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EX-31.1 - SECTION 302 CEO CERTIFICATION - LEAF Equipment Leasing Income Fund III, L.P.dex311.htm
EX-10.3 - WAIVER - LEAF Equipment Leasing Income Fund III, L.P.dex103.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - LEAF Equipment Leasing Income Fund III, L.P.dex312.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - LEAF Equipment Leasing Income Fund III, L.P.dex322.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - LEAF Equipment Leasing Income Fund III, L.P.dex321.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended September 30, 2009

 

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

For the transition period from                      to                     

Commission file number 000-53174

 

 

LEAF EQUIPMENT LEASING INCOME FUND III, L.P.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   20-5455968

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

110 South Poplar Street, Suite 101, Wilmington Delaware 19801

(Address of principal executive offices)

(800) 819-5556

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    þ  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ¨  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   þ
Non-accelerated filer   ¨ (Do not check if a smaller reporting company)    Smaller Reporting Company   ¨

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

 

 

 


Table of Contents

LEAF EQUIPMENT LEASING INCOME FUND III, L.P.

INDEX TO QUARTERLY REPORT

ON FORM 10-Q

 

          PAGE
PART I   

FINANCIAL INFORMATION

  

ITEM 1.

  

Financial Statements

  
  

Consolidated Balance Sheets – September 30, 2009 (unaudited) and December 31, 2008

   3
  

Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2009 and 2008 (unaudited)

   4
  

Consolidated Statement of Changes in Partners’ Capital
Nine Months Ended September 30, 2009 (unaudited)

   5
  

Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2009 and 2008 (unaudited)

   6
  

Notes to Consolidated Financial Statements – September 30, 2009 (unaudited)

   7

ITEM 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   18

ITEM 3.

  

Quantitative and Qualitative Disclosures about Market Risk

   29

ITEM 4.

  

Controls and Procedures

   30

PART II

  

OTHER INFORMATION

  

ITEM 6.

  

Exhibits

   31

SIGNATURES

   32

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands)

 

     September 30,
2009
    December 31,
2008
 
     (unaudited)        

ASSETS

    

Cash

   $ 463      $ 3,236   

Restricted cash

     26,754        42,595   

Accounts receivable

     440        335   

Investment in leases and loans, net

     383,079        682,458   

Deferred financing costs, net

     3,796        9,418   

Investment in affiliated leasing partnerships

     1,035        —     

Other assets

     423        380   
                
   $ 415,990      $ 738,422   
                

LIABILITIES AND PARTNERS’ CAPITAL

    

Liabilities:

    

Bank debt

   $ 359,160      $ 644,223   

Accounts payable and accrued expenses

     1,462        2,664   

Other liabilities

     938        1,275   

Derivative liabilities at fair value

     9,444        21,145   

Due to affiliates

     7,076        2,593   
                

Total liabilities

     378,080        671,900   
                

Commitments and contingencies

    

Partners’ Capital:

    

General partner

     (541     (295

Limited partners

     50,459        74,914   

Accumulated other comprehensive loss

     (12,008     (18,563
                

Total LEAF III partners’ capital

     37,910        56,056   

Noncontrolling interest

     —          10,466   
                

Total partners’ capital

     37,910        66,522   
                

Total liabilities and partners’ capital

   $ 415,990      $ 738,422   
                

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

 

3


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LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES

Consolidated Statements of Operations

(in thousands, except unit and per unit data)

(unaudited)

 

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

Revenues:

        

Interest on equipment financings

   $ 11,463      $ 17,619      $ 41,386      $ 45,299   

Rental income

     1,206        804        3,506        1,969   

Gains on sales of equipment and lease dispositions, net

     178        690        889        3,610   

Other

     933        1,048        3,407        3,624   
                                
     13,780        20,161        49,188        54,502   
                                

Expenses:

        

Interest expense

     8,581        12,573        32,722        31,905   

Losses on derivative hedging activities

     914        —          1,519        —     

Depreciation on operating leases

     997        671        2,905        1,628   

Provision for credit losses

     6,637        8,612        18,182        18,484   

General and administrative expenses

     1,320        1,014        4,290        2,671   

Administrative expenses reimbursed to affiliate

     1,370        1,965        4,824        5,337   

Management fees to affiliate

     1,430        2,203        4,825        6,292   
                                
     21,249        27,038        69,267        66,317   
                                

Loss before equity in (loss) earnings of affiliate

     (7,469     (6,877     (20,079     (11,815

Equity in (loss) earnings of affiliate

     (40     —          (40     1,812   
                                

Net loss

     (7,509     (6,877     (20,119     (10,003

Less: Net loss attributable to noncontrolling interest

     571        —          3,261        —     
                                

Net loss attributable to LEAF III

   $ (6,938   $ (6,877   $ (16,858   $ (10,003
                                

Weighted average number of limited partner units outstanding during the period

     1,196,631        1,199,200        1,197,163        1,085,832   
                                

Net loss per weighted average limited partner unit

   $ (5.74   $ (5.68   $ (13.94   $ (9.12
                                

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

 

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LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES

Consolidated Statement of Changes in Partners’ Capital

For the Nine Months Ended September 30, 2009

(in thousands, except unit data)

(unaudited)

 

     General
Partner
Amount
    Limited Partners     Accumulated
Other
Comprehensive
(Loss) Income
    LEAF III
Partners’

Capital
    Noncontrolling
Interest
    Total
Partners’
Capital
    Comprehensive
(Loss) Income
 
       Units     Amount            

Balance, January 1, 2009

   $ (295   1,198,068      $ 74,914      $ (18,563   $ 56,056      $ 10,466      $ 66,522        —     

Cash distributions

     (77       (7,640     —          (7,717     —          (7,717  

Redemption of limited partnership units

     —        (1,437     (126     —          (126     —          (126  

Issuance of subsidiary shares to noncontrolling interest

     —        —          —          —          —          1,225        1,225     

Comprehensive Loss:

                

Net loss

     (169   —          (16,689     —          (16,858     (3,261     (20,119   $ (20,119
                      

Unrealized gains on financial derivatives

     —        —          —          2,981        2,981        1,346        4,327        4,327   

Amortization of loss on financial derivative

     —        —          —          795        795        —          795        795   
                      

Other comprehensive income

     —        —          —          —          —          —          —          5,122   
                      

Comprehensive loss

     —        —          —          —          —          —          —          (14,997

Deconsolidation of LEAF Funding, LLC

     —        —          —          2,779        2,779        (9,776     (6,997  

Comprehensive loss attributable to noncontrolling interest

     —        —          —          —          —          —          —          1,915   
                      

Comprehensive loss attributable to LEAF III

     —        —          —          —          —          —          —        $ (13,082
                                                              

Balance, September 30, 2009

   $ (541   1,196,631      $ 50,459      $ (12,008   $ 37,910      $ —        $ 37,910     
                                                        

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

 

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LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

     Nine Months Ended September 30,  
     2009     2008  

Cash flows from operating activities:

    

Net loss attributable to LEAF III

   $ (16,858   $ (10,003

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Net loss attributable to noncontrolling interest

     (3,261     —     

Gains on sales of equipment and lease dispositions, net

     (889     (3,610

Equity in (loss) earnings of affiliate

     40        (1,812

Depreciation on operating leases

     2,905        1,628   

Provision for credit losses

     18,182        18,484   

Amortization of deferred financing costs

     5,694        1,264   

Amortization of loss on financial derivative

     795        80   

Amortization of interest rate caps

     8        —     

Unrealized gains on derivative hedging activities

     (619     —     

Changes in operating assets and liabilities, net of effect of deconsolidation of Funding, LLC and acquisition:

