fund's consolidated balance sheets. The Fund's leases and restricted cash
are assigned as collateral for these borrowings and there is no further recourse
to the general credit of the Fund. Collateral in excess of these borrowings
represents the Fund's maximum loss exposure.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For cash, receivables and payables, the carrying amounts approximate
fair values because of the short maturity of these instruments. The carrying
value of debt approximates fair market value since interest rates approximate
current market rates. The interest rate swap discussed in Note 8 is recorded at
fair value in the accompanying consolidated balance sheet.
NOTE 3 - RESTRICTED CASH
Restricted Cash as of March 31, 2005 and December 31, 2004 includes cash
being held in reserve by the Fund's lenders.
10
LEASE EQUITY APPRECIATION FUND I, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 4 - DUE FROM LOCKBOX
Customer payments are deposited into a lockbox shared with our General
Partner and other partnerships serviced by our General Partner. The lockbox is
in the name of U.S. Bank NA as trustee under an inter-creditor agreement amongst
our General Partner, the other partnerships and their respective lenders.
Amounts recorded as due from lockbox on the accompanying Balance Sheet,
represent customer payments received by the lockbox, applied to the respective
customer's accounts, but not transferred to our bank account.
NOTE 5 - INVESTMENT IN DIRECT FINANCING LEASES AND NOTES
The Fund's direct financing leases are for initial lease terms ranging
from 3 to 84 months. The interest rates on notes receivable range from 7% to
21%. As of March 31, 2005 and December 31, 2004, 23% and 14% of leased
equipment, respectively, was located in California.
MARCH 31, DECEMBER 31,
2005 2004
------------- -------------
(Audited)
Direct financing leases .................................... $ 86,777,495 $ 51,340,412
Notes receivable ........................................... 4,276,118 1,810,247
------------- -------------
$ 91,053,613 $ 53,150,659
============= =============
The components of the net investment in direct financing leases as of
March 31, 2005 and December 31, 2004 are as follows:
MARCH 31, DECEMBER 31,
2005 2004
------------- -------------
(Audited)
Total future minimum lease payments ..................... $ 99,851,478 $ 58,892,148
Unearned rental income .................................. (12,510,984) (7,401,200)
Residuals, net of unearned residual income .............. 613,364 401,166
Security deposits ....................................... (926,363) (431,702)
------------- -------------
87,027,495 51,460,412
Allowance for possible losses ........................... (250,000) (120,000)
------------- -------------
$ 86,777,495 $ 51,340,412
============= =============
11
LEASE EQUITY APPRECIATION FUND I, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 5 - INVESTMENT IN DIRECT FINANCING LEASES AND NOTES - (CONTINUED)
The following is a summary of the Fund's allowance for possible losses
for the periods indicated:
FOR THE THREE MONTHS ENDED
MARCH 31,
-----------------------------
2005 2004
------------- -------------
Allowance for possible losses, beginning of period ...... $ 120,000 $ 5,000
Provision for credit losses ............................. 240,450 10,000
Net write offs .......................................... (110,450) -
------------- -------------
Allowance for possible losses, end of period ............ $ 250,000 $ 15,000
============= =============
The future minimum lease payments and related rental payments expected
to be received on non-cancelable direct financing leases, notes and operating
leases at March 31, 2005 are as follows:
DIRECT
PERIODS ENDING FINANCING OPERATING
MARCH 31, LEASES NOTES LEASES TOTAL
-------------------- -------------- -------------- -------------- --------------
2006 ............... $ 26,918,077 $ 744,573 $ 780,277 $ 28,442,927
2007 ............... 29,729,556 1,057,334 803,944 31,590,834
2008 ............... 21,999,442 999,666 491,568 23,490,676
2009 ............... 13,883,167 603,965 203,998 14,691,130
2010 ............... 6,313,665 458,052 107,132 6,878,849
Thereafter ......... 1,007,571 412,528 - 1,420,099
-------------- -------------- -------------- --------------
$ 99,851,478 $ 4,276,118 $ 2,386,919 $ 106,514,515
============== ============== ============== ==============
NOTE 6 - OTHER ASSETS
As of March 31, 2005 and December 31, 2004, other assets include
$761,204 and $794,456, respectively, of unamortized deferred financing costs
which are being amortized over the terms of the related debt.
