10-Q 1 form10q.htm LEAF EQUIPMENT FINANCE FUND 4, LP 10-Q 9-30-2012 form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2012
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from   to  
 
Commission file number 000-53667
 

LEAF EQUIPMENT FINANCE FUND 4, L.P.
(Exact Name of Registrant as Specified in Its Charter)

 
Delaware
 
61-1552209
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
110 South Poplar Street, Suite 101, Wilmington Delaware 19801
(Address of principal executive offices) (Zip Code)
 
(800) 819-5556
(Registrant’s telephone number, including area code)
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x Yes     ¨ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   x Yes      ¨ No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer   ¨
 
Accelerated filer
¨
       
Non-accelerated filer     ¨
(Do not check if a smaller reporting company)
Smaller Reporting Company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes     x No
 
There is no public market for the Registrant’s securities.
 


 
1

 
 
LEAF EQUIPMENT FINANCE FUND 4, L.P.
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
 
PART I
FINANCIAL INFORMATION
PAGE
ITEM 1.
3
  3
  4
  5
  6
  7
ITEM 2.
15
ITEM 3.
24
ITEM 4.
24
     
PART II
OTHER INFORMATION
 
ITEM 6.
25
     
  26
 
 
2

 
PART I. FINANCIAL INFORMATION

LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
(In thousands)

   
September 30,
       
   
2012
   
December 31,
 
   
(Unaudited)
   
2011
 
ASSETS
           
Cash
  $ 214     $ 405  
Restricted cash
    12,319       19,202  
Investment in leases and loans, net
    112,254       184,938  
Deferred financing costs, net
    1,571       2,629  
Other assets
    88       217  
Total assets
  $ 126,446     $ 207,391  
                 
LIABILITIES AND PARTNERS’ (DEFICIT) CAPITAL
               
Liabilities:
               
Debt
  $ 90,405     $ 157,911  
Accounts payable, accrued expenses and other liabilities
    1,050       1,143  
Due to affiliates
    1,436       190  
Subordinated notes payable
    9,355       9,355  
Total liabilities
    102,246       168,599  
                 
Commitments and contingencies (note 11)
               
                 
Partners’ (Deficit) Capital:
               
General partner
    (860 )     (716 )
Limited partners
    24,732       39,027  
Total partners' capital
    23,872       38,311  
Noncontrolling interest
    328       481  
Total capital
    24,200       38,792  
Total liabilities and capital
  $ 126,446     $ 207,391  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
3

 
LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
(In thousands, except unit and per unit data)
(Unaudited)

   
Three Months Ended
September 30,
   
Nine Months Ended
 September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenues:
                       
Interest on equipment financings
  $ 2,144     $ 4,212     $ 7,214     $ 14,874  
Rental income
    275       604       1,081       1,964  
Gains on sale of equipment and lease dispositions, net
    217       360       958       1,273  
Gain on extinguishment of debt
    -       -       -       13,677  
Other income
    144       277       718       831  
      2,780       5,453       9,971       32,619  
                                 
Expenses:
                               
Interest expense
    3,090       4,725       9,880       16,937  
Depreciation on operating leases
    123       474       730       1,568  
Provision for credit losses
    2,308       3,089       8,252       12,293  
General and administrative expenses
    213       256       891       1,152  
Administrative expenses reimbursed to affiliate
    273       609       993       1,983  
Loss on derivative activities
    -       -       -       126  
      6,007       9,153       20,746       34,059  
Net loss
    (3,227 )     (3,700 )     (10,775 )     (1,440 )
Less: Net loss (income) attributable to the noncontrolling interest
    56       22       153       (27 )
Net loss attributable to LEAF 4 partners
  $ (3,171 )   $ (3,678 )   $ (10,622 )   $ (1,467 )
Net loss allocated to LEAF 4's limited partners
  $ (3,139 )   $ (3,641 )   $ (10,516 )   $ (1,452 )
Weighted average number of limited partner units outstanding during the period
    1,259,537       1,259,537       1,259,537       1,259,537  
                                 
Net loss per weighted average limited partner unit
  $ (2.49 )   $ (2.89 )   $ (8.35 )   $ (1.15 )
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
4

 
LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
(In thousands, except unit data)
(Unaudited)
 
   
General
         
Total Partners’
   
Non-
   
Total
 
   
Partner
   
Limited Partners
   
(Deficit)
   
Controlling
   
(Deficit)
 
   
Amount
   
Units
   
Amount
   
Capital
   
Interest
   
Capital
 
Balance, at January 1, 2012
  $ (716 )     1,259,537     $ 39,027     $ 38,311     $ 481     $ 38,792  
Cash distributions paid
    (38 )     -       (3,779 )     (3,817 )     -       (3,817 )
Net loss
    (106 )     -       (10,516 )     (10,622 )     (153 )     (10,775 )
Balance, September 30, 2012
  $ (860 )     1,259,537     $ 24,732     $ 23,872     $ 328     $ 24,200  
 
The accompanying notes are an integral part of this consolidated financial statement.
 
 
5

 
LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
(In thousands)
(Unaudited)

   
Nine Months Ended September 30,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net loss
  $ (10,775 )   $ (1,440 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Gain on extinguishment of debt
    -       (13,677 )
Gains on sale of equipment and lease dispositions, net
    (958 )     (1,273 )
Amortization of deferred charges and discount on debt
    5,470       9,532  
Depreciation on operating leases
    730       1,568  
Provision for credit losses
    8,252       12,293  
Loss on derivative hedging activities
    -       166  
Changes in operating assets and liabilities:
               
Other assets
    129       (33 )
Accounts payable, accrued expenses, and other liabilities
    (93 )     267  
Due to affiliates
    1,246       45  
Net cash provided by operating activities
    4,001       7,448  
                 
Cash flows from investing activities:
               
Purchases of leases and loans
    (384 )     (411 )
Proceeds from leases and loans
    65,277       102,935  
Security deposits returned, net of collections
    (1,511 )     (1,602 )
Net cash provided by investing activities
    63,382       100,922  
                 
Cash flows from financing activities:
               
Borrowings of  debt
    -       90,041  
Repayment of  debt
    (70,628 )     (193,920 )
Decrease in restricted cash
    6,883       4,309  
Increase in deferred financing costs
    (12 )     (1,756 )
Termination of financial derivatives
    -       (2,875 )
Cash distributions to partners
    (3,817 )     (3,817 )
Net cash used in financing activities
    (67,574 )     (108,018 )
                 
(Decrease) increase in cash
    (191 )     352  
Cash, beginning of period
    405       394  
Cash, end of period
  $ 214     $ 746  
                 
Cash paid for interest
  $ 4,471     $ 7,325  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
6


LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
September 30, 2012
(Unaudited)
 
NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS
 
LEAF Equipment Finance Fund 4, L.P. (“LEAF 4” or the “Fund”), a Delaware limited partnership, was formed on January 25, 2008 by its general partner, LEAF Asset Management, LLC (the “General Partner”), which manages the Fund. The General Partner is a Delaware limited liability company and a subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly traded company (NASDAQ: REXI) that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. Through its offering termination date of October 30, 2009, the Fund raised $125.7 million by selling 1.2 million of its limited partner units. It commenced operations in September 2008.
 