    

Accounts receivable

     (122     (110

Other assets

     (154     (573

Accounts payable and accrued expenses and other liabilities

     (870     (3,378

Due to affiliates, net

     5,585        4,724   
                

Net cash provided by operating activities

     10,436        6,694   
                

Cash flows from investing activities:

    

Purchases of leases and loans

     (48,761     (152,276

Proceeds from leases and loans

     188,637        208,273   

Proceeds from sale of leases to third parties

     —          30,735   

Security deposits returned, net of collected

     (2,101     3,159   

Acquisition of LEAF Funding, LLC

     —          (22,890

Investment in LEAF Funds JV2

     (428     —     

Proceeds from sale of interest in LEAF Funding, LLC, net of cash sold

     8,382        —     
                

Net cash provided by investing activities

     145,729        67,001   
                

Cash flows from financing activities:

    

Borrowings of bank debt

     42,208        157,282   

Repayment of bank debt

     (201,055     (273,715

Decrease in restricted cash

     7,925        6,786   

Increase in deferred financing costs

     (1,398     (952

Acquisition of financial derivative

     —          (76

Payment on termination of financial derivative

     —          (1,220

Limited Partners’ capital contributions

     —          45,624   

Redemption of Limited Partner’s capital

     (126     (113

Payment of offering costs related to the sale of partnership units

     —          (5,814

Cash distributions to partners

     (7,717     (6,653

Issuance of subsidiary shares to noncontrolling interest

     1,225        —     
                

Net cash used in financing activities

     (158,938     (78,851
                

Decrease in cash

     (2,773     (5,156

Cash, beginning of period

     3,236        5,583   
                

Cash, end of period

   $ 463      $ 427   
                

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

 

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LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

September 30, 2009

(unaudited)

NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS

LEAF Equipment Leasing Income Fund III, L.P. (the “Fund” or “LEAF III”) is a Delaware limited partnership formed on May 16, 2006 by its General Partner, LEAF Asset Management, LLC (the “General Partner”). The General Partner, a Delaware limited liability company, is a wholly owned subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly-traded company (NASDAQ: REXI) that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. The Fund received its minimum subscription proceeds of $2.0 million (20,000 units) required to begin operations and it broke escrow on March 13, 2007. On April 24, 2008, the Fund reached its maximum subscription of 1.2 million limited partnership units for gross proceeds of $120.0 million.

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 from LEAF Financial Corporation (“LEAF Financial”), an affiliate of its General Partner and a subsidiary of RAI. The primary objective of the Fund is to generate regular cash distributions to its partners from its equipment finance portfolio over the life of the Fund.

As of September 30, 2009, in addition to its 1% general partnership interest, the General Partner invested $1.1 million for a 1% limited partnership interest in the Fund. The Fund is managed by the General Partner.

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

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of the Fund and its wholly owned subsidiaries, LEAF Fund III, LLC, LEAF III A SPE, LLC, LEAF III B SPE, LLC, and LEAF III C SPE, LLC. All intercompany accounts and transactions have been eliminated in consolidation.

From January 2008 to April 2008, the Fund owned a 49% interest in LEAF Funding, LLC. During this period, the Fund accounted for LEAF Funding, LLC under the equity method of accounting since the Fund had the ability to exercise significant influence over the operating and financial decisions of this entity. In April 2008, the Fund acquired the remaining 51% interest in LEAF Funding, LLC. In November 2008, the Fund sold a 49% interest in LEAF Funding, LLC to LEAF Equipment Finance Fund 4, L.P. (“LEAF 4”), a fund sponsored by the General Partner. As of December 31, 2008, the Fund owned 51% of LEAF Funding, LLC.

 

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Table of Contents

LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements – (Continued)

September 30, 2009

(unaudited)

 

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

Basis of Presentation – (Continued)

In August 2009, the Fund sold an additional interest of approximately 47% in LEAF Funding, LLC to LEAF 4. Effective August 2009, the Fund no longer consolidates LEAF Funding, LLC due to its approximate 4% ownership interest and accounts for its interest in LEAF Funding, LLC under the equity method of accounting as of August 31, 2009. The impact of the deconsolidation of LEAF Funding, LLC on the Fund’s consolidated balance sheet was as follows (in millions):

 

     Increase (Decrease)  

Cash

   $ (0.1

Restricted Cash

     (7.9

Investment in leases and loans, net

     (138.6

Deferred financing costs, net

     (1.3

Investment in affiliated leasing partnerships

     0.6   

Other assets

     (0.1
        

Total assets

   $ (147.4
        

Bank debt

   $ (126.2

Accounts payable and accrued expenses

     (0.3

Other liabilities

     (0.4

Derivative liabilities at fair value

     (3.9

Due to affiliates

     (1.1
        

Total liabilities

   $ (131.9
        

Noncontrolling interest

     (9.8

Accumulated other comprehensive loss

     2.8  
        

Total partners’ capital

     (7.0
        

Total liabilities and partner’s capital

   $ (138.9
        

In March 2009, the Fund entered into an agreement with LEAF 4 to form LEAF Funds Joint Venture 2, LLC (“LEAF Funds JV2”). Through September 30, 2009, the Fund invested $428,000 in LEAF Funds JV2, representing a 2% interest. The Fund accounts for its investment in LEAF Funds JV2 under the cost method of accounting. Under the cost method, the Fund does not include its share of the income or losses of LEAF Funds JV2 in the Fund’s consolidated statements of operations.

Newly Adopted Accounting Principles

On January 1, 2009, the Fund adopted guidance issued by the Financial Accounting Standards Board (“FASB”) relating to noncontrolling interests in consolidated financial statements. This guidance establishes accounting and reporting standards for the noncontrolling interest in a subsidiary, as well as the deconsolidation of a subsidiary, and clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the deconsolidated entity that should be reported as equity in the consolidated financial statements. It also (1) changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest and (2) establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation. This guidance was applied prospectively, with the exception of the presentation and disclosure requirements, which were applied retrospectively for all periods presented. Any noncontrolling interest resulting from the consolidation of a less-than-wholly-owned subsidiary beginning January 1, 2009 is accounted for in accordance with the revised guidance. The adoption of this guidance did not have a material impact on the Fund’s

 

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Table of Contents

LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements – (Continued)

September 30, 2009

(unaudited)

 

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

Newly Adopted Accounting Principles – (Continued)

consolidated financial position or consolidated results of operations; however, it did have an impact on the presentation of noncontrolling interests, formerly known as “minority interest,” in the Fund’s consolidated financial statements.

On January 1, 2009, the Fund adopted amended guidance issued by the FASB relating to disclosures about derivative instruments and hedging activities. This amended guidance requires enhanced disclosures for derivative instruments, including those used in hedging activities, which the Fund has included in Note 5. The adoption of the amended guidance had no impact on the Fund’s consolidated financial position or results of operations.

