LEAF Equipment Finance Fund 4, L.P. - FORM 10-Q - November 14, 2013

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


FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2013
 
OR
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from             to            
 
Commission file number 000-53667
 
 
LEAF EQUIPMENT FINANCE FUND 4, L.P.
(Exact Name of Registrant as Specified in Its Charter)
 
 
Delaware
 
61-1552209
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
110 South Poplar Street, Suite 101, Wilmington Delaware 19801
(Address of principal executive offices) (Zip Code)
 
(800) 819-5556
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x Yes     ¨ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   x Yes      ¨ No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer
¨
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller Reporting Company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨ Yes     x No
 
There is no public market for the Registrant’s securities.
 
LEAF EQUIPMENT FINANCE FUND 4, L.P.
INDEX TO QUARTERLY REPORT
ON FORM 10-Q

PART I
FINANCIAL INFORMATION
PAGE
ITEM 1.
3
 
3
 
4
 
5
 
6
 
7
ITEM 2.
15
ITEM 3.
23
ITEM 4.
23
 
 
 
PART II
OTHER INFORMATION
24
ITEM 6.
24
 
 
 
25

2
PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

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

 
  
September 30, 2013
    
December 31, 2012
  
 
  
(Unaudited)
    
 
ASSETS
  
   
 
Cash
  
$
217
    
$
38
  
Restricted cash
    
9,699
      
11,552
  
Investment in leases and loans, net
    
45,236
      
89,302
  
Deferred financing costs, net
    
762
      
1,322
  
Other assets
    
125
      
92
  
Total assets
  
$
56,039
    
$
102,306
  
 
                
LIABILITIES AND PARTNERS’ (DEFICIT) CAPITAL
                
Liabilities:
                
Debt
  
$
35,118
    
$
72,701
  
Accounts payable, accrued expenses, and other liabilities
    
788
      
1,380
  
Due to affiliates
    
5,021
      
2,472
  
Subordinated notes payable
    
9,295
      
9,355
  
Total liabilities
    
50,222
      
85,908
  
 
                
Commitments and contingencies (Note 10)
                
 
                
Partners’ (Deficit) Capital:
                
General partner
    
(1,042
)
    
(938
)
Limited partners
    
6,729
      
17,040
  
Total partners' capital
    
5,687
      
16,102
  
Noncontrolling interest
    
130
      
296
  
Total capital
    
5,817
      
16,398
  
Total liabilities and capital
  
$
56,039
    
$
102,306
  
 
The accompanying notes are an integral part of these consolidated financial statements.
3
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,
  
 
  
2013
    
2012
    
2013
    
2012
  
Revenues:
  
   
   
   
 
Interest on equipment financings
  
$
783
    
$
2,144
    
$
3,596
    
$
7,214
  
Rental income
    
105
      
275
      
386
      
1,081
  
Gains on sale of equipment and lease dispositions, net
    
99
      
217
      
447
      
958
  
Gains on extinguishment of debt
    
–
      
–
      
16
      
–
  
Other income
    
124
      
144
      
370
      
718
  
 
    
1,111
      
2,780
      
4,815
      
9,971
  
 
                                
Expenses:
                                
Interest expense
    
1,554
      
3,090
      
5,397
      
9,880
  
Depreciation on operating leases
    
51
      
123
      
153
      
730
  
Provision for credit losses
    
2,775
      
2,308
      
4,982
      
8,252
  
General and administrative expenses
    
103
      
213
      
603
      
891
  
Administrative expenses reimbursed to affiliate
    
115
      
273
      
444
      
993
  
 
    
4,598
      
6,007
      
11,579
      
20,746
  
Net loss
    
(3,487
)
    
(3,227
)
    
(6,764
)
    
(10,775
)
Net income attributable to the noncontrolling interest
    
23
      
56
      
166
      
153
  
Net loss attributable to LEAF 4 partners
  
$
(3,464
)
  
$
(3,171
)
  
$
(6,598
)
  
$
(10,622
)
Net loss allocated to LEAF 4's limited partners
  
$
(3,429
)
  
$
(3,139
)
  
$
(6,532
)
  
$
(10,516
)
Weighted average number of limited partner units outstanding during the period
    
1,259,537
      
1,259,537
      
1,259,537
      
1,259,537
  
 
                                
Net loss per weighted average limited partner unit
  
$
(2.72
)
  
$
(2.49
)
  
$
(5.19
)
  
$
(8.35
)

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

4
LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
Consolidated Statement of Changes in Partners’ (Deficit) Capital
(In thousands, except unit data)
(Unaudited)

 
  
General
    
   
Total Partners’
    
Non-
    
Total
  
 
  
Partner
    
Limited Partners
    
(Deficit)
    
Controlling
    
(Deficit)
  
 
  
Amount
    
Units
    
Amount
    
Capital
    
Interest
    
Capital
  
Balance, at January 1, 2013
  
$
(938
)
    
1,259,537
    
$
17,040
    
$
16,102
    
$
296
    
$
16,398
  
Cash distributions paid
    
(38
)
    
-
      
(3,779
)
    
(3,817
)
    
-
      
(3,817
)
Net loss
    
(66
)
    
-
      
(6,532
)
    
(6,598
)
    
(166
)
    
(6,764
)
Balance, September 30, 2013
  
$
(1,042
)
    
1,259,537
    
$
6,729
    
$
5,687
    
$
130
    
$
5,817
  

The accompanying notes are an integral part of this consolidated financial statement.
5
LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

 
  
Nine Months Ended September 30,
  
 
  
2013
    
2012
  
Cash flows from operating activities:
  
   
 
Net loss
  
$
(6,764
)
  
$
(10,775
)
Adjustments to reconcile net loss to net cash provided by operating activities:
                
Gain on extinguishment of subordinated note payable
    
(16
)
    
–
  
Gains on sale of equipment and lease dispositions, net
    
(447
)
    
(958
)
Amortization of deferred charges
    
1,367
      
2,347
  
Amortization of discount on debt
    
1,425
      
3,123
  
Depreciation on operating leases
    
153
      
730
  
Provision for credit losses
    
4,982
      
8,252
  
Changes in operating assets and liabilities:
                
Other assets
    
(33
)
    
129
  
Accounts payable, accrued expenses, and other liabilities
    
(592
)
    
(93
)
Due to affiliates
    
2,549
      
1,246
  
Net cash provided by operating activities
    
2,624
      
4,001
  
 
                
Cash flows from investing activities:
                
Purchases from leases and loans
    
–
      
(384
)
Proceeds from leases and loans
    
39,156
      
65,277
  
Security deposits returned, net of collections
    
(565
)
    
(1,511
)
Net cash provided by investing activities
    
38,591
      
63,382
  
 
                
Cash flows from financing activities:
                
Repayment of  debt
    
(39,008
)
    
(70,628
)
Decrease in restricted cash
    
1,853
      
6,883
  
Increase in deferred financing costs
    
(20
)
    
