LEAF Equipment Leasing Income Fund III, L.P. - FORM 10-Q - May 16, 2011

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EX-31.1 - EXHIBIT 31.1 - LEAF Equipment Leasing Income Fund III, L.P.ex31_1.htm
EX-31.2 - EXHIBIT 31.2 - LEAF Equipment Leasing Income Fund III, L.P.ex31_2.htm
EX-32.2 - EXHIBIT 32.2 - LEAF Equipment Leasing Income Fund III, L.P.ex32_2.htm
EX-32.1 - EXHIBIT 32.1 - LEAF Equipment Leasing Income Fund III, L.P.ex32_1.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2011
 
OR
 
o
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.    x  Yes   o  No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   o  Yes    o  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 o
 
Accelerated filer
o
       
Non-accelerated filer   o
 (Do not check if a smaller reporting company)
Smaller Reporting Company 
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
o  Yes     x  No
 
There is no public market for the Registrant’s securities.
 
 
 
 
 
LEAF EQUIPMENT LEASING INCOME FUND III, L.P.
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
 
     
PAGE
PART I
  
FINANCIAL INFORMATION
 
   
    3
      4
      5
      6
      7
    14
  20
    20
       
PART II
  
OTHER INFORMATION
  
    21
   
  22
 
 
2
 
PART I. FINANCIAL INFORMATION
 
 
LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES
(In thousands)
(Unaudited)
             
   
March 31,
    
December 31,
  
   
2011
    
2010
  
ASSETS
            
Cash
   $ 238     $ 526  
Restricted cash
     12,126       13,019  
Accounts receivable
     193       201  
Investment in leases and loans, net
     157,518       187,892  
Deferred financing costs, net
     2,673       3,132  
Investment in affiliated leasing partnerships
     845       863  
Other assets
     255       240  
Total assets
   $ 173,848     $ 205,873  
LIABILITIES AND PARTNERS’ (DEFICIT) CAPITAL
                
Liabilities:
                
Debt
     156,292     $ 183,972  
Note payable
     —       696  
Accounts payable and accrued expenses
     933       529  
Other liabilities
     681       877  
Due to affiliate
     16,479       17,560  
Total liabilities
     174,385       203,634  
                 
Commitments and contingencies
                
                 
Partners’ (Deficit) Capital:
                
General partner
     (1,045 )     (1,017 )
Limited partners
     508       3,256  
Total partners’ (deficit) capital
     (537 )     2,239  
Total liabilities and partners’ (deficit) capital
   $ 173,848     $ 205,873  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
3
 
LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES
(In thousands, except unit and per unit data)
(Unaudited)
 
   
Three Months Ended March 31,
  
   
2011
    
2010
  
Revenues:
            
Interest on equipment financings
   $ 3,734     $ 6,583  
Rental income
     921       1,320  
Losses on sales of equipment and lease dispositions, net
     (42 )     (43 )
Other
     714       857  
      5,327       8,717  
                 
Expenses:
                
Interest expense
     2,897       4,499  
Losses on derivative activities
     —       600  
Depreciation on operating leases
     783       1,082  
Provision for credit losses
     2,979       7,026  
General and administrative expenses
     383       802  
Administrative expenses reimbursed to affiliate
     447       1,159  
Management fees to affiliate
     —       1,104  
      7,489       16,272  
Loss before equity in (loss) earnings of affiliate
     (2,162 )     (7,555 )
Equity in (loss) earnings of affiliate
     (18 )     168  
Net loss
     (2,180 )     (7,387 )
Net loss allocated to LEAF III’s limited partners
   $ (2,158 )   $ (7,313 )
Weighted average number of limited partner units outstanding during the period
     1,195,631       1,196,631  
Net loss per weighted average limited partner unit
   $ (1.81 )   $ (6.11 )
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
4
 
LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES
(In thousands except unit data)
(Unaudited)
   
General
    
Limited Partners
    
Total
  
   
Partner
                
Partners’ (Deficit)
  
   
Amount
    
Units
    
Amount
    
Capital
  
Balance, January 1, 2011
   $ (1,017 )     1,195,631     $ 3,256     $ 2,239  
Cash distributions paid
     (6 )     —       (590 )     (596 )
Net loss
     (22 )     —       (2,158 )     (2,180 )
Balance, March 31, 2011
   $ (1,045 )     1,195,631     $ 508     $ (537 )
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
5
 
LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES
(In thousands)
(Unaudited)
 
   
Three Months Ended March 31,
  
 
  
2011
    
2010
  
Cash flows from operating activities:
                
Net loss
   $ (2,180 )   $ (7,387 )
Adjustments to reconcile net loss to net cash provided by operating activities:
                
Losses on sales of equipment and lease dispositions, net
     42       43  
Equity in loss (earnings) of affiliate
     18       (168 )
Depreciation on operating leases
     783       1,082  
Provision for credit losses
     2,979       7,026  
Amortization of deferred charges and discount on debt
     1,805       800  
Amortization and loss on financial derivative
     —       265  
Amortization of interest rate caps
     —       4  
Losses on derivative hedging activities
     —       30  
Changes in operating assets and liabilities:
                
Accounts receivable
     8       (79 )
Other assets
     (15 )     222  
Accounts payable and accrued expenses and other liabilities
     208       (471 )
Due to affiliate
     (1,081 )     5,712  
Net cash provided by operating activities
     2,567       7,079  
                 
Cash flows from investing activities:
                
Purchases of leases and loans
     —       (11,858 )
Proceeds from leases and loans
     26,654       37,128  
Security deposits returned collections, net of returns
     (84 )     (151 )
Net cash provided by investing activities
     26,570       25,119  
                 
Cash flows from financing activities:
                
Borrowings of debt
     —       6,482  
Repayment of debt
     (28,909 )     (39,224 )
Repayment of note payable
     (813 )     —  
Decrease in restricted cash
     893       3,178  
Increase in deferred financing costs
     —       (79 )
Cash distributions to partners
     (596 )     (2,533 )
Net cash used in financing activities
     (29,425 )     (32,176 )
                 
(Decrease) increase in cash
     (288 )     22  
Cash, beginning of period
     526       21  
Cash, end of period
   $ 238     $ 43  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
6
 
LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES
March 31 2011
(Unaudited)
 
NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS
 
LEAF Equipment Leasing Income Fund III, L.P. (the “Fund”) is a Delaware limited partnership formed on May 16, 2006 by its General Partner, LEAF Asset Management, LLC (the “General Partner”), which manages the Fund. The General Partner is a Delaware limited liability company, and a subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly-traded company (NASDAQ: REXI) that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. Through its offering termination date of April 24, 2008, the Fund raised $120.0 million by selling 1.2 million of its limited partner units. It commenced operations in March 2007.
 
The Fund is expected to have a nine-year life, consisting of an offering period of up to two years, a five-year reinvestment period and a subsequent maturity period of two years, during which the Fund’s leases and secured loans will either mature or be sold. In the event the Fund is unable to sell its leases and loans during the maturity period, the Fund expects to continue to return capital to its partners as those leases and loans mature. Substantially all of the Fund’s leases and loans mature by the end of 2014. The Fund expects to enter its maturity period beginning in April 2013. Contractually, the Fund will terminate on December 31, 2031, unless sooner dissolved or terminated as provided in the Limited Partnership Agreement.
 
The Fund acquires diversified portfolios of equipment to finance to end users throughout the United States as well as the District of Columbia and Puerto Rico. The Fund also acquires existing portfolios of equipment subject to existing financings from other equipment finance companies, primarily 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.
 
In addition to its 1% general partnership interest, the General Partner has also invested $1.1 million for a 1.0% limited partnership interest in the Fund.
 
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The consolidated financial statements include the accounts of the Fund and its wholly owned subsidiaries LEAF Fund III, LLC,  LEAF III B SPE, LLC, LEAF III C SPE, LLC, and LEAF Receivables Funding 5, LLC.  All intercompany accounts and transactions have been eliminated in consolidation.
 
The Fund owns approximately a 4% ownership interest in LEAF Funding, LLC (“Funding LLC”). The Fund accounts for its interest in Funding LLC under the equity method of accounting.
 
In March 2009, the Fund entered into an agreement with LEAF Equipment Finance Fund 4, L.P. (“LEAF 4”) to form LEAF Funds Joint Venture 2, LLC (“LEAF Funds JV2”). Through March 31, 2011,  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.
 
The accompanying unaudited financial statements reflect all adjustments that are, in the opinion of management, of a normal and recurring nature and necessary for a fair statement of the Fund’s financial position as of March 31, 2011, and the results of its operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of results of the Fund’s operations for the 2011 fiscal year. The Fund has evaluated subsequent events through the date the financial statements were issued. The financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to those rules and regulations. These interim financial statements should be read in conjunction with the Fund’s financial statements and notes thereto presented in the Fund’s Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC on March 31, 2011.
 
