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EX-31.1 - EXHIBIT 31.1 - LEASE EQUITY APPRECIATION FUND I LPex31_1.htm
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EX-32.2 - EXHIBIT 32.2 - LEASE EQUITY APPRECIATION FUND I LPex32_2.htm
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EXCEL - IDEA: XBRL DOCUMENT - LEASE EQUITY APPRECIATION FUND I LPFinancial_Report.xls


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

 
FORM 10-Q
 

 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2012
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___________ to_____________
 
Commission file number 333-84730
 

 
LEASE EQUITY APPRECIATION FUND I, L.P.
(Exact Name of Registrant as Specified in Its Charter)
 

 
Delaware
 
68-0492247
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
110 South Poplar Street, Suite 101, Wilmington Delaware 19801
(Address of principal executive offices) (Zip Code)
 
(800) 819-5556
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x Yes     ¨ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate 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).    x Yes     ¨ No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ¨
Accelerated filer
¨
     
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)
Smaller Reporting Company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨ Yes    x No
 
There is no public market for the Registrant’s securities.



 
 

 
 
LEASE EQUITY APPRECIATION FUND I, L.P.
INDEX TO QUARTERLY REPORT
ON FORM 10-Q

   
PAGE
PART I
FINANCIAL INFORMATION
 
ITEM 1.
3
  3
  4
  5
  6
  7
  8
ITEM 2.
17
ITEM 3.
24
ITEM 4.
24
     
PART II
OTHER INFORMATION
 
ITEM 6.
25
     
26

 
2

 
PART 1. FINANCIAL INFORMATION
 
ITEM I – FINANCIAL STATEMENTS
 
LEASE EQUITY APPRECIATION FUND I, L.P. AND SUBSIDIARY
Consolidated Balance Sheets
(In thousands)
 
   
September 30,
       
   
2012
   
December 31,
 
   
(Unaudited)
   
2011
 
ASSETS
           
Cash
  $ 5     $ 48  
Restricted cash
    572       1,089  
Investment in leases and loans, net
    4,438       10,565  
Deferred financing costs, net
    107       45  
Other assets
    32       70  
Total assets
  $ 5,154     $ 11,817  
                 
LIABILITIES AND PARTNERS’ DEFICIT
               
Liabilities:
               
Bank debt
  $ 4,721     $ 10,889  
Accounts payable and accrued expenses
    157       152  
Other liabilities
    76       89  
Derivative liabilities, at fair value
    146       381  
Due to affiliates
    7,632       7,649  
Total liabilities
    12,732       19,160  
                 
Commitments and contingencies (Note 10)
               
                 
Partners’ Deficit:
               
General partner
    (220 )     (211 )
Limited partners
    (6,964 )     (6,299 )
Accumulated other comprehensive loss
    (394 )     (833 )
Total partners’ deficit
    (7,578 )     (7,343 )
Total liabilities and partners' deficit
  $ 5,154     $ 11,817  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
3


LEASE EQUITY APPRECIATION FUND I, L.P. AND SUBSIDIARY
Consolidated Statements of Operations
(In thousands, except unit and per unit data)
(Unaudited)
 
   
Three Months Ended
 September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenues:
                       
Interest on equipment financings
  $ 142     $ 351     $ 577     $ 1,218  
Rental income
    11       51       57       211  
Gains on sales of equipment and lease dispositions, net
    14       (17 )     118       122  
Other income
    36       54       143       233  
      203       439       895       1,784  
                                 
Expenses:
                               
Interest expense
    304       178       583       594  
Depreciation on operating leases
    8       35       37       165  
Provision for credit losses
    255       309       384       2,378  
General and administrative expenses
    50       179       266       439  
Administrative expenses reimbursed to affiliate
    16       45       61       161  
Loss on derivative activites
    6       28       35       107  
      639       774       1,366       3,844  
Net loss
  $ (436 )   $ (335 )   $ (471 )   $ (2,060 )
Net loss allocated to limited partners
  $ (432 )   $ (332 )   $ (466 )   $ (2,039 )
                                 
Weighted average number of limited partner units outstanding during the period
    171,696       171,696       171,696       171,696  
Net loss per weighted average limited partner unit
  $ (2.51 )   $ (1.93 )   $ (2.72 )   $ (11.88 )
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
4

 
LEASE EQUITY APPRECIATION FUND I, L.P. AND SUBSIDIARY
Consolidated Statements of Comprehensive Loss
(In thousands)
(Unaudited)
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Net loss
  $ (436 )   $ (335 )   $ (471 )   $ (2,060 )
Amortization of loss on financial derivatives  reclassified  from accumulated other comprehensive loss
    238       110       439       335  
Comprehensive loss
  $ (198 )   $ (225 )   $ (32 )   $ (1,725 )
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
5

 
LEASE EQUITY APPRECIATION FUND I, L.P. AND SUBSIDIARY
Consolidated Statement of Changes in Partners’ Deficit
(In thousands, except unit data)
(Unaudited)
 
               
Accumulated
       
   
General
         
Other
   
Total
 
   
Partner
   
Limited Partners
   
Comprehensive
   
Partners’
 
   
Amount
   
Units
   
Amount
   
(Loss) Income
   
Deficit
 
                               
Balance at January 1, 2012
  $ (211 )     171,696     $ (6,299 )   $ (833 )   $ (7,343 )
                                         
Cash distributions to partners
    (4 )     -       (199 )     -       (203 )
Net loss
    (5 )     -       (466 )     -       (471 )
Amortization of loss on financial derivatives
    -       -       -       439       439  
Balance, September 30, 2012
  $ (220 )     171,696     $ (6,964 )   $ (394 )   $ (7,578 )
 
The accompanying notes are an integral part of this consolidated financial statement.
 
