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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

 

¨	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)

(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.    þ  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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).    ¨  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  ¨		Smaller Reporting Company  þ
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨  Yes    þ  No

 

 

 

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LEAF EQUIPMENT FINANCE FUND 4, L.P.

INDEX TO QUARTERLY REPORT

ON FORM 10-Q

 

				PAGE
PART I		FINANCIAL INFORMATION
ITEM 1.		Financial Statements
		Consolidated Balance Sheets – September 30, 2009 (unaudited) and December 31, 2008		3
		Consolidated Statements of Operations Three and Nine Months Ended September 30, 2009 and 2008 (unaudited)		4
		Consolidated Statement of Changes in Partners’ Capital Nine Months Ended September 30, 2009 (unaudited)		5
		Consolidated Statement of Cash Flows Nine Months Ended September 30, 2009 and 2008 (unaudited)		6
		Notes to Consolidated Financial Statements – September 30, 2009 (unaudited)		7
ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
ITEM 3.		Quantitative and Qualitative Disclosures about Market Risk		29
ITEM 4.		Controls and Procedures		30
PART II		OTHER INFORMATION
ITEM 2.		Unregistered Sales of Equity Securities and Use of Proceeds		31
ITEM 6.		Exhibits		32
SIGNATURES				33

 

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PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands)

 

		September 30, 2009				December 31, 2008
		(unaudited)
ASSETS
Cash		$	5,514			$	6,736
Restricted cash			22,079				16
Investment in commercial finance assets, net			526,678				14,934
Investment in affiliated leasing partnership			—				10,466
Derivative assets at fair value			752				—
Deferred financing costs, net			4,362				125
Other assets			282				10
		$	559,667			$	32,287
LIABILITIES AND PARTNERS’ CAPITAL
Liabilities:
Bank debt		$	459,555			$	—
Accounts payable, accrued expenses and other liabilities			2,357				199
Derivative liabilities at fair value			12,890				—
Due to affiliates			2,309				427
Subordinated notes payable			9,355				—
Total liabilities			486,466				626
Commitments and contingencies
Partners’ Capital:
General partner			(170	)			(12	)
Limited partners			72,407				32,240
Accumulated other comprehensive loss			—				(567	)
Total LEAF 4 partners’ capital			72,237				31,661
Noncontrolling interest			964				—
Total partners’ capital			73,201				31,661
Total liabilities and partners’ capital		$	559,667			$	32,287

The accompanying notes are an integral part of these consolidated financial statements.

 

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LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Consolidated Statements of Operations

(in thousands, except unit and per unit data)

(unaudited)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008*
Revenues:
Interest on equipment financings		$	8,548			$	3			$	15,336			$	3
Rental income			514				—				1,024				—
Gains on sales of equipment and lease dispositions, net			201				—				224				—
Other			250				—				450				—
			9,513				3				17,034				3
Expenses:
Interest expense			8,143				—				12,403				—
Losses (gains) on derivative hedging activities			107				—				(876	)			—
Depreciation on operating leases			452				—				889				—
Provision for credit losses			4,909				—				7,941				—
General and administrative expenses			371				1				983				1
Administrative expenses reimbursed to affiliate			818				—				1,847				—
Management fees to affiliate			1,148				—				2,621				—
			15,948				1				25,808				1
(Loss) income before equity in losses of affiliate			(6,435	)			2				(8,774	)			2
Equity in losses of affiliate			(571	)			—				(3,261	)			—
Net (loss) income			(7,006	)			2				(12,035	)			2
Less: Net loss attributable to noncontrolling interests			83				—				111				—
Net (loss) income attributable to LEAF 4		$	(6,923	)		$	2			$	(11,924	)		$	2
Weighted average number of limited partner units outstanding during the period			908,843				103,188	**			679,229				n/m
Net (loss) income per weighted average limited partner unit		$	(7.54	)		$	0.02			$	(17.38	)		$	n/m

 

*	For the period January 25, 2008 (date of formation) to September 30, 2008

 

**	For the period September 16, 2008 (commencement of operations) through September 30, 2008

n/m – not meaningful

The accompanying notes are an integral part of these consolidated financial statements.

 

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LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Consolidated Statement of Changes in Partners’ Capital

For the Nine Months Ended September 30, 2009

(in thousands, except unit data)

(unaudited)

 

		General Partner				Limited Partners							Accumulated Other Comprehensive								Noncontrolling				Total Partners’				Comprehensive
		Amount				Units			Amount				(Loss) Income				Total				Interest				Capital				(Loss) Income
Balance, January 1, 2009		$	(12	)		390,925			$	32,240			$	(567	)		$	31,661			$	—			$	31,661			$	—
Sales of limited partnership units			—			644,227				64,223				—				64,223				—				64,223				—
Offering costs related to the sale of limited partner units			—			—				(7,900	)			—				(7,900	)			—				(7,900	)			—
Issuance of membership interest to noncontrolling interest			—			—				—				—				—				428				428				—
Cash distributions			(39	)		—				(3,833	)			—				(3,872	)			—				(3,872	)			—
Redemption of limited partnership units			—			(6,054	)			(518	)			—				(518	)			—				(518	)			—
Comprehensive Loss:
Net loss			(119	)		—				(11,805	)			—				(11,924	)			(111	)			(12,035	)		$	(12,035	)
Unrealized gains on financial derivatives			—			—				—				1,347				1,347				—				1,347				1,347
Comprehensive loss			—			—				—				—				—				—				—				(10,688	)
Consolidation of LEAF Funds JV1			—			—				—				(780	)			(780	)			647				(133	)			—
Comprehensive loss attributable to noncontrolling interest			—			—				—				—				—				—				—				111
Comprehensive loss attributable to LEAF 4			—			—				—				—				—				—				—			$	(10,577	)
Balance, September 30, 2009		$	(170	)		1,029,098			$	72,407			$	—			$	72,237			$	964			$	73,201

The accompanying notes are an integral part of this consolidated financial statement.

 

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LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Consolidated Statement of Cash Flows

(in thousands)

(unaudited)

 

		Nine Months Ended September 30,
		2009				2008*
Cash flows from operating activities:
Net (loss) income attributable to LEAF 4		$	(11,924	)		$	2
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Gains on sales of equipment and lease dispositions, net			(224	)			—
Amortization of deferred financing costs and financial derivatives			3,601				—
Depreciation on operating leases			889				—
Provision for credit losses			7,941				—
Equity in losses of affiliate			3,261				—
Net loss attributable to noncontrolling interest			(111	)			—
Gains on derivative hedging activities			(1,148	)			—
Changes in operating assets and liabilities, net of effect of acquisitions:
Other assets			73				—
Accounts payable, accrued expenses and other liabilities			202				4
Due to affiliates, net			(421	)			575
Net cash provided by operating activities			2,139				581
Cash flows from investing activities:
Purchases of commercial finance assets, net			(154,838	)			(10,675	)
Proceeds from commercial finance assets, net			56,045				16
Security deposits returned, net of collected			(103	)			—
Issuance of membership interest in LEAF Funds JV2 to noncontrolling interest			428				—
Investment in LEAF Funds JV1			(1,225	)			—
Investment in LEAF Commercial Finance Fund, net of cash acquired			(7,649	)			—
Investment in RCF			(7,545	)			—
Investment in LEAF Fund JV1, net of cash acquired			(8,382	)			—
Net cash used in investing activities			(123,269	)			(10,659	)
Cash flows from financing activities:
Borrowings of bank debt			127,125				—
Repayment of bank debt			(54,316	)			—
Increase in restricted cash			(3,216	)			(14	)
Increase in deferred financing costs			(1,840	)			—
Acquisition of financial derivatives			(81	)			—
General partner’s capital contributions			—				1
Limited partners’ capital contributions			64,223				12,750
Payment of offering costs incurred for the sale of partnership units			(7,597	)			(1,312	)
Cash distributions to partners			(3,872	)			—
Redemption of limited partnership units			(518	)			—
Net cash provided by financing activities			119,908				11,425
(Decrease) increase in cash			(1,222	)			1,347
Cash, beginning of period			6,736				—
Cash, end of period		$	5,514			$	1,347

*	For the period January 25, 2008 (date of formation) to September 30, 2008

The accompanying notes are an integral part of these consolidated financial statements.