(12
)
Redemption of subordinated note payable
    
(44
)
    
–
  
Cash distributions to partners
    
(3,817
)
    
(3,817
)
Net cash used in financing activities
    
(41,036
)
    
(67,574
)
 
                
Increase (decrease) in cash
    
179
      
(191
)
Cash, beginning of period
    
38
      
405
  
Cash, end of period
  
$
217
    
$
214
  
 
                
Cash paid for interest
  
$
2,651
    
$
4,471
  

The accompanying notes are an integral part of these consolidated financial statements.
6
LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
September 30, 2013
(Unaudited)

NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS
 
LEAF Equipment Finance Fund 4, L.P. (“LEAF 4” or the “Fund”), a Delaware limited partnership, was formed on January 25, 2008 by its general partner, LEAF Asset Management, LLC (the “General Partner”), which manages the Fund. The General Partner is a Delaware limited liability company and a subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly traded company (NASDAQ: REXI) that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. Through its offering termination date of October 30, 2009, the Fund raised $125.7 million by selling 1.3 million of its limited partner units. It commenced operations in September 2008.
 
The Fund is expected to have a minimum of a nine-year life, consisting of an offering period of up to two years, a five-year reinvestment period and a subsequent maturity period of two years, during which the Fund’s leases and secured loans will either mature or be sold. In the event the Fund is unable to sell its leases and loans during the maturity period, the Fund expects to continue to return capital to its partners as those leases and loans mature. All of the Fund’s leases and loans mature by the end of 2032. The Fund expects to enter its maturity period beginning in October 2014. Contractually, the Fund will terminate on December 31, 2032, unless sooner dissolved or terminated as provided in the Limited Partnership Agreement (the “Partnership Agreement”).
 
The Fund acquires diversified portfolios of equipment to finance to end users throughout the United States as well as the District of Columbia and Puerto Rico. The Fund also acquires existing portfolios of equipment subject to existing financings from other equipment finance companies, primarily an affiliate of its General Partner. The primary objective of the Fund is to generate regular cash distributions to its partners from its equipment finance portfolio over the life of the Fund.
 
In addition to its 1% general partnership interest, the General Partner has also invested $1.0 million for a 0.85% limited partnership interest in the Fund.
 
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of the Fund and its wholly owned subsidiary LEAF Receivables Funding 4, LLC. The consolidated financial statements also include LEAF Funds Joint Venture 2, LLC (“LEAF Funds JV2”) and its subsidiaries LEAF Commercial Finance Fund, LLC (LCFF) and LEAF Receivables Funding 6, LLC, as well as LEAF Funding, LLC (“LEAF Funds JV1”) and its wholly owned subsidiaries LEAF Capital Funding III, LLC and LEAF Receivables Funding II, LLC. The Fund maintains a 98%, and 96% ownership interest in LEAF Funds JV2 and LEAF Funds JV1, respectively. All intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited financial statements reflect all adjustments that are, in the opinion of management, of a normal and recurring nature and necessary for a fair statement of the Fund’s financial position as of September 30, 2013, and the results of its operations and cash flows for the periods presented. The results of operations for the three and nine month periods ended September 30, 2013 are not necessarily indicative of results of the Fund’s operations for the entire fiscal year. The financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial reporting.  Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to those rules and regulations. These interim financial statements should be read in conjunction with the Fund’s financial statements and notes thereto presented in the Fund’s Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC on April 1, 2013.

Use of Estimates
 
Preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the allowance for credit losses and the estimated unguaranteed residual values of leased equipment, among others. The Fund bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

7
LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements – (Continued)
September 30, 2013
(Unaudited)
 
Investments in Commercial Finance Assets
 
The Fund’s investments in commercial finance assets consist of direct financing leases, operating leases, and loans.

Direct Financing Leases. Certain of the Fund’s lease transactions are accounted for as direct financing leases (as distinguished from operating leases). Such leases transfer substantially all benefits and risks of equipment ownership to the customer. The Fund’s investment in direct financing leases consists of the sum of the total future minimum lease payments receivable and the estimated unguaranteed residual value of leased equipment, less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum contracted payments plus the estimated unguaranteed residual value expected to be realized at the end of the lease term over the cost of the related equipment.
 
Unguaranteed residual value represents the estimated amount to be received at lease termination from lease extensions or ultimate disposition of the leased equipment. The estimates of residual values are based upon the General Partner’s history with regard to the realization of residuals, available industry data and the General Partner’s experience with respect to comparable equipment. The estimated residual values are recorded as a component of investments in leases. Residual values are reviewed periodically to determine if the current estimate of the equipment’s fair market value appears to be below its recorded estimate. If required, residual values are adjusted downward to reflect adjusted estimates of fair market values. Upward adjustments to residual values are not permitted.
 
Operating Leases. Leases not meeting the criteria to be classified as direct financing leases are deemed to be operating leases. Under the accounting for operating leases, the cost of the leased equipment, including acquisition fees associated with lease placements, is recorded as an asset and depreciated on a straight-line basis over the equipment’s estimated useful life, generally up to seven years. Rental income consists primarily of monthly periodic rental payments due under the terms of the leases. The Fund recognizes rental income on a straight line basis.
 
Generally, during the lease terms of existing operating leases, the Fund will not recover all of the cost and related expenses of its rental equipment and, therefore, it is prepared to remarket the equipment in future years. The Fund’s policy is to review, on a quarterly basis, the expected economic life of its rental equipment in order to determine the recoverability of its undepreciated cost. 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.
 
Loans. For term loans, the investment in loans consists of the sum of the total future minimum loan payments receivable less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum contracted loan payments over the cost of the loan. For all other loans, interest income is recorded at the stated rate on the accrual basis to the extent that such amounts are expected to be collected.
 
Allowance for Credit Losses. The Fund evaluates the adequacy of the allowance for credit losses (including investments in leases and loans) based upon, among other factors, management’s historical experience on the portfolios it manages, an analysis of contractual delinquencies, economic conditions and trends and equipment finance portfolio characteristics, adjusted for expected recoveries.  In evaluating historic performance of the Fund’s leases and loans, the Fund performs a migration analysis, which estimates the likelihood that an account progresses through delinquency stages to ultimate charge-off unless individually reviewed for impairment.  In an individual review for impairment the Fund considers the loans performance, probability of repayment, and general and local economic conditions when assessing whether impairment is necessary.  Substantially all of the Fund’s leases and loans evaluated for impairment on an individual basis include an analysis of the market values of underlying collateral values, as adjusted for estimated selling and other closing costs. After an account becomes 180 or more days past due, any remaining balance is fully-reserved less an estimated recovery amount. Generally, past due accounts are referred to our internal recovery group consisting of a team of credit specialists and collectors. The group utilizes several resources in an attempt to maximize recoveries on charged-off accounts including: 1) initiating litigation against the end user customer and any personal guarantor, 2) referring the account to an outside law firm or collection agency and/or 3) repossessing and remarketing the equipment or other assets through third parties.
 