 
6

 
LEASE EQUITY APPRECIATION FUND I, L.P. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
   
Nine Months Ended September 30,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net loss
  $ (471 )   $ (2,060 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Gains on sales of equipment and lease dispositions, net
    (118 )     (122 )
Depreciation on operating leases
    37       165  
Provision for credit losses
    384       2,378  
Amortization of deferred financing costs
    74       86  
Net loss (gain) on derivative activities
    474       (210 )
Changes in operating assets and liabilities:
               
Other assets
    38       7  
Accounts payable and accrued expenses and other liabilities
    (325 )     168  
Due to affiliates
    (17 )     (42 )
Net cash provided by operating activities
    76       370  
                 
Cash flows from investing activities:
               
Purchases of leases and loans
    (7 )     -  
Proceeds from leases and loans
    6,004       11,467  
Security deposits returned
    (173 )     (141 )
Net cash provided by investing activities
    5,824       11,326  
                 
Cash flows from financing activities:
               
Repayment of debt
    (6,168 )     (12,016 )
Decrease in restricted cash
    517       658  
Increase in deferred financing costs
    (89 )     -  
Cash distributions to partners
    (203 )     (262 )
Net cash used in financing activities
    (5,943 )     (11,620 )
                 
(Decrease)/increase in cash
    (43 )     76  
Cash, beginning of period
    48       37  
Cash, end of period
  $ 5     $ 113  
                 
Supplemental cash flow disclosure:
               
Cash paid for interest
  $ 73     $ 178  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
7

 
LEASE EQUITY APPRECIATION FUND I, L.P. AND SUBSIDIARY
Notes To Consolidated Financial Statements
September 30, 2012
(Unaudited)
 
NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS
 
Lease Equity Appreciation Fund I, L.P. (“LEAF I” or the “Fund”) is a Delaware limited partnership formed on January 31, 2002 by its General Partner, LEAF Financial Corporation (the “General Partner”). The General Partner manages the Fund. The General Partner is a subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly-traded company (NASDAQ: REXI) that uses industry specific expertise to evaluate, originate, service, and manage investment opportunities through its commercial finance, real estate and financial fund management segments. Through its offering termination date of August 15, 2004, the Fund raised $17.1 million by selling 171,746 of its limited partner units. The Fund commenced operations in March 2003.
 
The Fund was expected to have a minimum of a nine-year life, consisting of an offering period of up to two years, a five-year reinvestment period and a subsequent liquidation period of two years, during which the Fund’s leases and secured loans will either mature or be sold. The Fund’s five-year reinvestment period has ended and the Fund entered the liquidation period in August 2009. All of the Fund’s leases and loans mature by the end of 2027. Contractually, the Fund will terminate on December 31, 2027, unless sooner dissolved or terminated as provided in the Limited Partnership Agreement (“the Partnership Agreement”).
 
The Fund acquired 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 acquired 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 was to generate regular cash distributions to its partners from its equipment finance portfolio over the life of the Fund.
 
As of September 30, 2012 and 2011, in addition to its 1% general partnership interest, the General Partner also had invested $800,000 for a 6% limited partnership interest in the Fund.
 
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The consolidated financial statements include the accounts of the Fund and its wholly-owned subsidiary, LEAF Fund I, LLC. All intercompany accounts and transactions have been eliminated in consolidation.

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

The Fund has evaluated subsequent events through the date the consolidated financial statements were issued and determined there were no events that have occurred that would require adjustments to the consolidated financial statements.

Reclassification
 
Certain reclassifications have been made to 2011 reported amounts to conform to the current year presentation. Amortization of other comprehensive income on the Fund’s interest rate swaps of approximately $110,000 and $335,000 for the three and nine months ended September 30, 2011 was reclassified from loss on derivative activities to interest expense.

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, and the fair value and effectiveness of interest rate swaps. 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.
 
 
8

 
LEASE EQUITY APPRECIATION FUND I, L.P. AND SUBSIDIARY
Notes To Consolidated Financial Statements – (Continued)
September 30, 2012
(Unaudited)
 
Investments in Leases and Loans
 
The Fund’s investments in leases and loans consist of direct financing leases, operating leases and loans.
 
Direct Financing Leases. Certain of the Fund’s lease transactions are accounted for as direct financing leases (as distinguished from operating leases). Such leases transfer substantially all benefits and risks of equipment ownership to the customer. The Fund’s investment in direct financing leases consists of the sum of the total future minimum lease payments receivable plus 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 over the cost of the related equipment.
 
Unguaranteed residual value represents the estimated amount to be received at lease termination from lease extensions or ultimate disposition of the leased equipment. The estimates of residual values are based upon the Fund’s history with regard to the realization of residuals, available industry data and the General Partner’s experience with respect to comparable equipment. The estimated residual values are recorded as a component of investments in leases. Residual values are reviewed periodically to determine if the current estimate of the equipment’s fair market value appears to be below its recorded estimate. If required, residual values are adjusted downward to reflect adjusted estimates of fair market values. Upward adjustments to residual values are not permitted.
 
Operating Leases. Leases not meeting 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.
 
A review for impairment of operating leases is performed whenever events or changes in circumstances indicate that the carrying amount of the operating leases may not be recoverable.  The Fund writes down its rental equipment to its estimated net realizable value when it is probable that its carrying amount exceeds its fair value and the excess can be reasonably estimated; gains are only recognized upon actual sale of the rental equipment.
 
Loans. For term loans, the investment in loans consists of the sum of the total future minimum loan payments receivable less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum contracted loan payments over the cost of the related equipment. For all other loans, interest income is recorded at the stated rate on the accrual basis to the extent that such amounts are expected to be collected.
 
Allowance for Credit Losses. The Fund evaluates the adequacy of the allowance for credit losses (including investments in leases and loans) based upon, among other factors, the General Partner’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 will progress through delinquency stages to ultimate charge-off. After an account becomes 180 or more days past due, any remaining balance is fully-reserved less an estimated recovery amount. 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. Income is not recognized on leases and loans when a default on payment exists for a period of 90 days or more. Generally, income recognition resumes when a lease or loan becomes less than 90 days delinquent.  Fees from delinquent payments are recognized when received and are included in other income.
 
 
9

 
LEASE EQUITY APPRECIATION FUND I, L.P. AND SUBSIDIARY
Notes To Consolidated Financial Statements – (Continued)
September 30, 2012
(Unaudited)
 
Derivative Instruments
 
The Fund recognizes 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 depended on whether the derivative had been designated and qualified for hedge accounting treatment pursuant to U. S. GAAP.

Prior to October 1, 2010, the Fund entered into derivative contracts, including interest rate swaps, substantially all of which were accounted for as cash flow hedges.  Under hedge accounting, the effective portion of the overall gain or loss on a derivative designated as a cash flow hedge was reported in accumulated other comprehensive loss on the consolidated balance sheets and was then reclassified into earnings as an adjustment to interest expense over the term of the related borrowing.