 

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LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

September 30, 2009

(unaudited)

NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS

LEAF Equipment Finance Fund 4, L.P. (the “Fund”) is a Delaware limited partnership formed on January 25, 2008 by its General Partner, LEAF Asset Management, LLC (the “General Partner”). The General Partner, a Delaware limited liability company, is a wholly owned 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. The Fund received its minimum subscription proceeds of $2.0 million (20,000 units) required to begin operations and it broke escrow on September 16, 2008. The Fund had registered to raise $200 million through the offering of 2 million limited partnership units. However, the General Partner closed the offering on October 30, 2009. Through November 13, 2009, the Fund had received subscriptions for 1.2 million limited partnership units for gross proceeds of $125.6 million, which includes $1 million invested by the General Partner.

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.

The consolidated financial statements and notes thereto as of September 30, 2009 and for the three and nine months ended September 30, 2009 are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. However, in the opinion of management, these interim financial statements include all the necessary adjustments to fairly present the results of the interim periods presented. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Fund’s Annual Report on Form 10-K for the year ended December 31, 2008. The results of operations for the nine months ended September 30, 2009 may not necessarily be indicative of the results of operations for the year ending December 31, 2009.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Fund and its wholly owned subsidiary, LEAF 4A SPE, LLC. Effective March 1, 2009, the consolidated financial statements also include LEAF Funds Joint Venture 2, LLC (“LEAF Funds JV2”), in which the Fund acquired and maintains a 98% interest. Effective June 30, 2009, the consolidated financial statements also include Resource Capital Funding, LLC (“RCF”) in which the Fund acquired a 100% interest as discussed in Note 3. Also, as discussed in Note 3, effective August 31, 2009, the consolidated financial statements include LEAF Funding, LLC (“LEAF Funds JV1”) in which the Fund holds an approximate 96% interest. All intercompany accounts and transactions have been eliminated in consolidation.

When the Fund obtains an explicit or implicit interest in an entity, the Fund evaluates the entity to determine if the entity is a variable interest entity (“VIE”), and, if so, whether or not the Fund is deemed to be the primary beneficiary of the VIE. Generally, the Fund consolidates VIEs for which the Fund is deemed to be the primary beneficiary or for non-VIEs which the Fund controls. The primary beneficiary of a VIE is the variable interest holder that absorbs the majority of the variability in the expected losses or the residual returns of the VIE. When determining the primary beneficiary of a VIE, the Fund considers its aggregate explicit and implicit variable interests as a single variable interest. If the Fund’s single variable interest absorbs the majority of the variability in

 

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LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

September 30, 2009

(unaudited)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)

Principles of Consolidation – (Continued)

the expected losses or the residual returns of the VIE, the Fund is considered the primary beneficiary of the VIE. The Fund reconsiders its determination of whether an entity is a VIE and whether the Fund is the primary beneficiary of such VIE if certain events occur.

As discussed in Note 3, LEAF Funds JV2 purchased an interest in LEAF Commercial Finance Fund, LLC (“LCFF”) in March 2009 from LEAF Financial Corporation (“LEAF Financial”), an affiliate of our General Partner. While LEAF Financial continues to maintain voting control, the Fund consolidates LCFF because the Fund, through its ownership of LEAF Funds JV2, is deemed to be the primary beneficiary of LCFF.

The Fund reflects the participation of LEAF Equipment Leasing Income Fund III, L.P. (“LEAF III”) in the net assets and in the income or losses of LEAF Funds JV1 and LEAF Funds JV2 as noncontrolling interest in the consolidated balance sheets and statements of operations. Noncontrolling interest adjusts the Fund’s consolidated operating results to reflect only the Fund’s share of the earnings or losses of LEAF Funds JV1 and LEAF Funds JV2.

Reclassifications

Certain reclassifications have been made to the 2008 consolidated financial statements to conform to the 2009 presentation.

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, the estimated unguaranteed residual values of leased equipment, impairment of long-lived assets and the fair value of interest rate swaps and caps. 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 under different assumptions or conditions.

The Fund evaluates the adequacy of the allowance for credit losses (including investments in leases, loans and future payment card receivables) 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, the Fund performs a migration analysis, which estimates the likelihood that an account progresses through delinquency stages to ultimate charge-off. The Fund’s policy is to charge off to the allowance those financings which are in default and for which management has determined the probability of collection to be remote.

 

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LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

September 30, 2009

(unaudited)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)

Use of Estimates – (Continued)

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 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 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 assets exceed their estimated fair values.

Interest rate swaps and caps are recorded at fair value based on a value determined by a third-party pricing agent using an income approach and utilizing models that use as their primary basis readily observable market parameters. This valuation process considers factors including interest rate yield curves, time value, credit factors and volatility factors. 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 not exceed the benefits.

Restricted Cash

Restricted cash includes cash being held in reserve by the Fund’s lenders. Restricted cash also includes approximately $4.6 million of customer payments deposited into a lockbox shared with LEAF Financial and other entities serviced by LEAF Financial. The lockbox is in the name of U.S. Bank National Association as trustee under an inter-creditor agreement among LEAF Financial, the other entities and their respective lenders. These amounts represent customer payments received by the lockbox, applied to the respective customer’s accounts, but not transferred to the Fund’s bank account.

Revenue Recognition

The Fund’s investment in commercial finance assets consists of direct financing leases, operating leases, loans and future payment card receivables held directly or through acquisitions of participations.

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.

 

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LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

September 30, 2009

(unaudited)

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 term 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 three and nine months ended September 30, 2009.

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 payments over the original 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.

Future Payment Card Receivables. The Fund provides cash advances to small businesses on future payment card receipts. Revenues from this operation are recorded under the effective interest method over the period under which the cash advance is expected to be repaid.

The Fund discontinues the recognition of revenue for leases and loans for which payments are more than 90 days past due (“non-accrual”), or, in the case of future payment card receivables, when no payments have been received in 60 days. As of September 30, 2009 and December 31, 2008, the Fund had $11.9 million and $1.2 million, respectively, of commercial finance assets on non-accrual status. Fees from delinquent payments are recognized when received and are included in other income.

Derivative Instruments

The Fund’s debt facilities generally require it to enter into derivative contracts, including interest rate swaps and interest rate caps, to add stability to its financing costs and to manage its exposure to interest rate movements or other identified risks. U.S. GAAP requires recognition of all derivatives at fair value as either assets or liabilities in the consolidated balance sheets. The accounting for subsequent changes in the fair value of these derivatives depends on whether each has been designated and qualifies for hedge accounting treatment. The Fund has elected not to apply hedge accounting, and therefore any changes in the fair value of these derivative instruments is recognized immediately in gains (losses) on derivative hedging activities in the consolidated statements of operations.

 

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LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

September 30, 2009

(unaudited)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)

Transfers of Financial Assets

In connection with establishing its debt facilities with its banks, the Fund has formed bankruptcy remote special purpose entities through which the financings are arranged. The Fund’s transfers of assets to these special purpose entities 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 entities 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.