The Fund’s policy is to charge off to the allowance those financings which are in default and for which it is probable management will be unable to collect all amounts contractually owed. The Fund discontinues the recognition of revenue for leases and loans for which payments are more than 90 days past due.  Payments received while leases and loans are on non-accrual status are recorded as a reduction of principal. Generally income recognition resumes when a lease or loan becomes less than 90 days delinquent, unless certain factors specific to those leases or loans continue to raise concerns as to future collectability.
8
LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements – (Continued)
September 30, 2013
(Unaudited)
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 $114,000 and $332,000, respectively, for the three and nine month periods ended September 30, 2013, and was $129,000 and $656,000, respectively, for the three and nine month periods ending September 30, 2012.
 
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,
  
 
  
2013
    
2012
  
Direct financing leases (1)
  
$
10,164
    
$
25,970
  
Loans (2)
    
42,577
      
71,907
  
Operating leases
    
125
      
345
  
 
    
52,866
      
98,222
  
Allowance for credit losses
    
(7,630
)
    
(8,920
)
 
  
$
45,236
    
$
89,302
  
(1) The Fund’s direct financing leases are for initial lease terms generally ranging from 24 to 180 months.
(2) The interest rates on loans generally range from 5% to 20%.

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

 
  
September 30, 2013
    
December 31, 2012
  
 
  
Leases
    
Loans
    
Leases
    
Loans
  
Total future minimum lease payments
  
$
8,741
    
$
44,903
    
$
24,873
    
$
78,448
  
Unearned income
    
(404
)
    
(1,765
)
    
(1,280
)
    
(5,271
)
Residuals, net of unearned residual income
    
1,944
      
-
      
2,591
      
-
  
Security deposits
    
(117
)
    
(561
)
    
(214
)
    
(1,270
)
 
  
$
10,164
    
$
42,577
    
$
25,970
    
$
71,907
  


The Fund’s investment in operating leases consists of the following (in thousands):
 
  
September 30,
2013
    
December 31,
2012
  
Equipment
  
$
1,741
    
$
2,723
  
Accumulated depreciation
    
(1,616
)
    
(2,378
)
 
  
$
125
    
$
345
  

9
LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements – (Continued)
September 30, 2013
(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 of $7.6 million and $8.9 million) as of September 30, 2013 and December 31, 2012, respectively (in thousands):
 
 
  
September 30, 2013
    
December 31, 2012
  
Age of receivable
  
Investment in
leases and loans
    
%
    
Investment in
leases and loans
    
%
  
Current (a)
  
$
51,174
      
96.8
%
  
$
94,489
      
96.2
%
Delinquent:
                                
31 to 91 days past due
    
1,227
      
2.3
%
    
2,848
      
2.9
%
Greater than 91 days (b)
    
465
      
0.9
%
    
885
      
0.9
%
 
  
$
52,866
      
100.0
%
  
$
98,222
      
100.0
%

(a) Included in this category are approximately $12.4 million and $19.2 million as of September 30, 2013 and December 31, 2012, respectively, of certain loans which are contractually current but are on the cost recovery method due to continued uncertainty as to collectability of future payments due.
(b) Balances in this age category are collectively evaluated for impairment.

10
LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements – (Continued)
September 30, 2013
(Unaudited)
 
The Fund had $12.9 million and $20.1 million of leases and loans on nonaccrual status as of September 30, 2013 and December 31, 2012, respectively.  The credit quality of the Fund’s investment in leases and loans as of September 30, 2013 and December 31, 2012 are as follows (in thousands):

 
  
September 30,
2013
    
December 31,
2012
  
Performing
  
$
40,013
    
$
78,120
  
Nonperforming
    
12,853
      
20,102
  
 
  
$
52,866
    
$
98,222
  

The Company’s investments in non-performing leases and loans as of September 30, 2013 and December 31, 2012 were collectively evaluated for impairment, except for certain asset backed loans that were individually evaluated for impairment.

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

 
  
Three Months Ended September 30,
    
Nine Months Ended September 30,
  
 
  
2013
    
2012
    
2013
    
2012
  
Allowance for credit losses, beginning of period
  
$
6,420
    
$
4,630
    
$
8,920
    
$
4,410
  
Provision for credit losses
    
2,775
      
2,308
      
4,982
      
8,252
  
Charge-offs
    
(2,319
)
    
(2,817
)
    
(7,565
)
    
(9,193
)
Recoveries
    
754
      
250
      
1,293
      
902
  
Allowance for credit losses end of period
  
$
7,630
    
$
4,371
    
$
7,630
    
$
4,371
  
 
                                
Allowance for credit losses:
                                
Ending balance, individually evaluated for impairment
  
$
7,030
    
$
3,580
    
$
7,030
    
$
3,580
  
Ending balance, collectively evaluated for impairment
    
600
      
791
      
600
      
791
  
Balance, end of year
  
$
7,630
    
$
4,371
    
$
7,630
    
$
4,371
  
 
                                
Recorded investment  in leases and term loans:
                                
Ending balance, individually evaluated for impairment
  
$
12,388
    
$
19,902
    
$
12,388
    
$
19,902
  
Ending balance, collectively evaluated for impairment
    
40,478
      
96,723
      
40,478
      
96,723
  
Balance, end of year
  
$
52,866
    
$
116,625
    
$
52,866
    
$
116,625
  
 
NOTE 5 – DEFERRED FINANCING COSTS
 
As of September 30, 2013 and December 31, 2012, deferred financing costs include $762,000 and $1.3 million, respectively, of unamortized deferred financing costs which are being amortized over the terms of the estimated life of the related debt. Accumulated amortization as of September 30, 2013 and December 31, 2012 was $5.2 million, and $4.5 million, respectively.

11
LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements – (Continued)
September 30, 2013
(Unaudited)
 
NOTE 6 –DEBT
 
The Fund’s debt consists of the following (in thousands): 
 
 
December  31,
 
September 30, 2013
2012
 
Outstanding
Interest rate per
Outstanding
 
Type
  
Balance (1) (2)
    
annum
    
Balance
  
2011-1 Term Securitization
Term
  
$
15,044
    
1.7% to 5.5%
    
$
27,575
  
2010-3 Term Securitization
Term
    
15,792
    
3.5% to 5.5%
      
36,477
  
2010-1 Term Securitization
Term
    
4,282
      
5.00 %
    
8,649
  
 
  
  
$
35,118
            
$
72,701
  
 
(1) These borrowings are collateralized by specific leases and loans and restricted cash.  As of September 30, 2013, $37.6 million of leases and loans and $9.3 million of restricted cash were pledged as collateral under the Fund’s term securitizations.  Recourse under these securitizations is limited to the amount of collateral pledged.
(2) The outstanding balances are presented net of unamortized original issue discount of $1.7 million and $3.2 million as of September 30, 2013 and December 31, 2012, respectively.