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

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

 

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LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements – (Continued)

September 30, 2009

(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,
2009
    December 31,
2008
 

Direct financing leases

   $ 272,188      $ 402,505   

Loans

     110,988        279,168   

Operating leases

     10,183        11,159   
                
     393,359        692,832   

Allowance for credit losses

     (10,280     (10,374
                
   $ 383,079      $ 682,458   
                

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

 

     September 30, 2009     December 31, 2008  
     Leases     Loans     Leases     Loans  

Total future minimum payments

   $     301,538      $     132,004      $     453,508      $     344,050   

Unearned income

     (38,670     (19,421     (55,212     (54,539

Residuals, net of unearned residual income

     10,450        —          9,104        —     

Security deposits

     (1,130     (1,595     (4,895     (10,343
                                
   $ 272,188      $ 110,988      $ 402,505      $ 279,168   
                                

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

 

     September 30,
2009
    December 31,
2008
 

Equipment

   $ 16,524      $ 14,483   

Accumulated depreciation

     (6,231     (3,221

Security deposits

     (110     (103
                
   $ 10,183      $ 11,159   
                

 

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LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements – (Continued)

September 30, 2009

(unaudited)

 

NOTE 3 – INVESTMENT IN LEASES AND LOANS – (Continued)

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

 

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

Allowance for credit losses, beginning of period

   $     12,160      $     3,350      $ 10,374      $     1,300   

Provision for credit losses

     6,637        8,612        18,182        18,484   

Charge-offs

     (5,607     (3,350     (16,304     (11,254

Recoveries

     360        388        1,298        470   

Deconsolidation of LEAF Funding, LLC

     (3,270     —          (3,270     —     
                                

Allowance for credit losses, end of period

   $ 10,280      $ 9,000      $ 10,280      $ 9,000   
                                

The Fund discontinues the recognition of revenue for leases and loans for which payments are more than 90 days past due (“non-accrual”). As of September 30, 2009 and December 31, 2008, the Fund had $22.2 million and $19.9 million, respectively, of leases and loans on non-accrual status.

NOTE 4 – BANK DEBT

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

 

     Type    Maturity Date   September 30, 2009      
          Amount of
Facility
   Outstanding
Balance
   Available (2)    Interest
rate per
annum
adjusted
for swaps (3)
    December 31,
2008

Outstanding
Balance

WestLB AG (1)

   Revolving    June 2010 (4)   $     220,000    $     164,627    $     55,373    5.3   $     219,620

DZ Bank (1)

   Revolving    November 2013     150,000      130,840      19,160    4.2  

Key Equipment Finance (1)

   Term    June 2013     63,693      63,693      —      5.2     97,086

Morgan Stanley/RBS - A (5)

   —      —       —        —        —      —       169,548

Morgan Stanley/RBS - B (5)

   —      —       —        —        —      —       19,717
                                  
        $ 433,693    $ 359,160    $ 74,533      $ 644,223
                                  

 

(1) Collateralized by specific leases and loans and related equipment. As of September 30, 2009, $380.4 million of leases and loans and $24.5 million of restricted cash were pledged as collateral under the Fund’s credit facilities.
(2) Availability under these debt facilities is subject to having sufficient eligible leases or loans (as defined in the respective agreements) to pledge as collateral and compliance with the borrowing base formula.
(3) To mitigate fluctuations in interest rates, the Fund entered into interest rate swap and cap agreements. The interest rate swap agreements terminate on various dates and fix the LIBOR-component of the interest rate. This rate reflects the weighted average fixed rate.
(4) If the WestLB facility is not extended at the time of renewal (June 2010), the Fund would not be required to make full repayment at that time. Rather, the Fund would repay the outstanding debt as payments are received on the underlying leases and loans pledged as collateral.
(5) Balance at September 30, 2009 is zero due to the deconsolidation of LEAF Funding, LLC.

 

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LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements – (Continued)

September 30, 2009

(unaudited)

 

NOTE 4 – BANK DEBT– (Continued)

In 2009, the Fund amended its revolving credit facility with WestLB AG. These amendments change certain performance covenants in light of the current economic recession and its potential effect on future delinquencies. Interest on this facility increased to LIBOR plus 2.50% per annum for all borrowings subsequent to March 2009. In addition, the amendments reduced the availability under the facility to $220 million and adjusted the Fund’s borrowing base formula, requiring a larger portion of the Fund’s cash flow advance to be pledged as collateral on borrowings.

The Fund is subject to financial covenants under its debt facilities, including minimum tangible net worth, maximum leverage ratios and portfolio delinquency, that are intended to measure the Fund’s financial viability, limit the amount the Fund can borrow based on measuring its debt to net worth and measure performance of the Fund’s portfolio. In addition, the Fund’s debt facilities include financial covenants covering LEAF Financial, an affiliate of the Fund’s General Partner and the servicer of the Fund’s portfolio. These covenants exist to provide the lender with information about the financial viability of the entity that services the Fund’s portfolio. These covenants are similar in nature to the covenants discussed above that are applicable to the Fund, and are related to such things as the Fund’s servicer’s minimum tangible net worth, maximum leverage ratios, managed portfolio delinquency and compliance of the debt terms of all of LEAF Financial’s managed entities.

As of September 30, 2009, the Fund is in compliance with the covenants under its debt facilities, except for the minimum tangible net worth covenant under the DZ Bank revolving credit facility (the “DZ Bank Facility”). As of September 30, 2009, $130.8 million was outstanding under the DZ Bank Facility. Recourse under the DZ Bank Facility is limited to the amount of collateral pledged, which was $141.6 million as of September 30, 2009 plus 5% or $6.5 million of the outstanding debt balance.

DZ Bank has provided the Fund with a waiver of this covenant through December 12, 2009, and the Fund has agreed to not borrow any additional amounts under the DZ Bank Facility, while the parties negotiate an amendment to the debt agreement. Although the Fund expects to amend the debt agreement, there can be no assurance that such amendment will be executed. If such amendment is not executed, all amounts owed under the credit facility could become immediately due and payable upon expiration of the waiver and written notice from DZ Bank.

As of October 31, 2009, the Fund was not in compliance with the managed annualized default ratio under the WestLB loan agreement. In addition, during the month of October 2009, the portfolio delinquency rate increased and, as a result of such increase, additional principal payments will become due and payable on November 21, 2009 if the Fund does not receive the waiver described below. The Fund does not expect to have the ability to fund such principal payments, which would result in an event of default under the WestLB facility. As of October 31, 2009, $158.7 million was outstanding under the WestLB facility. Recourse under the WestLB facility is limited to the amount of collateral pledged, which was $183.8 million as of October 31, 2009.

The Fund has requested a waiver from WestLB with respect to the managed annualized default ratio and portfolio delinquency rate covenants. Although the Fund expects to obtain such waiver, there can be no assurance that such waiver will be executed. If not executed, all amounts owed under the WestLB facility could become immediately due and payable if the bank declares a default, which could also create defaults under other debt facilities.

Debt repayments

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

 

2010

   $ 139,868

2011

     105,115

2012

     68,186

2013

     32,719

2014

     11,949

Thereafter

     1,323
      
   $     359,160
      

NOTE 5 – DERIVATIVE INSTRUMENTS

The majority of the Fund’s assets and liabilities are financial contracts with fixed and variable rates. Any mismatch between the repricing and maturity characteristics of the Fund’s assets and liabilities exposes it to interest rate risk when interest rates fluctuate. For example, the Fund’s assets are structured on a fixed-rate basis, but since funds borrowed through warehouse facilities are obtained on a floating-rate basis, the Fund is exposed to a certain degree of risk if interest rates rise, which in turn will increase the Fund’s borrowing costs. In addition, when the Fund acquires assets, it bases its pricing in part on the spread it expects to achieve between the interest rate it charges its customers and the effective interest cost the Fund will pay when it funds those loans. Increases in interest rates that increase the Fund’s permanent funding costs between the time the assets are originated and the time they are funded could narrow, eliminate or even reverse this spread.

