ITEM 1. BUSINESS
General
We are Lease Equity Appreciation Fund I, L.P., a Delaware limited partnership that was formed on January 31, 2002. Our general partner is LEAF Financial Corporation. Our general partner 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 financial fund management, real estate and equipment finance sectors. As of August 15, 2004, the date our offering period terminated, we raised $17,060,772 through the sale of 171,746 of our limited partner units.
We acquire diversified portfolios of equipment that is leased to third parties. We may also acquire portfolios of equipment subject to existing leases from other equipment lessors. Our principal objective is to generate regular cash distributions to the 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.
We enter into both operating leases and full payout leases and equipment notes. Under operating leases, the rent we receive on a net present value basis will be in an amount that, when taken together with the amount we estimate we will receive from selling or re-leasing the equipment, or from extension payments, after the termination of the initial lease, which we call the “residual,” will be sufficient to return our invested capital plus an appropriate return. Under full payout leases and notes, the payments we receive over the term of the financing will return our invested capital plus an appropriate return without consideration of the residual and the obligor may acquire the equipment at the end of the lease term for a nominal amount.
We commenced operations on March 3, 2003. As of December 31, 2005 our portfolio contained 2,428 equipment leases with 2,141 individual end users located in states. No individual end user or single piece of equipment accounted for more than 1% of our portfolio based on original cost of the equipment. As of December 31, 2005, we had a net investment of $1,743,257 in equipment under operating leases and a net investment of $80,782,648 in direct financing leases and notes for a total investment in financing assets of $82,525,905.
We utilize debt facilities in addition to our equity to fund the acquisitions of lease portfolios. As of December 31, 2005, our outstanding debt was $77,326,886.
Our Lease Portfolio
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 leases, direct financing leases and notes as of December 31, 2005 and 2004 (dollars in thousands):
Direct Financing Leases and Notes
Operating Leases
The following schedules detail the type of business by standard industrial classification that lease our equipment as of December 31, 2005 and 2004 (dollars in thousands):
Direct Financing Leases and Notes
Operating Leases
Our average original equipment cost per equipment lease transaction was $49,820. As of December 31, 2005 and 2004, the average initial term of our financings was months and 42 months, respectively. As of December 31, 2005 and 2004, 22% and 17%, respectively, of our equipment was located in California. No other state accounted for more than 10% of our equipment portfolio.
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 December 31, 2005, our credit evaluation indicated the need for an allowance for possible losses of our lease assets of $405,000.
Our allowance for possible losses as of December 31, 2005 and 2004 is as follows:
Debt Facilities
We have augmented the proceeds of our offering with debt, and intend to continue to finance a significant portion of the cost of the equipment we acquire. We are not limited in the amount of debt, including financings through securitizations, we may incur. Our ability to obtain financing will, however, depend upon our General Partner's assessment of whether funds are available at rates and upon terms that are economically advantageous to us. As a result, the amount of our financings may vary significantly from our expectations.
As of December 31, 2005, the outstanding balance of the secured financing we have obtained from three lenders was $77,326,886. These loans are described below.
On December 31, 2004, Leaf Fund I LLC, our wholly owned subsidiary entered into a secured loan agreement with WestLB AG, New York Branch. This financing arrangement is a revolving line of credit, with an aggregate borrowing limit of $75.0 million collateralized by specific lease receivables and related equipment, with a credit reserve of 1%. As of December 31, 2005 the outstanding balance under this financing arrangement was $62,244,034. Interest on this facility is calculated at LIBOR plus 1.10% per annum. To mitigate fluctuations in interest rates the Fund has entered into interest rate swap agreements which fix the interest rate on this facility at 5.15%. The loan agreement is renewable for a one year period on December 31, 2006 and 2007. Interest and principal are due as payments are received under the leases.
In November 2003, we entered into a Master Loan and Security Agreement with OFC Capital, a division of ALFA Financial Corporation. Under the terms of the loan agreement, OFC makes available to us loans in an aggregate principal amount not to exceed $15.0 million. Each loan under the agreement will equal 93% of the aggregate payments due under the related equipment lease or equipment finance transaction that collateralizes such loan, discounted at an interest rate of 6.9%. Each loan will be funded subject to a credit reserve of 3% of the loan amount. As of December 31, 2005, the outstanding balance under this financing arrangement was $8,288,944. The balance is due February 15, 2009.
In September 2003, we entered into a financing arrangement with National City Commercial Capital Corporation (formerly Information Leasing Corporation, a subsidiary of Provident Bank of Cincinnati, Ohio). Under this arrangement, we assigned specified leases and their related receivables to National City Commercial Finance at a price generally equal to the sum of the receivables, discounted to present value at a discount rate of 5.79% and with a credit reserve of 8% after security deposit and transaction costs. As of December 31, 2005, the outstanding balance under this financing arrangement was $6,793,908. The loan is repayable as payments are made under the financings collateralizing the loan, with a final maturity date of June 10, 2010.
In May 2004, we entered into a $10.0 million financing arrangement with Sovereign Bank for a revolving warehouse facility. The facility had an aggregate borrowing limit of $10.0 million collaterized by specific lease receivables and related equipment. Interest on this facility was calculated at LIBOR plus 2.5% per annum. The line was paid in full as of December 31, 2005.
Agreements with our General Partner
We do not directly employ any persons to manage or operate our business. These functions are provided by our General Partner and employees of the General Partner and/or its affiliates. We reimburse our General Partner and/or its affiliates for all direct and indirect costs of services provided, including the cost of employees and benefits properly allocable to us and all other expenses necessary or appropriate to the conduct of our business.
Our General Partner and its affiliates receive substantial fees and other compensation from us such as:
·
our General Partner has a partnership interest equal to 1% of all of our taxable income, losses and cash distributions. Cash distributions paid to our General Partner in the years ended December 31, 2005, 2004 and were $13,879, $9,768 and $4,794, respectively;
·
our General Partner received an organization and offering expense allowance of 3% of offering proceeds to reimburse it for expenses incurred in preparing us for registration or qualification under federal and state securities laws and subsequently offering and selling our units. This expense allowance did not cover underwriting fees or sales commissions, but did cover reimbursement of bona fide accountable due diligence expenses of selling dealers to a maximum of 1/2 of 1% of offering proceeds. Organization and offering expenses reimbursed to the General Partner for the year ended December 31, 2004 and 2003 were $226,438 and $285,249, respectively.