Series 2011-1 Term Securitization.  On January 26, 2011 the Fund issued the 2011-1 Term Securitization (The “2011-1Term Securitization”) in which six classes of asset-backed notes were issued that have varying maturity dates ranging  from December 2018 to December 2023. The asset-backed notes totaled $96.0 million and bear interest at fixed, stated rates ranging from 1.7% to 5.5% and were issued at an original discount of approximately $6.2 million.

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

Series 2010-1 Term Securitization.  On May 18, 2010 three classes of asset-backed notes were issued (The “2010-1 Term Securitization”), one that matures on October 23, 2016 and two that mature on September 23, 2018, respectively. The asset-backed notes total $92.7 million and bear interest at a fixed, stated rate of 5% and were issued at an original discount of $6.5 million.
 
The Fund’s securitizations are serviced by an affiliate of the Fund’s General Partner (the “Servicer”).  If the Servicer of the Fund’s portfolio does not comply with certain requirements, then the noteholders have the right to replace the Servicer.  The servicing agreements of the 2010-1 Term Securitization and the 2010-3 Term Securitization were amended effective July 31, 2012 to increase the cumulative net loss percentages as the portfolio had exceeded the allowed cumulative net loss amount. In addition, the servicing agreements and the indentures on these facilities were amended to establish an additional reserve account to be funded by cash flows on leases and loans that will be used by the trustee as additional collateral. The 2011-1 Term Securitization was similarly amended in February 2013.  These events do not constitute an event of default on the Fund’s term securitizations.  Additionally, the Fund is not, nor has been, delinquent on any payments owed to the noteholders.

12
LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements – (Continued)
September 30, 2013
(Unaudited)
 
Debt Repayments:  Excluding $1.7 million of remaining unamortized discount on the term securitizations, estimated annual principal payments on the Fund’s aggregate borrowings over the next five annual periods ended September 30, and thereafter, are as follows (in thousands):

September 30, 2014
  
$
16,639
  
September 30, 2015
    
9,321
  
September 30, 2016
    
5,006
  
September 30, 2017
    
3,719
  
September 30, 2018
    
1,416
  
Thereafter
    
762
  
 
  
$
36,863
  
 
NOTE 7 – SUBORDINATED NOTES PAYABLE
 
LCFF has $9.3 million of 8.25% secured subordinated promissory notes (the “Notes”) outstanding, which are recourse to LCFF only. The Notes were issued to private investors and require interest only payments until their maturity in February 2015. LCFF may call or redeem the Notes, in whole or in part, at any time during the interest only period.
 
Covenants:  The Notes are subject to various covenants as set forth in their indenture, including an interest coverage ratio test which LCFF is not in compliance with.  LCFF notified the Trustee of this breach in April 2012.  As a result, the noteholders have the right to declare an event of default, which to date has not occurred.  If the noteholders would declare an event of default they have various rights and remedies available to them including (1) the right to declare all amounts currently outstanding under the Notes as immediately due and payable; (2) the right to take immediate possession of the assets of LCFF; and (3) the right to sell or otherwise dispose of the assets of LCFF in their current condition.  If the noteholders choose to repossess and sell LCFF’s assets, such a sale of a portfolio could be at prices lower than its carrying value, which could result in losses to the Fund. At September 30, 2013, LCFF had approximately $20.8 million in commercial finance assets, of which $16.4 million had been pledged as collateral on the 2011-1 Term Securitization.
 
Notwithstanding the foregoing, LCFF is not, nor has been, delinquent on any payments of interest owed to the noteholders.
 
NOTE 8 – 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.
 
There were no assets or liabilities measured at fair value at September 30, 2013 or December 31, 2012.
 
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.
13
LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements – (Continued)
September 30, 2013
(Unaudited)
 
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, 2013 and December 31, 2012 is as follows:

 
  
   
Fair Value Measurements Using
    
Liabilities
  
 
  
Carrying Value
    
Level 1
    
Level 2
    
Level 3
    
At Fair Value
  
Debt, at September 30, 2013
  
$
35,118
    
$
−
    
$
32,941
    
$
−
    
$
32,941
  
Debt, at December 31, 2012
  
$
72,701
    
$
−
    
$
69,719
    
$
−
    
$
69,719
  
 
The fair value of the debt was determined using quoted prices obtained from a broker-dealer 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,
  
 
  
2013
    
2012
    
2013
    
2012
  
Administrative expenses
  
$
115
    
$
273
    
$
444
    
$
993
  

Administrative Expenses. The General Partner and its affiliates are reimbursed by the Fund for administrative services reasonably necessary to operate the Fund which do not exceed the General Partner’s actual cost of those services.
 
Management Fees. The General Partner has waived all management fees. The General Partner has earned and waived management fees of approximately $240,000 and $803,000 for the three and nine month periods ended September 30, 2013, and $7.2 million have been unearned and waived on a cumulative basis.
 
Due to Affiliates. Due to affiliates includes amounts due to the General Partner and its affiliates related to acquiring and managing portfolios of equipment, management fees and reimbursed expenses.
 
Distributions. The General Partner owns a 1% general partner interest and 0.85% limited partner interest in the Fund. The General Partner was paid cash distributions of $38,000 for its general partner interests for each nine month period ended September 30, 2013 and 2012, respectively, and $32,000 for its limited partner interests for each nine month period ended September 30, 2013 and 2012, respectively.

NOTE 10 – COMMITMENTS AND CONTINGENCIES
 
The Fund is party to various routine legal proceedings arising out of the ordinary course of its business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the Fund’s financial condition or results of operations.

NOTE 11 – SUBSEQUENT EVENTS
 
The Fund has evaluated its September 30, 2013 financial statements for subsequent events through the date the financial statements were issued.  The Fund is not aware of any subsequent events which would require recognition or disclosure in the financial statements.
14
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, 2012.
 
As used herein, the terms “we,” “us,” or “our” refer to LEAF Equipment Finance Fund 4, L.P. and its subsidiaries.

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

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

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

• 500 or fewer employees;

• $1.0 billion or less in total assets;

• Or $100.0 million or less in total annual sales.

To date, limited partners have received total distributions ranging from approximately 18% to 28% of their original amount invested, depending upon when the investment was made.  For the three month period ended September 30, 2013, distributions were made at a rate of 4.0%.  Management is working to maximize the amount that can be distributed to 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. In order to reduce our ongoing cash requirements, the General Partner waived management fees in August 2010 and subsequently waived all future management fees.
15
General Economic Overview

For the quarter ended September 30, 2013, U. S. economic activity showed overall growth and improvement in many sectors of the economy.  The overall improvement was insufficient for the Federal Reserve to begin the highly anticipated tapering of asset purchases under the Quantitative Easing program. Failure to begin tapering resulted in some equity and debt market gyrations which quickly settled down and business sentiment seemed to adjust favorably to the prospect of continued monetary stimulus from the Federal Reserve in the absence of any fiscal policy direction from the Congress.  Toward the end of the quarter, the Congressional inaction with respect to the impending government shutdown, debate over the debt ceiling, and the implementation of the Affordable Care Act dominated the economic discussion.