 

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LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements – (Continued)

September 30, 2009

(unaudited)

 

NOTE 5 – DERIVATIVE INSTRUMENTS – (Continued)

To manage interest rate risk, the Fund employs a hedging strategy using derivative financial instruments such as interest rate swaps, $211.8 million notional of which are designated and qualify as cash flow hedges and $122.8 million related to the DZ Bank facility which are economic hedges but do not meet the strict hedge accounting requirements and are therefore undesignated as of September 30, 2009. For derivatives designated and qualifying as cash flow hedges, the effective portion of changes in fair value of those derivatives are recorded in accumulated other comprehensive loss and are subsequently reclassified into earnings when the hedged forecasted interest payments are recognized in earnings. For derivatives that are undesignated, changes in the fair value of those derivatives are recorded directly to earnings as they occur. The Fund does not use derivative financial instruments for trading or speculative purposes. The Fund manages the credit risk of possible counterparty default in these derivative transactions by dealing 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. The Fund has agreements with certain of its derivative counterparties that incorporates the loan covenant provisions of the Fund’s indebtedness with a lender affiliate of the derivative counterparty. Failure to comply with the loan covenant provisions would result in the Fund being in default on any derivative instrument obligations covered by the agreement. As of September 30, 2009, the fair value of derivatives in a net liability position, which excludes any adjustment for nonperformance risk, related to these agreements was $9.7 million. As of September 30, 2009, the Fund has not posted any collateral related to these agreements. If the Fund had breached any of these provisions at September 30, 2009, it could have been required to settle its obligations under the agreements at their termination value of $9.7 million.

Before entering into a derivative transaction for hedging purposes, the Fund determines whether a high degree of initial effectiveness exists between the change in the value of the hedged forecasted transactions and the change in the value of the derivative from a movement in interest rates. High effectiveness means that the change in the value of the derivative is expected to provide a high degree of offset against changes in the value of the hedged forecasted transactions caused by changes in interest rate risk. The Fund measures the effectiveness of each cash flow hedge throughout the hedge period. Any hedge ineffectiveness on cash flow hedging relationships, as defined by U.S. GAAP is recognized in the consolidated statements of operations.

There can be no assurance that the Fund’s hedging strategies or techniques will be effective, that profitability will not be adversely affected during any period of change in interest rates or that the costs of hedging will not exceed the benefits.

 

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LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements – (Continued)

September 30, 2009

(unaudited)

 

NOTE 5 – DERIVATIVE INSTRUMENTS – (Continued)

The following tables present the fair value of the Fund’s derivative financial instruments as well as their classification on the consolidated balance sheet as of September 30, 2009 and on the consolidated statement of operations for the three and nine months ended September 30, 2009 (in thousands):

 

     Notional
Amount
   Balance Sheet Location    Fair Value  

Derivatives designated as hedging instruments

        

Interest rate cap contracts

   $ 3,855    Other assets    $ 4   

Interest rate swap contracts

     207,987    Derivative liabilities at fair value      (7,532
            
     211,842      
            

Derivatives not designated as hedging instruments

        

Interest rate swap contracts

     122,820    Derivative liabilities at fair value    $ (1,912
            
   $     334,662      
            

 

     Amount of Gain or Loss Recognized
in OCI on Derivatives

(Effective Portion)
   Location and Amount of Loss Reclassified from
Accumulated OCI into Income

(Effective Portion)
 
     Three Months
Ended
   Nine Months
Ended
        Three Months
Ended
    Nine Months
Ended
 
     September 30, 2009         September 30, 2009  

Derivatives Designated as Cash Flow Hedging Relationships

        

Interest rate products

   $ 3,516    $ 7,413    Interest expense    $ (3,093   $ (9,721

 

     Notional Amount    Statement of Operations Location    Three Months
Ended
September 30,
2009
    Nine Months
Ended
September 30,
2009
 

Derivatives not designated as hedging instruments

          

Interest rate swap contracts

   $ 122,820    Losses on derivative hedging activities    $ (914   $ (1,519

The Fund terminated interest rate swap agreements in 2008 simultaneously with executing new loan agreements, resulting in a loss of $5.2 million which was recorded in accumulated other comprehensive loss. The Fund is amortizing the loss to interest expense over the remaining term of the terminated swap agreements. For the three and nine months ended September 30, 2009, $265,000 and $795,000, respectively, was recognized in accumulated other comprehensive loss and for the three and nine months ended September 30, 2008, $60,000 and $80,000, respectively, was recognized in interest expense. As of September 30, 2009, the unamortized balance of $4.3 million is included in accumulated other comprehensive loss.

Assuming market rates remain constant with the rates as of September 30, 2009, $5.8 million of the $7.6 million in accumulated other comprehensive loss is expected to be charged to earnings over the next 12 months.

 

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LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements – (Continued)

September 30, 2009

(unaudited)

 

NOTE 6 – FAIR VALUE MEASUREMENT

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

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

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the measurement date (exit price). U.S. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.

 

   

Level 1 – Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.

 

   

Level 2 – Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.

 

   

Level 3 – Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.

The Fund employs a hedging strategy to manage exposure to the effects of changes in market interest rates. All derivatives are recorded 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.

 

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LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements – (Continued)

September 30, 2009

(unaudited)

 

NOTE 6 – FAIR VALUE MEASUREMENT – (Continued)

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

 

     Fair Value Measurements Using    Assets (Liabilities)
At Fair Value
 
     Level 1    Level 2     Level 3   

Interest rate cap

   $ —      $ 4      $ —      $ 4   

Interest rate swaps

   $ —      $ (9,444   $ —      $ (9,444

NOTE 7 – 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 affiliate fees to manage the Fund. The following is a summary of fees and costs of services charged by the General Partner or its affiliates (in thousands):

 

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

Acquisition fees

   $ 15    $ 268    $ 960    $ 9,499

Management fees

     1,430      2,203      4,825      6,292

Administrative expenses

     1,370      1,965      4,824      5,337

Organization and offering expense allowance

     —        —        —        1,371

Underwriting fees

     —        —        —        4,443

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

Management Fees. The General Partner is paid a subordinated annual asset management fee equal to 4% or 2% of gross rental payments for operating leases or full payout leases, respectively, or a competitive fee, whichever is less. During the Fund’s five-year investment period, the management fees will be subordinated to the payment to the Fund’s limited partners of a cumulative annual distribution of 8.5% of their capital contributions, as adjusted by distributions deemed to be a return of capital.

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

Organization and Offering Expense Allowance and Underwriting Fees. The Fund paid the General Partner and Chadwick Securities, Inc. (“Chadwick”), a wholly owned subsidiary of RAI, an organization and offering expense allowance of 3% of the offering proceeds raised. This amount included reimbursement to Chadwick to use for the selling dealers’ bona fide accountable due diligence expenses of up to 0.5% of the proceeds of each unit sold by them. These charges were recorded by the Fund as offering costs related to the sale of partnership units. Chadwick was paid an underwriting fee of up to 3% of the offering proceeds for obtaining and managing the group of selling

 

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LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements – (Continued)

September 30, 2009

(unaudited)

 

NOTE 7 – CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH AFFILIATES – (Continued)

broker-dealers who sold the units in the offering. Chadwick also received sales commissions of 7% of the proceeds of each unit that they sold. Chadwick did not sell any units and did not retain sales commissions through September 30, 2009.

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

NOTE 8 – COMMITMENTS AND CONTINGENCIES

In connection with a sale of leases and loans to a third party, the Fund agreed to repurchase delinquent leases up to a maximum of 7.5% of total proceeds received from the sale (“Repurchase Liability”). The Fund’s maximum remaining Repurchase Liability at September 30, 2009 is $187,000. The Fund has recorded a liability of $42,000 to reflect the estimate of losses it expects to incur on assets repurchased. This liability is included in “Other Liabilities” in the consolidated balance sheets.