The Fund is expected to have a minimum of a nine-year life, consisting of an offering period of up to two years, a five-year reinvestment period and a subsequent maturity period of two years, during which the Fund’s leases and secured loans will either mature or be sold. In the event the Fund is unable to sell its leases and loans during the maturity period, the Fund expects to continue to return capital to its partners as those leases and loans mature. All of the Fund’s leases and loans mature by the end of 2032. The Fund expects to enter its maturity period beginning in October 2014. Contractually, the Fund will terminate on December 31, 2032, unless sooner dissolved or terminated as provided in the Limited Partnership Agreement (the “Partnership Agreement”).
 
The Fund acquires diversified portfolios of equipment to finance to end users throughout the United States as well as the District of Columbia and Puerto Rico. The Fund also acquires existing portfolios of equipment subject to existing financings from other equipment finance companies, primarily an affiliate of 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.
 
In addition to its 1% general partnership interest, the General Partner has also invested $1.0 million for a 0.85% limited partnership interest in the Fund.
 
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 Receivables Funding 4, LLC. The consolidated financial statements also include LEAF Funds Joint Venture 2, LLC (“LEAF Funds JV2”) and its subsidiaries LEAF Commercial Finance Fund, LLC (LCFF) and LEAF Receivables Funding 6, LLC, as well as LEAF Funding, LLC (“LEAF Funds JV1”) and its wholly owned subsidiaries LEAF Capital Funding III, LLC and LEAF Receivables Funding II, LLC. The Fund maintains a 98%, and 96% ownership interest in LEAF Funds JV2 and LEAF Funds JV1, respectively. All intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited financial statements reflect all adjustments that are, in the opinion of management, of a normal and recurring nature and necessary for a fair statement of the Fund’s financial position as of September 30, 2012, and the results of its operations and cash flows for the periods presented. The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of results of the Fund’s operations for the 2012 fiscal year. The financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial reporting.  Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to those rules and regulations. These interim financial statements should be read in conjunction with the Fund’s financial statements and notes thereto presented in the Fund’s Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the SEC on March 28, 2012.

The Fund has evaluated subsequent events through the date the financial statements were issued.  As described further in note 6, the Fund amended the indenture and servicing agreement on the 2010-3 Term Securitization on October 15, 2012.  The effective date of these amendments was July 31, 2012.
 
 
7

 
LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements– (Continued)
September 30, 2012
(Unaudited)
 
Use of Estimates
 
Preparation of financial statements in conformity with 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 allowance for credit losses and the estimated unguaranteed residual values of leased equipment, among others. The Fund bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

Investments in Commercial Finance Assets
 
The Fund’s investments in commercial finance assets consist of direct financing leases, operating leases, and loans.
 
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 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.
 
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 General Partner’s history with regard to the realization of residuals, available industry data and the General Partner’s experience with respect to comparable equipment. The estimated residual values are recorded as a component of investments in leases. 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. Upward adjustments to residual values are not permitted.
 
Operating Leases. Leases not meeting 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.
 
A review for impairment of operating leases is performed whenever events or changes in circumstances indicate that the carrying amount of the operating leases may not be recoverable.  The Fund writes down its rental equipment to its estimated net realizable value when it is probable that its carrying amount exceeds its fair value and the excess can be reasonably estimated; gains are only recognized upon actual sale of the rental equipment.
 
Loans. For term loans, the investment in loans 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 loan payments over the cost of the loan. For all other loans, interest income is recorded at the stated rate on the accrual basis to the extent that such amounts are expected to be collected.
 
Allowance for Credit Losses. The Fund evaluates the adequacy of the allowance for credit losses (including investments in leases and loans) based upon, among other factors, management’s historical experience on the portfolios it manages, an analysis of contractual delinquencies, economic conditions and trends and equipment finance portfolio characteristics, adjusted for expected recoveries.  In evaluating historic performance of the Fund’s leases and loans, the Fund performs a migration analysis, which estimates the likelihood that an account progresses through delinquency stages to ultimate charge-off unless individually reviewed for impairment.  In an individual review for impairment the Fund considers the loans performance, probability of repayment, and general and local economic conditions when assessing whether impairment is necessary.
 
Income is not recognized on leases and loans when a default on payment exists for a period of 90 days or more. Generally, income recognition resumes when a lease or loan becomes less than 90 days delinquent. Fees from delinquent payments are recognized when received and are included in other income. After an account becomes 180 or more days past due, any remaining balance is fully-reserved less an estimated recovery amount.
 
Other Income

Other income includes miscellaneous fees charged by the Fund such as late fee income, among others.    The Fund recognizes late fee income as fees are collected. Late fee income was $129,000 and $655,000, respectively, for the three and nine months ended September 30, 2012 and $233,000 and $717,000, respectively, for the three and nine months ended September 30, 2011.
 
 
8

 
LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements– (Continued)
September 30, 2012
(Unaudited)
 
Recent Accounting Standards
 
Accounting Standards Recently Adopted

Comprehensive Income - In June 2011, the FASB issued an amendment to eliminate the option to present components of other comprehensive income as part of the statement of changes in equity.  The amendment requires that all non-owner changes in equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The Fund adopted the two-statement approach for the period beginning January 1, 2012.  However, adoption of this standard did not impact the Fund’s financial statements for the three and nine months ending September 30, 2012 as the Fund had no items of other comprehensive income.

Fair Value Measurements - In May 2011, the FASB issued an amendment to revise the wording used to describe the requirements for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the amendments to result in a change in the application of the current requirements. Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements, such as specifying that the concepts of highest and best use and valuation premise in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements such as specifying that, in the absence of a Level 1 input, a reporting entity should apply premiums or discounts when market participants would do so when pricing the asset or liability. This guidance was adopted by the Fund for the period beginning January 1, 2012 and did not significantly impact the Fund’s consolidated financial statements.
 
NOTE 3 – INVESTMENT IN LEASES AND LOANS
 
The Fund’s investment in leases and loans, net, consists of the following (in thousands):
 
   
September 30,
   
December 31,
 
   
2012
   
2011
 
Direct financing leases (1)
  $ 32,801     $ 56,654  
Loans (2)
    83,301       130,788  
Operating leases
    523       1,645  
Future payment card receivables
    -       261  
      116,625       189,348  
Allowance for credit losses
    (4,371 )     (4,410 )
    $ 112,254     $ 184,938  
 

 
(1)
The Fund’s direct financing leases are for initial lease terms generally ranging from 24 to 120 months.
 
(2)
The interest rates on loans generally range from 7% to 16%.