Comprehensive Loss

Comprehensive loss includes net loss and all other changes in the equity of a business during a period from transactions and other events and circumstances from non-owner sources. These changes, other than net loss are referred to as “other comprehensive income (loss)” and for the Fund only includes the Fund’s share of unrealized gains on hedging contracts held by affiliates that the Fund accounted for under the equity method.

Newly Adopted Accounting Principles

In April 2009, the Financial Accounting Standards Board (“FASB”) issued guidance relating to subsequent events and established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. The Fund adopted this guidance during the quarter ended June 30, 2009.

In April 2009, the FASB issued amended guidance relating to interim disclosures about the fair value of financial instruments. The amended guidance requires disclosures about fair value of financial instruments in interim as well as in annual financial statements and requires those disclosures in summarized financial information at interim reporting periods. The adoption of the amended guidance had no impact on the Fund’s consolidated financial position or results of operations.

Accounting Standards Issued But Not Yet Effective

In June 2009, the FASB issued guidance requiring a qualitative approach to identifying a controlling financial interest in a VIE, and an ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. This guidance is effective for the Fund effective January 1, 2010. The Fund is currently evaluating the impact of this guidance on its consolidated financial position and results of operations.

 

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LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

September 30, 2009

(unaudited)

NOTE 3 – ACQUISITION OF INTERESTS IN POOLS OF LEASE ASSETS

In March 2009, the Fund and LEAF III formed LEAF Funds JV2, a joint venture which acquired an interest in LCFF, a VIE, that had been owned by LEAF Financial.

In June 2009, the Fund acquired a pool of lease assets through the acquisition of RCF from the Fund’s General Partner, which had acquired RCF in June 2009 from an affiliate of the Fund’s General Partner, for the purpose of obtaining such assets for the Fund.

In November 2008, the Fund and LEAF III formed LEAF Funds JV1, a joint venture which owned a pool of lease assets. The Fund acquired a 49% interest in such joint venture. In August 2009, the Fund increased its ownership interest in LEAF Funds JV1 by an additional 47%. As a result of this transaction, LEAF Funds JV1 was consolidated with the results of the Fund effective August 31, 2009.

The following summarizes the impact of the above transactions on the Fund’s consolidated balance sheet as of each respective acquisition date (in thousands):

 

		LCFF				RCF				LEAF Funds JV1
Cash		$	2,024			$	—			$	118
Restricted cash			6,713				4,218				7,916
Investment in commercial finance assets			192,528				90,534				140,538
Debt			(178,211	)			(82,319	)			(126,216	)
Derivative assets			719				—				—
Derivative liability			(5,566	)			(4,431	)			(3,887	)
Subordinated notes			(9,355	)			—				—
Due to affiliates			(8,409	)			(90	)			(1,102	)
Accounts payable and accrued expenses			—				(478	)			(691	)
Deferred financing costs and other assets			1,730				111				1,468
Other			—				—				133
			2,173				7,545				18,277
Less: the Fund’s prior ownership			—				—				(9,777	)
Total purchase price for equity interest			2,173				7,545				8,500
Cash acquired			(2,024	)			—				(118	)
Total purchase price for equity interest, net of cash acquired			149				7,545				8,382
Paydown of due to affiliate balance			7,500				—				—
Total purchase price, net of cash acquired		$	7,649			$	7,545			$	8,382

 

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LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

September 30, 2009

(unaudited)

NOTE 4 – INVESTMENT IN COMMERCIAL FINANCE ASSETS

The Fund’s investment in commercial finance assets, net, consists of the following (in thousands):

 

		September 30, 2009				December 31, 2008
Direct financing leases		$	171,149			$	3,025
Loans			353,680				8,700
Other financings (a)			7,539				3,779
			532,368				15,504
Allowance for credit losses			(5,690	)			(570	)
		$	526,678			$	14,934

 

(a)	Other financings include operating leases and future payment card receivables.

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

 

		September 30, 2009								December 31, 2008
		Direct Financing Leases				Loans				Direct Financing Leases				Loans
Total future minimum payments		$	194,365			$	422,918			$	3,404			$	9,312
Unearned income			(23,762	)			(60,703	)			(458	)			(531	)
Residuals, net of unearned residual income			3,365				—				105				—
Security deposits			(2,819	)			(8,535	)			(26	)			(81	)
		$	171,149			$	353,680			$	3,025			$	8,700

 

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LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

September 30, 2009

(unaudited)

NOTE 4 – INVESTMENT IN COMMERCIAL FINANCE ASSETS – (Continued)

The following is a summary of the Fund’s allowance for credit losses (in thousands):

 

		Three Months Ended September 30, 2009				Nine Months Ended September 30, 2009
Allowance for credit losses, beginning of period		$	3,225			$	570
Provision for credit losses			4,909				7,941
Charge-offs			(2,549	)			(3,009	)
Recoveries			105				188
Allowance for credit losses, end of period		$	5,690			$	5,690

NOTE 5 – BANK DEBT

The Fund’s bank debt consists of the following (in thousands):

 

						September 30, 2009
		Type		Maturity Date		Amount of Facility			Outstanding Balance (1)			Amount Available (2)			Interest rate per annum adjusted for swaps (3)
Wells Fargo		Revolving		February 2012		$	75,000		$	74,988		$	12		4.3	%
Morgan Stanley		Term		(4) (5)			164,458			164,458			—		5.0	%
HVB		Revolving		(4)			100,000			100,000			—		5.2	%
Morgan Stanley/RBS-A		Term		(5)			101,892			101,892			—		8.4	%
Morgan Stanley/RBS-B		Term		(5)			18,217			18,217			—		21.9	%
						$	459,567		$	459,555		$	12

 

(1)	Collateralized by specific leases and loans and related equipment. As of September 30, 2009, $495.1 million of leases and loans and $17.4 million of restricted cash were pledged as collateral under the Fund’s credit facilities.

 

(2)	Availability under these debt facilities is subject to having sufficient eligible leases or loans (as defined in the respective agreements) to pledge as collateral and compliance with the borrowing base formula.

 

(3)	To mitigate fluctuations in interest rates, the Fund entered into interest rate swap and cap agreements. The interest rate swap agreements terminate on various dates and fix the LIBOR-component of the interest rate. This rate reflects the weighted average fixed rate.

 

(4)

The Morgan Stanley facility matured on October 31, 2009 (see (5) below) and the HVB facility matures in March 2010. If these facilities are not extended at the time of maturity, the Fund would not be required to make full repayment at that time. Rather, the Fund would repay the outstanding debt as payments are received on the underlying leases and loans pledged as collateral.

 

(5)

The Morgan Stanley facility matured on October 31, 2009 and the Morgan Stanley/RBS facilities matured on November 1, 2009. In addition, the Fund breached a covenant whereby LEAF Financial, the servicer of the leases and loans, must meet certain profitability measures. The lenders have agreed to forebear from exercising any of their rights or remedies resulting from the loan’s maturities and servicer covenant breach until December 1, 2009. The Fund is engaged in discussions with the lenders to extend the maturities of these facilities in addition to modifying the covenant, although there can be no assurance that such extension and covenant modifications will be executed. If the Fund does not obtain such extension or covenant modifications, amounts owed under the credit facilities, which are non-recourse the Fund, could become due and payable on December 1, 2009.