NOTE 9 – SUBSEQUENT EVENTS

The Fund has evaluated subsequent events through November 16, 2009, the date which these financial statements were issued and filed with the SEC, and determined that there have not been any events that have occurred that would require adjustments to or additional disclosure in the unaudited consolidated financial statements.

 

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Table of Contents

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 Item 1A, under the caption “Risks Inherent in Our Business,” in our annual report on Form 10-K for the year ended December 31, 2008. These risks and uncertainties could cause actual results to differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release the results of any revisions to forward-looking statements which we may make to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.

Overview

We are a Delaware limited partnership formed on May 16, 2006 by our General Partner, LEAF Asset Management, LLC (our “General Partner”). Our General Partner, a Delaware limited liability company, is a wholly owned subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly-traded company (NASDAQ: REXI) that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. We received our minimum subscription proceeds of $2.0 million (20,000 units) required to begin operations and we broke escrow on March 13, 2007. On April 24, 2008, we reached our maximum subscription of 1.2 million limited partner units for gross proceeds of $120.0 million.

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 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 finance business-essential equipment including, but not limited to computers, copiers, office furniture, water filtration systems, machinery used in manufacturing and construction, medical equipment and telecommunications equipment. We focus on the small to mid-size business market, which generally includes businesses with:

 

   

500 or fewer employees;

 

   

$1.0 billion or less in total assets; or

 

   

$100.0 million or less in total annual sales.

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

Our leases consist of direct financing and operating leases as defined by accounting principles generally accepted in the United States of America (“U.S. GAAP”). Under the direct financing method of accounting, interest income (the excess of the aggregate future rentals and estimated unguaranteed residuals upon expiration of the lease over the related equipment cost) is recognized over the life of the lease using the interest method. Under the operating method, the cost of the leased equipment, including acquisition fees associated with lease placements, is recorded as an asset and depreciated on a straight-line basis over its estimated useful life. Rental income on operating leases consists primarily of monthly periodic rentals due under the terms of the leases. Generally, during the lease terms of existing operating leases, we will not recover all of the cost and related expenses of rental equipment and, therefore, we are prepared to remarket the equipment in future years. When a lease or loan is 90 days or more delinquent, the lease or loan is classified as being on non-accrual and we do not recognize interest income on that lease or loan until the lease or loan becomes less than 90 days delinquent.

As further discussed in the “Finance Receivables and Asset Quality” section below, the current economic recession in the United States has adversely affected our operations as a result of higher delinquencies and it may continue to do so until the economy recovers.

 

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Table of Contents

Finance Receivables and Asset Quality

Information about our portfolio of leases and loans is as follows (dollars in thousands):

 

     September 30,
2009
    December 31,
2008
 

Investment in commercial finance assets, net

   $     383,079      $     682,458   

Number of contracts

     50,000        60,000   

Number of individual end users (a)

     39,900        48,000   

Average origination equipment cost

   $ 14.3      $ 16.8   

Average initial term (in months)

     55        43   

States accounting for 10% or more of commercial finance assets portfolio:

    

California

     14     16

Types of equipment accounting for 10% or more of commercial finance assets portfolio:

    

Industrial equipment

     41     30

Office equipment

     13     9

Medical equipment

     9     12

Restaurant equipment

     5     10

Types of business accounting for 10% or more of commercial finance assets portfolio:

    

Services

     38     41

Transportation/Communication/Energy

     13     10

Retail Trade

     12     17

Manufacturing

     10     9

 

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

We utilize debt in addition to our equity to fund the acquisitions of lease portfolios. As of September 30, 2009 and December 31, 2008, our outstanding debt was $359.2 million and $644.2 million, respectively. The decrease in our outstanding debt was due to net repayments during the nine months ended September 30, 2009 and the deconsolidation of LEAF Funding, LLC.

 

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The performance of our lease and loan portfolio is a measure of our General Partner’s underwriting and collection standards, skills, policies and procedures and is an indication of asset quality. The table below provides information about our finance receivables 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,
    As of and For
the Year
Ended
December 31,
 
     2009     2008     Change    
         $     %     2008  

Investment in direct financing leases and loans before allowance for credit losses

   $     383,176      $     723,799      $ (340,623   (47 %)    $     681,673   

Weighted average investment in leases and loans before allowance for credit losses

   $ 514,942      $ 665,842      $ (150,900   (23 %)    $ 664,380   

Allowance for credit losses

   $ 10,280      $ 9,000      $         1,280      14   $ 10,374   

Non-performing assets

   $ 22,179      $ 16,279      $ 5,900      36   $ 19,871   

Charge-offs, net of recoveries

   $ 15,006      $ 10,784      $ 4,222      39   $ $16,980   

As a percentage of finance receivables:

          

Allowance for credit losses

     2.68     1.24         1.52

Non-performing assets

     5.79     2.25         2.92

As a percentage of weighted average finance receivables:

          

Charge-offs, net of recoveries

     2.91     1.62         2.56

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

Our allowance for credit losses is our estimate of losses inherent in our commercial finance receivables. The allowance is based on factors which include our historical loss experience on equipment finance portfolios we manage, an analysis of contractual delinquencies, current economic conditions and trends and equipment finance portfolio characteristics, adjusted for recoveries. In evaluating historic performance, we perform a migration analysis, which estimates the likelihood that an account progresses through delinquency stages to ultimate charge off. Our policy is to charge off to the allowance those financings which are in default and for which management has determined the probability of collection to be remote. Substantially all of our assets are collateral for our debt and, therefore, significantly greater delinquencies than anticipated will have an adverse impact on our cash flow and distributions to our partners.

The current economic recession in the United States has adversely affected our operations as a result of higher delinquencies and it may continue to do so until the economy recovers. The increase in delinquencies, as well as the current economic trends, has caused us to conclude that a greater allowance for credit loss is necessary. In addition our non-performing assets have increased due to the increase in customers who are more than ninety days delinquent at September 30, 2009, compared to September 30, 2008.

The equipment we finance includes computers, copiers, office furniture, water filtration systems, machinery used in manufacturing and construction, medical equipment and telecommunications equipment. We focus on financing equipment used by small to mid-size businesses, and our General Partner anticipates that the recession will make it more difficult for some of our customers to make payments on their financings with us on a timely basis, which could result in higher delinquencies.

 

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Table of Contents

Our net charge-offs increased in the three and nine months ended September 30, 2009 compared to 2008 due to the aging of our portfolio of leases and loans as well as the current economic recession as discussed above.

Critical Accounting Policies

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

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

 

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Table of Contents

Results of Operations

Three Months Ended September 30, 2009 compared to the Three Months Ended September 30, 2008

 

           Increase (Decrease)  
     2009     2008     $     %  

Revenues:

        

Interest on equipment financings

   $     11,463      $     17,619      $ (6,156   (35 %) 

Rental income

     1,206        804        402      50

Gains on sales of equipment and lease dispositions, net

     178        690        (512   (74 %) 

Other

     933        1,048        (115   (11 %) 
                          
     13,780        20,161        (6,381   (32 %) 
                          

Expenses:

        

Interest expense

     8,581        12,573        (3,992   (32 %) 

Losses on derivative hedging activities

     914        —          914      —  

Depreciation on operating leases

     997        671        326      49

Provision for credit losses

     6,637        8,612        (1,975   (23 %) 

General and administrative expenses

     1,320        1,014        306      30

Administrative expenses reimbursed to affiliate

     1,370        1,965        (595   (30 %) 

Management fees to affiliate

     1,430        2,203        (773   (35 %) 
                          
     21,249        27,038        (5,789   (21 %) 
                          

Loss before equity in loss of affiliate

     (7,469     (6,877     592      9

Equity in loss of affiliate

     (40     —          40      —  
                          

Net loss

     (7,509     (6,877     632      9

Less: Net loss attributable to noncontrolling interest

     571        —          571      —  
                          

Net loss attributable to LEAF III

   $ (6,938   $ (6,877   $         61      1
                          

In August 2009, we sold an additional interest of approximately 47% in LEAF Funding LLC to LEAF 4. Effective August 2009, we no longer consolidate the financial results of LEAF Funding, LLC due to our approximate 4% ownership interest. We account for our interest in LEAF Funding, LLC under the equity method of accounting as of August 31, 2009.