 
7
 
Reclassification
 
 A reclassification has been made to the 2010 consolidated financial statements to conform to the 2011 presentation.  In the statement of operations, renewal income of approximately $27,000 for the three months ended March 31, 2010, that was previously included in “Interest on equipment financings” has been reclassified to “Other” revenues.
 
Use of Estimates
 
Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the allowance for credit losses, the estimated unguaranteed residual values of leased equipment, impairment of long-lived assets and the fair value and effectiveness of interest rate swaps and caps. The Fund bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
 
Significant Accounting Policies
 
Investments in Leases and Loans
 
The Fund’s investment in leases and loans consist of direct financing leases, operating leases and loans.
 
Direct Financing Leases. Certain of the Fund’s lease transactions are accounted for as direct financing leases (as distinguished from operating leases). Such leases transfer substantially all benefits and risks of equipment ownership to the customer. The Fund’s investment in direct financing leases consists of the sum of the total future minimum lease payments receivable plus the estimated unguaranteed residual value of leased equipment, less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum contracted payments plus the estimated unguaranteed residual value over the cost of the related equipment.
 
Unguaranteed residual value represents the estimated amount to be received at lease termination from lease extensions or ultimate disposition of the leased equipment. The estimates of residual values are based upon the General Partner’s history with regard to the realization of residuals, available industry data and the General Partner’s senior management’s experience with respect to comparable equipment. The estimated residual values are recorded as a component of investments in leases. Residual values are reviewed periodically to determine if the current estimate of the equipment’s fair market value appears to be below its recorded estimate. If required, residual values are adjusted downward to reflect adjusted estimates of fair market values. Upward adjustments to residual values are not permitted.
 
Operating Leases. Leases not meeting any of the criteria to be classified as direct financing leases are deemed to be operating leases. Under the accounting for operating leases, the cost of the leased equipment, including acquisition fees associated with lease placements, is recorded as an asset and depreciated on a straight-line basis over the equipment’s estimated useful life, generally up to seven years. Rental income consists primarily of monthly periodic rental payments due under the terms of the leases. The Fund recognizes rental income on a straight line basis.
 
Generally, during the lease terms of existing operating leases, the Fund will not recover all of the cost and related expenses of its rental equipment and, therefore, it is prepared to remarket the equipment in future years. The Fund’s policy is to review, on a quarterly basis, the expected economic life of its rental equipment in order to determine the recoverability of its undepreciated cost. The Fund writes down its rental equipment to its estimated net realizable value when it is probable that its carrying amount exceeds such value and the excess can be reasonably estimated; gains are only recognized upon actual sale of the rental equipment. There were no write-downs of equipment during the three months ended March 31, 2011and 2010.
 
Loans. For term loans, the investment in loans consists of the sum of the total future minimum loan payments receivable less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum contracted loan payments over the cost of the related equipment. For all other loans, interest income is recorded at the stated rate on the accrual basis to the extent that such amounts are expected to be collected.
 
Allowance for Credit Losses. The Fund evaluates the adequacy of the allowance for credit losses (including investments in leases and loans) based upon, among other factors, management’s historical experience on the portfolios it manages, an analysis of contractual delinquencies, economic conditions and trends, and equipment finance portfolio characteristics, adjusted for expected recoveries. In evaluating historic performance, the Fund performs a migration analysis, which estimates the likelihood that an account progresses through delinquency stages to ultimate charge-off. After an account becomes 180 or more days past due any remaining balance is fully-reserved less an estimated recovery amount. Generally, the account is then referred to our internal recovery group consisting of a team of collectors. The Fund’s policy is to charge off to the allowance those financings which are in default and for which management has determined the probability of collection to be remote.
 
 
8
 
Income is not recognized on leases and loans when a default on monthly payment exists for a period of 90 days or more. Income recognition resumes when a lease or loan becomes less than 90 days delinquent.  Fees from delinquent payments are recognized when received and are included in other income.
 