12
LEASE EQUITY APPRECIATION FUND I, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 7 - DEBT
The table below summarizes the Fund's debt at March 31, 2005 and
December 31, 2004 as follows:
MARCH 31, DECEMBER 31,
2005 2004
------------- -------------
Sovereign Bank, revolving warehouse line of credit, with an
aggregate borrowing limit of $10 million collateralized by
specific finance receivables and related equipment. Interest
on this facility is calculated at LIBOR plus 2.5% per annum
(5.09% at March 31, 2005). Interest and principal are due
monthly. The line expires in May 2005................................. $ 8,349,549 $ 3,436,872
WestLB AG, New York Branch revolving line of credit, with an
aggregate borrowing limit of $75 million collateralized by
specific lease receivables and related equipment, with a 1%
credit reserve of the outstanding line of credit. Interest
on this facility is calculated at LIBOR plus 1.10% per
annum. To mitigate fluctuations in interest rates the Fund
has entered into a interest rate swap agreements. The
interest rate swap agreements terminate January 20, 2012.
The interest rate swap agreements fix the interest rate on
this facility at 5.15%. Interest and principal are due as
payments are received under the financings. The line of
credit is renewable for one year periods on December 30,
2005, 2006 and 2007................................................... 57,038,980 23,258,244
National City Commercial Capital Corporation f/k/a
Information Leasing Corporation, collateralized by specified
lease receivables, generally equal to the sum of the
receivables, discounted to present value at 5.79%, less a
credit reserve of 8% after security deposit. The loan is
repayable as payments are made under the leases or equipment
financing transactions collateralizing the loan, with a
final maturity date of November 10, 2009.............................. 10,592,571 12,017,788
OFC Capital, a division of ALFA Financial Corporation,
collateralized by specific lease receivables equal to 93% of
the aggregate payments due under the related equipment lease
or equipment finance transaction, discounted at an interest
rate of 6.9%, funded subject to a credit reserve of 3% of
the loan amount. The loan is repayable as payments are made
under the leases or equipment financing transactions
collateralizing the loan, with a final maturity date of
February 15, 2009..................................................... 11,602,144 12,748,767
------------- -------------
Total outstanding debt................................................ $ 87,583,244 $ 51,461,671
============= =============
13
LEASE EQUITY APPRECIATION FUND I, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 7 - DEBT - (CONTINUED)
The debt maturity for each of the succeeding twelve month periods ending
March 31 and thereafter, is as follows:
2006.................... $ 33,668,278
2007.................... 22,201,417
2008.................... 16,361,960
2009.................... 10,251,522
2010.................... 4,376,787
Thereafter.............. 723,280
---------------
$ 87,583,244
===============
NOTE 8 - DERIVATIVE INSTRUMENTS
The majority of the Fund's assets and liabilities are financial
contracts with fixed and variable rates. Any mismatch between the repricing and
maturity characteristics of the Fund's assets and liabilities exposes us to
interest rate risk when interest rates fluctuate. For example, the Fund's assets
are structured on a fixed-rate basis, but since funds borrowed through warehouse
facilities are obtained on a floating-rate basis, the Fund is exposed to a
certain degree of risk if interest rates rise which in turn will increase the
Fund's borrowing costs. In addition, when the Fund originates assets, it bases
its pricing in part on the spread it expects to achieve between the interest
rate it charges its customers and the effective interest cost the Fund will pay
when it funds those loans. Increases in interest rates that increase the Fund's
permanent funding costs between the time the assets are originated and the time
they are funded could narrow, eliminate or even reverse this spread.
To manage interest rate risk, the Fund employs a hedging strategy using
derivative financial instruments such as interest rate swaps which are
designated as cash flow hedges. The Fund does not use derivative financial
instruments for trading or speculative purposes. The Fund manages the credit
risk of possible counterparty default in these derivative transactions by
dealing exclusively with counterparties with investment grade ratings.