 
9

 
LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements– (Continued)
September 30, 2012
(Unaudited)

The components of direct financing leases and loans, net, are as follows (in thousands):

   
September 30,
   
December 31,
 
   
2012
   
2011
 
   
Leases
   
Loans
   
Leases
   
Loans
 
Total future minimum lease payments
  $ 32,221     $ 91,203     $ 58,450     $ 145,038  
Unearned income
    (1,851 )     (6,424 )     (4,215 )     (11,817 )
Residuals, net of unearned residual income (1)
    2,739       -       3,256       -  
Security deposits
    (308 )     (1,478 )     (837 )     (2,433 )
    $ 32,801     $ 83,301     $ 56,654     $ 130,788  


 
(1)
Unguaranteed residuals for direct financing leases represent the estimated amounts recoverable at lease termination from lease extensions or disposition of the equipment.
 
The Fund’s investment in operating leases, net, consists of the following (in thousands):
 
   
September 30,
   
December 31,
 
   
2012
   
2011
 
Equipment
  $ 3,980     $ 6,998  
Accumulated depreciation
    (3,457 )     (5,353 )
    $ 523     $ 1,645  
 
NOTE 4 – ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY

The following table is an age analysis of the Fund’s receivables from leases and loans (presented gross of allowance for credit losses of $4.4 million for each period) as of September 30, 2012 and December 31, 2011, respectively (in thousands):
 
   
September 30, 2012
   
December 31, 2011
 
Age of receivable
 
Investment in
leases and loans
   
%
   
Investment in
leases and loans
   
%
 
Current (a)
  $ 113,043       96.9 %   $ 183,187       96.7 %
Delinquent:
                               
31 to 91 days past due
    2,541       2.2 %     4,118       2.2 %
Greater than 91 days (b)
    1,041       0.9 %     2,043       1.1 %
    $ 116,625       100.0 %   $ 189,348       100.0 %
 

 
(a)
Included in this category are approximately $19.9 million and $24.8 million as of September 30, 2012 and December 31, 2011, respectively, of certain loans which are contractually current but are on the cost recovery method due to continued uncertainty as to collectability of future payments due.
 
(b)
Balances in this age category are collectively evaluated for impairment.

 
10


LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements– (Continued)
September 30, 2012
(Unaudited)

The Fund had $20.9 million and $26.8 million of leases and loans on nonaccrual status as of September 30, 2012 and December 31, 2011, respectively.  The credit quality of the Fund’s investment in leases and loans as of September 30, 2012 and December 31, 2011 are as follows (in thousands):
 
   
September 30,
2012
   
December 31,
2011
 
Performing
  $ 95,682     $ 162,548  
Nonperforming
    20,943       26,800  
    $ 116,625     $ 189,348  
 
The Company’s investments in non-performing leases and loans as of September 30, 2012 and December 31, 2011 were collectively evaluated for impairment, except for certain asset backed loans that were individually evaluated for impairment. The following table summarizes the activity in the allowance for credit losses (in thousands):
 
   
Three Months Ended 
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Allowance for credit losses, beginning of period
  $ 4,630     $ 6,510     $ 4,410     $ 9,854  
Provision for credit losses
    2,308       3,089       8,252       12,293  
Charge-offs
    (2,817 )     (5,431 )     (9,193 )     (18,804 )
Recoveries
    250       751       902       1,576  
Allowance for credit losses end of period
  $ 4,371     $ 4,919     $ 4,371     $ 4,919  
                                 
Allowance for credit losses:
  $ 3,580     $ -     $ 3,580     $ -  
Ending balance, individually evaluated for impairment
                               
Ending balance, collectively evaluated for impairment
    791       4,919       791       4,919  
Balance, end of year
  $ 4,371     $ 4,919     $ 4,371     $ 4,919  
                                 
Recorded investment  in leases and term loans:
  $ 19,902     $ 25,179     $ 19,902     $ 25,179  
Ending balance, individually evaluated for impairment
                               
Ending balance, collectively evaluated for impairment
    96,723       198,640       96,723       198,640  
Balance, end of year
  $ 116,625     $ 223,819     $ 116,625     $ 223,819  
 
NOTE 5 – DEFERRED FINANCING COSTS
 
As of September 30, 2012 and December 31, 2011, deferred financing costs include $1.6 million and $2.6 million, respectively, of unamortized deferred financing costs which are being amortized over the terms of the estimated life of the related debt. Accumulated amortization as of September 30, 2012 and December 31, 2011 was $4.2 million, and $3.1 million, respectively.
 
 
11

 
LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements– (Continued)
September 30, 2012
(Unaudited)
 
NOTE 6 –DEBT
 
The Fund’s debt consists of the following (in thousands):
 
                 
December 31,
 
 
September 30, 2012
   
2011
 
     
Outstanding
   
Interest rate per
   
Outstanding
 
 
Type
 
Balance (1) (2)
   
annum
   
Balance
 
2011-1 Term Securitization
Term
  $ 34,096    
1.7% to 5.5%
    $ 56,205  
2010-1 Term Securitization
Term
    10,545       5.00 %     21,825  
2010-3 Term Securitization
Term
    45,764    
3.5% to 5.5%
      79,881  
      $ 90,405             $ 157,911  


 
(1)
These borrowings are collateralized by specific leases and loans and restricted cash. As of September 30, 2012, $94.0 million of leases and loans and $10.6 million of restricted cash were pledged as collateral under the Fund’s term securitizations. Recourse under these securitizations is limited to the amount of collateral pledged.
 
(2)
The outstanding balances are presented net of unamortized original issue discount of $3.9 million and $7.0 million as of September 30, 2012 and December 31, 2011, respectively.

Series 2011-1 Term Securitization.  On January 26, 2011, a previous lender was paid-off with the proceeds from the 2011-1 Term Securitization (The “2011-1Term Securitization”) in which six classes of asset-backed notes were issued that  have varying maturity dates ranging  from December 2018 to December 2023. The asset-backed notes totaled $96.0 million and bear interest at fixed, stated rates ranging from 1.7% to 5.5% and were issued at an original discount of approximately $6.2 million.  As a result of the retirement of the previous term loan, the Fund recognized a gain on extinguishment of debt of $13.7 million.

Series 2010-1 Term Securitization.  On May 18, 2010 three classes of asset-backed notes were issued (The “2010-1 Term Securitization”), one that matures on October 23, 2016 and two that mature on September 23, 2018, respectively. The asset-backed notes total $92.7 million and bear interest at a fixed, stated rate of 5% and were issued at an original discount of $6.5 million.

Series 2010-3 Term Securitization.  On August 17, 2010 five classes of asset-backed notes were issued (The “2010-3 Term Securitization”), one that matures on June 20, 2016 and 4 that mature on February 20, 2022, respectively. The asset-backed notes total $171.4 million and bear interest at fixed, stated rates ranging from 3.5% to 5.5% and were issued at an original discount of $3.7 million.

The Fund’s securitizations are serviced by an affiliate of the Fund’s General Partner (the “Servicer”).  If the Servicer or the Fund’s portfolio does not comply with certain requirements, then the noteholders have the right to replace the Servicer.  The portfolios of the 2010-1 Term Securitization and 2010-3 Term Securitization exceeded the cumulative net loss percentage permitted in April 2012.  The servicing agreements were amended effective July 31, 2012 to increase the cumulative net loss percentages and as a result the portfolios were in compliance with these agreements as of September 30, 2012.  In addition, the servicing agreements and the indentures on these facilities were amended to establish an additional reserve account to be funded by cash flows on leases and loans that will be used by the trustee as additional collateral.