Recent Accounting Standards
 
Accounting Standards Issued But Not Yet Effective
 
The Financial Accounting Standards Board (“FASB”) has issued the following guidance that is not yet effective for the Fund as of March 31, 2011:
 
Troubled Debt Restructurings - In 2010, the FASB issued guidance that required the disclosure of more detailed information on the nature and extent of troubled debt restructurings and their effect on the allowance for loan and lease losses.  In January 2011, the FASB deferred the effective date of these disclosures.  In April 2011, the FASB issued additional guidance related to determining whether a creditor has granted a concession, including factors and examples for creditors to consider in evaluating whether a restructuring results in a delay in payment that is insignificant, prohibits creditors from using the borrower’s effective rate test to evaluate whether a concession has been granted to the borrower, and adds factors for creditors to use in determining whether a borrower is experiencing financial difficulties.  A provision in the April issuance also ends the FASB’s deferral of the additional disclosures about troubled debt restructurings. This guidance is not expected to have a material impact on the Fund’s consolidated financial statements, results of operations or cash flows.  For public companies, the new guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption.
 
NOTE 3 – SUPPLEMENTAL CASH FLOW INFORMATION
 
Supplemental disclosure of cash flow information (in thousands):

   
Three Months Ended March 31,
  
   
2011
    
2010
  
Cash paid for:
            
Interest
   $ 1,113     $ 1,858  
 
NOTE 4 – INVESTMENT IN LEASES AND LOANS
 
The Fund’s investment in leases and loans, net, consists of the following (in thousands):
 
   
March 31,
    
December 31,
  
   
2011
    
2010
  
Direct financing leases (a)
   $ 104,278     $ 125,728  
Loans (b)
     57,574       65,129  
Operating leases
     5,296       6,215  
      167,148       197,072  
Allowance for credit losses
     (9,630 )     (9,180 )
    $ 157,518     $ 187,892  
 
(a)
The Fund’s direct financing leases are for initial lease terms generally ranging from 24 to 84 months.
(b)
The interest rates on loans generally range from 7% to 14%.
 
The components of direct financing leases and loans are as follows (in thousands):
 
   
March 31,
    
December 31,
  
   
2011
    
2010
  
   
Leases
    
Loans
    
Leases
    
Loans
  
Total future minimum lease payments
   $ 109,832     $ 66,238     $ 133,992     $ 75,255  
Unearned income
     (10,681 )     (7,791 )     (13,718 )     (9,196 )
Residuals, net of unearned residual income (a)
     5,913       —       6,273       —  
Security deposits
     (786 )     (873 )     (819 )     (930 )
    $ 104,278     $ 57,574     $ 125,728     $ 65,129  
 
(a)
Unguaranteed residuals for direct financing leases represent the estimated amounts recoverable at lease termination from extensions or disposition of the equipment.
 
 
9
 
The Fund’s investment in operating leases, net, consists of the following (in thousands):
             
   
March 31,
    
December 31
  
   
2011
    
2010
  
Equipment on operating leases
   $ 14,881     $ 15,346  
Accumulated depreciation
     (9,529 )     (9,094 )
Security deposits
     (56 )     (37 )
    $ 5,296     $ 6,215  
 
The Fund discontinues the recognition of revenue for leases and loans for which payments are more than 90 days past due.  As of March 31, 2011and December 31, 2010, the Fund had $12.2 million and $11.3 million, respectively, of leases and loans on non-accrual status.
 
NOTE 5 – ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY
 
The disclosures in this footnote follow new guidance issued by the FASB that requires companies to provide more information about the credit quality of their financing receivables including, but not limited to, significant purchases and sales of financing receivables, aging information and credit quality indicators.
 
The following table is an age analysis of the Fund’s receivables from leases and loans (presented gross of allowance for credit losses of $9.6 million) as of March 31, 2011 (in thousands):
 
   
Investment in
        
Age of receivable
  
leases and loans
    
%
  
Current
   $ 151,082       90.4 %
Delinquent:
                
31 to 91 days past due
     3,897       2.3 %
Greater than 91 days (a)
     12,169       7.3 %
                 
    $ 167,148       100.0 %
 
(a) Balances in this age category are collectivelly evaluated for impairment.
 