The decrease in total revenues was primarily attributable to the following:

 

   

a decrease in interest income on equipment financings. Our weighted average net investment in financing assets decreased to $458.0 million for the three months ended September 30, 2009 as compared to $741.6 million for the three months ended September 30, 2008, a decrease of $283.6 million (38.2%). This decrease was partially offset by increased yields on leases acquired in 2008. We rely on both revolving and term debt facilities to fund our acquisitions of equipment financings. Our WestLB and DZ Bank debt facilities are revolving debt facilities that allow us to borrow additional amounts as we make payments. Our Key Bank debt facility is a term facility, which is contractually repaid over a period of time and we are not able to borrow additional amounts as we make payments. The decrease in our weighted average net investment was due to the run-off of our term facilities, which exceeded our current borrowing availability, and the deconsolidation of LEAF Funding, LLC.

 

   

a decrease in gains on sale of equipment and lease dispositions. Gains and losses on sales of equipment may vary significantly from period to period.

These decreases were partially offset by:

 

   

an increase in rental income, which was principally the result of an increase in our investment in operating leases in the 2009 period compared to the 2008 period.

 

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The decrease in total expenses was a result of the following:

 

   

a decrease in interest expense. This decrease was due to a reduction in average debt outstanding and a decrease in the effective interest rate, offset by amortization relating to an increase in debt issuance costs. Weighted average borrowings for the three months ended September 30, 2009 and 2008 were $518.9 million and $711.5 million, respectively, at an effective interest rate (excluding debt issuance cost amortization) of 6.0% and 6.7%, respectively. Included in the effective interest rate for the three months ended September 30, 2009 is $730,000 of losses on derivative hedging activities.

 

   

a decrease in our provision for credit losses. Our allowance for credit losses is as follows:

 

     Three Months Ended
September 30,
 
     2009     2008  

Allowance for credit losses, beginning of period

   $ 12,160      $ 3,350   

Provision for credit losses

     6,637        8,612   

Charge-offs

     (5,607     (3,350

Recoveries

     360        388   

Deconsolidation of LEAF Funding, LLC

     (3,270     —     
                

Allowance for credit losses, end of period

   $ 10,280      $ 9,000   
                

Investment in leases and loans before allowance for credit losses

   $     383,176      $     723,799   

Non-performing assets

     22,179        16,279   

Non-performing assets as a percentage of investment

     5.79     2.25

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 the provision for credit losses results from the decrease in the portfolio of equipment financing assets, primarily due to the deconsolidation of LEAF Funding, LLC. Our allowance for credit losses has increased due to the impact of the economic recession in the United States on our customers’ ability to make payments on their leases and loans, resulting in an increase in non-performing assets.

 

   

a decrease in administrative expenses reimbursed to affiliate. Administrative expenses decreased in 2009 when compared to 2008 due to a reduction in our net investment, as adjusted for the amount of net investment owned by non-controlling interests.

 

   

a decrease in management fees to affiliate attributable to the decrease in our portfolio of equipment financing assets as adjusted for the amount of net investment owned by non-controlling interests. Management fees are paid based on lease payments received, adjusted for payments received on contracts in which non-controlling shareholders own an interest.

These decreases were partially offset by:

 

   

an increase in losses on derivative hedging activities. The lease assets we originate are almost entirely fixed-rate, while the funds borrowed through our credit facilities are obtained on a floating-rate basis. Accordingly, we employ a hedging strategy using derivative financial instruments such as interest rate swaps, to fix the rate on our debt and attempt to lock in our interest rate spread between our interest received on our financings and the interest we pay on our debt. Under U.S. GAAP, we are required to recognize all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Since certain of our hedges do not qualify for hedge accounting, any change in the fair value of these derivative instruments is recognized immediately in gain (loss) on derivative hedging activities in our consolidated statement of operations. The losses recorded in the three months ended September 30, 2009 are based on the value of the derivative contracts at September 30, 2009 in a volatile market that is changing daily, and will

 

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not necessarily reflect the cash amount to be paid at settlement. We expect that certain hedges that we will enter into in the future also will not meet the criteria for hedge accounting. This will create volatility in our results of operations, as the market value of our derivative financial instruments changes over time, and this volatility may adversely impact our results of operations and financial condition.

 

   

an increase in depreciation on operating leases related to an increase in our investment in operating leases when compared to 2008.

 

   

an increase in general and administrative expenses, principally related to increased legal costs associated with collection efforts. Legal costs increased to $607,000 in the 2009 period, an increase of $122,000 (25%) over the 2008 period. We expect the increase in legal costs will result in future recoveries of credit losses.

The net loss per limited partner unit, after the net loss allocated to our General Partner for the three months ended September 30, 2009 and 2008 was $(5.74) and $(5.68), respectively, based on a weighted average number of limited partner units outstanding of 1,196,631 and 1,199,200, respectively.

Nine Months Ended September 30, 2009 compared to the Nine Months Ended September 30, 2008

 

           Increase (Decrease)  
     2009     2008     $     %  

Revenues:

        

Interest on equipment financings

   $     41,386      $     45,299      $ (3,913   (9 %) 

Rental income

     3,506        1,969        1,537      78

Gains on sales of equipment and lease dispositions, net

     889        3,610        (2,721   (75 %) 

Other

     3,407        3,624        (217   (6 %) 
                          
     49,188        54,502        (5,314   (10 %) 
                          

Expenses:

        

Interest expense

     32,722        31,905        817      3

Losses on derivative hedging activities

     1,519        —          1,519      —  

Depreciation on operating leases

     2,905        1,628        1,277      78

Provision for credit losses

     18,182        18,484        (302   (2 )% 

General and administrative expenses

     4,290        2,671        1,619      61

Administrative expenses reimbursed to affiliate

     4,824        5,337        (513   (10 %) 

Management fees to affiliate

     4,825        6,292        (1,467   (23 %) 
                          
     69,267        66,317        2,950      4
                          

Loss before equity in (loss) earnings of affiliate

     (20,079     (11,815     8,264      70

Equity in (loss) earnings of affiliate

     (40     1,812        (1,852   (102 %) 
                          

Net loss

     (20,119     (10,003     10,116      101

Less: Net loss attributable to noncontrolling interest

     3,261        —          3,261      —  
                          

Net loss attributable to LEAF III

   $ (16,858   $ (10,003   $     6,855      69
                          

The decrease in total revenues was primarily attributable to the following:

 

   

a decrease in interest income on equipment financings. Our weighted average net investment in financing assets decreased to $514.9 million for the nine months ended September 30, 2009 as compared to $665.8 million for the nine months ended September 30, 2008, a decrease of $150.9 million (22.7%). This decrease was primarily due to the deconsolidation of LEAF Funding, LLC.

 

   

a decrease in gains on sales of equipment and lease dispositions. Gains and losses on sales of equipment may vary significantly from period to period. Included in gains for the nine months ended September 30, 2008 is a gain of $1.9 million related to the sale of a pool of leases to an unrelated third party.

These decreases were partially offset by:

 

   

an increase in rental income which was principally the result of an increase in our investment in operating leases in the 2009 period compared to the 2008 period.