Effective October 1, 2010, the Fund discontinued the use of hedge accounting. Therefore, any subsequent changes in the fair value of derivative instruments, including those that had previously been accounted for under hedge accounting, and periodic settlements of contracts, are recognized immediately in the accompanying consolidated statements of operations. While the Fund will continue to use derivative financial instruments to reduce exposure to changing interest rates, this accounting change may create volatility in the Fund’s results of operations, as the fair value of the Fund’s derivative financial instruments change.
 
 
For the forecasted transactions that are probable of occurring, the derivative gain or loss remaining in accumulated other comprehensive loss as of September 30, 2012 is being reclassified into earnings over the terms of the related forecasted borrowings, consistent with hedge accounting treatment. In the event that the related forecasted borrowing is no longer probable of occurring, the related gain or loss in accumulated other comprehensive income will be recognized in earnings immediately.

Other Income

Other income includes miscellaneous fees charged by the Fund such as late fee income, among others.  The Fund recognizes late fee income as fees are collected.  Late fee income was $32,000 and $126,000, respectively, for the three and nine months ended September 30, 2012 and $56,000 and $203,000, respectively, for the three and nine months ended September 30, 2011.
 
Recent Accounting Standards
 
Accounting Standards Recently Adopted

Comprehensive Income - In June 2011, the Financial Accounting Standards Board (“FASB”) issued an amendment to eliminate the option to present components of other comprehensive income as part of the statement of changes in equity.  The amendment requires that all non-owner changes in equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The Fund adopted the two-statement approach for the period beginning January 1, 2012.

Fair Value Measurements - In May 2011, the FASB issued an amendment to revise the wording used to describe the requirements for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the amendments to result in a change in the application of the current requirements. Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements, such as specifying that the concepts of highest and best use and valuation premise in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements such as specifying that, in the absence of a Level 1 input, a reporting entity should apply premiums or discounts when market participants would do so when pricing the asset or liability. This guidance was adopted by the Fund for the period beginning January 1, 2012 and did not significantly impact the Fund’s consolidated financial statements.
 
 
10

 
LEASE EQUITY APPRECIATION FUND I, L.P. AND SUBSIDIARY
Notes To Consolidated Financial Statements – (Continued)
September 30, 2012
(Unaudited)
 
NOTE 3 –  INVESTMENT IN LEASES AND LOANS
 
The Fund’s investment in leases and loans, net, consists of the following (in thousands):
 
   
September 30,
   
December 31,
 
 
 
2012
   
2011
 
Direct financing leases (a)
  $ 2,903     $ 7,612  
Loans (b)
    1,778       3,023  
Operating leases
    17       80  
      4,698       10,715  
Allowance for credit losses
    (260 )     (150 )
    $ 4,438     $ 10,565  

(a)
The Fund’s direct financing leases are for initial lease terms generally ranging from 24 to 120 months.
(b)
The interest rates on loans generally range from 6% to 15%.
 
The components of direct financing leases and loans are as follows (in thousands):
 
   
September 30,
   
December 31,
 
   
2012
   
2011
 
   
Leases
   
Loans
   
Leases
   
Loans
 
Total future minimum lease payments
  $ 2,907     $ 2,085     $ 7,895     $ 3,486  
Unearned income
    (238 )     (248 )     (619 )     (397 )
Residuals, net of unearned residual income (a)
    257       -       519       -  
Security deposits
    (23 )     (59 )     (183 )     (66 )
    $ 2,903     $ 1,778     $ 7,612     $ 3,023  

(a)
Unguaranteed residuals for direct financing leases represent the estimated amounts recoverable at lease termination from lease extensions or disposition of the equipment.

The Fund’s investment in operating leases, net, consists of the following (in thousands):

   
September 30,
   
December 31,
 
   
2012
   
2011
 
Equipment
  $ 261     $ 539  
Accumulated depreciation
    (244 )     (459 )
    $ 17     $ 80  

 
11

 
LEASE EQUITY APPRECIATION FUND I, L.P. AND SUBSIDIARY
Notes To Consolidated Financial Statements – (Continued)
September 30, 2012
(Unaudited)
 
NOTE 4 –  ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY

The following table is an age analysis of the Fund’s receivables from leases and loans (presented gross of allowance for credit losses) as of September 30, 2012 and December 31, 2011, respectively (in thousands):

   
September 30, 2012
 
December 31, 2011
 
Age of receivable
 
Investments
in leases
and loans
   
%
   
Investments
in leases
and loans
   
%
Current
  $ 3,911       83.25 %   $ 10,016       93.5 %
Delinquent:
                               
31 to 91 days past due
    309       6.58 %     562       5.2 %
Greater than 91 days (a)
    478       10.17 %     137       1.3 %
    $ 4,698       100 %   $ 10,715       100 %

(a)
Balancesin this age category are collectively evaluated for impairment.
 
The Fund had $478,000 and $137,000 of leases and loans on nonaccrual status as of September 30, 2012 and December 31, 2011, respectively.  The credit quality of the Fund’s investment in leases and loans as of September 30, 2012 and December 31, 2011 are as follows (in thousands):
 
   
September 30,
2012
   
December 31,
2011
 
Performing
  $ 4,220     $ 10,578  
Nonperforming
    478       137  
                 
    $ 4,698     $ 10,715  

The following table summarizes the annual activity in the allowance for credit losses (in thousands):

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Allowance for credit losses, beginning of period
  $ 150     $ 2,170     $ 150     $ 1,680  
Provision for credit losses
    255       309       384       2,378  
Charge-offs
    (170 )     (2,314 )     (497 )     (4,175 )
Recoveries
    25       205       223       487  
Allowance for credit losses, end of period (a)
  $ 260     $ 370     $ 260     $ 370  
 

(a)
End of period balances are collectively evaluated for impairment.
 
NOTE 5 –  DEFERRED FINANCING COSTS
 
As of September 30, 2012 and December 31, 2011, deferred financing costs include $107,000 and $45,000, respectively, of unamortized deferred financing costs which are being amortized over the estimated life of the related debt. Accumulated amortization as of September 30, 2012 and December 31, 2011 was $1.2 million and $1.1 million, respectively.
 