Some specific key economic indicators and reports that were released in the second quarter of 2013 are summarized below.  These indicators have especially important relevance to the performance of small and medium-sized businesses, and loans and leases to small and medium-sized businesses comprise the majority of the LEAF Funds portfolios.

· The National Association of Realtors Pending Home Sales Index, a forward-looking indicator based on contract signings released in September 2013, showed that pending home sales have declined recently but still remain above levels from a year ago.  Rising interest rates, rising home prices, and tight inventory are contributing to the slowing home sales.
· The S&P Case-Shiller Home Price Indices released in September 2013 for the 10- and 20-City Composites showed 12% increases year over year for the last 12 months.
· One sign that the economy continues to improve for small businesses, the number of commercial bankruptcy filings (as reported by the American Bankruptcy Institute) for the first nine months of 2013 were down 23% as compared to the same period in 2012.
· In September 2013, The Bureau of Labor Statistics reported that the unemployment rate continued to drop slightly and is now at 7.3%.
· In September 2013, The Bureau of Labor Statistics reported a continuation of monthly new jobs creation, albeit at a pace that is not sufficient to produce a significant reduction in the unemployment rate.
· The Monthly Confidence Index for the Equipment Finance Industry continued to increase, demonstrating equipment finance industry participants’ increasing optimism despite continued moderate demand for equipment.  The September 2013 Index increased to 61.3 from 61.0 in August 2013.
· The National Association of Credit Management Index for September 2013 showed continued improvement in business credit conditions. The Index takes into account activities like credit extended, credit approval rates, delinquencies, and bankruptcies. The Index measured 56.4 (any number over 50 shows improving conditions), and is at the highest level since the start of the Great Recession.
· The September 2013 Institute of Supply Management report on manufacturing showed expansion for the fourth straight month and the PMI index registered 56.2, which is the highest reading for 2013, and demonstrated that the manufacturing sector is continuing to grow in tandem with the overall economy, which has shown growth for 52 consecutive months.
· The Thomson Reuters/PayNet Small Business Lending Index, which measures the volume of lending to small businesses, rose to its highest level since August 2007.  At the same time, delinquencies of 31 to 180 days fell to an all time low as measured by the Thomson Reuters/PayNet Small Business Delinquency Index.
· The National Federation of Independent Business (NFIB) reported in September 2013 that the NFIB Small Business Optimism Index remained flat as compared to the previous month. The Index measures ten different items including small business sentiment about business expansion, hiring, and sales trends.  Of the ten items measured, five were down, four were up, and one was unchanged as compared to the prior month.
· The Equipment Leasing & Finance Foundation’s Q4 U.S. Economic Outlook indicates improving fundamentals weighed down by a number of headwinds (primarily related to monetary and fiscal policies), resulting in subpar growth. The Q4 forecast is that the U. S. economy will generate positive but slow growth.
 
Taken altogether, these indicators point to an economy that is continuing to grow steadily but slowly.  It is also an economy that is facing some significant challenges.  An extended government shutdown is projected to cause a meaningful reduction in GDP.  The extent and magnitude of consequences of a government default are unknown. The outcomes, or lack of outcomes with respect to the government shutdown, debt ceiling negotiations, Affordable Care Act implementation, and a potential government default, add a great deal of uncertainty for economic performance in Q4 and beyond.  This economic uncertainty may have an effect on the performance of leases and loans which have been largely extended to small to medium-sized businesses which are particularly sensitive to economic dislocations.

16
Finance Receivables and Asset Quality
 
Information about our portfolio of commercial finance assets is as follows (dollars in thousands):

 
  
September 30, 2013
    
December 31, 2012
  
Investment in leases and loans, net
  
$
45,236
    
$
89,302
  
 
                
Number of contracts
    
5,100
      
6,700
  
Number of individual end users (1)
    
4,600
      
6,100
  
Average original equipment cost
  
$
61.8
    
$
61.0
  
Average initial lease term (in months)
    
59
      
58
  
Average remaining lease term (in months)
    
16
      
18
  
States accounting for more than 10% of lease and loan portfolio:
                
New York
    
31
%
    
19
%
California
    
9
%
    
10
%
 
                
Types of equipment accounting for more than 10% of lease and loan portfolio:
                
Medical equipment
    
26
%
    
22
%
Asset based lending
    
26
%
    
15
%
Restaurant equipment
    
13
%
    
12
%
Industrial equipment
    
9
%
    
18
%
 
                
Types of businesses accounting for more than 10% of lease and loan portfolio:
                
Services
    
42
%
    
41
%
Finance/Insurance/Real Estate
    
29
%
    
25
%
Retail trade
    
16
%
    
17
%

(1) Located in the 50 states as well as the District of Columbia and Puerto Rico. No individual end user or single piece of equipment accounted for more than 23% of our portfolio based on the origination amount.
17
Portfolio Performance

The table below provides information about our commercial finance assets including non-performing assets, which are those assets that are not accruing income due to non-performance or impairment (dollars in thousands):
 
 
  
As of and for the
  
 
  
Nine Months Ended September 30,
  
 
  
   
   
Change
  
 
  
2013
    
2012
    
$
    
%
  
Investment in leases and loans before allowance for credit losses
  
$
52,866
    
$
116,625
    
$
(63,759
)
    
(55
)%
Less: allowance for credit losses
    
(7,630
)
    
(4,371
)
    
(3,259
)
    
75
%
Investment in leases and loans, net
  
$
45,236
    
$
112,254
    
$
(67,018
)
    
(60
)%
 
                                
Weighted average investment in direct financing leases and loans  before allowance for credit losses
  
$
73,097
    
$
149,030
    
$
(75,933
)
    
(51
)%
Non-performing assets
  
$
12,853
    
$
20,943
    
$
(8,090
)
    
(39
)%
Charge-offs, net of recoveries
  
$
6,272
    
$
8,291
    
$
(2,019
)
    
(24
)%
As a percentage of finance receivables:
                                
Allowance for credit losses
    
14.43
%
    
3.75
%
                
Non-performing assets
    
24.31
%
    
17.96
%
                
As a percentage of weighted average finance receivables:
                                
Charge-offs, net of recoveries
    
8.58
%
    
5.56
%
                

Our allowance for credit losses is our estimate of losses inherent in our commercial finance receivables at the current time. The allowance is based on factors which include our historical loss experience on equipment finance portfolios we manage, an analysis of contractual delinquencies, current economic conditions and trends and equipment finance portfolio characteristics, adjusted for recoveries. In evaluating historic performance of our leases and loans, we perform a migration analysis, which estimates the likelihood that an account progresses through delinquency stages to ultimate charge-off unless individually reviewed for impairment.  In an individual review for impairment we consider the loans performance, probability of repayment, and general and local economic conditions when assessing whether impairment is necessary. Substantially all of our leases and loans evaluated for impairment on an individual basis include an analysis of the market values of underlying collateral values, as adjusted for estimated selling and other closing costs. Our policy is to charge-off to the allowance those financings for which it is probable management will be unable to collect all amounts contractually owed. Substantially all of our assets are collateral for our debt, and therefore, significantly greater delinquencies than anticipated will have an adverse impact on our cash flow and distributions to our partners.