·
our General Partner receives fees for acquiring our equipment of 2% of the purchase price we pay, including debt we incur or assume in connection with the acquisition. Fees for acquiring our equipment paid to the General Partner for the years ended December 31, 2005, 2004 and 2003 were $1,211,566, $850,220 and $516,239, respectively;
·
our General Partner receives a subordinated annual asset management fee of either 3% of gross rental payments on our operating leases or 2% of gross rental payments on our full payout leases and notes. During the five-year reinvestment period, the management fee will be subordinated to the payment to limited partners of a cumulative annual distribution of 8% of their capital contributions, as adjusted by distributions deemed to be a return of capital. Asset management fees paid to the General Partner for the years ended December 31, 2005, 2004, 2003 were $840,403, $383,798 and $73,095, respectively;
·
our General Partner will receive 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 our equipment after the expiration of a lease. This commission will be subordinated to the return to our Limited Partners of the purchase price of their units plus a cumulative annual distribution, compounded daily, of 8% of their capital contributions, as adjusted by distributions deemed to be a return of capital. No commissions were paid in the years ended December 31, 2005, 2004 and 2003;
·
our 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, payable as we receive rental payments from re-lease. We will not, however, pay a re-lease commission if the re-lease is with the original lessee or its affiliates. No re-lease commissions were paid in the years ended December 31, 2005, 2004 and 2003;
·
our General Partner is reimbursed for operating and administrative expenses, subject to limitations contained in our partnership agreement. Reimbursed administrative expenses paid to the General Partner for the years ended December 31, 2005 2004 and 2003 were $554,611, $482,180 and $594,985, respectively;
·
Anthem Securities, Inc., which was the dealer-manager for the offering of our units and an affiliate of our General Partner, received an underwriting fee of 2% of the offering proceeds for obtaining and managing the group of broker-dealers who sold the units in our offering. From this fee, Anthem Securities reimbursed selling broker-dealers up to 1% of the proceeds of each unit sold by them for marketing expenses. Anthem Securities was entitled to receive sales commissions of 8% of the proceeds of each unit sold by it. For the years ended 2004 and 2003, underwriting fees of $141,542 and $179,184, respectively, were paid to Anthem Securities. Anthem Securities did not sell any units and did not receive any sale commission during our offering period.
Competition
The equipment leasing business is highly fragmented and competitive. We compete with:
·
a large number of national, regional and local banks, savings banks, leasing companies and other financial institutions;
·
captive finance and leasing companies affiliated with major equipment manufacturers; and
·
other sources of equipment lease financing, including other publicly- offered partnerships.
Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we have. Competition with these entities may reduce the creditworthiness of potential lessees or borrowers to whom we have access or decrease our yields. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. A lower cost of funds could enable a competitor to offer leases or loans at rates which are less than ours, potentially forcing us to lower our rates or lose origination volume.
Employees
As is commonly the case with limited partnerships, we do not directly employ any of the persons responsible for our management or operations. Rather, the personnel of LEAF Financial Corporation and or its affiliates’ manage and operate our business. Officers of our General Partner may spend a substantial amount of time managing the business and affairs of LEAF Financial Corporation and its affiliates and may face a conflict regarding the allocation of their time between our business and affairs and their other business interests. The officers of our General Partner who provide services to us are not required to work full time on our affairs. These officers may devote significant time to the affairs of our General Partner's affiliates and be compensated by these affiliates for the services rendered to them. There may be significant conflicts between us and affiliates of our General Partner regarding the availability of these officers to manage us.
ITEM 1A.
ITEM 1A. RISK FACTORS
Our success will be subject to risks inherent in the equipment leasing business, any of which may affect our ability to operate profitably.
A number of factors may affect our ability to operate profitably. These include:
·
the quality of the equipment we lease;
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the continuing strength of the equipment manufacturers;
·
the timing of equipment purchases and our ability to forecast technological advances;
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technological and economic obsolescence;
·
changes in economic conditions, including fluctuations in demand for equipment, interest rates and inflation rates;
·
defaults by lessees; and
·
increases in our expenses, including labor, tax and insurance expenses.
Higher than expected equipment lease defaults may result in losses.
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. While we will seek to repossess and re-lease or sell the equipment subject to a defaulted lease, we may not be able to do so on advantageous terms. If a lessee files for protection under the bankruptcy laws, we may experience difficulties and delays in recovering the equipment from the defaulting lessee. The equipment may be returned in poor condition and we may be unable to enforce important lease provisions against an insolvent lessee, including the contract provisions that require the lessee to return the equipment in good condition. In some cases, a lessee's deteriorating financial condition may make trying to recover what the lessee owes impractical. The costs of recovering equipment upon a lessee's default, enforcing the lessee's obligations under the lease, and transporting, storing, repairing and finding a new lessee or purchaser for the equipment may be high and may affect our ability to make distributions or
result in a loss to us. If a lessee defaults on a lease we acquired using borrowed funds or subsequently financed, the entire proceeds from the re-leased or sold equipment will typically first be applied to payment of the financing and only after full repayment would we be entitled to any remaining proceeds. In these circumstances, we may lose some or all of our investment in the equipment.
Using "leverage" to build our portfolio subjects us to the risk that our revenues may not be sufficient to cover our operating costs plus debt service and, consequently, may result in losses.
While leverage can enhance our return on invested capital, if the return on investments we finance fails to cover the fixed cost of the financings, or if the return is negative, our ability to make distributions will be impaired and the value of our net assets will decline more rapidly than would be the case in the absence of leverage. We may pledge some of our entire portfolio as collateral for our financings. If we are unable to pay our debt service because of the failure of our lessees or borrowers to make lease or loan payments, or due to other factors, we may lose the pledged collateral. Lenders or securitizes may require covenants that could restrict our flexibility in the future. In order to repay our financing, we may be required to dispose of assets at a time we would otherwise not do so.