 

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LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

September 30, 2009

(unaudited)

NOTE 5 – BANK DEBT – (Continued)

In February 2009, the Fund entered into a $75 million non-recourse, revolving line of credit with Wells Fargo Foothill, LLC. Interest on this facility is calculated at LIBOR plus a variable margin (4.1% at September 30, 2009). Interest and principal are due monthly as payments are received on the leases and loans collateralizing the borrowings. The Fund is subject to financial covenants under this facility including minimum tangible net worth, maximum leverage ratios and portfolio delinquency that are intended to measure the Fund’s financial viability, limit the amount the Fund can borrow based on measuring its debt to net worth and measure performance of its portfolio. In addition, the Fund’s debt facilities include financial covenants covering LEAF Financial, an affiliate of the General Partner and the servicer of its portfolio. These covenants exist to provide the lender with information about the financial viability of the entity that services its portfolio. These covenants are similar in nature to the covenants discussed above that are applicable to the Fund, and are related to such things as its servicer’s minimum tangible net worth, maximum leverage ratios, managed portfolio delinquency and compliance with the debt terms of all of LEAF Financial’s managed entities. As of September 30, 2009, the Fund is in compliance with the covenants under this facility.

The Fund has a non-recourse term facility with Morgan Stanley Bank. Interest at LIBOR plus 3.00% and principal payments are due monthly. LCFF is subject to financial covenants under this facility that are similar to those discussed above with respect to the Fund’s Wells Fargo Foothill facility. As of September 30, 2009, the Fund is in compliance with the covenants under this facility.

The Fund has a $100 million secured revolving credit facility, which is recourse to RCF only, with Bayerische Hypo-Und Vereinsbank AG (“HVB”) to finance the purchase of equipment leases and loans. Borrowings under this facility bear interest at one of the two rates determined by asset class: Pool A- one month LIBOR plus 1.10% or Pool B- one month LIBOR plus 0.80%. The Fund utilizes interest rate swaps on this facility to mitigate fluctuations in interest rates. RCF is subject to financial covenants under this facility that are similar to those discussed above with respect to the Fund’s Wells Fargo Foothill facility. As of September 30, 2009, RCF is in compliance with the covenants under this facility.

The Fund has a $120.1 million non-recourse, term loan with Morgan Stanley/RBS. The term loan has two classes of loans—Class A and Class B. Borrowings under Class A have varying interest rates as follows: (i) through the maturity date the rate is one month LIBOR plus 4.00% and (ii) from and after the maturity date or during any event of default the rate is one month LIBOR plus 5.00%. Borrowings under Class B have varying interest rates as follows: (i) through the maturity date the rate is one month LIBOR plus 17.5% and (ii) from and after the maturity date or during any event of default the rate is one month LIBOR plus 20.0%. The Fund utilizes interest rate swaps under this facility to mitigate fluctuations in interest rates. LEAF Funds JV1 is subject to financial covenants under this facility that are similar to those discussed above with respect to the Morgan Stanley facility. As of September 30, 2009, LEAF Funds JV1 is in compliance with the covenants under this facility, except as described in note (5) to the table above.

 

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LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

September 30, 2009

(unaudited)

NOTE 5 – BANK DEBT – (Continued)

Debt repayments

Annual principal payments on the Fund’s aggregate borrowings over the next five years ended September 30 and thereafter, are as follows (in thousands):

 

2010		$	274,954
2011			64,176
2012			65,167
2013			25,783
2014			11,721
Thereafter			17,754
		$	459,555

NOTE 6 – SUBORDINATED NOTES PAYABLE

LCFF offered 8.25% secured promissory notes (the “Notes”), which are recourse to LCFF only. The Notes have a six-year term, are recourse to LCFF and require interest only payments until their maturity in February 2015. The Notes are subordinated to the Morgan Stanley bank debt. LCFF may call or redeem the Notes, in whole or in part, at any time during the interest only period. This offering closed in February 2009 having raised $9.4 million.

NOTE 7 – 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 acquires 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.

 

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LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

September 30, 2009

(unaudited)

NOTE 7 – DERIVATIVE INSTRUMENTS – (Continued)

To manage interest rate risk, the Fund employs a hedging strategy using derivative financial instruments such as interest rate swaps and caps. The Fund has elected not to apply hedge accounting; therefore, changes in the fair value of those derivatives are recorded directly to earnings as they occur. 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. The Fund has agreements with certain of its derivative counterparties that contain a provision where if the Fund defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Fund could also be declared in default on its derivative obligations. The Fund has agreements with certain of its derivative counterparties that incorporates the loan covenant provisions of the Fund’s indebtedness with a lender affiliate of the derivative counterparty. Failure to comply with the loan covenant provisions would result in the Fund being in default on any derivative instrument obligations covered by the agreement. As of September 30, 2009, the fair value of derivatives in a net liability position, which excludes any adjustment for nonperformance risk, related to these agreements was $13.2 million. As of September 30, 2009, the Fund has not posted any collateral related to these agreements. If the Fund had breached any of these provisions at September 30, 2009, it could have been required to settle its obligations under the agreements at their termination value of $13.2 million.

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 not exceed the benefits.

At September 30, 2009, the Fund had 40 interest rate swap agreements that terminate on various dates ranging from November 2009 to November 2020, and 11 interest rate cap agreements that terminate on various dates ranging from June 2011 to February 2016. The following tables present the fair value of the Fund’s derivative financial instruments as well as their classification on the consolidated balance sheet as of September 30, 2009 and on the consolidated statement of operations for the three and nine months ended September 30, 2009 (in thousands):

Fair Value of Derivative Instruments as of September 30, 2009

 

		Notional Amount			Balance Sheet Location		Fair Value
Derivatives not designated as hedging instruments
Interest rate cap contracts		$	76,468		Derivative assets at fair value		$	752
Interest rate swap contracts			337,847		Derivative liabilities at fair value			(12,890	)
		$	414,315

The Effect of Derivative Instruments on the Consolidated Statements of Operations

 

Derivatives not designated as hedging		Notional Amount			Statement of Operations Location		Three Months Ended September 30, 2009				Nine Months Ended September 30, 2009
Interest rate cap contracts		$	76,468		Losses (gains) on derivative hedging activities		$	573			$	(154	)
Interest rate swap contracts			337,847		Gains on derivative hedging activities			(466	)			(722	)
		$	414,315				$	107			$	(876	)

 

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LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

September 30, 2009

(unaudited)

NOTE 8 - FAIR VALUE MEASUREMENT

For cash, receivables and payables, the carrying amounts approximate fair values because of the short term maturity of these instruments. The carrying value of debt approximates fair market value since interest rates approximate current market rates.

It is not practicable for the Fund to estimate the fair value of the Fund’s commercial finance assets. They are comprised of a large number of transactions with commercial customers in different businesses, and may be secured by liens on various types of equipment and may be guaranteed by third parties and cross-collateralized. Any difference between the carrying value and fair value of each transaction would be affected by a potential buyer’s assessment of the transaction’s credit quality, collateral value, guarantees, payment history, yield, term, documents and other legal matters, and other subjective considerations. Value received in a fair market sale of a transaction would be based on the terms of the sale, the Fund’s and the buyer’s views of economic and industry conditions, the Fund’s and the buyer’s tax considerations, and other factors.

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.

 

•

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.

The Fund employs a hedging strategy to manage exposure to the effects of changes in market interest rates. All derivatives are recorded in the consolidated balance sheets at their fair value as either assets or liabilities. Because the Fund’s derivatives are not listed on an exchange, these instruments are valued by a third-party pricing agent using an income approach and utilizing models that use as their primary basis readily observable market parameters. This valuation process considers factors including interest rate yield curves, time value, credit factors and volatility factors. Although the Fund has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, the Fund has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Fund has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

 

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LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

September 30, 2009

(unaudited)

NOTE 8 - FAIR VALUE MEASUREMENT – (Continued)

Assets and liabilities measured at fair value on a recurring basis include the following as of September 30, 2009 (in thousands):

 

		Fair Value Measurements Using										Assets (Liabilities)
		Level 1			Level 2				Level 3			At Fair Value
Interest rate caps		$	—		$	752			$	—		$	752
Interest rate swaps		$	—		$	(12,890	)		$	—		$	(12,890	)

NOTE 9 – 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. 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,
		2009			2008			2009			2008*
Acquisition fees		$	971		$	150		$	2,428		$	150
Management fees			1,148			—			2,621			—
Administrative expenses			818			—			1,847			—
Organization and offering expense allowance			496			382			1,627			382
Underwriting fees			2,589			1,275			6,273			1,275

 

*	For the period January 25, 2008 (date of formation) to September 30, 2008.