This event does not constitute an event of default on the 2010-1 Term Securitization or the 2010-3 Term Securitization.  Additionally, the Fund is not, nor has been, delinquent on any payments owed to the noteholders.
 
 
12


LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements– (Continued)
September 30, 2012
(Unaudited)
 
Debt Repayments:  Excluding $3.9 million of  remaining unamortized discount on the term securitizations, estimated annual principal payments on the Fund’s aggregate borrowings over the next five annual periods ended September 30, and thereafter, are as follows (in thousands):
 
September 30, 2013
  $ 45,342  
September 30, 2014
    26,254  
September 30, 2015
    11,073  
September 30, 2016
    5,762  
September 30, 2017
    4,097  
Thereafter
    1,728  
    $ 94,256  
 
NOTE 7 – SUBORDINATED NOTES PAYABLE
 
LCFF has $9.4 million of 8.25% secured subordinated promissory notes (the “Notes”) outstanding, which are recourse to LCFF only. The Notes were issued to private investors and require interest only payments until their maturity in February 2015. LCFF may call or redeem the Notes, in whole or in part, at any time during the interest only period.
 
Covenants:  The Notes are subject to various covenants as set forth in their indenture, including an interest coverage ratio test, which LCFF was not in compliance with as of September 30, 2012.  LCFF notified the Trustee of this breach in April 2012.  As a result, the noteholders have the right to declare an event of default, which to date has not occurred.  If the noteholders would declare an event of default they have various rights and remedies available to them including (1) the right to declare all amounts currently outstanding under the Notes as immediately due and payable; (2) the right to take immediate possession of the assets of LCFF; and (3) the right to sell or otherwise dispose of the assets of LCFF in their current condition.  If the noteholders choose to repossess and sell LCFF’s assets, such a sale of a portfolio could be at prices lower than its carrying value, which could result in losses to the Fund. At September 30, 2012, LCFF had approximately $50.1 million in commercial finance assets, of which $34.1 million had been pledged as collateral on the 2011-1 Term Securitization.
 
Notwithstanding the foregoing, LCFF is not, nor has been, delinquent on any payments of interest owed to the noteholders.
 
NOTE 8 – DERIVATIVE INSTRUMENTS
 
Since the completion of the 2011-1 Term Securitization in January 2011 all of the Fund’s debt is on a fixed-rate basis which generally mitigates the Fund’s exposure to floating-rate interest rate risk on its borrowings.  Accordingly, the Fund no longer purchases or owns derivative instruments.

Prior to termination of the Fund’s interest rate swaps, the Fund recognized changes in fair value of its derivatives in mark to market changes on derivative liabilities on the accompanying statement of operations.  The Fund incurred a loss on mark to market changes on derivative liabilities of $126,000 for the nine month period ended September 30, 2011.
 
NOTE 9 – FAIR VALUE MEASUREMENT
 
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the measurement date (exit price). U.S. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.
 
 
Level 1 – Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
 
 
Level 2 – Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
 
 
13

 
LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements– (Continued)
September 30, 2012
(Unaudited)

 
 
Level 3 – Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
 
There were no assets or liabilities measured at fair value at September 30, 2012 or December 31, 2011.
 
The Fund is also required to disclose the fair value of financial instruments not measured at fair value for which it is practicable to estimate that value.  For cash, restricted cash, receivables, and payables, the carrying amounts approximate fair value because of the short term maturity of these instruments. At December 31, 2011, the carrying value of debt approximated fair value as interest rates were comparable to current market rates.
 
Subsequent to the adoption of Accounting Standards Update 2011-04 (“ASU 2011-04”), the Fund is also required to disclose the methods used to estimate fair value on financial instruments not measured at fair value and the level within the fair value hierarchy that those fair value measurements are categorized. The carrying value and fair value of the Fund’s debt at September 30, 2012 is as follows:
 
         
Fair Value Measuring Using
   
Liabilities
 
   
Carrying Value
   
Level 1
   
Level 2
   
Level 3
   
At Fair Value
 
Debt, at September 30, 2012
  $ 90,405     $ -     $ 87,385     $ -     $ 87,385  
                                         
 
The fair value of the debt at September 30, 2012 was determined using quoted prices obtained from a broker-dealer as of the measurement date.
 
NOTE 10 – CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH AFFILIATES
 
The Fund relies on the General Partner and its affiliates to manage the Fund’s operations and pays the General Partner or its affiliates fees to manage the Fund in accordance with the Partnership Agreement. The following is a summary of fees and costs of services and materials charged by the General Partner or its affiliates (in thousands):
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Administrative expenses
  $ 273     $ 609     $ 993     $ 1,983  
Management fees
    -       -       -       -  
 
Administrative Expenses. The General Partner and its affiliates are reimbursed by the Fund for administrative services reasonably necessary to operate the Fund which do not exceed the General Partner’s actual cost of those services.
 
Management Fees. Pursuant to the Partnership Agreement, the General Partner is entitled to receive a subordinated annual asset management fee equal to 4% of gross rental payments for operating leases or 2% for full payout leases or a competitive fee, whichever is less. During the Fund’s five-year investment period, the management fees will be subordinated to the payment to the Fund’s limited partners of a cumulative annual distribution of 8.5% of their capital contributions, as adjusted by distributions deemed to be a return of capital.  The General Partner has waived all future management fees.  Approximately $1.4 million of management fees were waived for the nine month period ended September 30, 2012 and $6.1 million have been waived on a cumulative basis.
 
Due to Affiliates. Due to affiliates includes amounts due to the General Partner and its affiliates related to acquiring and managing portfolios of equipment, management fees and reimbursed expenses.
 
NOTE 11 – COMMITMENTS AND CONTINGENCIES
 
The Fund is party to various routine legal proceedings arising out of the ordinary course of its business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the Fund’s financial condition or results of operations.
 
 
14

 

When used in this Form 10-Q, the words “believes” “anticipates,” “expects” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties more particularly described in other documents filed with the Securities and Exchange Commission. These risks and uncertainties could cause actual results to differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release the results of any revisions to forward-looking statements which we may make to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.

The following discussion provides an analysis of our operating results, an overview of our liquidity and capital resources and other items related to us. The following discussion and analysis should be read in conjunction with (i) the accompanying interim financial statements and related notes and (ii) our consolidated financial statements, related notes, and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2011.
 
As used herein, the terms “we,” “us,” or “our” refer to LEAF Equipment Finance Fund 4, L.P. and its subsidiaries.

Business
 
We are a Delaware limited partnership formed on January 25, 2008 by our general partner, LEAF Asset Management, LLC (the “General Partner”), which, along with its affiliates, manages us. Our General Partner is a Delaware limited liability company and a subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly-traded company (NASDAQ: REXI) that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. Our offering period began on August 12, 2008. Through our offering termination date of October 30, 2009, we raised $125.7 million by selling 1.2 million of our limited partner units. We commenced operations in September 2008.