Before entering into a derivative transaction for hedging purposes, the
Fund determines that a high degree of initial effectiveness exists between the
change in the value of the hedged item and the change in the value of the
derivative from a movement in interest rates. High effectiveness means that the
change in the value of the derivative will be effectively offset by the change
in the value of the hedged asset or liability. The Fund measures the
effectiveness of each hedge throughout the hedge period. Any hedge
ineffectiveness, as defined by Statement of Financial Accounting Standards
("SFAS") No. 133/138/149 is recognized in the income statement.
There can be no assurance that the Fund's hedging strategies or
techniques will be effective, that profitability will not be adversely affected
during any period of change in interest rates or that the costs of hedging will
exceed the benefits.
14
LEASE EQUITY APPRECIATION FUND I, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 8 - DERIVATIVE INSTRUMENTS - (CONTINUED)
At March 31, 2005 and December 31, 2004 the Fund had an unrealized gain
of $157,870 and an unrealized loss of $52,141, respectively, which is included
in accumulated other comprehensive income (loss). The Fund recognized no gain or
loss during the three months ended March 31, 2005 for hedge ineffectiveness.
Assuming market rates remain constant with the rates of March 31, 2005, $52,150
in accumulated other comprehensive income is expected to be recognized in
earnings over the next 12 months.
NOTE 9 - TRANSACTIONS WITH AFFILIATES
The General Partner receives an acquisition fee for assisting the Fund
in acquiring equipment and portfolios of equipment subject to existing equipment
leases. This fee is equal to 2% of the purchase price paid for the equipment and
portfolios of equipment subject to existing equipment leases, including in each
instance, debt it incurs or assumes in connection with the acquisition.
The General Partner receives a subordinated annual asset management fee
of 3% of gross rental payments for operating leases, as defined in the
Partnership Agreement, or 2% of gross rental payments for full payout leases, as
defined in the Partnership Agreement. During the Fund's five-year investment
period, the management fee will be subordinated to the payment of a cumulative
annual distribution to the Fund's Limited Partners equal to 8% of their capital
contributions, as adjusted by distributions deemed to be a return of capital.
The General Partner and its affiliate, Anthem Securities, Inc. ("Anthem
Securities"), a subsidiary of Resource America, Inc., received an organization
and offering expense allowance of 3% of the offering proceeds and an
underwriting fee of 2% of the offering proceeds raised. These charges were
recorded by the Fund as offering costs incurred for the sale of limited
partnership units on the Statement of Partners' Capital.
Anthem Securities, Inc. received underwriting fees of 2% of the offering
proceeds for obtaining and managing the group of selling broker-dealers who sold
units during the offering period.
The General Partner receives a subordinated commission equal to one-half
of a competitive commission, to a maximum of 3% of the contract sales price, for
arranging the sale of the Fund's equipment after the expiration of a lease. This
commission will be subordinated to the payment of a cumulative 8% annual return
to the Limited Partners on their capital contributions, as adjusted by
distributions deemed to be a return of capital. No commissions were paid during
the three months ended March 31, 2005 and 2004.
The General Partner will receive a commission equal to the lesser of a
competitive rate or 2% of gross rental payments derived from any re-lease of
equipment if the re-lease is not with the original lessee or its affiliates. No
re-lease commissions were paid during the three months ended March 31, 2005 and
2004.
15
LEASE EQUITY APPRECIATION FUND I, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 9 - TRANSACTIONS WITH AFFILIATES - (CONTINUED)
The General Partner and its parent company are reimbursed by the Fund
for certain costs of services and materials used by or for the Fund except those
items covered by the above-mentioned fees.
The following is a summary of fees and costs of services and materials
charged by the General Partner or its affiliates during the three months ended
March 31, 2005 and 2004:
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2005 2004
------------- -------------
Acquisition fees ....................... $ 891,303 $ 106,040
Asset management fees .................. $ 154,239 $ 80,340
Organization and offering expenses ..... $ - $ 31,526
Reimbursed administrative expenses ..... $ 140,261 $ 216,515
Underwriting fees ...................... $ - $ 104,852
Due to related parties, net as of March 31, 2005 and December 31, 2004
represents net monies due to the General Partner for management fees and lease
acquisition fees not yet paid.