The Fund had $12.2 million and $11.3 million of leases and loans on nonaccrual status as of March 31, 2011 and December 31, 2010, respectively.  The credit quality of the Fund’s investment in leases and loans as of March 31, 2011 is as follows (in thousands):

Performing
   $ 154,979  
Nonperforming
     12,169  
    $ 167,148  
 
The following table summarizes the annual activity in the allowance for credit losses (in thousands):
 
   
Three Months Ended March 31,
  
   
2011
    
2010
  
Allowance for credit losses, beginning of year
   $ 9,180     $ 17,400  
Provision for credit losses
     2,979       7,026  
Charge-offs
     (3,054 )     (14,285 )
Recoveries
     525       289  
Allowance for credit losses, end of period (a)
   $ 9,630     $ 10,430  
 
(a) End of period balances  were collectively evaluated for impairment.
 
 
10
 
NOTE 6 – DEFERRED FINANCING COSTS
 
As of March 31, 2011 and December 31, 2010, deferred financing costs include $2.7 million and $3.1 million, respectively, of unamortized deferred financing costs which are being amortized over the estimated useful life of the related debt. Accumulated amortization as of March 31, 2011 and December 31, 2010 is $1.4 million and $965,000, respectively. Estimated amortization expense of the Fund’s existing deferred financing costs for the years ending December 31, and thereafter, are as follows (in thousands):

2011
   $ 1,369  
2012
     827  
2013
     414  
2014
     45  
2015
     12  
Thereafter
     6  
    $ 2,673  
 
NOTE 7 –DEBT
 
The Fund’s bank debt consists of the following (dollars in thousands):
 
    March 31, 2011    
    Type    
Maturity Date
    
Outstanding
Balance
  
Interest rate per annum
   December 31, 2010 Outstanding Balance  
2010-4 Term Securitization (1)
  
Term
     (1)     $ 156,292  
1.70% to 5.50%
   $ 183,972  
DZ Bank (2)
  
Revolving
  
November 2013
       —  
Commercial Paper plus 1.75%
     —  
                $ 156,292       $ 183,972  
 
(1)
Previous lenders were paid off on December 8, 2010 with the proceeds from the 2010-4 Term Securitization in which 6 tranches of asset-backed notes were issued, one that matures in August 2018 and 5 that mature in January 2019, respectively. The asset-backed notes total $ 201.9 million and bear interest at stated, fixed  rates ranging from 1.7% to 5.5% and were issued at an original discount of approximately $ 7.2 million.
(2)
Availability under this loan is subject to having eligible leases or loans (as defined in the respective agreements) to pledge as collateral, compliance with covenants and the borrowing base formula.
 
DZ Bank
 
 The outstanding balance of $ 72.9 million was paid off on December 8, 2010 with the proceeds from the 2010-4 Term Securitization.  This facility has not been terminated.  The Fund is subject to certain financial covenants related to our DZ Bank facility.  As of March 31, 2011, the Fund had incurred multiple breaches under the covenants on its credit facility with DZ Bank and covenant breaches relating to the affiliate that services the Fund’s leases and loans.  The Fund has requested waivers from DZ Bank with respect to these breaches. As of March 31, 2011 no amounts are outstanding under this borrowing arrangement.
 
 
11
 
Debt Repayments: Estimated annual principal payments on the Fund’s aggregate borrowings (assuming that the lenders noted above waive the aforementioned covenant breaches) over the next five years ended March 31, and thereafter, are as follows (in thousands):

2012
   $ 68,259  
2013
     56,346  
2014
     21,143  
2015
     7,562  
2016
     2,044  
Thereafter
     938  
    $ 156,292  
 
NOTE 8 – NOTE PAYABLE
 
Guggenheim Note Payable: The note payable to Broadpoint Products was paid off on December 8, 2010, in part, with the proceeds from the 2010-4 Term Securitization and replaced with the Guggenheim Note Payable, that totaled $ 1.3 million and bore interest at 12% per annum and was paid off on March 21, 2011.
 
NOTE 9 – DERIVATIVE INSTRUMENTS
 
Since the completion of 2010-4 Term Securitization, all of the Fund’s debt is on a fixed-rate basis generally mitigating the Fund’s exposure to floating-rate interest rate risk.  Accordingly, the Fund no longer purchases or owns derivative instruments.
 
NOTE 10 – 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, and may be secured by liens on various types of equipment and may be guaranteed by third parties and cross-collateralized. Any difference between the carrying value and fair value of each transaction would be affected by a potential buyer’s assessment of the transaction’s credit quality, collateral value, guarantees, payment history, yield, term, documents and other legal matters, and other subjective considerations. Value received in a fair market sale of a transaction would be based on the terms of the sale, the Fund’s and the buyer’s views of economic and industry conditions, the Fund’s and the buyer’s tax considerations, and other factors.
 