 

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The increase in total expenses was a result of the following:

 

   

an increase in interest expense. Weighted average borrowings for the nine months ended September 30, 2009 and 2008 were $574.8 million and $633.6 million, respectively, at an effective interest rate (excluding debt issuance cost amortization) of 6.8% and 6.5%, respectively. The increase in interest expense is due to an increase in the effective interest rate and the increase in the amortization of debt issuance costs. Included in the effective interest rate calculation above is $2.1 million of payments under interest rate swap agreements that fix interest rates.

 

   

an increase in losses on derivative hedging activities. The lease assets we originate are almost entirely fixed-rate, while the funds borrowed through our credit facilities are obtained on a floating-rate basis. Accordingly, we employ a hedging strategy using derivative financial instruments such as interest rate swaps, to fix the rate on our debt and attempt to lock in our interest rate spread between our interest received on our financings and the interest we pay on our debt. Under U.S. GAAP, we are required to recognize all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Since certain of our hedges do not qualify for hedge accounting, any change in the fair value of these derivative instruments is recognized immediately in gain (loss) on derivative hedging activities in our Consolidated Statement of Operations. The losses recorded in the nine months ended September 30, 2009 are based on the value of the derivative contracts at September 30, 2009 in a volatile market that is changing daily, and will not necessarily reflect the cash amount to be paid at settlement. We expect that certain hedges that we will enter into in the future also will not meet the criteria for hedge accounting. This will create volatility in our results of operations, as the market value of our derivative financial instruments changes over time, and this volatility may adversely impact our results of operations and financial condition.

 

   

an increase in depreciation on operating leases related to an increase in our investment in operating leases when compared to 2008.

 

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an increase in general and administrative expenses, principally related to increased legal costs associated with collection efforts. Legal costs increased to $1.8 million in the 2009 period, an increase of $846,000 (85%) over the 2008 period. We expect the increase in legal costs will result in future recoveries of credit losses.

These increases were partially offset by:

 

   

a decrease in management fees to affiliate attributable to the decrease in our portfolio of equipment financing assets as adjusted for the amount of net investment owned by non-controlling interests. Management fees are paid based on lease payments received, adjusted for payments received on contracts in which non-controlling shareholders own an interest.

 

   

a decrease in our provision for credit losses. Our allowance for credit losses is as follows:

 

     Nine Months Ended
September 30,
 
     2009     2008  

Allowance for credit losses, beginning of period

   $ 10,374      $ 1,300   

Provision for credit losses

     18,182        18,484   

Charge-offs

     (16,304     (11,254

Recoveries

     1,298        470   

Deconsolidation of LEAF Funding, LLC

     (3,270     —     
                

Allowance for credit losses, end of period

   $ 10,280      $ 9,000   
                

Investment in direct financing leases and loans before allowance for credit losses

   $     383,176      $     723,799   

Non-performing assets

     22,179        16,279   

Non-performing assets as a percentage of investment

     5.79     2.25

We provide for credit losses when losses are likely to occur based on a migration analysis of past due payments and economic conditions. Our allowance for credit losses has increased due to the impact of the economic recession in the United States on our customers’ ability to make payments on their leases and loans, resulting in an increase in non-performing assets.

 

   

a decrease in administrative expenses reimbursed to affiliate. Administrative expenses decreased in 2009 when compared to 2008 due to a reduction in our net investment, as adjusted for the amount of net investment owned by non-controlling interests.

The net loss per limited partner unit, after the net loss allocated to our General Partner for the nine months ended September 30, 2009 and 2008 was $(13.94) and $(9.12), respectively, based on a weighted average number of limited partner units outstanding of 1,197,163 and 1,085,832, respectively.

Liquidity and Capital Resources

Our major sources of liquidity are obtained by the collection of lease payments after payments of debt principal and interest on debt. Our primary cash requirements, in addition to normal operating expenses, are for debt service, investment in leases and loans and distributions to partners. In addition to cash generated from operations, we plan to meet our cash requirements through borrowings from additional credit facilities.

 

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

 

     Nine Months Ended
September 30,
 
     2009     2008  

Net cash provided by operating activities

   $ 10,436      $ 6,694   

Net cash provided by investing activities

     145,729        67,001   

Net cash used in financing activities

     (158,938     (78,851
                

Decrease in cash

   $ (2,773   $ (5,156
                

Partners’ distributions paid for the nine months ended September 30, 2009 and 2008 were $7.7 million and $6.7 million, respectively. Distributions to limited partners were 8.5% of invested capital for both periods. However, there can be no assurance we will continue to make distributions at this rate.

Cash decreased by $2.8 million in the nine months ended September 30, 2009. The primary sources of cash during the period include proceeds from leases (net of leases acquired) of $139.9 million. In addition, amounts due to related parties increased by $5.6 million. These increases were more than offset by net pay downs of debt totaling $158.8 million.

In August 2009, we sold a 47% interest in LEAF Funding, LLC to LEAF 4, its joint venture partner, for $8.5 million. As a result of this transaction, $138.6 million in leases and loans and $126.2 million in the associated secured, non-recourse debt to Morgan Stanley/RBS were deconsolidated from our consolidated balance sheet. The proceeds from this transaction were used to help fund delevering commitments and fees due to WestLB, one of our lenders.

Our borrowing relationships each require the pledging of eligible leases and loans to secure amounts advanced. Borrowings outstanding under our credit facilities were as follows as of September 30, 2009 (in thousands):

 

     Type    Maturity   Maximum Facility
Amount
   Amount
Outstanding
   Amount
Available (1)
   Amount of
Collateral (2)

WestLB

   Revolving    (3)   $ 220,000    $ 164,627    $ 55,373    $ 189,724

DZ Bank

   Revolving    November 2013     150,000      130,840      19,160      141,601

Key Equipment Finance

   Term    June 2013     63,693      63,693      —        73,588
                                
        $ 433,693    $ 359,160    $ 74,533    $ 404,913
                                

 

(1) Availability under these debt facilities is subject to having sufficient eligible leases or loans (as defined in the respective agreements) to pledge as collateral and compliance with the borrowing base formula.
(2) Recourse under these facilities is limited to the amount of collateral pledged, and with respect to the DZ Bank facility, an additional 5% of the outstanding debt balance, or $6.5 million as of September 30, 2009.
(3) If the WestLB facility is not extended at the time of renewal (June 2010), we would not be required to make full repayment at the time of renewal. Rather, we would repay the outstanding debt as payments are received on the underlying leases and loans pledged as collateral.

In 2009, we amended our revolving credit facility with WestLB AG. These amendments change certain performance covenants in light of the current economic recession and its potential effect on future delinquencies. Interest on this facility increased to LIBOR plus 2.50% per annum for all borrowings subsequent to March 2009. In addition, the amendments reduced the availability under the facility to $220 million and adjusted our borrowing base formula, requiring a larger portion of our cash flow advance to be pledged as collateral on borrowings.

We are subject to financial covenants under our debt facilities, including minimum tangible net worth, maximum leverage ratios and portfolio delinquency, that are intended to measure our financial viability, limit the amount we can borrow based on measuring our debt to net worth and measure performance of our portfolio. In addition, our debt facilities include financial covenants covering LEAF Financial, an affiliate of our General Partner and the servicer of our portfolio. These covenants exist to provide the lender with information about the financial viability of the entity that services our portfolio. These covenants are similar in nature to the covenants discussed above that are applicable to us, and are related to such things as our servicer’s minimum tangible net worth, maximum leverage ratios, managed portfolio delinquency and compliance of the debt terms of all of LEAF Financial’s managed entities.