We focus on financing equipment used by small to mid-sized businesses. The recent economic recession in the U.S. has made it more difficult for some of our customers to make payments on their financings with us on a timely basis, which has adversely affected our operations in the form of higher delinquencies. These higher delinquencies have continued as the U.S. economy recovers.  Our non-performing assets as a percentage of our net investment increased to 24.31% at September 30, 2013 as compared to 17.96% at September 30, 2012, primarily due to certain non-performing loans that are contractually current but on the cost recovery method due to continued uncertainty as to future collectability.  Our charge-offs, net of recoveries, as a percentage of weighted average finance receivables, was 8.58% for the nine month period ended September 30, 2013, primarily due to the settlement of one or more non-performing asset based loans.  We had fully reserved for this loss at December 31, 2012 and accordingly, this settlement did not impact the results of our operations for the nine month period ended September 30, 2013.

Critical Accounting Policies

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

For a complete discussion of our critical accounting policies and estimates, see our annual report on Form 10-K for fiscal 2012 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates.”  There have been no material changes to these policies through September 30, 2013.
18
Results of Operations

As discussed previously, the economic recession has negatively impacted our operating results primarily through increased rates of default on outstanding leases and loans and increased costs of borrowing from our lenders.  These factors have resulted in our inability to reinvest earnings in additional leases and loans, leading to a decrease in our portfolio balance and a reduction in cash generated to continue to support distributions to our limited partners.

Three months ended September 30, 2013 compared to three months ended September 30, 2012 (dollars in thousands):

 
  
   
Increase (Decrease)
  
 
  
2013
    
2012
    
$
    
%
  
Revenues:
  
   
   
   
 
Interest on equipment financings
  
$
783
    
$
2,144
    
$
(1,361
)
    
(63
)%
Rental income
    
105
      
275
      
(170
)
    
(62
)%
Gains on sale of equipment and lease dispositions, net
    
99
      
217
      
(118
)
    
(54
)%
Other income
    
124
      
144
      
(20
)
    
(14
)%
 
    
1,111
      
2,780
      
(1,669
)
    
(60
)%
Expenses:
                                
Interest expense
    
1,554
      
3,090
      
(1,536
)
    
(50
)%
Depreciation on operating leases
    
51
      
123
      
(72
)
    
(59
)%
Provision for credit losses
    
2,775
      
2,308
      
467
      
20
%
General and administrative expenses
    
103
      
213
      
(110
)
    
(52
)%
Administrative expenses reimbursed to affiliate
    
115
      
273
      
(158
)
    
(58
)%
 
    
4,598
      
6,007
      
(1,409
)
    
(23
)%
Net loss
    
(3,487
)
    
(3,227
)
    
(260
)
        
Less: Net loss attributable to the noncontrolling interest
    
23
      
56
      
(33
)
        
Net loss attributable to LEAF 4 partners
  
$
(3,464
)
  
$
(3,171
)
  
$
(293
)
        
Net loss allocated to LEAF 4's limited partners
  
$
(3,429
)
  
$
(3,139
)
  
$
(290
)
        

The decrease in total revenues was primarily attributable to the following:
 
• A decrease in interest on equipment financings and rental income. Our weighted average net investment in financing assets decreased to $59.2 million for the three months ended September 30, 2013 as compared to $125.9 million for the three months ended September 30, 2012, a decrease of $66.7 million or 53%.  As noted previously, this decrease was primarily due to the continued runoff of our portfolio of leases and loans, as higher than anticipated defaults resulted in excess cash being used to settle debt obligations and support distributions to our partners, rather than be reinvested in new leases and loans.
 
• Gains on the sale of equipment and lease dispositions decreased $118,000 to $99,000 for the three months ended September 30, 2013 compared to a gain of $217,000 for the three months ended September 30, 2012.  Gains and losses on sales of equipment may vary significantly from period to period.
 
• Other income decreased $20,000 from $144,000 at September 30, 2012 to $124,000 at September 30, 2013, a decrease of 14%.  The decrease is primarily due to a reduction in late fee income which is a result of the decrease in our portfolio.
 
The decrease in total expenses was primarily a result of the following:
 
• A decrease in interest due to a decrease in our average debt outstanding. Average borrowings for the three months ended September 30, 2013 and 2012 were $40.8 million and $100.1 million, respectively. The interest expense reduction was primarily driven by the reduction in the size of our portfolio of leases and loans.
 
• A decrease in depreciation on operating leases due to a decrease in the size of our portfolio.
 
• A decrease in administrative expenses reimbursed to affiliates and general and administrative expenses due to the reduction in the size of our portfolio.
 
The net loss per limited partner unit, after the net loss allocated to our General Partner, for the three months ended September 30, 2013 and 2012 was $2.72 and $2.49, respectively, based on a weighted average number of limited partner units outstanding of 1,259,537 each period.
19
Nine months ended September 30, 2013 compared to nine months ended September 30, 2012 (dollars in thousands):
 
 
  
   
Increase (Decrease)
  
 
  
2013
    
2012
    
$
      
%
  
Revenues:
  
   
   
         
Interest on equipment financings
  
$
3,596
    
$
7,214
    
$
(3,618
)
    
(50
)%
Rental income
    
386
      
1,081
      
(695
)
    
(64
)%
Gains on sale of equipment and lease dispositions, net
    
447
      
958
      
(511
)
    
(53
)%
Gains on extinguishment of debt
    
16
      
–
      
16
      
100
%
Other income
    
370
      
718
      
(348
)
    
(48
)%
 
    
4,815
      
9,971
      
(5,156
)
    
(52
)%
 
                                
Expenses:
                                
Interest expense
    
5,397
      
9,880
      
(4,483
)
    
(45
)%
Depreciation on operating leases
    
153
      
730
      
(577
)
    
(79
)%
Provision for credit losses
    
4,982
      
8,252
      
(3,270
)
    
(40
)%
General and administrative expenses
    
603
      
891
      
(288
)
    
(32
)%
Administrative expenses reimbursed to affiliate
    
444
      
993
      
(549
)
    
(55
)%
 
    
11,579
      
20,746
      
(9,167
)
    
(44
)%
Net loss
    
(6,764
)
    
(10,775
)
    
4,011
          
Less: Net loss attributable to the noncontrolling interest
    
166
      
153
      
13
          
Net loss attributable to LEAF 4 partners
  
$
(6,598
)
  
$
(10,622
)
  
$
4,024
          
Net loss allocated to LEAF 4's limited partners
  
$
(6,532
)
  
$
(10,516
)
  
$
3,984
          

The decrease in total revenues was primarily attributable to the following:
 
• A decrease in interest on equipment financings and rental income. Our weighted average net investment in financing assets decreased to $73.1 million for the nine months ended September 30, 2013 as compared to $149.0 million for the nine months ended September 30, 2012, a decrease of $75.9 million or 51%.  As noted previously, this decrease was primarily due to the continued runoff of our portfolio of leases and loans, as higher than anticipated defaults resulted in excess cash being used to settle debt obligations and support distributions to our partners, rather than be reinvested in new leases and loans.
 
