The
accompanying notes are an integral part of these financial statements.
6
LEASE EQUITY
APPRECIATION FUND I, L.P.
NOTES TO FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
BASIS OF PRESENTATION
The
accompanying 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 year ended December 31, 2003. The results for the nine months ended September
30, 2004 are not necessarily indicative of the results that may be expected for the year
ending December 31, 2004.
Certain reclassifications have been made to the financial statements as of December 31, 2003 and for the
three and nine month periods ended September 30, 2003 to conform to the presentation as of September 30, 2004 and
for the three and nine month periods ended September 30, 2004.
NOTE 1 —
ORGANIZATION AND NATURE OF BUSINESS
The
Fund is a Delaware limited partnership that was formed on January 31, 2002. On June 30,
2004, the Fund’s general partner, LEAF Asset Management, Inc. merged into its parent,
LEAF Financial Corporation (“the General Partner” or “LEAF”). LEAF is
a wholly owned subsidiary of Resource Leasing, Inc., a wholly owned subsidiary of Resource
America, Inc. which is a publicly-traded company (NASDAQ: REXI) operating
in the real estate, financial services, energy and equipment leasing sectors.
The Fund seeks to acquire diversified portfolios 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. As of August 15, 2004, the date the Fund’s
offering period terminated, the Fund had raised $16,671,282 through the sale of 167,798 limited partner units and
$384,943 from the sale of 3,898 limited partner units from the reinvestment by limited partners of cash
distributions.
As of September 30, 2004 and December 31, 2003, 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 Fund’s 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 — (Continued)
September 30, 2004
(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 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
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.
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. At
September 30, 2004, the Fund had deposits at two banks totaling $2,319,021, of which
$2,119,021 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 — (Continued)
September 30, 2004
(Unaudited)
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 direct financing 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 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. 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 nine months ended
September 30, 2004 and 2003.
Other
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)
September 30, 2004
(Unaudited)
NOTE 2 — SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES — (Continued)
Income Taxes
Federal
and most 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 nine month periods ended September 30, 2004 and September 30, 2003, the Fund paid $1,236,384 and $138,609
for interest, respectively.
The Fund paid cash distributions of $114,071 in October 2004 which were accrued at September 30, 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
Partner Unit
Net loss per limited partner unit is computed by dividing net loss allocated to limited partners by the
weighted average number of limited partner units outstanding during the period. The weighted average number of
limited partner units outstanding during the period is computed based on the number of limited partner units issued
during the period weighted for the days outstanding during the period. There were no potentially dilutive
securities outstanding in any periods during 2004 or 2003.
Recent Accounting
Pronouncements
In
January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51” (“FIN 46”). In December
2003, the FASB issued a revised interpretation of FIN 46 (“FIN 46-R”), which
supersedes FIN 46 and clarifies and expands current accounting guidance for variable
interest entities (“VIE’s”). FIN 46 clarifies when a company should
consolidate in its financial statements the assets, liabilities and activities of a VIE.
FIN 46 provides general guidance as to the definition of a VIE and requires it to be
consolidated if a party with an ownership, contractual or other financial interest absorbs
the majority of the VIE’s expected losses, or is entitled to receive a majority of
the residual returns, or both. A variable interest holder that is such a primary
beneficiary of the VIE is required to consolidate the VIE’s assets, liabilities and
non-controlling interests at fair value at the date the interest holder first becomes the
primary beneficiary of the VIE. FIN 46 and FIN 46-R were effective immediately for all
VIEs created after January 31, 2003 and for VIEs created prior to February 1, 2003, no
later than the end of the first reporting period after March 15, 2004. The adoption of FIN
46 on July 1, 2003 had no impact on the Fund’s financial position or results of
operations.
10
LEASE EQUITY
APPRECIATION FUND I, L.P.
NOTES TO FINANCIAL
STATEMENTS — (Continued)
September 30, 2004
(Unaudited)
NOTE 2 — SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES — (Continued)
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
September 30, 2004 and December 31, 2003, other receivables include restricted cash of $2,128,266 and
$1,595,631, respectively, being held in reserve by the Fund’s lenders and $432,428
and $574,246, respectively, of customers’ payments deposited in a lockbox account
that have not yet been transferred to the Fund.
Other Assets
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