If we are unable to realize the residual value of our equipment, we may incur losses.
Our ability to recover the full equipment purchase price and our expected return in connection with an operating lease depends on the potential value of the equipment once the primary lease term expires. We call this the "residual value." The residual value will depend upon numerous factors beyond our control, including:
·
whether the original lessee desires to retain the equipment;
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the cost of comparable new equipment;
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the obsolescence or poor condition of the leased equipment; and
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the existence of a secondary market for the type of used equipment.
Interest rate changes may reduce the value of our portfolio and our returns on it.
Changes in interest rates will affect the market value of our portfolio. In general, the market value of an equipment lease will change in inverse relation to an interest rate change where it 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. Interest rate changes will also affect the return we obtain on new equipment leases. During a period of declining rates, our reinvestment of rental payments may be at lower rates than we obtained in prior equipment leases or the equipment leases being repaid, thereby reducing our gross revenues. Also, increases in interest on financing we obtain will not necessarily be reflected in increased rates of return on the equipment leases funded through that debt, which would adversely affect our net return on them. Accordingly, interest rate changes may materially affect our revenues, which in turn may affect the amount we are able to distribute to Limited Partners.
Damage or disruptions to our General Partner's operating systems could make us less attractive as a source of equipment leases.
Our ability to originate leases, manage our operations and realize residual values from our equipment leases depends upon the operating systems of our General Partner, particularly its computer, telecommunications and related equipment, and its ability to protect those systems against damage or disruptions from power loss, telecommunications failure, computer intrusions or viruses or similar adverse events. Although our General Partner has implemented security and protective measures, our General Partner's systems could still be vulnerable. Any damage or disruption to these systems could make us less attractive to customers as a source of equipment leases.
We may be unable to obtain insurance for certain types of losses.
While our equipment leases generally require lessees or borrowers to have comprehensive insurance on the equipment under lease and to assume the risk of loss, some losses may be either uninsurable or not economically insurable, such as from war or earthquakes. Furthermore, we can neither anticipate nor obtain insurance against all possible contingencies that may affect the equipment. If an event against which we have no insurance were to occur, we could lose some or all of our investment in the affected equipment.
If we are, or become, subject to usury laws, it could result in reduced revenues or, possibly, lags on our investment.
Equipment leases have sometimes been deemed to be loan transactions subject to state usury laws. These laws impose maximum interest rates that may be charged on loans as well as penalties for violation, including restitution of excess interest and unenforceability of debt. We seek to structure our leases so that they will not be deemed to be loans or to violate state usury laws. However, uncertainties in the application of some laws may result in inadvertent violations which could result in reduced investment returns or, possibly, loss on an investment.
Investments in joint ventures may be subject to risks that our co-venturer may have different business objectives than ours.
Our partnership agreement permits us to invest in joint ventures. Investing in joint ventures involves risks not present when directly investing in equipment to lease to end users. These risks include the possibility that our co-venturer may have business or economic objectives or interests that are inconsistent with ours and want to manage the joint venture in ways that do not maximize our return. Among other things, actions by a co-venturer might subject equipment leases owned by the venture to liabilities greater than those we contemplate. Also, when more than one person controls a venture, there may be a stalemate, or impasse, on decisions, including decisions regarding a proposed sale or other transfer of assets. Moreover, while our partnership agreement requires that any joint venture arrangement contain provisions permitting one venturer to buy the equipment from the other co-venturer in the case of a sale, it may not have the resources to do so.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2.
ITEM 2. PROPERTIES
We do not own or lease any real property.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are not subject to any pending legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our Limited Partners during the fourth quarter of the year ended December 31, 2005.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our limited partnership units are not publicly traded. There is no market for our limited partnership units and it is unlikely that any will develop. The following table shows the number of equity security holders as of December 31, 2005:
Total distributions paid to limited partners for years ended December 31, 2005, 2004 and 2003 were $1,373,982, $967,980 and $474,950, respectively.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read together with our financial statements, the notes to our financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
We are Lease Equity Appreciation Fund I L.P. (the “Fund”), a Delaware limited partnership that was formed on January 31, 2002. On June 30, 2004, our 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 financial fund management, real estate and equipment finance sectors.
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 seek to acquire a diversified portfolio of 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 the 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, $1.0 billion or less in total assets or $100.0 million or less in total annual sales. We specialize in financing business essential equipment within a price range of $20,000 to $2.0 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 cost and related expenses of 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 become less than 90 days delinquent.
We commenced operations on March 3, 2003. As of December 31, 2005 our portfolio contained 2,428 equipment leases with 2,141 individual end users located in states. No individual end user or single piece of equipment accounted for more than 1% of our portfolio based on original cost of the equipment. As of December 31, 2005, we had a net investment of $1,743,257 in equipment under operating leases and a net investment of $80,782,648 in direct financing leases and notes for a total investment in financing assets of $82,525,905. Our average original equipment cost per equipment lease transaction was $49,820. As of December 31, 2005, the average initial term of our financings was 47 months.
We utilize debt facilities in addition to our equity to fund the acquisitions of lease portfolios. As of December 31, 2005 our outstanding debt was $77,326,886.