• Gains on the sale of equipment and lease dispositions decreased $511,000 to $447,000 for the nine months ended September 30, 2013 compared to a gain of $958,000 for the nine months ended September 30, 2012.  Gains and losses on sales of equipment may vary significantly from period to period.
 
 
 
 • Other income decreased $348,000 from $718,000 for the nine months ended September 30, 2012 to $370,000 for the nine months ended September 30, 2013, a decrease of 48%.  The decrease is primarily due to a reduction in late fee income which is a result of the decrease in our portfolio.
 
The decrease in total expenses was primarily a result of the following:
 
• A decrease in interest due to a decrease in our average debt outstanding.  Average borrowings for the nine months ended September 30, 2013 and 2012 were $53.1 million and $121.3 million, respectively. The interest expense reduction was primarily driven by the reduction in the size of our portfolio of leases and loans.
 
• A decrease in depreciation on operating leases due to a decrease in the size of our portfolio.
 
• A decrease in our provision for credit losses is principally due to a decrease of our equipment financing portfolio.
 
• A decrease in administrative expenses reimbursed to affiliates and general and administrative expenses due to the reduction in the size of our portfolio.
 
The net loss per limited partner unit, after the net loss allocated to our General Partner, for the nine months ended September 30, 2013 and 2012 was $5.19 and $8.35, respectively, based on a weighted average number of limited partner units outstanding of 1,259,537 each period.
20
Liquidity and Capital Resources
 
General
 
Our major source of liquidity is from the collection of lease and loan payments.  Our primary cash requirements, in addition to normal operating expenses are for debt service, investments in leases and loans and distributions to our partners.
 
The following table sets forth our sources and uses of cash for the periods indicated (in thousands):

 
  
Nine Months Ended September 30,
  
 
  
2013
    
2012
  
Net cash provided by operating activities
  
$
2,624
    
$
4,001
  
Net cash provided by investing activities
    
38,591
      
63,382
  
Net cash used in financing activities
    
(41,036
)
    
(67,574
)
Increase (decrease) in cash
  
$
179
    
$
(191
)
 
Cash increased by $179,000 due to net proceeds from our investments in leases and loans of $38.6 million, a reduction in our restricted cash of $1.9 million, and cash provided by operating activities of $2.6 million, partially offset by debt repayments of $39.0 million and distributions to our partners of $3.8 million.

Partner’s distributions paid for the nine months ended September 30, 2013 and September 30, 2012 were $3.8 million each period. Cumulative partner distributions paid from our inception to September 30, 2013 were approximately $29.0 million. To date, limited partners have received total distributions of approximately 23% of their original amount invested, depending upon when the investment was made.   Partner distributions for the nine months ended September 30, 2013 and 2012 were made at a rate of 4.0% of capital invested. Future cash distributions are not guaranteed and are solely dependent on our performance and are impacted by a number of factors which include lease and loan defaults by our customers, accelerated principle payments on our debt facilities required per our agreements, and prevailing economic conditions. The terms of our current debt facilities are structured to use excess cash to accelerate the repayment of debt. This results in paying less interest expense over time, but also limits available cash to make monthly distributions to the partners. The terms of our current debt facilities coupled with continued higher than expected lease and loan defaults, caused by a slow economic recovery could impact our ability to make monthly cash distributions to our limited partners.
 
Beginning August 1, 2010, our General Partner waived its asset management fee and subsequently waived all future management fees. Through September 30, 2013, the General Partner has earned and waived management fees of $7.2 million, of which $803,000 related to the nine months ended September 30, 2013.

 Borrowings

Our borrowing relationships each require the pledging of eligible leases and loans to secure amounts advanced. Borrowings outstanding under our debt facilities as of September 30, 2013 were as follows (in thousands):

 
  
  
Amount
    
Amount of
  
 
Type
  
Outstanding
    
Collateral (1)
  
2011-1 Term Securitization
Term
  
$
15,044
    
$
16,355
  
2010-3 Term Securitization
Term
    
15,792
      
22,121
  
2010-1 Term Securitization
Term
    
4,282
      
8,415
  
 
  
  
$
35,118
    
$
46,891
  
(1) These borrowings are collateralized by specific leases and loans and restricted cash. As of September 30, 2013, $37.6 million of leases and loans and $9.3 million of restricted cash were pledged as collateral under the Fund’s term securitizations. Recourse under these securitizations is limited to the amount of collateral pledged.

2011-1 Term Securitization.  On January 26, 2011, we issued the 2011-1 Term Securitization (The “2011-1 Term Securitization”) in which six classes of asset-backed notes were issued that have varying maturity dates ranging from December 2018 to December 2023. The asset-backed notes totaled $96.0 million and bear interest at fixed, stated rates ranging from 1.7% to 5.5% and were issued at an original discount of approximately $6.2 million.

Series 2010-3 Term Securitization.  On August 17, 2010 five classes of asset-backed notes were issued (The “2010-3 Term Securitization”), one that matures on June 20, 2016 and four that mature on February 20, 2022, respectively. The asset-backed notes total $171.4 million and bear interest at fixed, stated rates ranging from 3.5% to 5.5% and were issued at an original discount of $3.7 million.
21
Series 2010-1 Term Securitization.  On May 18, 2010 three classes of asset-backed notes were issued (The “2010-1 Term Securitization”), one that matures on October 23, 2016 and two that mature on September 23, 2018, respectively. The asset-backed notes total $92.7 million and bear interest at a fixed, stated rate of 5% and were issued at an original discount of $6.5 million.
 
Our securitizations are serviced by an affiliate of our General Partner (the “Servicer”).  If the Servicer of our portfolio does not comply with certain requirements, then the noteholders have the right to replace the Servicer.  The servicing agreements of the 2010-1 Term Securitization and the 2010-3 Term Securitization were amended effective July 31, 2012 to increase the cumulative net loss percentages as the portfolio had exceeded the allowed cumulative net loss amount. In addition, the servicing agreements and the indentures on these facilities were amended to establish an additional reserve account to be funded by cash flows on leases and loans that will be used by the trustee as additional collateral. The 2011-1 Term Securitization was similarly amended in February 2013.  The portfolio was in compliance with the financial covenants of these agreements as of September 30, 2013.