NOTE 6 –  BANK DEBT
 
The Fund has a secured term loan agreement with Portigon Financial Services (“Portigon” or the “Lender”), previously known as WestLB AG, New York Branch, which is collateralized by specific lease receivables and related equipment.
 
As of September 30, 2012 and December 31, 2011, the outstanding balance under this financing arrangement was $4.7 million and $10.9 million, respectively. Interest and principal are due as payments are received on the underlying leases and loans pledged as collateral, with any remaining balance due in March 2014 (maturity date). Interest on this facility is calculated at London Interbank Offered Rate (“LIBOR”) plus 0.95% per annum. To mitigate fluctuations in interest rates, the Fund has entered into interest rate swap agreements which fix the interest rate on this facility at 5.4%. The interest rate swap agreements terminate at various dates through June 2015. Recourse under this facility is limited to the amount of collateral pledged. As of September 30, 2012, $4.7 million of leases and loans and $428,000 of restricted cash were pledged as collateral under this facility.
 
 
12

 
LEASE EQUITY APPRECIATION FUND I, L.P. AND SUBSIDIARY
Notes To Consolidated Financial Statements – (Continued)
September 30, 2012
(Unaudited)
 
On June 29, 2012, the Fund amended its agreement with the Lender to remove certain covenants from the loan agreement.  In exchange for the foregoing, the Fund and the parent of the Fund’s General Partner agreed to a limited guaranty of a portion of the remaining amount due to the Lender.  The Lender has further agreed to accept a discount on a payoff of the loan at the maturity date in the event the natural runoff of the portfolio had not paid off the loan balance prior to such date.
 
As of September 30, 2012 the Fund was in compliance with the term facility.
 
Debt   repayments: Estimated annual principal payments on the Fund’s aggregate borrowings for each of the two succeeding twelve month periods ending September 30 are as follows (in thousands):
 
September 30, 2013
  $ 2,699  
September 30, 2014
    2,022  
    $ 4,721  

NOTE 7 –  DERIVATIVE INSTRUMENTS
 
Since the Fund’s assets are structured on a fixed-rate basis and funds borrowed through bank debt are obtained on a floating-rate basis, the Fund is exposed to interest rate risk if rates rise because it will increase the Fund’s borrowing costs. To manage interest rate risk, the Fund employs a hedging strategy using derivative financial instruments such as interest rate swaps.  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 primarily 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. As of September 30, 2012, the Fund has not posted any collateral related to these agreements. If the Fund had breached any of these provisions at September 30, 2012, it could be required to settle its obligations under the agreements at their termination value of $155,000.
 
At September 30, 2012, the Fund had 22 interest rate swap contracts that terminate on various dates ranging from November 2012 to June 2015 which generally coincide with the maturity period of our portfolio of leases and loans which collateralize the credit facility.
 
In the fourth quarter of 2010, the Fund made an election to discontinue the use of hedge accounting for its derivative financial instruments whereby any subsequent changes in the fair value of derivative instruments, including those that had previously been accounted for under hedge accounting, are recognized immediately in the accompanying consolidated statements of operations.  While this change may create future volatility in the Fund’s reported income statement results, it is not expected to have any impact on the Fund’s future cash flows.

For the forecasted transactions that are probable of occurring, the derivative loss remaining in accumulated other comprehensive loss as of September 30, 2012 is being reclassified into earnings over the terms of the related forecasted borrowings, consistent with hedge accounting treatment. In July 2012 the Fund prospectively revised its estimate on amortization of accumulated other comprehensive loss which will accelerate amortization and more closely align the recognition of accumulated other comprehensive loss with projected repayments of the Fund’s borrowings.    This increased the Fund’s net loss and interest expense by $144,000 for the three and nine month periods ended September 30, 2012, respectively, and increased the net loss per limited partner unit by $0.83 and $0.84 per share for the three and nine month periods ended September 30, 2012, respectively.
 
The following tables present the fair value of the Fund’s derivative financial instruments as well as their classification on the consolidated balance sheets as of September 30, 2012 and December 31, 2011 and on the consolidated statements of operations for the nine months ended September 30, 2012 and 2011 (dollars in thousands):
 
   
2012
   
2011
 
Fixed swaps (notional amount)
  $ 5,262     $ 12,657  
Range of receive rate
    0.21% - 0.24 %     0.23% - 0.57 %
Range of pay rate
    2.90% - 5.74 %     2.90% - 5.74 %
 
 
13

 
LEASE EQUITY APPRECIATION FUND I, L.P. AND SUBSIDIARY
Notes To Consolidated Financial Statements – (Continued)
September 30, 2012
(Unaudited)
 
The following table indicates the fair value of the derivative contracts as of September 30, 2012 and December 31, 2011(in thousands):
 
 
Balance Sheet Location
 
Derivative Assets
   
Derivative Liabilities
 
2012
Derivative liabilities, at fair value
  $ -     $ 146  
2011
Derivative liabilities, at fair value
  $ -     $ 381  

 
The following table summarizes the effect of the interest rate swaps on the consolidated statement of operations and other comprehensive income for the nine months ended September 30, 2012 and 2011 (in thousands):

 
Location of loss
reclassified from OCI to
the statement of
operations
 
Amount of loss
reclassified from OCI to
the statements of
operations
 
Location of loss
recognized  in the
statements of operations
 
Amount of loss
recognized in the
statements of
operations
 
2012
(a)
  $ 439  
(b)
  $ 35  
2011
(a)
  $ 335  
(b)
  $ 107  
 

 
(a)
Losses reclassified from accumulated other comprehensive loss were realized in interest expense on the accompanying statements of operations.
 
 
(b)
All changes in fair value of derivatives subsequent to dedesignation as cash flow hedges were realized in loss on derivative activities on the accompanying statements of operations.
 
As of September 30, 2012, $330,000 of the remaining balance in accumulated other comprehensive loss is expected to be charged to earnings over the next 12 months.
 
NOTE 8 – FAIR VALUE MEASUREMENT
 
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the measurement date (exit price). U.S. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.
 
 
Level 1 – Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
 
 
Level 2 – Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
 
 
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 on 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.
 