We expect to have a minimum of a nine-year life, consisting of an offering period of up to two years, a five year reinvestment period and a subsequent maturity period of two years, during which our leases and secured loans will either mature or be sold. In the event we are unable to sell our leases and loans during the maturity period, we expect to continue to return capital to our partners as those leases and loans mature. All of our leases and loans mature by the end of 2032. We expect to enter our maturity period beginning in October 2014. We will terminate on December 31, 2032, unless sooner dissolved or terminated as provided in the Partnership Agreement.

We acquire a diversified portfolio of new, used or reconditioned equipment that we lease to third parties. We also acquire portfolios of equipment subject to existing leases from other equipment lessors. Our financings are typically acquired from LEAF Financial Corporation (“LEAF Financial”), an affiliate of our General Partner and also a subsidiary of RAI. In addition, we may make secured loans to end users to finance their purchase of equipment. We attempt to structure our secured loans so that, in an economic sense, there is no difference to us between a secured loan and a full payout equipment lease. We also invest in equipment, leases and secured loans through joint venture arrangements with our General Partner’s affiliated investment programs. We finance business essential equipment including, but not limited to, computers, copiers, office furniture, water filtration systems, machinery used in manufacturing and construction, medical equipment and telecommunications equipment. We focus on the small to mid-size business market, which generally includes businesses with:

 
500 or fewer employees;

 
$1.0 billion or less in total assets;

 
Or $100.0 million or less in total annual sales.

Our principal objective is to generate regular cash distributions to our limited partners.
 
 
15


General Economic Overview

Economic indicators for the quarter ending September 30, 2012 show a continuation of the uneven pattern of economic activity that was seen in the first half of 2012. The overall economic landscape exhibits a stagnant condition with some sectors showing modest improvement and other sectors showing declines.  These mixed results are especially evident in the important housing market, a major engine of economic activity, as existing home sales declined 1.7% in September while new housing starts increased.  A lack of consumer and business confidence seems to be driving the lackluster economic performance. Consumer and business confidence also remains uncertain pending the outcomes of the United States of America (“U.S.”) presidential election, tax changes, the “fiscal cliff” (an automatic combination of tax increases and mandated government spending cuts), the U.S. debt ceiling, and the European debt problem.

Some specific key economic indicators and reports that were released in the third quarter of 2012 and that show the downward trend are summarized below.
 
 
·
The Commerce Department reported that durable goods orders fell 13.2% which was the largest drop since January 2009 when the economy was in recession.
 
 
·
Rising gas prices are negatively impacting consumer spending.
 
 
·
Slowing global growth is negatively impacting U.S. manufacturing which had shown signs of growth due to expanding exports.
 
 
·
The National Federation of Independent Business Optimism Index reported a drop in September 2012 and continued to indicate a “solid recession reading”. This is particularly noteworthy as small businesses comprise the majority of the equipment lease and loan obligors in our portfolios. Lack of confidence and optimism among this group does not bode well for economic expansion and job creation.
 
 
·
Business investment and capital spending, which are important contributors to economic growth, were reported to be down in the quarter ending September 2012.
 
With the presidential election looming, congressional gridlock firmly in place and uncertainty about tax policy we might expect the economy to remain stagnant in the fourth quarter. Additionally, with the looming “fiscal cliff” the outlook for 2013 is not positive with many economists now warning of the possibility of recession if the issues surrounding the “fiscal cliff” are not promptly addressed.  In such a situation the performance of our portfolio of leases and loans might be negatively impacted.

 
16

 
Finance Receivables and Asset Quality
 
Information about our portfolio of commercial finance assets is as follows (dollars in thousands):
 
   
September 30,
   
December 31,
 
   
2012
   
2011
 
Investment in leases and loans, net
  $ 112,254     $ 184,938  
                 
Number of contracts
    7,800       10,000  
Number of individual end users (1)
    7,000       9,000  
Average original equipment cost
  $ 58.7     $ 59.6  
Average initial lease term (in months)
    58       58  
Average remaining lease term (in months)
    17       23  
States accounting for more than 10% of lease and loan portfolio:
               
New York
    18 %     15 %
California
    11 %     12 %
                 
Types of equipment accounting for more than 10% of lease and loan portfolio:
               
Medical equipment
    22 %     22 %
Industrial equipment
    19 %     20 %
Asset based lending
    13 %     10 %
Restaurant equipment
    12 %     11 %
                 
Types of businesses accounting for more than 10% of lease and loan portfolio:
               
Services
    43 %     44 %
Finance/Insurance/Real Estate
    22 %     18 %
Retail trade
    16 %     17 %


(1)
Located in the 50 states as well as the District of Columbia and Puerto Rico. No individual end user or single piece of equipment accounted for more than 10% of our portfolio based on the origination amount.
 
 
17

 
Portfolio Performance
The table below provides information about our commercial finance assets including non-performing assets, which are those assets that are not accruing income due to non-performance or impairment (dollars in thousands):
 
   
As of and for the
 
   
Nine Months Ended September 30,
 
               
Change
 
   
2012
   
2011
    $       %  
Investment in leases and loans before allowance for credit losses
  $ 116,625     $ 223,819     $ (107,194 )     (48 )%
Less: allowance for credit losses
    (4,370 )     (4,919 )     548       (11 )%
Investment in leases and loans, net
  $ 112,254     $ 218,900     $ (97,904 )     (45 )%
                                 
Weighted average investment in direct financing leases and loans before allowance for credit losses
  $ 149,030     $ 273,927     $ (124,897 )     (46 )%
Non-performing assets
  $ 20,943     $ 4,498     $ 16,445       366 %
Charge-offs, net of recoveries
  $ 8,291     $ 17,228     $ (8,937 )     (52 )%
As a percentage of finance receivables:
                               
Allowance for credit losses
    3.75 %     2.20 %                
Non-performing assets
    17.96 %     2.02 %                
As a percentage of weighted average finance receivables:
                               
Charge-offs, net of recoveries
    5.56 %     6.29 %                
 
Our allowance for credit losses is our estimate of losses inherent in our commercial finance receivables. The allowance is based on factors which include our historical loss experience on equipment finance portfolios we manage, an analysis of contractual delinquencies, current economic conditions and trends and equipment finance portfolio characteristics, adjusted for recoveries. In evaluating historic performance of our leases and loans, we perform a migration analysis, which estimates the likelihood that an account progresses through delinquency stages to ultimate charge-off unless individually reviewed for impairment.  In an individual review for impairment we consider the loans performance, probability of repayment, and general and local economic conditions when assessing whether impairment is necessary. Our policy is to charge-off to the allowance those financings for which management has determined the probability of collection to be remote. Substantially all of our assets are collateral for our debt and, therefore, significantly greater delinquencies than anticipated will have an adverse impact on our cash flow and distributions to our partners.