Results of Operations
Year Ended December, 31, 2005 Compared to Year Ended December 31,
Total revenues increased to $7,703,829 for the year ended December 31, 2005 as compared to $3,537,123 in the year ended December 31, 2004, an increase of $4,166,706 (118%). This increase was primarily attributable to our increase in interest and rental income. Our interest income increased to $6,197,420 for the year ended December 31, 2005 as compared to $2,921,349 in the year ended December 31, 2004, an increase of $3,276,071 (112%). Our rental income increased to $992,691 for the year ended December 31, 2005 as compared to $433,373 in the year ended December 31, 2004, an increase of $559,318 (129%). This is attributable to our increase in leased assets. Total lease assets increased to $82,525,905 in the year ended December 31, 2005 as compared to $55,152,115 in the year ended December 31, 2004, an increase of $27,373,790 (50%). This growth was driven by our General Partner’s increased
sales and marketing efforts supported by lines of financing. Total expenses increased to $8,387,692 for the year ended December 31, 2005 as compared to $3,786,797 in the year December 31, 2004, an increase of $4,600,895 (121%). This increase was primarily attributable to an increase in interest expense, provision for credit losses, management fees paid to our general partner and depreciation expense. Interest expense increased to $4,344,009 in the year ended December 31, 2005 as compared to $1,873,986 in the year ended December 31, 2004, an increase of $2,470,023 (132%) due to our increase in debt incurred to acquire equipment subject to leases. Debt increased to $77,326,886 at December 31, 2005 as compared to $51,461,671 at December 31, 2004, an increase of $25,865,215 (50%). Our provision for credit losses increased to $1,352,191 in the year ended December 31, 2005 as compared to $394,928 in the year ended December 31, 2004, an increase of $957,263 (242%). The increase in our provision for credit losses was principally a result of the growth of our lease portfolio. Though we experienced a significant increase in our provision for credit losses, this increase was within our expectations. We provide for bad debts when losses are likely to occur based on a migration analysis of past due payments and economic conditions. Management fees increased to $840,403 in the year ended December 31, 2005 as compared to $383,798 in the year ended December 31, 2004, an increase of $456,605 (119%). This increase is directly attributable to our growth in lease assets, since management fees are paid based on lease payments received. Depreciation expense from operating leases increased to $820,650 in the year ended December 31, 2005 as compared to $342,865 in the year ended December 31, 2004, an increase of $477,785 (139%). This increase is due to an increase in operating leases acquired.
Our net loss for the years ended December 31, 2005 and 2004 was $683,863 and $249,674, respectively. The loss per limited partnership unit, after the loss allocated to our General Partner for the years ended December 31, 2005 and 2004 was $3.94 and $1.80, respectively, based on a weighted average number of limited partnership units outstanding of 171,746 and 137,000, respectively.
Partners’ distributions paid during the years ended December 31, 2005 and December 31, 2004 were $1,387,861 and $977,748, respectively.
Year Ended December, 31, 2004 Compared to Year Ended December 31,
Total revenues increased to $3,537,123 for the year ended December 31, 2004 as compared to $973,055 in the year ended December 31, 2003, an increase of $2,564,068 (264%). This increase was primarily attributable to our increase in interest and rental income. Our interest income increased to $2,921,349 for the year ended December 31, 2004 as compared to $781,989 in the year ended December 31, 2003, an increase of $2,139,360 (274%). Our rental income increased to $433,373 for the year ended December 31, 2004 as compared to $184,197 in the year ended December 31, 2003, an increase of $249,167 (135%). This increase is attributable to our increase in leased assets. Total lease assets increased to $55,152,115 in the year ended December 31, 2004 as compared to $24,554,103 in the year ended December 31, 2003, an increase of $30,598,012 (55%). This growth was driven by our General Partner’s increased sales and marketing efforts supported by lines of financing. Total cost increased to $3,786,797 for the year ended December 31, 2004 as compared to $1,369,340 in the year December 31, 2003, an increase of $2,417,457 (177%). This increase was primarily attributable to an increase in interest expense, provision for credit losses, management fees paid to our general partner and depreciation expense. Interest expense increased to $1,873,986 in the year ended December 31, 2004 as compared to $321,472 in the year ended December 31, 2003, an increase of $1,552,514 (483%) due to our increase in debt incurred to acquire equipment subject to leases. Debt increased to $51,461,671 at December 31, 2004 as compared to $20,386,402 at December 31, 2003, an increase of $31,075,269 (152%). Our provision for credit losses increased to $394,928 in the year ended December 31, 2004 as compared to $5,000 in the year ended December 31, 2003, an increase of $389,928. Management fees increased to $383,798 in the year ended December 31, 2004 as compared to $73,095 in the year ended December 31, 2003, an increase of $310,703 (425%). This increase is directly attributable to our growth in lease assets. Depreciation expense from operating leases increased to $342,865 in the year ended December 31, 2004 as compared to $167,622 in the year ended December 31, 2003, an increase of $175,243 (105%). This increase is due to an increase in operating leases acquired.
Our net loss for the years ended December 31, 2004 and 2003 was $249,674 and $396,285, respectively. The loss per limited partnership unit, after the loss allocated to our General Partner for the years ended December 31, 2004 and 2003 was $1.80 and $6.42, respectively, based on a weighted average number of limited partnership units outstanding of 137,000 and 61,149, respectively.
Partners’ distributions paid during the years ended December 31, 2004 and December 31, 2003 were $977,748 and $479,744, respectively.
Liquidity and Capital Resources
General
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.
The following table sets forth our sources and uses of cash for the periods indicated:
Our liquidity is affected by our ability to leverage our portfolio through our credit facilities. 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 December 31, 2005, we were in compliance with all such covenants. If we do not meet the requirements of the covenants in the future, defaults could occur that will have an adverse effect on our operations and could force us to liquidate our portfolio.
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. As of December 31, 2005, our credit evaluation indicated the need for an allowance for possible losses of $405,000. As our lease portfolio increases we anticipate the allowance for possible losses will increase.
We describe factors affecting our liquidity, as well as the risks and uncertainties relating to our ability to generate this liquidity, in Item 1A, “Risk Factors" and in this item in "Results of Operations,” and "Contractual Obligations and Commercial Commitments."
The decrease in cash provided by operations is primarily due to the reduction to accrued expenses and amounts due to our General Partner in the year ended December 31, 2005 as compared to the year ended December 31, 2004.
Our investing activities utilized $1,816,375 less cash in the year ended December 31, 2005 as compared to the year ended December 31, 2004. This was primarily due to an increase in proceeds from direct financing leases and notes of $19,417,336 which was partially offset by our increase in investments in equipment finances of $17,567,137.