Acquisition Fees. An affiliate of the General Partner is paid a fee for assisting the Fund in acquiring equipment subject to existing equipment leases equal to up to 2% of the purchase price the Fund pays for the equipment or portfolio of equipment subject to existing equipment financing.

Management Fees. LCFF pays the General Partner a subordinated annual asset management fee equal to 1% of assets under management for managing LCFF’s assets, or, if less, a management fee that is reasonably competitive, and would customarily be paid to non-affiliated third-parties rendering similar services. For all other leases and loans, the Fund pays the General Partner a subordinated annual asset management fees equal to 4% or 2% of gross rental payments for operating leases or full payout leases, respectively, or a competitive fee, whichever is less. During the Fund’s five-year investment period, 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.

Administrative Expenses. The Fund reimburses the General Partner and its affiliates for certain costs of services and materials used by or for the Fund except those items covered by the above-mentioned fees.

Organization and Offering Expense Allowance and Underwriting Fees. The Fund pays the General Partner and Chadwick Securities, Inc. (“Chadwick”), a wholly owned subsidiary of RAI, an organization and offering expense allowance based on a sliding scale of the offering proceeds raised. This amount includes reimbursement to

 

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LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

September 30, 2009

(unaudited)

NOTE 9 – CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH AFFILIATES – (Continued)

Chadwick to use for the selling dealers’ bona fide accountable due diligence expenses of up to 0.5% of the proceeds of each unit sold by them. These charges were recorded by the Fund as offering costs related to the sale of partnership units.

Chadwick was paid an underwriting fee of 3% of the offering proceeds for obtaining and managing the group of selling broker-dealers who sold the units in the offering. Chadwick also received sales commissions of 7% of the proceeds of each unit that they sold. Chadwick did not sell any units and did not retain sales commissions through September 30, 2009.

Due to Affiliates. Due to affiliates includes amounts due to the General Partner related to acquiring and managing portfolios of equipment from its General Partner, management fees and reimbursed expenses.

NOTE 10 – SUBSEQUENT EVENTS

The Fund has evaluated subsequent events through November 23, 2009, the date which these financial statements were issued and filed with the SEC, and determined that there have not been any events that have occurred that would require adjustments to or additional disclosure in the unaudited consolidated financial statements.

 

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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 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.

Overview

We are a Delaware limited partnership formed on January 25, 2008 by our General Partner, LEAF Asset Management, LLC (our “General Partner”). Our General Partner, a Delaware limited liability company, is a wholly owned 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. We received our minimum subscription proceeds of $2.0 million (20,000 units) required to begin operations and we broke escrow on September 16, 2008. We had registered to raise $200 million through the sale of 2 million limited partnership units. However, the General Partner closed the offering on October 30, 2009. Through November 13, 2009, we received subscriptions for 1.2 million limited partnership units for gross proceeds of $125.6 million, which includes $1 million invested by our General Partner.

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 an indirect 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.

Our leases consist of direct financing and operating leases as defined by accounting principles generally accepted in the United States of America (“U.S. GAAP”). Under the direct financing method of accounting, 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, 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. We discontinue the recognition of revenue for leases and loans for which payments are more than 90 days past due, or, in the case of future payment card receivables, when no payments have been received in 60 days. These assets are classified as non-accrual.

 

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Finance Receivables and Asset Quality

We own commercial finance assets purchased directly from our General Partner, which are included on our consolidated balance sheets. We also participate in commercial finance assets through a joint venture, LEAF Funds JV1, that we formed with LEAF Equipment Leasing Income Fund III, L.P. (“LEAF III”), another fund sponsored by our General Partner. As of December 31, 2008, we did not consolidate this joint venture, and therefore, the commercial finance assets owned by this joint venture were not included in our consolidated balance sheet. Because we participate in the returns of the commercial finance assets held by this joint venture, the 2008 data below presents the assets we held directly and our pro-rata share of the assets held indirectly through LEAF Funds JV1. Effective August 31, 2009, we owned approximately 96% of this joint venture, and therefore the commercial finance assets owned by this joint venture were included in our consolidated balance sheet beginning on such date.

Information about our portfolio of commercial finance assets is as follows (dollars in thousands):

 

		September 30, 2009				December 31, 2008
						Held Directly by Us				Held Indirectly by us through LEAF Funds JV1
Investment in commercial finance assets, net		$	526,678			$	14,934			$	95,016
Number of contracts			13,000				1,000				7,000
Number of individual end users (a)			11,700				800				6,200
Average origination amount		$	64.4			$	20.9			$	42.8
Average initial term (in months)			61.8				45				51
States accounting for 10% or more of commercial finance assets portfolio:
California			15	%			21	%			20	%
Florida			9	%			6	%			10	%
Types of equipment accounting for 10% or more of commercial finance assets portfolio:
Medical equipment			21	%			11	%			20	%
Industrial equipment			20	%			15	%			39	%
Restaurant equipment			12	%			4	%			22	%
Transportation equipment			—	%			45	%			—	%
Types of business accounting for 10% or more of commercial finance assets portfolio:
Services			47	%			25	%			52	%
Retail Trade			19	%			17	%			32	%
Finance/Insurance/Real Estate			8	%			37	%			2	%

 

(a)	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 1% of our portfolio based on the origination amount.

As of September 30, 2009, the average original equipment cost increased as a result of the growth in our portfolio.

We utilize debt, in addition to our equity, to fund the acquisitions of lease and loan portfolios. Our leases and loans are generally assigned as collateral for borrowings as discussed in Liquidity and Capital Resources. As of September 30, 2009, our outstanding debt was $459.6 million. We had no debt outstanding as of December 31, 2008.

 

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The performance of our commercial finance assets portfolio is a measure of our General Partner’s underwriting and collection standards, skills, policies and procedures and is an indication of asset quality. 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, 2009				As of and For the Period Ended December 31, 2008
						Held Directly by Us				Held Indirectly by Us Through LEAF Funds JV1
Investment in commercial finance assets before allowance for credit losses		$	532,368			$	15,504			$	96,650
Weighted average investment before allowance for credit losses			252,616				6,383				99,988
Allowance for credit losses			5,690				570				1,634
Non-performing assets			11,874				1,187				2,756
Charge-offs, net of recoveries		$	2,821			$	—			$	567
As a percentage of finance receivables:
Allowance for credit losses			1.07	%			3.68	%			1.69	%
Non-performing assets			2.23	%			7.66	%			2.85	%
As a percentage of weighted average finance receivables:
Charge-offs, net of recoveries			1.12	%			—	%			0.57	%

We manage our credit risk by adhering to strict credit policies and procedures, and closely monitoring our receivables. Our General Partner and LEAF Financial, the servicer of our commercial finance assets portfolio, has responded to the current economic recession by increasing the number of employees in its collection department and it has implemented earlier intervention techniques in collection procedures. Our General Partner has also increased its credit standards and limited the amount of business we do with respect to certain industries, geographic locations and equipment types. Because of the current scarcity of credit available to small and mid-size businesses, we have been able to increase our credit standards without reducing the rates we charge on our leases and loans.

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, we perform a migration analysis, which estimates the likelihood that an account progresses through delinquency stages to ultimate charge-off. Our policy is to charge-off to the allowance those financings which are in default and 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-size businesses, and our General Partner anticipates that the recession will make it more difficult for some of our customers to make payments on their financings with us on a timely basis, which could result in higher delinquencies than we anticipate.