We focus on financing equipment used by small to mid-sized businesses. The recent economic recession in the U.S. has made it more difficult for some of our customers to make payments on their financings with us on a timely basis, which has adversely affected our operations in the form of higher delinquencies. These higher delinquencies may continue as the U.S. economy recovers.  Non-performing assets increased to 17.96% at September 30, 2012 as compared to 2.02% at September 30, 2011, primarily due to certain non-performing loans that are contractually current but on the cost recovery method due to continued uncertainty as to future collectability.  However, the aging of receivables greater than 91 days past due improved slightly to 0.9% of the portfolio at September 30, 2012 compared to 2.0% at September 30, 2011.

Our net charge-offs decreased in the 2012 period compared to the 2011 period due to a decrease in the size of our portfolio of leases and loans.
 
Critical Accounting Policies
 
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and cost and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including the allowance for credit losses and the estimated unguaranteed residual values of leased equipment, among others. We base our estimates on historical experience, current economic conditions and on various other assumptions that we believe reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
 
18

 
For a complete discussion of our critical accounting policies and estimates, see our annual report on Form 10-K for fiscal 2011 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations- Critical Accounting Policies and Estimates.”  There have been no material changes to these policies through September 30, 2012.
 
Results of Operations
As discussed previously, the economic recession has negatively impacted our operating results primarily through increased rates of default on outstanding leases and loans and increased costs of borrowing from our lenders.  These factors have resulted in our inability to reinvest earnings in additional leases and loans, leading to a decrease in our portfolio balance and a reduction in cash generated to continue to support distributions to our limited partners.

Three months ended September 30, 2012 compared to three months ended September 30, 2011 (dollars in thousands):
 
         
Increase (Decrease)
 
   
2012
   
2011
    $       %  
Revenues:
                         
Interest on equipment financings
  $ 2,144     $ 4,212     $ (2,068 )     (49 )%
Rental income
    275       604       (329 )     (54 )%
Gains on sale of equipment and lease dispositions, net
    217       360       (143 )     (40 )%
Other income
    144       277       (133 )     (48 )%
      2,780       5,453       (2,673 )     (49 )%
                                 
Expenses:
                               
Interest expense
    3,090       4,725       (1,635 )     (35 )%
Depreciation on operating leases
    123       474       (351 )     (74 )%
Provision for credit losses
    2,308       3,089       (781 )     (25 )%
General and administrative expenses
    213       256       (43 )     (17 )%
Administrative expenses reimbursed to affiliate
    273       609       (336 )     (55 )%
Management fees to affiliate
    -       -       -       (- )%
      6,007       9,153       (3,146 )     (34 )%
Net loss
    (3,227 )     (3,700 )     473          
Less: Net loss attributable to the noncontrolling interest
    56       22       34          
Net loss attributable to LEAF 4 partners
  $ (3,171 )   $ (3,678 )   $ 507          
Net loss allocated to LEAF 4's limited partners
  $ (3,139 )   $ (3,641 )   $ 502          
 
The decrease in total revenues was primarily attributable to the following:
 
 
·
A decrease in interest on equipment financings and rental income. Our weighted average net investment in financing assets decreased to $125.9 million for the three months ended September 30, 2012 as compared to $234.7 million for the three months ended September 30, 2011, a decrease of $108.8 million or 46%. As noted previously, this decrease was primarily due to the continued runoff of our portfolio of leases and loans, as higher than anticipated defaults resulted in excess cash being used to settle debt obligations and support distributions to our partners, rather than be reinvested in new leases and loans.
 
 
·
Gains on the sale of equipment and lease dispositions decreased $143,000 to $217,000 for the three months ended September 30, 2012 compared to $360,000 for the three months ended September 30, 2011.  Gains and losses on sales of equipment may vary significantly from period to period.
 
 
·
Other income decreased $133,000 from $277,000 at September 30, 2011 to $144,000 at September 30, 2012, a decrease of 48%.  The decrease is primarily due to a reduction in late fee income which is a result of the decrease in our portfolio.
 
The decrease in total expenses was primarily a result of the following:
 
 
·
A decrease in interest due to a decrease in our average debt outstanding. Average borrowings for the three months ended September 30, 2012 and 2011 were $100.1 million and $200.6 million, respectively. Borrowings for the three months ended September 30, 2012 and 2011 were at an effective interest rate of 12.4% and 9.3%, respectively. The interest expense reduction was primarily driven by the reduction in the size of our portfolio of leases and loans.
 
 
19

 
 
·
A decrease in depreciation on operating leases due to a decrease in the size of our portfolio.
 
 
·
A decrease in our provision for credit losses is principally due to a decrease of our equipment financing portfolio and a slight improvement in the aging of our receivables. The aging of our receivables greater than 91 days past due improved to 0.9% of the portfolio at September 30, 2012 compared to 2.0% at September 30, 2011.
 
 
·
A decrease in administrative expenses reimbursed to affiliates and general and administrative expenses occurred due to the reduction in the size of our portfolio.
 
The net loss per limited partner unit, after the net loss allocated to our General Partner, for the three months ended September 30, 2012 and 2011 was $2.49 and $2.89, respectively, based on a weighted average number of limited partner units outstanding of 1,259,537 each period.

Nine Months Ended September 30, 2012 compared to the Nine Months Ended September 30, 2011 (dollars in thousands):

         
Increase (Decrease)
 
   
2012
   
2011
    $       %  
Revenues:
                         
Interest on equipment financings
  $ 7,214     $ 14,874     $ (7,660 )     (51 )%
Rental income
    1,081       1,964       (883 )     (45 )%
Gains on sale of equipment and lease dispositions, net
    958       1,273       (315 )     (25 )%
Gain on extinguishment of debt
    -       13,677       (13,677 )     (100 )%
Other income
    718       831       (113 )     (14 )%
      9,971       32,619       (22,648 )     (69 )%
                                 
Expenses:
                               
Interest expense
    9,880       16,937       (7,057 )     (42 )%
Depreciation on operating leases
    730       1,568       (838 )     (53 )%
Provision for credit losses
    8,252       12,293       (4,041 )     (33 )%
General and administrative expenses
    891       1,152       (261 )     (23 )%
Administrative expenses reimbursed to affiliate
    993       1,983       (990 )     (50 )%
Mark to market changes on derivative activities
    -       126       (126 )     (100 )%
Management fees to affiliate
    -       -       -       (- )%
      20,746       34,059       (13,313 )     (39 )%
Net loss
    (10,775 )     (1,440 )     (9,335 )        
Less: Net loss (income) attributable to the noncontrolling interest
    153       (27 )     180          
Net loss attributable to LEAF 4 partners
  $ (10,622 )   $ (1,467 )   $ (9,155 )        
Net loss allocated to LEAF 4's limited partners
  $ (10,516 )   $ (1,452 )   $ (9,064 )        
 
The decrease in total revenues was primarily attributable to the following:
 
 
·
A decrease in interest income on equipment financings and rental income. Our weighted average net investment in financing assets decreased to $149.0 million for the nine months ended September 30, 2012 as compared to $273.9 million for the nine months ended September 30, 2011, a decrease of $124.9 million or 46.0%. As noted previously, this decrease was primarily due to the continued runoff of our portfolio of leases and loans, as higher than anticipated defaults resulted in excess cash being used to settle debt obligations and support distributions to our partners, rather than be reinvested in new leases and loans.
 