 
14

 
LEASE EQUITY APPRECIATION FUND I, L.P. AND SUBSIDIARY
Notes To Consolidated Financial Statements – (Continued)
September 30, 2012
(Unaudited)
 
Liabilities measured at fair value on a recurring basis included the following (in thousands):
 
   
Fair Value Measurements Using
   
Liabilities
 
   
Level 1
   
Level 2
   
Level 3
   
At Fair Value
 
Interest Rate Swaps at September 30, 2012
  $ -     $ (146 )   $ -     $ (146 )
Interest Rate Swaps at December 31, 2011
  $ -     $ (381 )   $ -     $ (381 )
 
The Fund is also required to disclose the fair value of financial instruments not measured at fair value for which it is practicable to estimate that value.  For cash, restricted cash, receivables, and payables, the carrying amounts approximate fair value because of the short term maturity of these instruments. At December 31, 2011, the carrying value of debt approximated fair value as interest rates were comparable to current market rates.
 
Subsequent to the adoption of Accounting Standards Update 2011-04 (“ASU 2011-04”), the Fund is also required to disclose the methods used to estimate fair value on financial instruments not measured at fair value and the level within the fair value hierarchy that those fair value measurements are categorized. The carrying value and fair value of the Fund’s debt at September 30, 2012 is as follows:
 
   
Carrying
   
Fair Value Measuring Using
   
Liabilities
 
   
Value
   
Level 1
   
Level 2
   
Level 3
   
At Fair Value
 
Bank debt, at September 30, 2012
  $ (4,721 )   $ -     $ (4,545 )   $ -     $ (4,545 )
 
The fair value of the debt as of September 30, 2012 was determined using quoted prices from broker-dealers of comparable securities as of the measurement date.
 
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 in accordance with the Partnership Agreement.  The following is a summary of fees and costs of services and materials charged by the General Partner or its affiliates (in thousands):
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Management  fees
  $ -     $ -     $ -     $ -  
Administrative expenses
  $ 16     $ 45     $ 61     $ 161  
 
Management Fees. Pursuant to the Partnership Agreement the General Partner is entitled to receive a subordinated annual asset management fee equal to 3% or 2% of gross rental payments for operating leases or full payout leases, respectively, or a competitive fee, whichever is less. To maximize the return to the limited partners, the General Partner began waiving management fees in 2009 and has waived all future management fees. Through September 30, 2012, the General Partner has waived $1.8 million of asset management fees, of which $145,000 related to the nine months ended September 30, 2012.
 
Administrative Expenses. The General Partner and its affiliates are reimbursed by the Fund for administrative services reasonably necessary to operate the Fund which do not exceed the General Partner’s actual cost of those services.
 
Due to Affiliates. Due to affiliates includes amounts due to the General Partner and its affiliates related to acquiring and managing portfolios of equipment from its General Partner, management fees and reimbursed expenses.
 
NOTE 10 –COMMITMENTS AND CONTINGENCIES
 
The Fund is party to various routine legal proceedings arising in the ordinary course of its business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the Fund’s financial condition or results of operations.
 
 
15

 
LEASE EQUITY APPRECIATION FUND I, L.P. AND SUBSIDIARY
Notes To Consolidated Financial Statements – (Continued)
September 30, 2012
(Unaudited)
 
In connection with a sale of leases and loans to a third-party in July of 2008, the Fund contractually agreed to repurchase delinquent leases up to a maximum of $120,000, calculated as 7.5% of total proceeds received from the sale (“Repurchase Commitment”).  As of September 30, 2012, the Fund has $77,000 remaining as a Repurchase Commitment, of which none was recorded as a liability at September 30, 2012.
 
 
16

 
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 the Securities and Exchange Commission. These risks and uncertainties could cause actual results to differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release the results of any revisions to forward-looking statements which we may make to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.
 
The following discussion provides an analysis of our operating results, an overview of our liquidity and capital resources and other items related to us. The following discussion and analysis should be read in conjunction with (i) the accompanying interim financial statements and related notes and (ii) our consolidated financial statements, related notes, and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2011.
 
As used herein, the terms “we,” “us,” or “our” refer to Lease Equity Appreciation Fund I, L.P. and subsidiary.
 
Business
 
We are a Delaware limited partnership formed on January 31, 2002 by our General Partner, LEAF Financial Corporation (the “General Partner”), which manages us. Our General Partner is a subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly-traded company (NASDAQ: REXI) that uses industry specific expertise, to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. Through our offering termination date of August 15, 2004, we raised $17.1 million by selling 171,746 of our limited partner units. We commenced operations in March 2003.
 
We were expected to have a minimum of a nine-year life, consisting of an offering period of up to two years, a five year reinvestment period and a subsequent liquidation period of two years, during which our leases and secured loans will either mature or be sold. Our five year reinvestment period has ended and we entered the liquidation period in August 2009. All of our leases and loans mature by the end of 2027. We will terminate on December 31, 2027, unless sooner dissolved or terminated as provided in the Partnership Agreement.
 
We acquired a diversified portfolio of new, used or reconditioned equipment that we lease to third-parties. We also acquired portfolios of equipment subject to existing leases from other equipment lessors. Our financings were typically acquired from an affiliate of our General Partner. In addition, we made secured loans to end users to finance their purchase of equipment. We attempted to structure our secured loans so that, in an economic sense, there was no difference to us between a secured loan and a full payout equipment lease. We financed 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 focused on the small to mid-size business market, which generally includes businesses with:
 
500 or fewer employees;
 
$1 billion or less in total assets;
 
Or $100 million or less in total annual sales.
 
Our principal objective was to generate regular cash distributions to our limited partners. However, as a result of the continued liquidation of the Fund’s investment portfolio, the Fund ceased making regular cash distributions in July 2012.

General Economic Overview

Economic indicators for the quarter ending September 30, 2012 show a continuation of the uneven pattern of economic activity that was seen in the first half of 2012. The overall economic landscape exhibits a stagnant condition with some sectors showing modest improvement and other sectors showing declines.  These mixed results are especially evident in the important housing market, a major engine of economic activity, as existing home sales declined 1.7% in September while new housing starts increased.  A lack of consumer and business confidence seems to be driving the lackluster economic performance. Consumer and business confidence also remains uncertain pending the outcomes of the United States of America (“U.S.”) presidential election, tax changes, the “fiscal cliff” (an automatic combination of tax increases and mandated government spending cuts), the U.S. debt ceiling, and the European debt problem.
 
