The accompanying notes
are an integral part of these financial statements.
6
LEASE EQUITY
APPRECIATION FUND I, L.P.
NOTES TO FINANCIAL
STATEMENTS
March 31, 2004
Basis of Presentation
The
accompanying unaudited financial statements have been prepared by Lease Equity Appreciation Fund I
("the Fund") in accordance with accounting principles generally accepted in the United States of America,
pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. These unaudited financial statements should be
read in conjunction with the audited financial statements and notes thereto included in
the Fund's Annual Report on Form 10-K for the fiscal year ended December 31, 2003.
The results for the three months ended March 31, 2004 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2004.
Note 1. —
Organization and Nature of Business
The Fund is a
Delaware limited partnership that was formed on January 31, 2002 by LEAF Asset Management, Inc.
(“the General Partner”). The General Partner is a Delaware corporation and a wholly owned subsidiary of LEAF
Financial Corporation (“LEAF”).
LEAF is a wholly owned subsidiary of Resource Leasing, Inc., 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.
As
of March 31, 2004, the Fund raised $10,266,973 through the sale of 103,268 limited
partnership units and $292,187 from the sale of 2,956 limited partnership units
from the reinvestment of cash distributions by limited partners. The Fund seeks to
acquire a diversified portfolio of equipment to lease to end users throughout the United
States. The Fund also seeks to acquire existing portfolios of equipment subject to
existing leases from other equipment lessors. The primary objective of the Fund is to
generate regular cash distributions to the limited partners from its equipment lease
portfolio over the life of the Fund.
At
March 31, 2004 and December 31, 2003, the General Partner had purchased a
limited partnership interest in the Fund of 4.3% and 5.0%, respectively. 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
Financial Statement
Classification
Management
believes that, consistent with the financial statement presentation of other equipment
leasing companies, it is more appropriate to present the Fund’s balance sheets 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 FINANCIAL STATEMENTS
March 31, 2004
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 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 senior management’s prior 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
Fund’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.
Impairment of Long-Lived
Assets
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 future cash flows derived from long-lived assets will not be
sufficient to recover their carrying amounts, an impairment charge will be recorded to
reduce the carrying amounts to the assets’ 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. At March 31, 2004, the Fund had deposits at a bank of
$1,218,296, of which $1,118,296 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 FINANCIAL
STATEMENTS
March 31, 2004
Note 2. — Summary of
Significant Accounting Policies (Continued)
Revenue Recognition
The
Fund’s investment in leases consists of direct financing and operating leases which
are recorded in accordance with Statement of Financial Accounting Standards No. 13,
“Accounting for Leases” and its various amendments and interpretations.
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. A lease is a direct financing lease if
the creditworthiness of the customer and the collectibility of lease payments are
reasonably certain and it meets one of the following criteria: (i) the lease transfers
ownership of the equipment to the customer at the end of the lease term; (ii) the lease
contains a bargain purchase option; (iii) the lease term at inception is at least 75% of
the estimated economic life of the leased equipment; or (iv) the present value of the
minimum lease payments is at least 90% of the fair market value of the leased equipment at
inception of the lease. The Fund’s investment in leases consists of the sum of the
total future minimum lease payments receivable and the estimated unguaranteed residual
value of leased equipment, less unearned lease income. Unearned lease income, which is
recognized as revenue over the term of the lease by the effective interest method,
represents the excess of the total future minimum lease 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.
Leases
not meeting any of the four criteria to be classified as direct financing leases are
deemed to be operating leases. Under the accounting for operating leases, the cost,
including acquisition fees associated with lease placements, of the leased equipment is
recorded as an asset and depreciated on a straight-line basis over its estimated useful
life, up to seven years. Rental income consists primarily of monthly periodic rentals due
under the terms of the leases. 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. Fund policy is to review quarterly 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 months ended
March 31, 2004 or 2003.
Fee
income consists of fees for delinquent payments which are recognized when received.
9
LEASE EQUITY
APPRECIATION FUND I, L.P.
NOTES TO FINANCIAL
STATEMENTS — (Continued)
March 31, 2004
Note 2. — Summary of
Significant Accounting Policies (Continued)
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.
Supplemental Disclosure
of Cash Flow Information
During
the three month period ended March 31, 2004, the Fund paid $381,066 for interest. No cash
payments were made during the three month period ended March 31, 2003 for interest.