 

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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 costs 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, the estimated unguaranteed residual values of leased equipment, impairment of long-lived assets and for the fair value of interest rate swaps and caps. 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.

For a discussion of our critical accounting policies and estimates, see the discussion in our annual report on Form 10-K for the year ended December 31, 2008 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates.”

Fair Value of Interest Rate Swaps and Caps

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). Because our derivatives are not listed on an exchange, these instruments are valued by a third-party pricing agent using an income approach and utilizing models that use as their primary basis readily observable market parameters. This valuation process considers factors including interest rate yield curves, time value, credit factors and volatility factors. Although we have determined that the majority of the inputs used to value our derivatives fall within level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2009, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in level 2 of the fair value hierarchy.

Assets and liabilities measured at fair value on a recurring basis included the following as of September 30, 2009 (in thousands):

 

		Fair Value Measurements Using										Assets (Liabilities) At Fair Value
		Level 1			Level 2				Level 3
Interest rate caps		$	—		$	752			$	—		$	752
Interest rate swaps		$	—		$	(12,890	)		$	—		$	(12,890	)

 

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Results of Operations

Three and Nine Months Ended September 30, 2009 and 2008.

We commenced our operations on September 16, 2008. The following summarizes our result of operations for the three and nine months ended September 30, 2009 and 2008 (dollars in thousands):

 

		Three Months Ended September 30,							Nine Months Ended September 30,
		2009				2008			2009				2008*
Revenues:
Interest on equipment financings		$	8,548			$	3		$	15,336			$	3
Rental income			514				—			1,024				—
Gains on sales of equipment and lease dispositions, net			201				—			224				—
Other			250				—			450				—
			9,513				3			17,034				3
Expenses:
Interest expense			8,143				—			12,403				—
Losses (gains) on derivative hedging activities			107				—			(876	)			—
Depreciation on operating leases			452				—			889				—
Provision for credit losses			4,909				—			7,941				—
General and administrative expenses			371				1			983				1
Administrative expenses reimbursed to affiliate			818				—			1,847				—
Management fees to affiliate			1,148				—			2,621				—
			15,948				1			25,808				1
(Loss) income before equity in losses of affiliate			(6,435	)			2			(8,774	)			2
Equity in losses of affiliate			(571	)			—			(3,261	)			—
Net (loss) income			(7,006	)			2			(12,035	)			2
Less: Net loss attributable to noncontrolling interest			83				—			111				—
Net (loss) income attributable to LEAF 4		$	(6,923	)		$	2		$	(11,924	)		$	2

 

*	For the period January 25, 2008 (date of formation) to September 30, 2008

We expect our revenues to increase as we continue to acquire equipment finance assets from our General Partner and we realize the full year effect of the growth in our portfolio in 2009. Our investments in commercial finance assets increased to $526.7 million as of September 30, 2009 compared to $14.9 million as of December 31, 2008. We expect to acquire additional commercial finance assets as we raise more capital through the sale of partner units and through the use of debt facilities. Our General Partner expects revenue derived from these additional leases and loans to exceed the interest expense incurred by the debt incurred to obtain these financings.

As our portfolio of commercial finance assets increases, our operating expenses will increase, including:

 

•

increased depreciation expense as we continue to purchase operating leases.

 

•

increased provision for credit losses as we increase our portfolio.

 

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•

increased interest expense as we entered into a loan and security agreement with Wells Fargo Foothill, LLC in February 2009 and have fully utilized the facility to acquire leases and loans, and we now consolidate the debt of LCFF, RCF and LEAF Funds JV1. During the three and nine months ended September 30, 2009, our weighted average interest rate was 7.0% and 4.4%, respectively, on average debt balances of $457.3 million and $451.7 million, respectively. The weighted average interest rate increased during the three months ended September 30, 2009 due to the consolidation of the LEAF Funds JV1 debt.

 

•

increased management fees to affiliate based on payments of commercial finance assets processed by our General Partner.

 

•

increased administrative expenses reimbursed to affiliate representing reimbursements made to our General Partner for expenses incurred for managing us.

 

•

increased general and administrative expenses representing costs we incur to operate.

 

•

gains (losses) on derivative hedging activities. Gains (losses) on derivative hedging activities include cash payments or receipts relating to our hedging activities and the changes in the fair value of our derivative financial instruments. For the nine months ended September 30, 2009, net cash payments were $272,000 and the change in fair value resulted in a non-cash gain of $1.1 million. These gains (losses) will be based on the value of the derivative contracts at the respective balance sheet date and in a volatile market that is changing daily, may not necessarily reflect the cash amount to be paid at settlement. These gains (losses) will create volatility in our results of operations, as the market value of our derivative financial instruments changes over time, and this volatility may adversely impact our results of operations and financial condition.

Equity in losses of affiliate was $571,000 and $3.3 million for the three and nine months ended September 30, 2009. In November 2008, we formed a joint venture with LEAF III, and acquired a 49% interest in that joint venture and the pool of leases held by it. From November 2008 through August 2009, we accounted for our investment in LEAF Funds JV1 under the equity method of accounting. In August 2009, we increased our interest in LEAF Funds JV1 by 47%. As a result of this transaction, we now own approximately 96% of LEAF Funds JV1 and LEAF Funds JV1 was consolidated with our results effective August 31, 2009.

The net loss per limited partner unit, after the net loss allocated to our General Partner, for the three and nine months ended September 30, 2009 was $(7.54) and $(17.38), respectively, based on a weighted average number of limited partner units outstanding of 908,843 and 679,229, respectively, during each period.

 

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Liquidity and Capital Resources

Our primary cash requirements, in addition to normal operating expenses, are for debt service, investment in leases and loans and distributions to partners. During the life of the partnership, we depend upon cash generated from operations, and the excess cash derived from the collection of lease payments after debt service to meet our liquidity needs. However, during the offering period, which closed on October 30, 2009, our principal source of liquidity has been the sale of $125.6 million in partnership units.

Our ongoing liquidity is affected by our ability to leverage our portfolio through the use of debt facilities. Our ability to obtain debt financing needed to execute our investment strategies has been impacted by the continued tightening of the credit markets. Specifically, we rely on both revolving and term debt facilities to fund our acquisitions of equipment financings. If we are unable to obtain debt that will allow us to invest the repayments of existing leases and loans into new investments, the volume of our leases and loans will be reduced.

We continue to seek and maintain sources of financing, including expanded bank financing and the use of joint venture strategies, which will enable us to originate investments and generate income while preserving capital. We are in discussion with several sources of debt financing to support the growth in our lease and loan portfolio. To the extent the credit markets available to us are or become adversely affected by the current weaknesses in the national economy, our ability to obtain debt to help build our portfolio on terms we deem acceptable may be reduced or delayed and our cost of borrowings may increase.

Despite the tight credit markets during 2009, we have been able to obtain leverage by acquiring existing pools of commercial finance assets and the existing related debt.

We anticipate that the lease and loan rates we charge to our customers will also increase to compensate for our increase in borrowing costs. However, our profitability may be negatively impacted if we are unable to increase our lease and loan rates and our borrowing costs increase.

The terms of our existing and future debt facilities include and will include financial covenants. Our liquidity and compliance with the covenants under our debt facilities could also be affected by higher than expected payment defaults on our commercial finance assets. These payment defaults would 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 addition, if we do not meet the requirements of the debt covenants, a default could occur that would have an adverse effect on our operations, payment of partners’ distributions and could force us to liquidate all or a portion of our portfolio securing our debt facilities. If required, a sale of a portfolio, or any portion thereof, could be at prices lower than its carrying value, which could result in losses and reduce our income and distributions to our partners. Covenant violations could also lead to changes in debt terms that would adversely impact our cash flow.