 
17

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

Finance Receivables and Asset Quality
 
Information about our portfolio of leases and loans is as follows (dollars in thousands):
 
   
September 30,
2012
   
December 31,
2011
 
Investment in leases and loans, net
  $ 4,438     $ 10,565  
                 
Number of contracts
    2,900       3,700  
Number of individual end users (a)
    2,700       3,500  
Average original equipment cost
  $ 16.7     $ 17.6  
Average initial lease term (in months)
    63       62  
Average remaining lease term (in months)
    18       21  
States accounting for more than 10% of lease and loan portfolio:
               
California
    17 %     15 %
Florida
    12 %     9 %
                 
Types of equipment accounting for more than 10% of lease and loan portfolio:
               
Medical Equipment
    27 %     20 %
Industrial Equipment
    24 %     24 %
Office Equipment
    14 %     16 %
Water Purification
    13 %     15 %
                 
Types of businesses accounting for more than 10% of lease and loan portfolio:
               
Services
    56 %     48 %
Manufacturing
    12 %     12 %
Retail Trade
    10 %     12 %
 

(a)
Located in most of 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 4% of our portfolio based on original cost of the equipment.
 
Portfolio Performance
 
The table below provides information about our finance receivables including non-performing assets, which are those assets that are not accruing income due to non-performance or impairment (dollars in thousands):
 
 
18

 
   
As of and for the
 
   
Nine Months Ended September 30,
 
               
Change
 
   
2012
   
2011
    $     %  
Investment in leases and loans before allowance for credit losses
  $ 4,698     $ 13,762     $ (9,064 )     (66 )%
Less: allowance for credit losses
    (260 )     (370 )     110       30 %
Investment in leases and loans, net
  $ 4,438     $ 13,392     $ (8,954 )     (67 )%
                                 
Weighted average investment in direct financing leases and loans before allowance for credit losses
  $ 7,528     $ 21,328     $ (13,800 )     (65 )%
Non-performing assets
  $ 478     $ 486     $ (8 )     (2 )%
Charge-offs, net of recoveries
  $ 274     $ 3,688     $ (3,414 )     (93 )%
As a percentage of finance receivables:
                               
Allowance for credit losses
    5.5 %     2.7 %                
Non-performing assets
    10.2 %     3.5 %                
As a percentage of weighted average finance receivables:
                               
Charge-offs, net of recoveries
    3.6 %     17.3 %                
 
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 focused on financing equipment used by small to mid-sized businesses. The recent economic recession in the U.S. made it more difficult for some of our customers to make payments on their financings with us on a timely basis, which adversely affected our operations in the form of higher delinquencies. These higher delinquencies may continue as the U.S. economy recovers.  Our non-performing assets as a percentage of finance receivables reflect this, increasing from 3.5% at September 30, 2011 to 10.2% at September 30, 2012.  The increase in non-performing assets to $478,000 at September 30, 2012 is representative of a recent deterioration in the performance of our portfolio as evidenced by a comparison to non-performing assets at June 30, 2012 of $170,000, an increase of $308,000. Our allowance for credit losses as a percentage of our investments in leases and loans also reflects this, increasing from 2.7% at September 30, 2011 to 5.5% at September 30, 2012.
 
Critical Accounting Policies
 
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and cost and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including the allowance for credit losses, the estimated unguaranteed residual values of leased equipment, impairment of long-lived assets and the fair value and effectiveness of interest rate swaps. 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 complete discussion of our critical accounting procedures and estimates, see our annual report on Form 10-K for fiscal 2011 under “Management’s Discussion and Analysis of Financial Condition and Analysis of Financial Condition and Results of Operations- Critical Accounting Policies and Estimates.”  There have been no material changes to those policies through September 30, 2012.

 
19


Results of Operations
 
Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011
         
Increase (Decrease)
 
   
2012
   
2011
    $     %  
Revenues:
                         
Interest on equipment financings
  $ 142     $ 351     $ (209 )     (60 )%
Rental income
    11       51       (40 )     (78 )%
Gains on sales of equipment and lease dispositions, net
    14       (17 )     31       ( 182 )%
Other income
    36       54       (18 )     (33 )%
      203       439       (236 )     (54 )%
                                 
Expenses:
                               
Interest expense
    304       178       126       71 %
Depreciation on operating leases
    8       35       (27 )     (77 )%
Provision for credit losses
    255       309       (54 )     (17 )%
General and administrative expenses
    50       179       (129 )     (72 )%
Administrative expenses reimbursed to affiliate
    16       45       (29 )     (64 )%
Loss on  derivative activities
    6       28       (22 )     (79 )%
      639       774       (135 )     (17 )%
Net loss
  $ (436 )   $ (335 )   $ (101 )        
Net loss allocated to limited partners
  $ (432 )   $ (332 )   $ (100 )        
 
The overall decrease in revenues is primarily a result of a decreasing lease and loan portfolio since the Fund is in its liquidation phase whereby it is prohibited from acquiring any more leases and loans. A more specific discussion follows:
 
The decrease in total revenues was primarily attributable to the following:
 
 
A significant decrease in interest on equipment financings and rental income, due to a decrease in our weighted average net investment in financing assets to $5.6 million for the three months ended September 30, 2012 as compared to $16.6 million for the three months ended September 30, 2011,  a decrease of $11.0 million or 66%.  As we entered our liquidation phase in August 2009, we are not permitted under the Partnership Agreement to acquire additional leases and loans. Therefore, our revenues are expected to continue to decline as our weighted average net investment in financing assets declines.
 
 
Gains on the sale of equipment and lease dispositions increased $31,000 to $14,000 for the three months ended September 30, 2012 compared to a net loss of $17,000 for the three months ended September 30, 2011. Gains and losses on sales of equipment may vary significantly from period to period.
 
 
Other income decreased from $54,000 for the three months ended September 30, 2011 to $36,000 for the three months ended September 30, 2012, a decrease of $18,000 or 33%.  The decrease in other income is primarily related to a decrease in late fee income, which is driven by the decrease in the size of our portfolio.
 