 
·
Gains on the sale of equipment and lease dispositions decreased $315,000 to $958,000 for the nine months ended September 30, 2012 compared to $1.3 million for the nine months ended September 30, 2011.  Gains and losses on sales of equipment may vary significantly from period to period.
 
 
·
The nine month period ended September 30, 2011 was significantly impacted by a non-recurring gain on the extinguishment of debt of $13.7 million related to the payoff and termination of a term facility. This non-recurring gain increased limited partner’s earnings per unit for the nine month period ending September 30, 2011 by $10.86.
 
 
20

 
The decrease in total expenses was primarily a result of the following:
 
 
·
A decrease in interest due to our decrease in average debt outstanding. Average borrowings for the nine months ended September 30, 2012 and 2011 were $121.3 million and $237.5 million, respectively. Borrowings for the nine months ended September 30, 2012 and 2011 were at an effective interest rate of 10.9% and 9.5%, respectively. The interest expense reduction was primarily driven by the reduction in the size of our portfolio of leases and loans.
 
 
·
A decrease in depreciation on operating leases related to the decrease in our investment in operating leases.
 
 
·
A decrease in our provision for credit losses. Our provision for credit losses has decreased due to the decrease in size of the portfolio and an improvement in the aging of our receivables, partially offset by an individual reserve applied to certain non-performing asset backed leases and loans. The aging of our receivables greater than 91 days past due improved to 0.9% of the portfolio at September 30, 2012 compared to 2.0% at September 30, 2011.  However, the individual reserve applied to certain non-performing asset backed leases and loans increased $2.0 million to $3.6 million at September 30, 2012.  There was no individual reserve applied to these assets at September 30, 2011.
 
 
·
A decrease in administrative expenses reimbursed to affiliates and general and administrative expenses occurred due to the reduction in the size of our portfolio.
 
 
·
A decrease in mark to market changes on derivative activities.  As noted previously, subsequent to the completion of the 2011-1 Term Securitization, all of our debt was on a fixed-rate basis and, therefore, we terminated all of our interest rate swap contracts in January 2011.  Accordingly, we no longer own any derivative instruments.
 
The net loss per limited partner unit, after the net loss allocated to our General Partner, for the nine months ended September 30, 2012 and 2011 was $8.35 and $1.15, respectively, based on a weighted average number of limited partner units outstanding of 1,259,537 each period.
 
Liquidity and Capital Resources
 
General
 
Our major source of liquidity is from the collection of lease and loan payments.  Our primary cash requirements, in addition to normal operating expenses are for debt service, investments in leases and loans and distributions to our partners.
 
We believe at this time that future net cash inflows will be sufficient to finance operations and meet debt service payments. The following table sets forth our sources and uses of cash for the periods indicated (in thousands):

   
Nine Months Ended September 30,
 
   
2012
   
2011
 
Net cash provided by operating activities
  $ 4,001     $ 7,448  
Net cash provided by investing activities
    63,382       100,922  
Net cash used in financing activities
    (67,574 )     (108,018 )
(Decrease) increase in cash
  $ (191 )   $ 352  
 
Cash decreased by $191,000 due to debt repayments of $70.6 million and distributions to partners of $3.8 million, partially offset by net proceeds from lease and loan assets of $63.4 million, a reduction in our restricted cash of $6.8 million, and cash provided by operating activities of $4.0 million.

Partner’s distributions paid for the nine months ended September 30, 2012 and September 30, 2011 were $3.8 million. Cumulative partner distributions paid from our inception to September 30, 2012 were approximately $23.9 million. To date, limited partners have received total distributions of approximately 19% of their original amount invested, depending upon when the investment was made.   Partner distributions for the nine months ended September 30, 2012 and 2011 were made at a rate of 4.0% of capital invested. Future cash distributions are not guaranteed and are solely dependent on our performance and are impacted by a number of factors which include lease and loan defaults by our customers, accelerated principle payments on our debt facilities required per our agreements, and prevailing economic conditions. The terms of our current debt facilities are structured to use excess cash to accelerate the repayment of debt. This results in paying less interest expense over time, but also limits available cash to make monthly distributions to the partners. The terms of our current debt facilities coupled with continued higher than expected lease and loan defaults, caused by a slow economic recovery could impact our ability to make monthly cash distributions to our limited partners.
 
 
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Beginning August 1, 2010, our General Partner waived its asset management fee and subsequently waived all future management fees. Through September 30, 2012, the General Partner has waived $6.1 million of asset management fees, of which $1.4 million related to the nine months ended September 30, 2012.
 
Borrowings
Our borrowing relationships each require the pledging of eligible leases and loans to secure amounts advanced. Borrowings outstanding under our debt facilities as of September 30, 2012 were as follows (in thousands):
 
     
Amount
   
Amount of
 
 
Type
 
Outstanding
   
Collateral (1)
 
2011-1 Term Securitization
Term
  $ 34,096     $ 36,882  
2010-1 Term Securitization
Term
    10,545       14,471  
2010-3 Term Securitization
Term
    45,764       53,323  
      $ 90,405     $ 104,676  


(1)
These borrowings are collateralized by specific leases and loans and restricted cash. As of September 30, 2012, $94.0 million of leases and loans and $10.6 million of restricted cash were pledged as collateral under the Fund’s term securitizations. Recourse under these securitizations is limited to the amount of collateral pledged.

2011-1 Term Securitization.  On January 26, 2011, a previous lender was paid-off with the proceeds from the 2011-1 Term Securitization (The “2011-1 Term Securitization”) in which six classes of asset-backed notes were issued that  have varying maturity dates ranging from December 2018 to December 2023. The asset-backed notes totaled $96.0 million and bear interest at fixed, stated rates ranging from 1.7% to 5.5% and were issued at an original discount of approximately $6.2 million.  As a result of the retirement of the previous term loan, we recognized a gain on extinguishment of debt of $13.7 million.

Series 2010-1 Term Securitization.  On May 18, 2010 three classes of asset-backed notes were issued (The “2010-1 Term Securitization”), one that matures on October 23, 2016 and two that mature on September 23, 2018, respectively. The asset-backed notes total $92.7 million and bear interest at a fixed, stated rate of 5% and were issued at an original discount of $6.5 million.

Series 2010-3 Term Securitization.  On August 17, 2010 five classes of asset-backed notes were issued (The “2010-3 Term Securitization”), one that matures on June 20, 2016 and 4 that mature on February 20, 2022, respectively. The asset-backed notes total $171.4 million and bear interest at fixed, stated rates ranging from 3.5% to 5.5% and were issued at an original discount of $3.7 million.

Our securitizations are serviced by an affiliate of our General Partner (the “Servicer”).  If the Servicer or our portfolio does not comply with certain requirements, then the noteholders have the right to replace the Servicer.  The portfolios of the 2010-1 Term Securitization and 2010-3 Term Securitization exceeded the cumulative net loss percentage permitted in April 2012.  The servicing agreements were amended effective July 31, 2012 to increase the cumulative net loss percentages and as a result the portfolio was in compliance with these agreements as of September 30, 2012.  In addition, the servicing agreements and the indentures on these facilities were amended to establish an additional reserve account to be funded by cash flows on leases and loans that will be used by the trustee as additional collateral.