NOTE 10 - ALLOCATION OF PARTNERSHIP INCOME, LOSS AND CASH DISTRIBUTIONS
Cash distributions, if any, are made monthly as follows: 99% to the
Limited Partners and 1% to the General Partner until the Limited Partners have
received an amount equal to their unpaid cumulative return (8% of their adjusted
capital contribution) and thereafter, to investment and reinvestment in
investments or, if the General Partner elects not to invest or reinvest such
distributable cash, 99% to the Limited Partners and 1% to the General Partner.
Net income for any fiscal period during the reinvestment period (the
period commencing March 3, 2003 and ending August 15, 2009) is allocated 99% to
the Limited Partners and 1% to the General Partner. Income during the
liquidation period, as defined in the Partnership Agreements, will be allocated
first to the Partners in proportion to and to the extent of the deficit
balances, if any, in their respective capital accounts. Thereafter, net income
will be allocated 99% to the Limited Partners and 1% to the General Partner.
NOTE 11 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes net income and all other changes in
the equity of a business during a period from non-owner sources. These changes,
other than net income (loss), are referred to as "other comprehensive income
(loss)" and for the Fund, only include changes in the fair value of unrealized
hedging gains and losses. Comprehensive loss for the three month period ended
March 31, 2004, only includes net loss.
16
LEASE EQUITY APPRECIATION FUND I, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2005
(UNAUDITED)
NOTE 12 - NET LOSS PER LIMITED PARTNERSHIP UNIT
Net loss per limited partnership unit is computed by dividing net loss
allocated to the Fund's Limited Partners by the weighted average number of
limited partnership units outstanding during the period. The weighted average
number of limited partnership units outstanding during the period is computed
based on the number of limited partnership units issued during the period
weighted for the days outstanding during the period. Basic loss per limited
partnership unit equals dilutive net loss per limited partnership unit because
there are no potential dilutive units.
17
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
WHEN USED IN THIS FORM 10-Q, THE WORDS "BELIEVES" "ANTICIPATES," "EXPECTS" AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH
STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES MORE PARTICULARLY
DESCRIBED IN ITEM 1, UNDER THE CAPTION "RISKS INHERENT IN OUR BUSINESS", IN OUR
ANNUAL REPORT ON FORM 10-K FOR FISCAL 2004. THESE RISKS AND UNCERTAINTIES COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. READERS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE
DATE HEREOF. WE UNDERTAKE NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY
REVISIONS TO FORWARD-LOOKING STATEMENTS WHICH WE MAY MAKE TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE OF THIS FORM 10-Q OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
OVERVIEW
We are a Delaware limited partnership formed on January 31, 2002. On
June 30, 2004, our General Partner, LEAF Asset Management, Inc., merged into its
parent, LEAF Financial Corporation. Consequently, our General Partner is a
wholly owned subsidiary of Resource Leasing, Inc., a wholly owned subsidiary of
Resource America, Inc. a publicly-traded company (Nasdaq: REXI) operating in the
real estate, financial services, equipment leasing sectors and energy.
As of August 15, 2004, the date our offering period terminated, we had
raised $17,060,772 through the sale of 171,746 limited partner units.
We acquire equipment that is financed for third parties. We may also
acquire portfolios of equipment subject to existing leases and notes from other
equipment lessors. Our principal objective is to generate regular cash
distributions to our limited partners. The equipment we finance is principally
for general business and industrial use and we focus on the small to mid sized
business market, generally businesses with 500 or fewer employees, $1 billion or
less in total assets or $100 million or less in total annual sales. We
specialize in financing business essential equipment within a price range of
$20,000 to $2 million. The equipment we finance includes computers, copiers,
furniture, heating, ventilation and air conditioning equipment, industrial
equipment, medical equipment and telecommunications equipment.