The decrease in total expenses was primarily attributable to the following:
 
 
A decrease in our provision for credit losses. We provide for credit losses when losses are likely to occur based on a migration analysis of past due payments and economic conditions.  The decrease in our provision is due to a decline in the portfolio of equipment financed assets, however, was offset by an increase in our non-performing assets.  Non-performing assets increased as a percentage of our portfolio to 10.2% at September 30, 2012 compared to 3.5% at September 30, 2011.
 
 
A decrease in depreciation on operating leases due to continued maturity of our lease and loan portfolio.
 
 
The decreases in total expense were partially offset by an increase in interest expense.   In July 2012 we revised our estimate of amortizing accumulated other comprehensive loss to more closely align the recognition of accumulated other comprehensive loss with projected repayments of our borrowings, which increased our interest expense by $144,000.  This increase was partially offset by a decrease in our bank debt caused by the ongoing maturities of our portfolio of leases and loans. Weighted average borrowings for the three months ended September 30, 2012 were $5.6 million as compared to $15.4 million at September 30, 2011. Borrowings for the three months ended September 30, 2012 and 2011 were at an effective interest rate of 1.8% and 4.7%, respectively.
 
 
20

 
The net loss per limited partner unit, after the net loss allocated to our General Partner, for the three months ended September 30, 2012 and 2011 was $2.51 and $1.93, respectively, based on a weighted average number of limited partner units outstanding of 171,696 for both periods.
 
Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011
 
         
Increase (Decrease)
 
   
2012
   
2011
    $     %  
Revenues:
                         
Interest on equipment financings
  $ 577     $ 1,218     $ (641 )     (53 )%
Rental income
    57       211       (154 )     (73 )%
Gains on sales of equipment and lease dispositions, net
    118       122       (4 )     (3 )%
Other income
    143       233       (90 )     (39 )%
      895       1,784       (889 )     (50 )%
                                 
Expenses:
                               
Interest expense
    583       594       (11 )     (2 )%
Depreciation on operating leases
    37       165       (128 )     (78 )%
Provision for credit losses
    384       2,378       (1,994 )     (84 )%
General and administrative expenses
    266       439       (173 )     (39 )%
Administrative expenses reimbursed to affiliate
    61       161       (100 )     (62 )%
Loss on derivative activities
    35       107       72       (67 )%
      1,366       3,844       (2,478 )     (64 )%
Net loss
  $ (471 )   $ (2,060 )   $ 1,589          
Net loss allocated to limited partners
  $ (466 )   $ (2,039 )   $ 1,573          
 
The decrease in total revenues was primarily attributable to the following:
 
 
A significant decrease in interest on equipment financings and rental income due to a decrease in our weighted average net investment in financing assets to $7.5 million for the nine months ended September 30, 2012 as compared to $21.3 million for the nine months ended September 30, 2011, a decrease of $13.8 million or 65.0%.  As we entered our liquidation phase in August 2009, we are not permitted under the Partnership Agreement to acquire additional leases and loans. Therefore, our revenues are expected to continue to decline as our weighted average net investment in financing assets declines.
 
 
Other income decreased from $233,000 for the nine months ended September 30, 2011 to $143,000 for the nine months ended September 30, 2012, a decrease of $90,000 or 39%.  The decrease in other income is primarily related to a decrease in late fee income which is driven by the decrease in the size of our portfolio.
 
The decrease in total expenses was primarily attributable to the following:
 
 
A decrease in interest expense primarily due to the decrease in our bank debt caused by the ongoing maturities of our portfolio of leases and loans, partially offset by an increase in amortization of accumulated other comprehensive loss related to our interest rate swaps. Weighted average borrowings for the nine months ended September 30, 2012 were $7.6 million as compared to $19.3 million at September 30, 2011. Borrowings for the nine months ended September 30, 2012 and 2011 were at an effective interest rate of 2.5% and 1.8%, respectively.  The increase in amortization of accumulated other comprehensive loss is the result of a revision in our estimate of amortizing accumulated other comprehensive loss to more closely align the recognition of accumulated other comprehensive loss with projected repayments of our borrowings, which increased our interest expense by $144,000.
 
 
A decrease in depreciation on operating leases due to continued maturity of our lease and loan portfolio.
 
 
A decrease in our provision for credit losses. We provide for credit losses when losses are likely to occur based on a migration analysis of past due payments and economic conditions. This decrease is consistent with the decline in the portfolio of equipment financed assets, however, was partially offset by an increase in our non-performing assets as a percentage of our portfolio to 10.2% at September 30, 2012 compared to 3.5% at September 30, 2011.
 
The net loss per limited partner unit, after the net loss allocated to our General Partner, for the nine months ended September 30, 2012 and 2011 was $2.72 and $11.88, respectively, based on a weighted average number of limited partner units outstanding of 171,696 for both periods.
 
 
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Liquidity and Capital Resources
 
General
 
Our major source of liquidity is excess cash derived from the collection of lease payments, after payment of debt principal and interest on debt. Our other cash requirements, in addition to debt service, are for normal operating expenses and, prior to July 2012, distributions to our limited partners. As noted previously, we ceased making regular cash distributions in July 2012. Accordingly, any future cash distributions to our limited partners are dependent upon excess cash remaining after we have repaid our obligations.
 
We believe that our future net cash inflows can be estimated as the total scheduled future payments to be received from leases and loans less our debt service payments. At September 30, 2012, the total future minimum lease and loan payments scheduled to be received was $5.0 million which excludes the $260,000 allowance for credit losses. The Fund also derives cash from fees paid by our customers and from recoveries of previous bad debts. The outstanding principal balance owed on our debt facility was $4.7 million. We believe at this time that future net cash inflows will be sufficient to finance operations and meet debt service payments. The following table sets forth our sources and uses of cash for the periods indicated (in thousands):
 
   
Nine Months Ended September 30,
 
   
2012
   
2011
 
Net cash provided by operating activities
  $ 76     $ 370  
Net cash provided by  investing activities
    5,824       11,326  
Net cash used in financing activities
    (5,943 )     (11,620 )
(Decrease) increase in cash
  $ (43 )   $ 76  
 
Cash decreased by $43,000 primarily due to debt repayments of $6.2 million and distributions to our partners of $203,000, partially offset by net proceeds from leases and loans of $5.8 million and operating cash flows of $76,000.
 