Net cash provided by our financing activities increased by $273,285 for the year ended December 31, 2005 as compared to the year ended December 31, 2004. This increase in our cash flows is principally reflective of the following:
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a decrease in net borrowings of $5,210,054 in the year ended December 31, 2005 as compared to the year ended December 31, 2004;
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a decrease in partners’ capital contributions and related offering costs of $7,552,469 and $935,940, respectively, in the year ended December 31, 2005 as compared to the year ended December 31, 2004;
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an increase in distributions to partners of $410,113 in the year ended December 31, 2005 as compared to the year ended December 31, 2004;
·
restricted cash increased in 2004 by $6,046,595 and decreased in 2005 by $5,754,294, resulting in a net change of $11,800,889, and
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a net decrease in deferred financing costs of $709,092, these costs were related to the WestLB facility, in the year ended December 31, 2005 as compared to the year ended December 31, 2004.
Contractual Obligations and Commercial Commitments
The following table sets forth our obligations and commitments as of December 31, 2005.
Contractual cash obligations:
Recently Issued Accounting Pronouncements
We do not believe that there are any recently issued, but not yet effective, accounting standards that will have a material effect on our financial position or results of operations.
Critical Accounting Policies
Revenue Recognition
Our investment in financing assets consists of direct financing leases and 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 our 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. Our 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 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.
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. We recognize rental income on a straight line basis. Generally, during the lease terms of existing operating leases, we will not recover all of the cost and related expenses of our rental equipment and, therefore, we are prepared to remarket the equipment in future years. Our policy is to review, on a quarterly basis, the expected economic life of our rental equipment in order to determine the recoverability of its undepreciated cost. In accordance with U.S. GAAP, we write down our 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 years ended December 31, 2005 and 2004.
Notes Receivable. Our investment in notes receivable consists of the sum of the total future minimum loan payments receivable 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 term over the cost of the related equipment.
We generally discontinue the recognition of revenue for leases and notes for which payments are more than 90 days past due. Fees from delinquent payments are recognized when received and are included in other income.
Derivative Instruments and Hedging Activities. We account for our derivative instruments and hedging activities in accordance with Statement of Financial Accounting Standard or SFAS 149 "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 clarifies and amends SFAS No. 133, “Accounting for Derivative Financial Instruments and Hedging Activities” for implementation issues raised by constituents or includes the conclusions reached by the FASB on certain FASB Staff Implementation Issues.
ITEM 7A.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2005 our outstanding debt totaled $77,326,886, which consists of fixed rate debt of $15,082,852 and variable rate debt of $62,244,034.
To mitigate interest rate risk on the variable 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% on a weighted average basis.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Partners
Lease Equity Appreciation Fund I, L.P. and Subsidiary
We have audited the accompanying consolidated balance sheets of Lease Equity Appreciation Fund I, L.P. and subsidiary as of December 31, 2005 and 2004 and the related consolidated statements of operations, partners’ capital and comprehensive income (loss) and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lease Equity Appreciation Fund I, L.P. and subsidiary as of December 31, 2005 and 2004 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
/s/ Grant Thornton LLP
Cleveland, Ohio
February 17, 2006
LEASE EQUITY APPRECIATION FUND I, L.P.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
The accompanying notes are an integral part of these consolidated financial statements.
LEASE EQUITY APPRECIATION FUND I, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
The accompanying notes are an integral part of these consolidated financial statements.
LEASE EQUITY APPRECIATION FUND I, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
The accompanying notes are an integral part of these consolidated financial statements.
LEASE EQUITY APPRECIATION FUND I, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
The accompanying notes are an integral part of these consolidated financial statements.
LEASE EQUITY APPRECIATION FUND I, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS
Lease Equity Appreciation Fund I, L.P. (the “Fund”), a Delaware limited partnership, was formed on January 31, 2002 by LEAF Financial Corporation, a Delaware corporation (the “General Partner”). As of December 31, 2005, 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 operating in the real estate, financial fund management and equipment finance sectors. As of August 15, 2004, the date our offering period terminated, the Fund had raised $17,060,772 through the sale of 171,746 limited partner units.
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 finance companies, primarily its’ General Partner. The primary objective of the Fund is to generate regular cash distributions to its partners from its equipment finance portfolio over the life of the Fund.
As of December 31, 2005 and 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 2004 consolidated financial statements to conform to the 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 sheets on a non-classified basis, which does not segregate assets and liabilities into current and non-current categories.
LEASE EQUITY APPRECIATION FUND I, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Use of Estimates
Preparation of financial statements in conformity with generally accepted accounting principles 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 Funds 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 December 31, 2005, the Fund had deposits at two banks totaling $3,225,181 of which $3,025,181 was over the insurance limit of the Federal Deposit Insurance Corporation. No losses have been experienced on such deposits.
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.
LEASE EQUITY APPRECIATION FUND I, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Revenue Recognition − (Continued)
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 rental payments 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 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 years ended December 31, 2005 and 2004.
Notes Receivable. The Company’s investment in notes receivable consists of the sum of the total future minimum loan payments receivable 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 term over the cost of the related equipment.
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.
Supplemental Disclosure of Cash Flow Information
During the years ended December 31, 2005, 2004 and 2003, the Fund paid interest of $4,188,264, $1,764,859 and $224,763, respectively.
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.
LEASE EQUITY APPRECIATION FUND I, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2005
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 maturities of these instruments. The carrying value of debt approximates fair market value since interest rates approximate current market rates. The interest rate swaps discussed in Note 8 are recorded at fair value in the accompanying consolidated balance sheet.
NOTE 3 − RESTRICTED CASH
Restricted cash as of December 31, 2005 and 2004 includes cash being held in reserve by the Fund’s lenders.
NOTE 4 − DUE FROM LOCKBOX
Customer payments are deposited into a lockbox shared with our General Partner and other entities serviced by the Fund’s General Partner. The lockbox is in the name of U.S. Bank NA as trustee under an inter-creditor agreement amongst the Fund’s General Partner, the other entities and their respective lenders. Amounts recorded as due from lockbox on the accompanying Consolidated Balance Sheets, represent customer payments received by the lockbox, applied to the respective customer’s accounts, but not transferred to the Fund’s bank account.