Our leases consist of both direct financing and operating leases which
are recorded in accordance with generally accepted accounting principles in the
United States of America. Under the direct financing method of accounting for
leases, interest income (the excess of the aggregate future rentals and
estimated unguaranteed residuals upon expiration of the lease over the related
equipment cost) is recognized over the life of the lease using the interest
method. Under the operating method of accounting for leases, the cost of the
leased equipment, including acquisition fees associated with lease placements,
is recorded as an asset and depreciated on a straight-line basis over its
estimated useful life. Rental income on operating leases consists primarily of
monthly periodic rentals due under the terms of the leases. Generally, during
the lease terms of existing operating leases, we will not recover all of the
undepreciated cost and related expenses of our rental equipment and, therefore,
we are prepared to remarket the equipment in future years. When a direct
financing lease is 90 days or more delinquent, the lease is classified as being
on non-accrual and we do not recognize interest income on that lease until the
lease becomes less than 90 days delinquent.
18
We commenced operations on March 3, 2003. As of March 31, 2005 our
portfolio contained 2,364 equipment leases with 2,194 individual end users in 50
states. No individual end user or single piece of equipment accounted for more
than 3% of our portfolio based on original cost of the equipment. As of March
31, 2005, we had net investment of $2,447,249 in equipment under operating
leases and a net investment of $91,053,613 in direct financing leases and notes
for a total investment in lease assets of $93,500,862. Our average original
equipment cost per equipment finance transaction was $47,603. As of March 31,
2005, the weighted average initial term of a lease was 46 months.
The following schedules detail the type, net investment (before
allocating the allowance for possible losses) and percentage of the various
types of equipment leased by us under operating lease, direct financing leases
and notes as of March 31, 2005 and December 31, 2004 (dollars in thousands):
DIRECT FINANCING LEASES AND NOTES
MARCH 31, 2005
-------------------------
NET
TYPE OF EQUIPMENT INVESTMENT PERCENTAGE
- ------------------------------ ----------- -----------
Industrial Equipment ......... $ 24,580 26.9%
Medical Equipment ............ 23,413 25.6
Office Equipment ............. 11,678 12.8
Computers .................... 10,476 11.5
Software ..................... 5,581 6.1
Garment Care ................. 4,566 5.0
Restaurant Equipment ......... 3,940 4.3
Building systems ............. 3,362 3.7
Communications ............... 3,112 3.4
Agriculture .................. 596 0.7
----------- -----------
$ 91,304 100.0%
=========== ===========
DECEMBER 31, 2004
-------------------------
NET
TYPE OF EQUIPMENT INVESTMENT PERCENTAGE
- ------------------------------ ----------- -----------
Medical Equipment ............ $ 13,656 25.6%
Industrial Equipment ......... 11,184 21.0
Computers .................... 8,289 15.6
Software ..................... 4,705 8.8
Office Equipment ............. 4,305 8.1
Garment Care ................. 3,916 7.4
Communications ............... 2,612 4.9
Building systems ............. 2,260 4.2
Restaurant Equipment ......... 1,892 3.6
Agriculture .................. 452 0.8
----------- -----------
$ 53,271 100.0%
=========== ===========
OPERATING LEASES
MARCH 31, 2005
-------------------------
NET
TYPE OF EQUIPMENT INVESTMENT PERCENTAGE
- ------------------------------ ----------- -----------
Computers .................... $ 916 37.4%
Office Equipment ............. 618 25.2
Industrial Equipment ......... 414 16.9
Communications ............... 379 15.5
Medical Equipment ............ 87 3.6
Software ..................... 31 1.3
Restaurant Equipment ......... 2 0.1
----------- -----------
$ 2,447 100.0%
=========== ===========
DECEMBER 31, 2004
-------------------------
NET
TYPE OF EQUIPMENT INVESTMENT PERCENTAGE
- ------------------------------ ----------- -----------
Computers .................... $ 762 48.5%
Office Equipment ............. 473 30.1
Communications ............... 272 17.3
Software ..................... 36 2.3
Industrial Equipment ......... 15 1.0
Medical Equipment ............ 9 0.6
Restaurant Equipment ......... 3 0.2
----------- -----------
$ 1,570 100.0%
----------- -----------
The following schedules detail the type of business by standard
industrial classification, that lease our equipment as of March 31, 2005 and
December 31, 2004 (dollars in thousands):
19
DIRECT FINANCING LEASES AND NOTES
MARCH 31, 2005
-------------------------
NET
TYPE OF BUSINESS INVESTMENT PERCENTAGE
- ------------------------------ ----------- -----------