As of September 30, 2012, $4.7 million was outstanding under our secured term loan agreement with Portigon Financial Services (“Portigon” or the “Lender”), previously known as WestLB AG, New York Branch. No further borrowings are available under the secured term loan agreement. This facility is secured by eligible leases and loans that have been pledged as collateral. Recourse under this facility is limited to the amount of collateral pledged. As of September 30, 2012, $4.7 million of leases and loans and $428,000 of restricted cash were pledged as collateral under this facility. Interest on this facility is calculated at LIBOR plus 0.95% per annum. Interest rate swap agreements fix the interest rate on this facility at 5.4%. Interest and principal are due as payments are received on the underlying leases and loans pledged as collateral, with any remaining balance due in March 2014 (maturity date).
 
On June 29, 2012, we amended our agreement with the Lender to remove certain covenants from the loan agreement.  In exchange for the foregoing, we and the parent of our General Partner agreed to a limited guaranty of a portion of the remaining amount due to the Lender.  The Lender has further agreed to accept a discount on a payoff of the loan at the maturity date in the event the natural runoff of the portfolio had not paid off the loan balance prior to such date.
 
As of September 30, 2012 we were in compliance with the term facility.
 
Partners’ distributions paid during the nine months ended September 30, 2012 and 2011 were $203,000 and $262,000, respectively.  Cumulative partner distributions paid from our inception to September 30, 2012 were approximately $9.6 million.  To date, limited partners have received total distributions of approximately 56% of their original amount invested, depending upon when the investment was made.  Partner distributions for the nine months ended September 30, 2012 and 2011 were made at a rate of 2% of capital invested.  As noted previously, we ceased making regular cash distributions in July 2012. However, our General Partner will continue to work to maximize the amount that can be distributed to our limited partners in the future. Future cash distributions are not guaranteed and are solely dependent on our performance and are impacted by a number of factors which include lease and loan defaults by our customers, accelerated principal payments on our debt facilities required per our agreements, and prevailing economic conditions. As noted previously, any future cash distributions to our limited partners are dependent upon excess cash remaining after we have repaid our obligations.
 
The General Partner waived its management fees beginning May 1, 2009. Accordingly, we did not record any management fee expense for the nine months ended September 30, 2012. The General Partner has also waived all future management fees.  The cash savings on management fees and distributions is expected to be used to pay down our liabilities. Through September 30, 2012, the General Partner has waived $1.8 million of asset management fees, of which $145,000 related to the nine months ended September 30, 2012.
 
 
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As discussed above, our liquidity has been and may continue to be adversely affected by higher than expected equipment lease defaults, which result in a loss of anticipated revenues. These losses affect our ability to make distributions to our partners and, if the level of defaults is sufficiently large, result in our inability to fully recover our investment in the underlying equipment. In evaluating our allowance for losses on uncollectible leases, we consider our contractual delinquencies, economic conditions and trends, lease portfolio characteristics and our General Partner’s prior experience with similar lease assets. At September 30, 2012, our credit evaluation indicated a need for an allowance for credit losses of $260,000. As our lease portfolio ages, and if the economy in the United States deteriorates, we may need to increase our allowance for credit losses.
 
 
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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Quantitative and Qualitative Disclosures about Market Risk have been omitted as permitted under rules applicable to smaller reporting companies.
 
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 at the reasonable assurance level discussed above.
 
Changes in Internal Control over Financial Reporting
 
There has been no change in our internal control over financial reporting that occurred during the three months ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
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PART II.  OTHER INFORMATION
 
ITEM 6 – EXHIBITS
 
No.
Description
3.1
Amended and Restated Agreement of Limited Partnership (1)
3.2
Certificate of Limited Partnership (2)
4.1
Forms of letters sent to limited partners confirming their investment (2)
10.1
Origination and Servicing Agreement among LEAF Financial Corporation, Lease Equity Appreciation Fund I, L.P. and LEAF Funding, Inc., dated April 4, 2003 (4)
10.2
Secured Loan Agreement dated as of December 31, 2004 among LEAF Fund I, LLC, LEAF Funding, Inc., Lease Equity Appreciation Fund I, L.P., LEAF Financial Corporation, U.S. Bank National Association, and WestLB, New York Branch (3)
10.3
First Amendment to WestLB AG, New York Branch, Secured Loan Agreement (5)
10.4
Third Amendment to WestLB AG , New York Branch, Secured Loan Agreement (6)
10.5
Fourth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (7)
10.6
Fifth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (8)
10.7
Seventh Amendment WestLB AG, New York Branch, Secured Loan Agreement (9)
10.8
Eighth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (10)
10.9
Ninth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (11)
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets at September 30, 2012 and December 31, 2011; (ii) the Consolidated Statements of  Operations for the three and nine month periods ended September 30, 2012 and 2011; (iii) the Consolidated Statements of Comprehensive Loss for the three and nine month periods ended September 30, 2012 and 2011; (iv) the Consolidated Statement of Changes in Partners’ Deficit for the nine month period ended September 30, 2012; (iv) the Consolidated Statements of Cash Flows for the periods ended September 30, 2012 and 2011; and, (iv) the Notes to Consolidated Financial Statements.
 

 
(1)
Filed previously as Appendix A to our Post-Effective Amendment No. 3 to our Registration Statement on Form S-1, filed on January 26, 2004 and by this reference incorporated herein.
 
(2)
Filed previously as an exhibit to Amendment No. 1 to our Registration Statement on Form S-1 filed on June 7, 2002 and by this reference incorporated herein.
 
(3)
Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2004 and by this reference incorporated herein.
 
(4)
Filed previously on Form 8-K, filed on September 19, 2003 and by this reference incorporated herein.
 
(5)
Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2005 and by this reference incorporated herein.
 
(6)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 and by this reference incorporated herein.
 
(7)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 and by this reference incorporated herein.
 
(8)
Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2007 and by this reference incorporated herein.
 
(9)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 and by this reference incorporated herein.
 
(10)
Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2008 and by this reference incorporated herein.
 
(11)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 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.
 
A Delaware Limited Partnership
     
 
By:
LEAF Asset Management, LLC, its General Partner
     
November 14, 2012
By:
/s/ CRIT S. DEMENT
   
Crit S. DeMent
   
Chief Executive Officer
     
November 14, 2012
By:
/s/ ROBERT K. MOSKOVITZ
   
Robert K. Moskovitz
   
Chief Financial Officer
 
 
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