NOTE 5 -INVESTMENT IN DIRECT FINANCING LEASES AND NOTES
The Fund’s direct financing leases are for initial lease terms ranging from 12 to 84 months. The interest rates on notes receivable range from 7% to 21%. As of December 31, 2005 and 2004, 23% and 14% of equipment financings, respectively, were located in California.
The components of the net investment in direct financing leases as of December 31, 2005 and 2004 are as follows:
LEASE EQUITY APPRECIATION FUND I, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2005
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:
The future minimum lease payments and related rental payments expected to be received on non-cancelable direct financing leases, notes and operating leases at December 31, 2005 are as follows:
NOTE 6− OTHER ASSETS
As of December 31, 2005 and 2004, other assets include $574,649 and $794,456, respectively, of unamortized deferred financing costs which are being amortized over the terms of the related debt. Accumulated amortization as of December 31, 2005 and 2004 is $199,298 and $67,164, respectively.
LEASE EQUITY APPRECIATION FUND I, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2005
NOTE 7 - DEBT
The table below summarizes the Fund’s debt as of December 31, 2005 and 2004:
The debt maturity for each of the five succeeding fiscal years ended December 31, and thereafter, are as follows:
LEASE EQUITY APPRECIATION FUND I, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2005
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 it 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 US GAAP and is recognized in the consolidated statements of operations.
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.
At December 31, 2005 and 2004, the notional amounts of the interest rate swaps were $61,628,998 and $23,258,244, respectively. At December 31, 2005 and 2004, the Fund had an unrealized gain and loss, respectively, of $710,751 and $52,141, on these interest rate swaps. Both are included in accumulated other comprehensive income (loss). The Fund recognized no gain or loss during the year ended December 31, 2005 for hedge ineffectiveness. Assuming market rates remain constant with the rates of December 31, 2005, $335,365 in accumulated other comprehensive income is expected to be recognized in earnings over the next 12 months.
LEASE EQUITY APPRECIATION FUND I, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2005
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 financing.
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 is 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 General Partner and its former affiliate, Anthem Securities, Inc. (“Anthem Securities”), an indirect subsidiary of Resource America, Inc. at the time, 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.
The General Partner is entitled to receive 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 is 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 years ended December 31, 2005, 2004 and 2003.
The General Partner is entitled to 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 years ended December 31, 2005, 2004 and 2003.
The following is a summary of fees and costs of services and materials charged by the General Partner or its affiliates during the years ended December 31, 2005, 2004 and 2003:
Due from related parties, net as of December 31, 2005 and 2004 represents net monies due to the General Partner for management fees, reimbursed expenses and other advances not yet paid.
LEASE EQUITY APPRECIATION FUND I, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
December 31, 2005
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.
NOTE 12 - 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. Basic loss per limited partnership unit equals dilutive net loss per limited partnership unit because there are no potential dilutive units.
ITEM 9.
ITEM 9. CHANGES IN AND DISAREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The chairman and chief financial officer of our General Partner (our principal executive officer and financial officer, respectively) have evaluated our disclosure controls and procedures, (as defined in Rules 13a-14 (c) and 15d-14(c)) within 90 days prior to the filing of this report. Based upon this evaluation, these officers believe that our disclosure controls and procedures are effective. There were no changes that occurred during the fiscal year ended December 31, 2005 that have materially affected, or are reasonably likely to affect, our internal controls over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER
Our general partner manages us and our activities. Although our limited partners have limited voting rights under our partnership agreement, they do not directly or indirectly participate in our management or day-to-day operations, nor do they have any authority to enter into contracts on our behalf or to otherwise bind us. Our general partner will be liable, as general partner, for all of our debts and obligations to the extent they are not paid by us, except to the extent that any debt or other obligation incurred by us is specifically with recourse only to our assets (i.e., “nonrecourse liabilities”). Whenever possible, our general partner intends to make all of our debts or other obligations nonrecourse liabilities.
As is common in the case of limited partnerships, we do not directly employ any of the persons responsible for our management or day-to-day activities. Instead, the General Partner personnel will manage and operate us and our business. Also, officers of our general partner will spend a substantial amount of time managing the business and affairs of our General Partner and its other affiliates, and there may be a conflict of interest regarding the allocation of their time between our affairs and business and the affairs and business of its other affiliates, including activities for its own account.
The following table sets forth information with respect to the directors and executive officers of our general partner.
Name
Age
Position
Crit S. DeMent
Chairman of the Board of Directors and Chief Executive Officer
Miles Herman
President, Chief Operating Officer and Director
Jonathan Z. Cohen
Director
Alan D. Schreiber, M.D.
Director
Linda Richardson
Director
Robert K. Moskovitz
Chief Financial Officer and Treasurer
David H. English
Executive Vice President
Darshan V. Patel
General Counsel and Secretary
Daniel G. Courtney
Senior Vice President - Investment Programs
Scott A. Smith
Vice President - Corporate Development
CRIT S. DEMENT has been Chairman of the Board of Directors and Chief Executive Officer since he joined our General Partner in November 2001. Mr. DeMent was Chairman of the Board of Directors and Chief Executive Officer of LEAF Asset Management from January until June 2004. Before that, he was President of Fidelity Leasing, Inc. and its successor, the Technology Finance Group of Citi-Capital Vendor Finance from to 2001. Mr. DeMent was Vice President of Marketing for Tokai Financial Services from 1987 through 1996.
MILES HERMAN has been President, Chief Operating Officer and a Director of our General Partner since January 2002. Mr. Herman was President, Chief Operating Officer and a Director of LEAF Asset Management from January 2002 until June 2004. Mr. Herman held various senior operational offices with Fidelity Leasing, Inc. and its successor from 1998 to 2001, ending as Senior Vice President. From 1990 to 1998, he held various operational, marketing, program management, business development and sales positions with Tokai Financial, most recently as Director of Capital Markets. Before that, he served as Vice President, Operations and Sales at LSI Leasing Services, Inc. from 1989 to 1990, and as a manager of operations at Master Lease Corporation from 1984 to 1989.