Services ..................... $ 46,299 50.7%
Manufacturing ................ 11,531 12.6
Retail Trade ................. 10,744 11.8
Construction ................. 4,943 5.4
Transportation/
Communication/
Energy ..................... 4,834 5.3
Wholesale Trade .............. 4,831 5.3
Finance/Insurance/
Real Estate ................ 4,296 4.7
Agriculture .................. 2,725 3.0
Public Administration ........ 1,100 1.2
----------- -----------
$ 91,304 100.0%
=========== ===========
DECEMBER 31, 2004
-------------------------
NET
TYPE OF BUSINESS INVESTMENT PERCENTAGE
- ------------------------------ ----------- -----------
Services ..................... $ 33,412 62.7%
Manufacturing ................ 5,775 10.9
Retail Trade ................. 5,549 10.4
Finance/Insurance/
Real Estate ................ 2,506 4.7
Transportation/
Communication/
Energy ..................... 1,993 3.7
Wholesale Trade .............. 1,991 3.7
Construction ................. 1,482 2.8
Public Administration ........ 534 1.0
Mining ....................... 29 0.1
----------- -----------
$ 53,271 100.0%
=========== ===========
OPERATING LEASES
MARCH 31, 2005
-------------------------
NET
TYPE OF BUSINESS INVESTMENT PERCENTAGE
- ------------------------------ ----------- -----------
Services ..................... $ 1,170 47.8%
Construction ................. 497 20.3
Wholesale Trade .............. 272 11.1
Manufacturing ................ 198 8.1
Transportation/
Communication/
Energy .................... 149 6.1
Finance/Insurance/
Real Estate ............... 118 4.8
Public Administration ........ 22 0.9
Retail Trade ................. 14 0.6
Mining ....................... 7 0.3
----------- -----------
$ 2,447 100.0%
=========== ===========
DECEMBER 31, 2004
-------------------------
NET
TYPE OF BUSINESS INVESTMENT PERCENTAGE
- ------------------------------ ----------- -----------
Services ..................... $ 862 54.9%
Wholesale Trade .............. 266 16.9
Manufacturing ................ 175 11.1
Transportation/
Communication/
Energy ..................... 104 6.7
Finance/Insurance/
Real Estate ................ 96 6.1
Construction ................. 52 3.3
Mining ....................... 8 0.5
Public Administration ........ 4 0.3
Retail Trade ................. 3 0.2
----------- -----------
$ 1,570 100.0%
=========== ===========
In evaluating our allowance for possible uncollectible accounts, we
consider our contractual delinquencies, economic conditions and trends, industry
statistics, lease portfolio characteristics and our General Partner's prior
experience with similar lease assets. As of March 31, 2005, our credit
evaluation indicated the need for an allowance for possible losses of our lease
assets of $250,000.
We utilize debt facilities in addition to equity to fund the
acquisitions of lease portfolios. As of March 31, 2005, our outstanding debt was
$87,583,244.
20
RESULTS OF OPERATIONS
Three month period ended March 31, 2005 compared to three month period ended
March 31, 2004
Our interest and rental income increased to $1,439,329 for the three
month period ended March 31, 2005 as compared to $624,824 in the three month
period ended March 31, 2004, an increase of $814,505 (130%). This increase is
attributable to our increase in lease assets. Total lease assets increased to
$93,500,862 at March 31, 2005 as compared to $27,651,356 at March 31, 2004, an
increase of $65,849,506 (238%). The proceeds from the sale of limited
partnership units and additional lines of credit allowed us to acquire more
leases from our General Partner. Interest expense increased to $832,793 for the
three month period ended March 31, 2005 as compared to $374,216 for the three
month period ended March 31, 2004, an increase of $458,577 (123%) due to our
increase in debt incurred to acquire equipment subject to leases. Debt was
$87,583,244 at March 31, 2005 as compared to $22,667,699 at March 31, 2004, an
increase of $64,915,545 (286%). As our lease portfolio grows and we incur
additional debt, interest expense will increase in future periods. Our provision
for credit losses increased to $240,450 for the three month period ended March
31, 2005 as compared to $10,000 for the three month period ended March 31, 2004,
an increase of $230,450. As our portfolio grows our provision for credit losses
will also grow. Total operating expenses increased to $602,259 for the three
month period ended March 31, 2005 as compared to $394,364 for the three month
period ended March 31, 2004, an increase of $207,895 (53%) This increase was
primarily due to increases in management fees paid to our General Partner as
well as an increase in depreciation expense. Management fees increased to
$154,239 for the three month period ended March 31, 2005 as compared to $80,340
for the three month period ended March 31, 2004, an increase of $73,899 (92%).