This event does not constitute an event of default on the 2010-1 Term Securitization or the 2010-3 Term Securitization.  Additionally, we are not, nor have been, delinquent on any payments owed to the noteholders.

In addition to the above borrowings, LEAF Commercial Finance Fund, LLC (“LCFF”), a subsidiary of LEAF Funds JV2, has $9.4 million of 8.25% secured subordinated promissory notes (the “Notes”) outstanding, which are recourse to LCFF only. The Notes were issued to private investors and require interest only payments until their maturity in February 2015. LCFF may call or redeem the Notes, in whole or in part, at any time during the interest only period.

The Notes are subject to various covenants as set forth in their indenture, including an interest coverage ratio test, which LCFF was not in compliance with as of September 30, 2012.  LCFF has notified the Trustee of this breach.  As a result, the noteholders have the right to declare an event of default.  If the noteholders would declare an event of default they have various rights and remedies available to them including (1) the right to declare all amounts currently outstanding under the Notes as immediately due and payable; (2) the right to take immediate possession of the assets of LCFF; and (3) the right to sell or otherwise dispose of the assets of LCFF in their current condition.  If the noteholders choose to repossess and sell LCFF’s assets, such a sale of a portfolio could be at prices lower than its carrying value, which could result in losses to us.
 
 
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Notwithstanding the foregoing, LCFF is not, nor has been, delinquent on any payments of interest owed to the noteholders.

Our primary source of liquidity comes from payments on our lease and loan portfolio. Our liquidity has been and could be further adversely affected by higher than expected equipment lease defaults, which results in a loss of revenues. These losses may adversely affect our ability to make distributions to our partners and, if the level of defaults are sufficiently large, may result in our inability to fully recover our investment in the underlying equipment. As our lease portfolio ages, and if the recovery in the United States economy falters for a substantial period of time, we may need to increase our allowance for credit losses.
 
Our primary use of cash is for debt service. Substantially all of our leases and loans are collateral for our debt, however, all of our debt is non-recourse to the partnership which limit our financial exposure. Repayment of our debt is based on the payments we receive from our customers. If a lease or loan becomes delinquent our lender uses the excess collateral from performing leases to repay our loan, even though our customer has not paid us. Therefore, higher than expected lease and loan defaults will reduce our liquidity.

The terms of securitizations require the use of excess cash flow from the underlying collateral to accelerate the repayment on our debt.  As a result, this minimizes the excess cash flow available to us for the acquisition of new leases and loans until our securitizations are paid off. When we have available resources, the climate of the credit markets is such that our liquidity may be adversely affected, particularly our ability to obtain or renew debt financing needed to execute our investment strategies. Historically, we have utilized both revolving and term debt facilities to fund our acquisitions of equipment financings.  If we are unable to obtain new debt that will allow us to invest the repayments of existing leases and loans into new investments, then our portfolio of leases and loans will continue to decline.
 
Legal Proceedings
 
We are a party to various routine legal proceedings arising out of the ordinary course of our business. Our General Partner believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.
 
 
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Quantitative and Qualitative Disclosures about Market Risk have been omitted as permitted under rules applicable to smaller reporting companies.
 
 
Disclosure Controls
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
 
Under the supervision of our General Partner’s chief executive officer and chief financial officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our General Partner’s chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level discussed above.
 
Changes in Internal Control over Financial Reporting
 
There has been no change in our internal control over financial reporting that occurred during the three months ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
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PART II. OTHER INFORMATION
 
 
Exhibit
   
No.
 
Description
3.1
 
Certificate of Limited Partnership (1)
3.2
 
Amended and Restated Agreement of Limited Partnership (2)
3.3
 
Amendment No. 1 to Amended and Restated Agreement of Limited Partnership of LEAF Equipment Finance Fund 4, L.P. (7)
4.1
 
Forms of letters sent to limited partners confirming their investment (1)
10.1
 
Form of Origination and Servicing Agreement Among LEAF Financial Corporation, LEAF Equipment Finance Fund 4, LP and LEAF Funding, Inc. (1)
10.2
 
Indenture by and between LEAF Commercial Finance Fund, LLC and U.S. Bank National Association (3)
10.3
 
Amended and Restated Limited Liability Company Agreement of LEAF Commercial Finance Fund, LLC(3)
10.4
 
Limited Liability Company Agreement of LEAF Funds Joint Venture 2, LLC (3)
10.5
 
Indenture between LEAF Receivables Funding 2, LLC and U.S. Bank National Association dated as of May 1, 2010 (4)
10.6
 
Indenture between LEAF Receivables Funding 4, LLC and U.S. Bank National Association dated as of July 4, 2010 (5)
10.7
 
Indenture between LEAF Receivables Funding 6, LLC and U.S. Bank National Association dated as of January 6, 2011 (6)
10.8
 
First Amendment dated as of September 28, 2012 to the Indenture between LEAF Receivables Funding 2, LLC and U.S. Bank National Association
10.9
 
First Amendment dated as of October 15, 2012 to the Indenture between LEAF Receivables Funding 4, LLC and U.S. Bank National Association
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Certification of Chief Executive Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
Certification of Chief Financial Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
 
Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets at September 30, 2012 and December 31, 2011; (ii) the Consolidated Statements of  operations for the three and nine month periods ended September 30, 2012 and 2011; (iii) the Consolidated Statements of Comprehensive Income for the three and nine month period ended September 30, 2012; (iv) the Consolidated Statement of Changes in Partners’ (Deficit) Capital for the nine month period ended September 30, 2012; (iv) the Consolidated Statements of Cash Flows for the periods ended September 30, 2012 and 2011; and, (iv) the Notes to Consolidated Financial Statements.
 

 
(1)
Filed previously as an exhibit to our Registration Statement on Form S-1 filed on March 24, 2008 and by this reference incorporated herein.
 
(2)
Filed previously as an exhibit to Form 8-K on May 8, 2009 and by this reference incorporated herein.
 
(3)
Filed previously on May 12, 2009 in Post-Effective Amendment No. 1 as an exhibit to our Registration Statement and by this reference incorporated herein.
 
(4)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2010 and by this reference incorporated herein.
 
(5)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q/A for the quarter ended September 30, 2010 and by this reference incorporated herein.
 
(6)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 and by this reference incorporated herein.
 
(7)
 Filed previously as an exhibit to form 8-K on October 20, 2011 and by this reference incorporated herein.

 
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
LEAF EQUIPMENT FINANCE FUND 4, L.P.
 
A Delaware Limited Partnership
     
 
By:
LEAF Asset Management, LLC, its General Partner
     
November 14, 2012
By:
/s/ CRIT S. DEMENT
   
Crit S. DeMent
   
Chief Executive Officer
     
November 14, 2012
By:
/s/ ROBERT K. MOSKOVITZ
   
Robert K. Moskovitz
   
Chief Financial Officer
 
 
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