JONATHAN Z. COHEN has been a Director of our General Partner since January 2002, and was a Director of LEAF Asset Management from January 2002 until June 2004. Mr. Cohen has been President of Resource America, Inc. since 2003, Chief Executive Officer since 2004 and a Director since 2002. He was Chief Operating Officer of Resource America, Inc. from 2002 to 2004, Executive Vice President from 2001 to 2003 and Senior Vice President from 1999 to 2001. He also has been Vice Chairman of the Managing Board of Atlas Pipeline Partners GP since its formation in 1999, Vice Chairman of Atlas America, Inc. since its formation in 2000, a Trustee and Secretary of RAIT Investment Trust (a publicly-traded real estate investment trust) since 1997, Vice Chairman of RAIT Investment Trust since 2003, and Chairman of the Board of The Richardson Company (a sales consulting company) since 1999.
ALAN D. SCHREIBER, M.D. has been a director of our General Partner since April 2003. Dr. Schreiber has been a Professor of Medicine since 1984, and the Assistant Dean for Research since 1994, at the University of Pennsylvania School of Medicine. In addition, Dr. Schreiber has been Scientific Founder and Chairman of the Scientific Advisory Board of InKine Pharmaceutical Co. Inc. for five years. Before that, he had been Scientific Founder and Chief Scientific Officer at CorBec Pharmaceutical Co., Inc. for four years, and Founder and Scientific Chairman of ZaBeCor Pharmaceutical Co., LLC for one year. Dr. Schreiber was also a member of the Resource America, Inc. Board of Directors from December 1994 to April 2003.
LINDA RICHARDSON has been a Director of our General Partner since August 2002. Ms. Richardson has also been the President and Chief Executive Officer of The Richardson Group, a sales consulting company, since 1978 and a faculty member of the Wharton School, University of Pennsylvania since 1988.
ROBERT K. MOSKOVITZ has been Chief Financial Officer of our General Partner since February 2004, and Treasurer since September 2004, and he also serves as its chief accounting officer. Mr. Moskovitz was Chief Financial Officer of LEAF Asset Management from February 2004 until June 2004. From 2002 to 2004, Mr. Moskovitz was an independent management consultant. From 2001 to 2002, Mr. Moskovitz was Executive Vice President and Chief Financial Officer of ImpactRx, Inc. From to 2001, Mr. Moskovitz was Chief Financial Officer of Breakthrough Commerce LLC. From 1983 to 1997, Mr. Moskovitz held senior financial positions with several high growth public and privately owned companies. Mr. Moskovitz is a Certified Public Accountant and began his career with Deloitte & Touche LLP (formerly Touche Ross & Co).
DAVID H. ENGLISH has been Executive Vice President of our General Partner since April 2003. Mr. English was Executive Vice President and Chief Investment Officer of LEAF Asset Management from April 2003 until June 2004. From 1996 until joining the Fund’s General Partner, Mr. English was the Senior Vice President-Risk Management for Citi-Capital Vendor Finance’s Technology Finance Group, and its predecessor, Fidelity Leasing, Inc., where he held a similar position. From 1991 to 1996 Mr. English held various credit and operational management positions with Tokai Financial Services, Inc., including Director of Credit for the small ticket leasing division.
DARSHAN V. PATEL has been General Counsel and Secretary of our General Partner since August 2001. Mr. Patel also was General Counsel and Secretary of LEAF Asset Management from January 2002 until June 2004. In addition, Mr. Patel serves as Associate General Counsel of Resource America, Inc., a position he has held since 2001. From to 2001, Mr. Patel was associated with the law firm of Berman, Paley, Goldstein & Kannry, New York, NY.
DANIEL G. COURTNEY was appointed Senior Vice President, Investment Programs of our General Partner in October 2005. Mr. Courtney also is or will be registered through Anthem Securities, an affiliate of LEAF Financial Corporation which serves as dealer-manager of the offering of our units. Mr. Courtney was Senior Vice President with ATEL Capital Group, a San Francisco-based sponsor of leasing limited partnerships from October 2003 to October 2005. From April 2000 to October 2003 Mr. Courtney was Vice President of Marketing and Business Development for BridgeSpan, Inc., which provided technology and financial services to banks and insurance companies. Mr. Courtney received a B.S./B.A. degree in Management and Industrial Technology from Southeast Missouri State University in 1984.
SCOTT A. SMITH has been Vice President - Corporate Development of our General Partner since December 2005. From June 2004 to December 2005, Mr. Smith served as LEAF Financial Corporation’s Vice President - Direct Participation Programs. He joined LEAF Financial Corporation in July 2002 as director of sales for its syndications group. For the three months before joining LEAF Financial Corporation, Mr. Smith worked in a consultative capacity as a performance improvement specialist with Team Builders Plus, and the year before that he was the director of sales training for Fidelity Leasing and its successor. From 1993 to 2000 he held various sales and marketing management positions with Advanta Leasing Corporation, ending as their director of training and development.
Code of Business Conduct and Ethics
Because we do not directly employ any persons, we rely on a Code of Business Conduct and Ethics adopted by Resource America, Inc. that applies to the principal executive officer, principal financial officer and principal accounting officer of our general partner, as well as to persons performing services for us generally. You may obtain a copy of this code of ethics by a request to our general partner at LEAF Financial Corporation, 1845 Walnut Street, Suite 1000, Philadelphia, Pennsylvania 19103.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
We do not have any employees. We do not compensate the executive officers of our General Partner, as this is prohibited in our partnership agreement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 31, 2005, the only executive officer and members of the board of our General Partner who beneficially owned our limited partner units was Mr. DeMent, who owned 640 units comprising less than 1% of the outstanding units. Mr. DeMent's address is 1818 Market Street, 9th Floor, Philadelphia, PA 19102.