These events do not constitute an event of default on our term securitizations.  Additionally, we are not, nor have been, delinquent on any payments owed to the noteholders.

In addition to the above borrowings, LEAF Commercial Finance Fund, LLC (“LCFF”), a subsidiary of LEAF Funds JV2, has $9.3 million of 8.25% secured subordinated promissory notes (the “Notes”) outstanding, which are recourse to LCFF only. The Notes were issued to private investors and require interest only payments until their maturity in February 2015. LCFF may call or redeem the Notes, in whole or in part, at any time during the interest only period.

The Notes are subject to various covenants as set forth in their indenture, including an interest coverage ratio test, which LCFF is not in compliance with.  LCFF has notified the Trustee of this breach.  As a result, the noteholders have the right to declare an event of default.  If the noteholders would declare an event of default they have various rights and remedies available to them including (1) the right to declare all amounts currently outstanding under the Notes as immediately due and payable; (2) the right to take immediate possession of the assets of LCFF; and (3) the right to sell or otherwise dispose of the assets of LCFF in their current condition.  If the noteholders choose to repossess and sell LCFF’s assets, such a sale of a portfolio could be at prices lower than its carrying value, which could result in losses to us.

Notwithstanding the foregoing, LCFF is not, nor has been, delinquent on any payments of interest owed to the noteholders.

Our primary source of liquidity comes from payments on our lease and loan portfolio. Our liquidity has been and could be further adversely affected by higher than expected equipment lease defaults, which results in a loss of revenues. These losses may adversely affect our ability to make distributions to our partners and, if the level of defaults are sufficiently large, may result in our inability to fully recover our investment in the underlying equipment. As our lease portfolio ages, and if the recovery in the United States economy falters for a substantial period of time, we may need to increase our allowance for credit losses.

Our primary use of cash is for debt service. Substantially all of our leases and loans are collateral for our debt, however, all of our debt is non-recourse to the partnership which limits our financial exposure. Repayment of our debt is based on the payments we receive from our customers. If a lease or loan becomes delinquent our lender uses the excess collateral from performing leases to repay our loan, even though our customer has not paid us. Therefore, higher than expected lease and loan defaults will reduce our liquidity.

The terms of securitizations require the use of excess cash flow from the underlying collateral to accelerate the repayment on our debt.  As a result, this minimizes the excess cash flow available to us for the acquisition of new leases and loans until our securitizations are paid off. When we have available resources, the climate of the credit markets is such that our liquidity may be adversely affected, particularly our ability to obtain or renew debt financing needed to execute our investment strategies. Historically, we have utilized both revolving and term debt facilities to fund our acquisitions of equipment financings.  If we are unable to obtain new debt that will allow us to invest the repayments of existing leases and loans into new investments, then our portfolio of leases and loans will continue to decline.
 
Legal Proceedings
 
We are a party to various routine legal proceedings arising out of the ordinary course of our business. Our General Partner believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.
22
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 quarter ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
23
PART II. OTHER INFORMATION

ITEM 6 – EXHIBITS

Exhibit
 
 
No.
 
Description
3.1
 
Certificate of Limited Partnership (1)
3.2
 
Amended and Restated Agreement of Limited Partnership (2)
3.3
 
Amendment No. 1 to Amended and Restated Agreement of Limited Partnership of LEAF Equipment Finance Fund 4, L.P. (7)
4.1
 
Forms of letters sent to limited partners confirming their investment (1)
10.1
 
Form of Origination and Servicing Agreement Among LEAF Financial Corporation, LEAF Equipment Finance Fund 4, LP and LEAF Funding, Inc. (1)
10.2
 
Indenture by and between LEAF Commercial Finance Fund, LLC and U.S. Bank National Association (3)
10.3
 
Amended and Restated Limited Liability Company Agreement of LEAF Commercial Finance Fund, LLC(3)
10.4
 
Limited Liability Company Agreement of LEAF Funds Joint Venture 2, LLC (3)
10.5
 
Indenture between LEAF Receivables Funding 2, LLC and U.S. Bank National Association dated as of May 1, 2010 (4)
10.6
 
Indenture between LEAF Receivables Funding 4, LLC and U.S. Bank National Association dated as of July 4, 2010 (5)
10.7
 
Indenture between LEAF Receivables Funding 6, LLC and U.S. Bank National Association dated as of January 6, 2011 (6)
10.8
 
First Amendment dated as of September 28, 2012 to the Indenture between LEAF Receivables Funding 2, LLC and U.S. Bank National Association (8)
10.9
 
First Amendment dated as of October 15, 2012 to the Indenture between LEAF Receivables Funding 4, LLC and U.S. Bank National Association (8)
10.10
 
First Amendment dated as of February 25, 2013 to the Indenture between LEAF Receivables Funding 6, LLC and U.S. Bank National Association (8)
 
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, 2013 and December 31, 2012; (ii) the Consolidated Statements of Operations for the three and nine month periods ended September 30, 2013 and 2012; (iii) the Consolidated Statement of Changes in Partners’ (Deficit) Capital for the nine months ended September 30, 2013; (iv) the Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2013 and 2012; and, (v) the Notes to Consolidated Financial Statements.

(1)
 
Filed previously as an exhibit to our Registration Statement on Form S-1 filed on March 24, 2008 and by this reference incorporated herein.
(2)
 
Filed previously as an exhibit to Form 8-K on May 8, 2009 and by this reference incorporated herein.
(3) Filed previously on May 12, 2009 in Post-Effective Amendment No. 1 as an exhibit to our Registration Statement and by this reference incorporated herein.
(4) Filed previously as an exhibit to our Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2010 and by this reference incorporated herein.
(5) Filed previously as an exhibit to our Quarterly Report on Form 10-Q/A for the quarter ended September 30, 2010 and by this reference incorporated herein.
(6) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 and by this reference incorporated herein.
(7) Filed previously as an exhibit to form 8-K on October 20, 2011 and by this reference incorporated herein.
(8) Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2012 and by this reference incorporated herein.
24
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
LEAF EQUIPMENT FINANCE FUND 4, L.P.
 
A Delaware Limited Partnership
 
 
 
 
By:
LEAF Asset Management, LLC, its General Partner
 
 
 
November 14, 2013
By:
/s/ CRIT S. DEMENT
 
 
Crit S. DeMent
 
 
Chief Executive Officer
 
 
 
November 14, 2013
By:
/s/ ROBERT K. MOSKOVITZ
 
 
Robert K. Moskovitz
 
 
Chief Financial Officer
 
 
25

LEAF Equipment Finance Fund 4, L.P. Reports

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