Changes in interest rates will affect the market value of our portfolio and our ability to obtain financing. In general, the market value of an equipment lease will change in inverse relation to an interest rate change where the lease has a fixed rate of return. Accordingly, in a period of rising interest rates, the market value of our equipment leases will decrease. A decrease in the market value of our portfolio will adversely affect our ability to obtain financing against our portfolio or to liquidate it.

The following table sets forth our sources and uses of cash for the period indicated (in thousands):

 

		Nine Months Ended September 30,
		2009				2008
Net cash provided by operating activities		$	2,139			$	581
Net cash used in investing activities			(123,269	)			(10,659	)
Net cash provided by financing activities			119,908				11,425
(Decrease) increase in cash		$	(1,222	)		$	1,347

 

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Partners’ distributions paid for the nine months ended September 30, 2009 were $3.9 million. Distributions to limited partners were 8.5% of invested capital. However, there can be no assurance we will continue to make distributions at this rate.

Cash decreased by $1.2 million primarily due to net acquisitions of leases and loans of $98.8 million, investments in LCFF, RCF and LEAF Funds JV1 of $24.8 million in total, distributions to partners of $3.9 million and an increase in restricted cash of $3.2 million, which was partially offset by net borrowings of $72.8 million and capital raised of $56.6 million (net of offering costs of $7.6 million).

Through November 13, 2009, we sold 1.2 million limited partnership units for $125.6 million (before offering costs), which includes $1 million invested by our General Partner.

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, 2009 were as follows (in thousands):

 

		Type		Maturity Date		Amount of   Facility			Amount Outstanding			Amount Available (1)			Amount of Collateral (2)
Wells Fargo		Revolving		February 2012		$	75,000		$	74,988		$	12		$	91,102
Morgan Stanley		Term		(4)			164,458			164,458			—			172,356
HVB		Revolving		(3)			100,000			100,000			—			109,208
Morgan Stanley/RBS		Term		(4)			120,109			120,109			—			139,829
						$	459,567		$	459,555		$	12		$	512,495

 

(1)	Availability under these debt facilities is subject to having sufficient eligible leases or loans (as defined in the respective agreements) to pledge as collateral and compliance with the borrowing base formula.

 

(2)	Recourse under these facilities is limited to the amount of collateral pledged.

 

(3)

The Morgan Stanley facility matured on October 31, 2009 (see (4) below) and the HVB facility matures in March 2010. If these facilities are not extended at the time of maturity, we would not be required to make full repayment at that time. Rather, we would repay the outstanding debt as payments are received on the underlying leases and loans pledged as collateral.

 

(4)

The Morgan Stanley facility matured on October 31, 2009 and the Morgan Stanley/RBS facilities matured on November 1, 2009. In addition, we breached a covenant whereby LEAF Financial, the servicer of the leases and loans, must meet certain profitability measures. The lenders have agreed to forebear from exercising any of their rights or remedies resulting from the loan’s maturities and servicer covenant breach until December 1, 2009. We are engaged in discussions with the lenders to extend the maturities of these facilities in addition to modifying the covenant, although there can be no assurance that such extension and covenant modifications will be executed. If we do not obtain such extension or covenant modifications, amounts owed under the credit facilities, which are non-recourse to us, could become due and payable on December 1, 2009.

In February 2009, we entered into a $75 million non-recourse, revolving line of credit with Wells Fargo Foothill, LLC. Interest on this facility is calculated at LIBOR plus a variable margin (4.1% at September 30, 2009). Interest and principal are due monthly as payments are received on the leases and loans collateralizing the borrowings. We are subject to financial covenants under this facility including minimum tangible net worth, maximum leverage ratios and portfolio delinquency that are intended to measure our financial viability, limit the amount we can borrow based on measuring our debt to net worth and measure performance of our portfolio. In addition, our debt facilities include financial covenants covering LEAF Financial, an affiliate of our General Partner and the servicer of our portfolio. These covenants exist to provide the lender with information about the financial viability of the entity that services our portfolio. These covenants are similar in nature to the covenants discussed above that are applicable to us, and are related to such things as our servicer’s minimum tangible net worth, maximum leverage ratios, managed portfolio delinquency and compliance with the debt terms of all of LEAF Financial’s managed entities. As of September 30, 2009, we are in compliance with the covenants under this facility.

We have a non-recourse term facility with Morgan Stanley Bank. Interest at LIBOR plus 3.00% and principal payments are due monthly. LCFF is subject to financial covenants under this facility that are similar to those discussed above with respect to our Wells Fargo Foothill facility. As of September 30, 2009, we are in compliance with the covenants under this facility.

 

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We have a $100 million secured revolving credit facility, which is recourse to RCF only, with Bayerische Hypo-Und Vereinsbank AG (“HVB”) to finance the purchase of equipment leases and loans. Borrowings under this facility bear interest at one of the two rates determined by asset class: Pool A- one month LIBOR plus 1.10 % or Pool B- one month LIBOR plus 0.80%. We utilize interest rate swaps on this facility to mitigate fluctuations in interest rates. RCF is subject to financial covenants under this facility that are similar to those discussed above with respect to our Wells Fargo Foothill facility. As of September 30, 2009, RCF is in compliance with the covenants under this facility.

We have a $120.1 million non-recourse, term loan with Morgan Stanley/RBS. The term loan has two classes of loans—Class A and Class B. Borrowings under Class A have varying interest rates as follows: (i) through the maturity date the rate is one month LIBOR plus 4.00% and (ii) from and after the maturity date or during any event of default the rate is one month LIBOR plus 5.00%. Borrowings under Class B have varying interest rates as follows: (i) through the maturity date the rate is one month LIBOR plus 17.5% and (ii) from and after the maturity date or during any event of default the rate is one month LIBOR plus 20.0%. We utilize interest rate swaps under this facility to mitigate fluctuations in interest rates. LEAF Funds JV1 is subject to financial covenants under this facility that are similar to those discussed above with respect to the Morgan Stanley facility. As of September 30, 2009, LEAF Funds JV1 is in compliance with the covenants under this facility, except as described in note (4) to the table above.

Contractual Obligations and Commercial Commitments

The following table sets forth our obligations and commitments as of September 30, 2009 (in thousands):

 

					Payments Due by Period
		Total			Less than     1 Year			1 – 3     Years			4 – 5     Years			After 5     Years
Bank debt (1)		$	459,555		$	274,954		$	129,343		$	37,504		$	17,754
Subordinated notes (2)			9,355			—			—			—			9,355

 

1)

To mitigate interest rate risk on the variable rate debt, we employ a hedging strategy using derivative financial instruments such as interest rate swaps and caps which fix the weighted average interest rates. Not included in the table above are estimated interest payments calculated at rates in effect at September 30, 2009: Less than 1 year: $18.0 million; 1-3 years: $11.6 million; 4-5 years: $3.3 million; and after 5 years: $443,000.

 

2)	Not included in the table above are estimated interest payments on the subordinated notes at September 30, 2009; Less than 1 year: $772,000; 1-3 years: $1.5 million; 4-5 years: $1.5 million; and after 5 years: $322,000.