 

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As of September 30, 2009, we were in compliance with the covenants under our debt facilities, except for the minimum tangible net worth covenant under the DZ Bank revolving credit facility (the “DZ Bank Facility”). As of September 30, 2009, $130.8 million was outstanding under the DZ Bank Facility. Recourse under the DZ Bank Facility is limited to the amount of collateral pledged, which was $ 141. 6 million as of September 30, 2009 plus 5% or $6.5 million of the outstanding debt balance.

DZ Bank has provided us with a waiver of this covenant through December 12, 2009 and we have agreed to not borrow any additional amounts under the DZ Bank Facility while the parties negotiate an amendment to the debt agreement. Although we expect to amend the debt agreement, there can be no assurance that such amendment will be executed. If such amendment is not executed, all amounts owed under the credit facility would become immediately due and payable upon expiration of the waiver and written notice from DZ Bank.

As of October 31, 2009, we were not in compliance with the managed annualized default ratio under the WestLB loan agreement. In addition, during the month of October 2009, the portfolio delinquency rate increased and, as a result of such increase, additional principal payments will become due and payable on November 21, 2009 if we do not receive the waiver described below. We do not expect to have the ability to fund such principal payments, which would result in an event of default under the WestLB facility. As of October 31, 2009, $158.7 million was outstanding under the WestLB facility. Recourse under the West LB facility is limited to the amount of collateral pledged, which was $183.8 million as of October 31, 2009.

We have requested a waiver from WestLB with respect to the managed annualized default ratio and portfolio delinquency rate covenants. Although we expect to obtain such waiver, there can be no assurance that such waiver will be executed. If not executed, all amounts owed under the WestLB facility could become immediately due and payable if the bank declares a default, which could also create defaults under other debt facilities.

If we do not obtain the waiver or amendment discussed above or meet the requirements of our other debt covenants in the future, a default could occur that would have an adverse effect on our operations and could force us to liquidate all or a portion of our portfolio securing our debt facilities. If required, a sale of a portfolio, or any portion thereof, could be at prices lower than its carrying value, which could result in losses and reduce our income and distributions to our partners.

We use debt to acquire leases and loans. Repayment of our debt is based on the payments we receive from our customers. If a lease or loan becomes delinquent we must repay our lender, even though our customer has not paid us. Higher than expected lease and loan defaults will reduce our liquidity.

Our liquidity would be adversely affected by higher than expected equipment lease defaults, which would result in a loss of anticipated revenues. These losses may adversely affect our ability to make distributions to our partners and, if the level of defaults is sufficiently large, may result in our inability to fully recover our investment in the underlying equipment. In evaluating our allowance for losses on uncollectible leases, we consider our contractual delinquencies, economic conditions and trends, lease portfolio characteristics and our General Partner’s management’s prior experience with similar lease assets. At September 30, 2009, our credit evaluation indicated a need for an allowance for credit losses of $10.3 million. As our lease portfolio ages, and if the economy in the United States deteriorates even further or the recession continues for a substantial period of time, we anticipate the need to increase our allowance for credit losses.

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

To date, we have been successful in obtaining new debt financing and either extending or refinancing our credit facilities prior to their maturities; however, there can be no assurance that we will be able to continue to do so, as such activities are dependent on many factors beyond our control, including general economic and credit conditions. We continue to seek additional sources of financing, including expanded bank financing and use of joint venture strategies, that will enable us to originate investments and generate income while preserving capital. We expect that future financings may be at higher interest rates with lower leverage. As a result, our profitability may be negatively impacted if we are unable to increase our lease and loan rates to offset increases in borrowing rates.

Contractual Obligations and Commercial Commitments

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

 

     Total    Payments Due by Period
      Less than
1 Year
   1 – 3
Years
   4 – 5
Years
   After 5
Years

Bank debt (1)

   $     359,160    $     139,868    $     173,301    $     44,668    $     1,323

 

(1) To mitigate interest rate risk on the variable rate debt, we employ a hedging strategy using derivative financial instruments such as interest rate swaps and caps which fix the weighted average interest rates. Not included in the table above are estimated interest payments calculated at rates in effect at September 30, 2009: Less than 1 year: $14.1 million; 1-3 years: $11.9 million; 4-5 years: $1.8 million; and after 5 years: $35,000.

The above table does not include expected payments related to the Repurchase Liability (defined below) as of September 30, 2009. In connection with a sale of leases and loans to a third party, we agreed to repurchase delinquent leases up to maximum of 7.5% of total proceeds received from the sale (the “Repurchase Liability”). Our maximum remaining Repurchase Liability at September 30, 2009 is $187,000.

 

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Legal Proceedings

We are a party to various routine legal proceedings arising in the ordinary course of our business. Our General Partner believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of losses arising from changes in values of financial instruments. We are exposed to market risks associated with changes in interest rates and our earnings may fluctuate with changes in interest rates. The lease assets we purchase are almost entirely fixed-rate. Accordingly, we seek to finance these assets with fixed interest rate debt. At September 30, 2009, our outstanding bank debt totaled $359.2 million which consisted of variable rate debt. To mitigate interest rate risk on the variable bank rate debt, we employ a hedging strategy using derivative financial instruments such as interest rate swaps and caps, which fixes the weighted average interest rates as follows: WestLB AG (5.3%), DZ Bank (4.2%) and Key Equipment Finance (5.2%). At September 30, 2009, the notional amounts of the 22 interest rate swaps and caps were $334.7 million. The interest rate swap agreements terminate on various dates ranging from February 2012 to August 2015.

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

 

     Interest rates
fall 100 basis
points
    Unchanged     Interest rates
rise 100 basis
points
 

Hedging instruments

      

Fair value

   $ (13,983   $ (9,440   $ (5,491

Change in fair value

   $ (4,543     $ 3,949   

Change as a percent of fair value

     (48 )%        42

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

 

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ITEM 4 – CONTROLS AND PROCEDURES

Disclosure Controls

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision of our General Partner’s chief executive officer and chief financial officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our General Partner’s chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the three months ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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ITEM 6 – EXHIBITS

 

Exhibit No.

  

Description

  3.1    Certificate of Limited Partnership (1)
  3.2    Amended and Restated Agreement of Limited Partnership of LEAF Equipment Leasing Income Fund III, L.P. (1)
  4.1    Forms of letters sent to limited partners confirming their investment (1)
10.1    First Amendment to Loan and Security Agreement dated as of February 23, 2009 among LEAF III B SPE, LLC and Key Equipment Finance Inc. (2)
10.2    Amendment No. 5 to Secured Loan Agreement dated as of June 26, 2009, among WestLB AG, New York Branch, U.S. Bank National Association, LEAF Equipment Leasing Income Fund III, L.P., LEAF Financial Corporation, LEAF Funding, Inc., and LEAF Fund III, LLC (3)
10.3    Waiver, dated as of November 13, 2009, from DZ Bank.
31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certification of Chief Executive Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Certification of Chief Financial Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(1) Filed previously as an exhibit to our Registration Statement on Form S-1 filed on October 2, 2006 and by this reference incorporated herein.
(2) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 and by this reference incorporated herein.
(3) Filed previously as an exhibit to Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 and by this reference incorporated herein.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    LEAF EQUIPMENT LEASING INCOME FUND III, L.P.
    By: LEAF Asset Management, LLC, its General Partner
November 16, 2009     /s/ Crit DeMent
    CRIT DEMENT
    Chairman and Chief Executive Officer
November 16, 2009     /s/ Robert K. Moskovitz
    ROBERT K. MOSKOVITZ
    Chief Financial Officer and Chief Accounting Officer

 

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