This increase is directly attributable to our growth in lease assets because
management fees are based on a percentage of customer payments received.
Depreciation expense from operating leases increased to $202,522 for the three
month period ended March 31, 2005 as compared to $53,512 for the three month
period ended March 31, 2004, an increase of $149,010 (278%). Depreciation
expense grew due to the increase in assets subject to operating leases.
Our net loss for the three month periods ended March 31, 2005 and 2004
was $165,404 and $92,588, respectively. The loss per limited partnership unit,
after the loss allocated to our General Partner for the three month periods
ended March 31, 2005 and 2004 was $.95 and $.93, respectively, based on a
weighted average number of limited partnership units outstanding of 171,746 and
98,898, respectively. To attain profitability, we need to increase our revenues
by acquiring additional lease portfolios. It is expected that our debt facility
with WestLB AG, will allow us to purchase additional lease portfolios to attain
profitability. However, income (loss) before depreciation, amortization and
increases in the allowance for credit losses for the three month period ended
March 31, 2005 and 2004, was $210,118 and $(22,076), respectively.
Partners' distributions paid for the three month periods ended March 31,
2005 and March 31, 2004 were $342,212 and $196,249, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Our major sources of liquidity have been obtained by the sale of
partnership units and the issuance of debt. The offering of partnership units
terminated in August 2004.
Our primary cash requirements, in addition to normal operating expenses,
are for debt service, investment in leases and distributions to partners. In
addition to cash generated from operations, we plan to meet our cash
requirements through new credit facilities.
21
The following table sets forth our sources and uses of cash for the
periods indicated:
FOR THE THREE MONTH PERIODS
ENDED MARCH 31,
-----------------------------
2005 2004
------------- -------------
Net cash (used in) provided by operating activities ........ $ (675,756) $ 261,253
Net cash used in investing activities ...................... (39,226,303) (3,091,796)
Net cash provided by financing activities .................. 40,651,967 2,969,619
------------- -------------
Increase in cash ........................................... $ 749,908 $ 139,076
============= =============
Our liquidity is affected by our ability to leverage our portfolio
through expansion of credit facilities. Our increase in our debt to equity
ratio, to seven to one at March 31, 2005 from four to one at December 31, 2005,
reflects the additional borrowings under our WestLB line of credit that we
entered into in December 2004. We would expect that our leverage ratio will
remain in the seven to one range as we become fully invested under our lines of
credit. In addition, changes in interest rates will affect the market value of
our portfolio and our ability to obtain financing. In general, the market value
of an equipment lease will change in inverse relation to an interest rate change
where the lease has a fixed rate of return. Accordingly, in a period of rising
interest rates, the market value of our equipment leases will decrease. A
decrease in the market value of our portfolio will adversely affect our ability
to obtain financing against our portfolio or to liquidate it. In addition, the
terms of our credit facilities have financial covenants related to our net worth
and leverage. As of March 31, 2005, we were in compliance with all such
covenants. If we do not meet the requirements of the covenants in the future,
default could occur that will have an adverse effect on our operations and could
force us to liquidate our portfolio. In the event that our WestLB line of credit
is not renewed in December 2005, we expect to obtain an alternative credit
facility with comparable terms.
Our liquidity could also be affected by higher than expected equipment
lease defaults. Higher than expected equipment lease defaults will result in a
loss of anticipated revenues. These losses may adversely affect our ability to
make distributions to partners and, if the level of defaults is sufficiently
large, may result in our inability to fully recover our investment in the
underlying equipment. In evaluating our allowance for possible losses on
uncollectible leases, we consider our contractual delinquencies, economic
conditions and trends, industry statistics, lease portfolio characteristics and
our General Partner's management's prior experience with similar lease assets.