The
General Partner declared and paid cash distributions of $71,019 in April 2004 for the
month of March 2004 to all admitted partners as of March 31, 2004. The General Partner
declared and paid a cash distribution of $65,676 in January 2004 for the month of December
2003 to all admitted partners as of December 31, 2003.
Net Loss per Limited
Partnership Unit
Net
loss per limited partnership unit is computed by dividing net loss allocated to 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.
10
LEASE EQUITY
APPRECIATION FUND I, L.P.
NOTES TO FINANCIAL
STATEMENTS — (Continued)
March 31, 2004
Note 2. — Summary of
Significant Accounting Policies (Continued)
Recent Accounting
Pronouncements
In
January 2003, the Financial Accounting Standards Board issued FIN 46 “Consolidation of Variable Interest
Entities”, revised December 2003 (“FIN 46R”). FIN 46R clarifies the
application of Accounting Research Bulletin 51, “Consolidated Financial
Statements,” for certain entities that do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial support from
other parties or in which equity investors do not have the characteristics of a
controlling financial interest (“variable interest entities”). Variable interest
entities within the scope of FIN 46R will be required to be consolidated by their primary
beneficiary. The primary beneficiary of a variable interest entity is determined to be the
party that absorbs a majority of the entity’s expected losses, receives a majority of
its expected returns, or both. FIN 46R applies to entities considered to be
special-purpose entities, as defined, no later than as of the end of the first reporting
period ending after December 15, 2003 for other entities and no later than the end of the first reporting
period that ends after March 15, 2004. The Fund does not have any special purpose entities
as of March 31, 2004.
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.
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, are referred to as
“other comprehensive income.” The Fund has no other elements of comprehensive
income (loss), other than net income (loss) to report.
Other Receivables
At
March 31, 2004 and December 31, 2003, other receivables include cash reserves of
$1,714,049 and $1,595,631, respectively, being held by the Fund’s lenders
and $449,321 and $574,246, respectively, of customers’ payments deposited in a
lockbox account that had not yet been transferred to the Fund.
11
LEASE EQUITY
APPRECIATION FUND I, L.P.
NOTES TO FINANCIAL
STATEMENTS — (Continued)
March 31, 2004
Note 2. — Summary of
Significant Accounting Policies (Continued)
Other Assets
At
March 31, 2004 and December 31, 2003 other assets include $162,855 and $154,315,
respectively, of unamortized deferred financing costs which are being amortized over the terms
of the related debt.
Note 3. — 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 partnership General Partner elects
not to invest or reinvest such distributable cash, 99% to the limited partners and 1% to
the General Partner. The General Partner declared cash distributions of $201,592 during
the three months period ended March 31, 2004, to all admitted partners as of March 31,
2004. No cash distributions were made during the three month period ended March 31, 2003.
The General Partner declared and paid a cash distribution of $71,019 in April 2004 for the
month of March 2004 to all admitted partners as of March 31, 2004. The General Partner
declared and paid a cash distribution of $65,676 in January 2004 for the month of December
2003, to all admitted partners as of December 31, 2003.
Net
income for any fiscal period during the reinvestment period (the period commencing with
March 3, 2003 and ending five years after the last closing date on which any limited
partner is admitted) is allocated 99% to the limited partners and 1% to the General
Partner. Income during the liquidation period 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.
Net
losses for any fiscal period are allocated 99% to the limited partners and 1% to the
General Partner until the limited partners have been allocated losses equal to the excess,
if any, of their aggregated capital account balances over their aggregated adjusted
capital contributions. Next, losses are allocated to the partners in proportion to and to
the extent of their respective remaining positive capital account balances, if any.
Thereafter, losses are allocated 99% to the limited partners and 1% to the General
Partner.
12
LEASE EQUITY
APPRECIATION FUND I, L.P.
NOTES TO FINANCIAL
STATEMENTS — (Continued)
March 31, 2004
Note 4. —
Investment in Lease Receivables
The
Fund’s direct financing leases are for initial lease terms ranging from approximately
3 to 80 months. Unguaranteed residuals for direct financing leases represent the estimated
amounts recoverable at lease termination from lease extensions or disposition of the
equipment. As of March 31, 2004, approximately 16% and 10% of leased equipment was located
in the states of California and Illinois, respectively. No other state accounted for more
than 10% of the Fund's equipment portfolio.
The
components of the net investment in direct financing leases are as follows at:
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