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the measurement date (exit price). U.S. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.
 
As discussed in Note 9, the Fund no longer has a need to employ a hedging strategy as all of its debt is on a fixed- rate basis.  Historically the Fund’s vehicles to manage interest rate risk such as interest rate caps or interest rate swaps were the Fund’s only assets or liabilities measured at fair value on a recurring basis.
 
NOTE 11 – CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH AFFILIATES
 
The Fund relies on the General Partner and its affiliates to manage the Fund’s operations and pays the General Partner or its affiliates fees to manage the Fund. The following is a summary of fees and costs of services charged by the General Partner or its affiliates (in thousands):
 
   
Three Months Ended March 31,
  
    2011    
2010
  
Acquisition fees
   $ —     $ 233  
Management fees
     —       1,104  
Administrative expenses
     447       1,159  
 
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.
 
 
12
 
Management Fees. The General Partner is paid a subordinated annual asset management fee equal to 4% of gross rental payments for operating leases or 2% for full payout leases or a competitive fee, whichever is less. During the Fund’s five-year investment period, the management fees will be subordinated to the payment to the Fund’s limited partners of a cumulative annual distribution of 8.5% of their capital contributions, as adjusted by distributions deemed to be a return of capital. Beginning August 1, 2009, the General Partner waived asset management fees.  The General Partner has also waived all future management fees.
 
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.
 
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 12 – COMMITMENTS AND CONTINGENCIES
 
In connection with a sale of leases and loans to a third-party in July of 2008, the Fund contractually agreed to repurchase delinquent leases up to a maximum of $327,000 calculated as 7.5% of total proceeds received from the sale (“Repurchase Commitment”).  As of March 31, 2011 the Fund has a $181,000 remaining Repurchase Commitment.
 
The Fund is party to various routine legal proceedings arising out of the ordinary course of its business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the Fund’s financial condition or results of operations.
 
 
13
 
 
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, 2010. These risks and uncertainties could cause actual results to differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release the results of any revisions to forward-looking statements which we may make to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.
 
The following discussion provides an analysis of our operating results, an overview of our liquidity and capital resources and other items related to us. The following discussion and analysis should be read in conjunction with (i) the accompanying interim financial statements and related notes and (ii) Our consolidated financial statements, related notes, and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2010.
 
As used herein, the terms “we,” “us,” or “our” refer to LEAF Equipment Leasing Income Fund III, L.P. and Subsidiaries.
 
Business
 
We are a Delaware limited partnership formed on May 16, 2006 by our General Partner, LEAF Asset Management, LLC (the “General Partner”), which manages us. The General Partner is a Delaware limited liability company, and subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly-traded company (NASDAQ: REXI) that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. Through our offering termination date of April 24, 2008 we raised $120.0 million by selling 1.2 million of our limited partner units. We commenced operations in March 2007.
 
We are expected to have a nine-year life, consisting of an offering period of up to two years, a five year reinvestment period and a subsequent maturity period of two years, during which our leases and secured loans will either mature or be sold. In the event we are unable to sell our leases and loans during the maturity period, we expect to continue to return capital to our partners as those leases and loans mature. Substantially all of our leases and loans mature by the end of 2014. We expect to enter our liquidation period beginning in April 2013. We will terminate on December 31, 2031, unless sooner dissolved or terminated as provided in the Limited Partnership Agreement.
 
We acquire a diversified portfolio of new, used or reconditioned equipment that we lease to third parties. We also acquire portfolios of equipment subject to existing leases from other equipment lessors. Our financings are typically acquired from LEAF Financial Corporation (“LEAF”), 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 million or less in total annual sales.
 
Our principal objective is to generate regular cash distributions to our limited partners.
 
 
14
 
Fund Summary
 
At the time of our commencement, the United States economy was experiencing strong growth, an abundance of liquidity in the debt markets and historically low credit losses.  It is widely believed that the United States economy over the past few years has suffered through the worst economic recession in over 75 years.  The recession has been severe and its consequences broadly felt.  Many well-known major financial institutions failed and others had to be bailed out.   Unemployment soared to generational highs and has remained at such levels.  Bank lending was severely reduced and became more expensive.   In recent years, banks became much more reluctant to lend, and when they did it became more expensive to borrow.   If existing loans came up for renewal and were extended, they were written for reduced amounts and at higher interest rates. Also, lenders insisted on ever-tighter covenants around delinquencies and write-offs that made it more difficult to remain in compliance. As our primary credit facilities matured and we had to extend, renew or refinance them, our costs increased.  Most significantly, we had to reduce our debt on the leases previously financed.  The money to pay down the debt had to come from lease payments and those amounts were no longer available to re-invest in new leases.  The lenders’ higher fees and costs also had to be paid from funds that were then unavailable to re-invest in new leases.    All of this happened while losses increased.  The small businesses that represent our typical leasing customer have suffered through the recession.  The increase in write-offs also created an additional burden on the cash available to re-invest.
 