At March 31, 2005, our credit evaluation indicated the need for an allowance for
possible losses of $250,000. As our lease portfolio increases we anticipate the
allowance for possible losses will increase.
Net cash used in operations for the three month period ended March 31,
2005 was $(675,756) as compared to cash provided by operations of $261,253 for
the three month period ended March 31, 2004 a decrease of $(937,009) (359%).
This decrease is primarily related to the payment of monies owed to our General
Partner for purchases of lease portfolios in December 2004 which were paid in
January 2005.
Net cash flows used in investing activities for the three month period
ended March 31, 2005 was ($39,226,303) as compared to ($3,091,796) for the three
month period ended March 31, 2004, an increase of ($36,134,507) (1,169%). This
increase is attributable to the increase in investment in leased assets of
($38,597,242) which is offset by proceeds received from leases. The expansion of
our credit facilities allowed us to increase its investment in lease portfolios.
Net cash provided by financing activities for the three month period
ended March 31, 2005 was $40,651,967. This was primarily due to debt proceeds of
$53,109,263 used to acquire lease portfolios (reduced by repayment of debt of
$16,987,690). The increase in borrowings is due to the expansion of our credit
facilities in 2005.
22
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
At March 31, 2005, our outstanding debt totaled $87,583,244, which
consists of fixed rate debt of $22,194,715 and variable rate debt of
$65,388,529. Our variable rate debt consists of $57,038,980 with WestLB AG and
$8,349,549 with Sovereign Bank. To mitigate interest rate risk on the WestLB AG
debt we employ a hedging strategy using derivative financial instruments such as
interest rate swaps, which fixes the interest rate on this facility at 5.15%.
The interest rate on the Sovereign facility is calculated at LIBOR plus 2% per
annum. The weighted average interest rate for this facility was 4.97% for the
three months ended March 31, 2005. Holding all variables constant, if interest
rates hypothetically increased or decreased by 10%, our net loss would change by
approximately $8,000.
ITEM 4. - CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our periodic reports under
the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the U.S. Securities
and Exchange Commission's rules and forms, and that such information is
accumulated and communicated to our management, including our General Partner's
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, our management recognized that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and our
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
Under the supervision of our General Partner's Chief Executive Officer
and Chief Financial Officer, we have carried out an evaluation of the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based upon that evaluation, our General Partner's
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective at the reasonable assurance
level.
There have been no significant changes in our internal controls over
financial reporting during the three months ended March 31, 2005 that has
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting during our most recent fiscal year.
23
PART II - OTHER INFORMATION
ITEM 6. - EXHIBITS.
Exhibit No. Description
----------- ---------------------------------------------------------------------
3.1 (1) Amended and Restated Agreement of Limited Partnership
3.2 (2) Certificate of Limited Partnership
4 (2) Forms of letters sent to limited partners confirming their investment
31.1 Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer
32.1 Section 1350 Certifications of Chief Executive Officer
32.2 Section 1350 Certifications of Chief Financial Officer
----------
(1) Filed previously as Appendix A to our Post-Effective Amendment
No. 3 to our Registration Statement on Form S-1, filed on January
24, 2004.
(2) Filed previously as an Exhibit to Amendment No. 1 to our
Registration Statement on Form S-1 filed on June 7, 2002.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEASE EQUITY APPRECIATION FUND I, L.P.
A Delaware Limited Partnership
By: LEAF Financial Corporation,
its General Partner
May 16, 2005 /s/ Crit DeMent
-------------------------------------------
CRIT DEMENT
Chairman and Chief Executive Officer
of the General Partner
May 16, 2005 /s/ Miles Herman
-------------------------------------------
MILES HERMAN
President, Chief Operating Officer and
Director of the General Partner
May 16, 2005 /s/ Robert K. Moskovitz
-------------------------------------------
ROBERT K. MOSKOVITZ
Chief Financial Officer, Treasurer
of the General Partner
25