As of December 31, 2005, our General Partner, LEAF Financial Corporation owned 9,007 units comprising 5.3% of the outstanding units. LEAF Financial Corporation address is 1818 Market Street, 9th Floor, Philadelphia, PA 19102.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the years ended December 31, 2005 and 2004, we were charged management fees by our General Partner of $840,403 and $383,798, respectively. Our General Partner will continue to receive 2% or 3% of rental payments on equipment under operating leases and full payout leases, respectively, for management services performed on our behalf. This management fee is paid monthly only if and when the Limited Partners have received distributions for the period from the initial closing through the end of the most recent calendar quarter equal to a return for such period at a rate of 8% per year on the aggregate amount paid for their units.
Our General Partner may also receive up to 3% of the proceeds from the sale of our equipment for services and activities to be performed in connection with arranging for the sale of our equipment after the expiration of lease. The payment of this sales fee is deferred until the Limited Partners have received cash distributions equal to the purchase price of their units plus an 8% cumulative compounded priority return.
Our General Partner shall apply distributable cash first at 1% to our General Partner and 99% to the Limited Partners in an amount equal to their unpaid cumulative return and thereafter, to investment and reinvestment in Investments or, if the General Partner shall elect not to invest or reinvest such distributable cash, 1% to our General Partner and 99% to the Limited Partners. During the years ended December 31, 2005 and 2004, our General Partner received cash distributions of $6,839 and $9,768, respectively.
Our General Partner received an organization and offering expense allowance of 3% of offering proceeds to reimburse it for expenses incurred in preparing us for registration or qualification under federal and state securities laws and subsequently offering and selling our units. This expense allowance does not cover underwriting fees or sales commissions, but does cover reimbursement of bona fide accountable due diligence expenses of selling dealers to a maximum of 1/2 of 1% of offering proceeds. Organization and offering expenses reimbursed to the General Partner for the year ended December 31, 2004 was $226,438. There were no organization and offering expenses reimbursed to the General Partner for the year ended December 31, 2005.
Our General Partner received fees for acquiring our equipment of 2% of the purchase price we pay, including debt we incur or assume in connection with the acquisition. Fees for acquiring our equipment paid to the General Partner for the years ended December 31, 2005 and 2004 were $1,211,566 and $850,220 respectively.
For the years ended December 31, 2005 and 2004, we reimbursed our General Partner and its affiliate’s administrative expenses of $554,611 and $482,180, respectively.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees. The aggregate fees billed by our independent auditors, Grant Thornton, LLP for professional services rendered were $77,000 and $80,000 in the years ending December 31, 2005 and 2004, respectively.
Audit-Related Fees. We did not incur fees in 2005 for other services not included above.
Tax Fees. We did not incur fees in 2005 for other services not included above.
All Other Fees. We did not incur fees in 2005 for other services not included above.
Procedures for Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditor.
Our general partner’s audit committee is the audit committee for its parent, Resource America, Inc., which reviews and approves in advance any audit and any permissible non-audit engagement or relationship between us and our independent auditors.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form 10-K:
1. Financial Statements
The financial statements required by this Item are set forth in Item 8
2. Financial Statements Schedules
No schedules are required to be presented.
3. Exhibits
Exhibit No.
Description
3.1
Amended and Restated Agreement of Limited Partnership (1)
3.2
Certificate of Limited Partnership (2)
Forms of letters sent to limited partners confirming their investment (2)
10.1
Sovereign Bank Revolving Credit Agreement (3)
10.2
WestLB AG, New York Branch Amendment to West LB Agreement Secured Loan Agreement (3)
10.3
First Amendment to WestLB AG Secured Loan Agreement
10.4
Origination and Servicing Agreement among LEAF Financial Corporation, Lease Equity Appreciation Fund I, L.P. and LEAF Funding, Inc., dated April 4, (4)
10.5
Master Program Agreement among LEAF Financial Corporation, Lease Equity Appreciation Fund I, L.P. and Information Leasing Corporation dated September 29, 2003 (5)
10.6
Master Loan and Security Agreement between Lease Equity Appreciation Fund I, L.P. and OFC Capital, a division of Alpha Financial Corporation, dated November 26, 2003 (6)
31.1
Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.
31.2
Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer.
32.1
Certification of Chief Executive Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.
32.2
Certification of Chief Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.
_________________________
(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.
(3)
Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2004.
(4)
Filed previously on Form 8-K, filed on September 19, 2003.
(5)
Filed previously as an exhibit to our Post-Effective Amendment No. 1 to our Registration Statement on Form S-1, filed on November 10, 2003.
(6)
Filed previously as an exhibit to our Post-Effective Amendment No. 2 to our Registration Statement on Form S-1, filed on January 13, 2004.
_________________________
(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.
(3)
Filed previously on Form 8-K, filed on September 19, 2003.
(4)
Filed previously as an exhibit to our Post-Effective Amendment No. 1 to our Registration Statement on Form S-1, filed on November 10, 2003.
(5)
Filed previously as an exhibit to our Post-Effective Amendment No. 2 to our Registration Statement on Form S-1, filed on January 13, 2004.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Delaware Limited Partnership
By: LEAF Financial Corporation
March 30, By: /s/ CRIT DEMENT
CRIT DEMENT
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Crit Dement
CRIT S. DEMENT
Chairman of the Board, Chief Executive Officer of the General Partner
March 30, 2006
/s/ Miles Herman
MILES HERMAN
President, Chief Operating Officer and Director of the General Partner
March 30, 2006
/s/ Robert K. Moskovitz
ROBERT K. MOSKOVITZ
Chief Financial Officer, Treasurer of the General Partner
March 30, 2006
/s/ Jonathan Z. Cohen
JONATHAN Z. COHEN
Director of the General Partner
March 30, 2006
/s/ Alan D. Schreiber, M.D.
ALAN D. SCHREIBER, M.D.
Director of the General Partner
March 30, 2006
/s/ Linda Richardson
LINDA RICHARDSON
Director of the General Partner
March 30, 2006