Legal Proceedings

We are a party to various routine legal proceedings arising in 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.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of losses arising from changes in values of financial instruments. We are exposed to market risks associated with changes in interest rates and our earnings may fluctuate with changes in interest rates. The lease assets we purchase are almost entirely fixed-rate. Accordingly, we seek to finance these assets with fixed interest rate debt. At September 30, 2009, our outstanding bank debt totaled $459.6 million which consists of variable rate debt. To mitigate interest rate risk on the variable rate bank debt, we employ a hedging strategy using derivative financial instruments such as interest rate swaps and caps, which fixes the weighted average interest rates as follows: Wells Fargo Foothill LLC (4.3%), Morgan Stanley (5.0%), HVB (5.2%) and Morgan Stanley/RBS – Pool A (8.4%) and Pool B (21.9%). At September 30, 2009, the notional amount of the 40 interest rate swaps was $414.3 million. The interest rate swap agreements terminate on various dates ranging from November 2009 to November 2020. At September 30, 2009, the notional amount of the 11 interest rate caps was $76.5 million. The interest rate cap agreements terminate on various dates ranging from June 2011 to February 2016.

 

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The following sensitivity analysis table shows, at September 30, 2009, the estimated impact on the fair value of our interest rate-sensitive investments and liabilities of changes in interest rates, assuming rates instantaneously fall 100 basis points and rise 100 basis points (dollars in thousands):

 

		Interest rates fall 100 basis points				Unchanged				Interest rates rise 100 basis points
Hedging instruments
Fair value		$	(17,818	)		$	(12,138	)		$	(7,207	)
Change in fair value		$	(5,680	)						$	4,931
Change as a percent of fair value			47	%							(41	)%

It is important to note that the impact of changing interest rates on fair value can change significantly when interest rates change beyond 100 basis points from current levels. Therefore, the volatility in the fair value of our assets could increase significantly when interest rates change beyond 100 basis points from current levels. In addition, other factors impact the fair value of our interest rate-sensitive investments and hedging instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, in the event of changes in actual interest rates, the change in the fair value of our assets would likely differ from that shown above and such difference might be material and adverse to our partners.

ITEM 4 – CONTROLS AND PROCEDURES

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.

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, 2009 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

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Our limited partnership interests are not publicly traded. As of September 30, 2009, we had 2,296 limited partners.

We offered units of our limited partnership interests pursuant to a registration statement (File No. 333-149881) that was made effective by the Securities and Exchange Commission on August 12, 2008 when the offering commenced. The dealer manager for the offering is Chadwick Securities, Inc. We registered the sale of 2 million units of limited partnership interests at an aggregate offering price of $200 million. Our General Partner terminated the offering on October 30, 2009.

The following table shows the use of proceeds from the offering since the effective date of the registration statement through September 30, 2009:

 

		As of September 30, 2009
Offering proceeds		$	103,286,671
Offering expenses based on the amount of the offering proceeds shown in the table:
Sales commissions and related fees (1)			7,074,040
Dealer-Manager fees (1)			3,056,497
Reimbursement for accountable due diligence expenses (3)			92,653
Organization expenses (2)			2,798,943
Total public offering and organization expenses			13,022,133
Acquisition fees (3)			2,608,068
Reserves			1,032,867
Total proceeds available for investment		$	86,623,603

 

(1)	Paid to an affiliate of our General Partner which is then remitted to third parties.

 

(2)	Paid to our General Partner.

 

(3)	Paid to an affiliate of our General Partner.

 

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ITEM 6 – EXHIBITS

 

Exhibit No.		Description
3.1		Certificate of Limited Partnership (1)
3.2		Amended and Restated Agreement of Limited Partnership (2)
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		Receivables Loan and Security Agreement, dated as of October 31, 2006, among Resource Capital Funding II, LLC, as the Borrower, and LEAF Financial Corporation, as the Servicer, and Morgan Stanley Bank, as a Lender and Collateral Agent, and U.S. Bank National Association, as the Custodian and the Lender’s Bank and Lyon Financial Services, Inc. (d/b/a U.S. Bank Portfolio Services), as the Backup Servicer, as amended through November 13, 2008 (3)
10.3		Forbearance and Reservation of Rights, dated as of May 14, 2009, by and among Resource Capital Funding II, LLC, LEAF Financial Corporation, Morgan Stanley Bank, NA, and Morgan Stanley Capital Services Inc. (4)
10.4		Indenture by and between LEAF Commercial Finance Fund, LLC and U.S. Bank National Association (3)
10.5		Amended and Restated Limited Liability Company Agreement of LEAF Commercial Finance Fund, LLC (3)
10.6		Limited Liability Company Agreement of LEAF Funds Joint Venture 2, LLC (3)
10.7		Membership Interest Purchase Agreement by and between LEAF Financial Corporation and LEAF Funds Joint Venture 2, LLC (3)
10.8		Seventh Amendment to the Receivables Loan and Security Agreement and Waiver, dated as of July 14, 2009, with Morgan Stanley Bank, N.A., as lender and as collateral agent (5)
10.9		Sale and Assignment Agreement between LEAF Asset Management, LLC and LEAF Equipment Finance Fund 4, LP dated September 30, 2009 (5)
10.10		Receivables Loan and Security Agreement, dated as of March 31, 2006, among Resource Capital Funding, LLC, LEAF Financial Corporation, Black Forest Funding Corporation, Bayerische Hypo- Und Vereinsbank AG, U.S. Bank National Association, and Lyon Financial Services, Inc. (d/b/a U.S. Bank Portfolio Services), as amended through the Seventh Amendment (the “HVB Agreement”) (5)
10.11		Eight Amendment Agreement to the HVB Agreement (5)
10.12		Ninth Amendment Agreement to the HVB Agreement (5)
10.13		Membership Interest Transfer Agreement, dated as of August 31, 2009, by and between LEAF Equipment Finance Fund 4, L.P. and LEAF Equipment Leasing Income Fund III, L.P.
10.14		Eighth Amendment to the Receivables Loan and Security Agreement and Waiver dated as of June 18, 2009, among LEAF Capital Funding III, LLC, LEAF Financial Corporation, Morgan Stanley Bank, Morgan Stanley Asset Funding Inc., The Royal Bank of Scotland PLC, U.S. Bank National Association, and Lyon Financial Services, Inc. (d/b/a U.S. Bank Portfolio Services)
10.15		Forbearance and Reservation of Rights, dated October 30, 2009, by and among LEAF Capital Funding III, LLC, LEAF Financial Corporation, Morgan Stanley Bank, N.A., Morgan Stanley Asset Funding Inc., The Royal Bank of Scotland PLC, Lyon Financial Services, Inc., U.S. Bank National Association, and Morgan Stanley Capital Services Inc.
10.16		Forbearance, Reservation of Rights and Amendment, dated October 31, 2009, by and among Resource Capital Funding II, LLC, LEAF Financial Corporation, Morgan Stanley Bank, N.A., Lyon Financial Services, Inc., U.S. Bank National Association, and Morgan Stanley Capital Services, Inc.
10.17		Forbearance and Reservation of Rights, dated November 20, 2009, by and among LEAF Capital Funding III, LLC, LEAF Financial Corporation, Morgan Stanley Asset Funding Inc., The Royal Bank of Scotland PLC, and Morgan Stanley Capital Services Inc.
10.18		Forbearance and Reservation of Rights, dated November 20, 2009, by and among Resource Capital Funding II, LLC, LEAF Financial Corporation, Morgan Stanley Asset Funding Inc., and Morgan Stanley Capital Services Inc.
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		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
32.2		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

 

(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-A 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 for the quarter ended March 31, 2009 and by this reference incorporated herein.

 

(5)	Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 and by this reference incorporated herein.

 

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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.

 

				LEAF EQUIPMENT FINANCE FUND 4, L.P.
				By:		LEAF Asset Management, LLC, its General Partner
November 23, 2009				/s/ Crit DeMent
				CRIT DEMENT
				Chairman and Chief Executive Officer
November 23, 2009				/s/ Robert K. Moskovitz
				ROBERT K. MOSKOVITZ
				Chief Financial Officer and Chief Accounting Officer

 

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