Our losses, while greater than projected, were still modest considering the magnitude of the economic storm.  In fact, the General Partner changed its underwriting standards early in 2008, and the portfolio of leases written since then have performed as well as originally modeled. We proactively negotiated with our lender to prevent them from foreclosing on any collateral, or requiring a distressed sale of leases that would have badly impaired capital. We sought new forms of capital, and were able to arrange debt for us at a time when lenders were not generally providing new facilities. In December of 2010, we completed a term securitization totaling approximately $202 million in which we were able to issue asset- backed notes and pay-off three of our existing lenders with the proceeds.
 
 Our General Partner has deferred payment of fees and reimbursement of expenses totaling approximately $16.5 million from inception through March 31, 2011, in order to preserve cash for us.  Additionally, the General Partner has also waived all future management fees.
 
To date, limited partners have received total distributions ranging from approximately 19% to 28% of their original amount invested, depending upon when the investment was made.   Our General Partner is working to maximize the amount that can be distributed to limited partners in the future. However, we could not continue to support 8.5% distributions, and beginning in August 2010, distributions were lowered to 2.0%.  .
 
General Economic Overview
 
The overall U.S. economic outlook remains unsettled.  In particular the small to medium sized business community has not fared as well as the larger businesses with respect to the economic recovery.  This is significant as our portfolio is composed primarily of equipment leases and loans to the small to medium size business community, and as stated the small to medium size business community is trailing behind other business segments in the economic recovery.  In fact, as reported by the U.S. Chamber of Commerce in its Small business Outlook Survey – April 2011, “The small business climate has deteriorated.  Small business owners almost universally agree – by a 73% to 17% margin – that the climate of the last two years has hindered their growth.” This decline in business performance and expectations is also seen in several other widely followed indicators of economic performance.
 
 
●
The U.S. housing market, historically a significant contributor to economic growth and wealth, continues to be depressed.  On April 26, 2011 the S&P/Case-Shiller Home Price Report for February  2011 was released and reported that single family home prices fell for an eighth consecutive month.  The report went on to state “Recent data on existing-home sales, housing starts, foreclosure activity and employment confirm we are still in a slow recovery.”
 
 
●
The National Association of Credit Managers reported that the manufacturing and Services Index Levels for March 2011 declined. “There were sharp declines in sales, new credit applications, dollar collections and the amount of credit extended.”
 
 
●
The Institute of Supply Management reports that its non-manufacturing index declined in March 2011 as compared to February 2011. Similarly the Institute of Supply Management’s manufacturing index declined in March 2011 as compared to February 2011. Significantly both indices reported declines in new orders.
 
 
●
The MLFI-25 Monthly Leasing and Finance Index published by the Equipment Lease and Finance Association reported increases in both delinquencies and charge-offs in March 2011 as compared to February 2011.
 
These various national economic trends have an impact on the businesses that have financings with us, and while the economy remains in an unsettled state, periodic swings in our portfolio performance may be expected.
 
 
15
 
Finance Receivables and Asset Quality
 
Information about our portfolio of leases and loans is as follows (dollars in thousands):
 
   
March 31,
    
December 31,
  
   
2011
    
2010
  
Investment in leases and loans, net
   $ 157,518     $ 187,892  
Number of contracts
     32,800       35,500  
Number of individual end users (a)
     27,300       29,400  
Average original equipment cost
   $ 16.3     $ 16.1  
Average initial lease term (in months)
     55       54  
Average remaining lease term (in months)
     20       18  
States accounting for more than 10% of lease and loan portfolio:
                
California
     13 %     13 %
Types of equipment accounting for more than 10% of lease and loan portfolio:
                
Industrial Equipment
     39 %     38 %
Office Equipment
     15 %     15 %
Medical Equipment
     11 %     11 %
Types of businesses accounting for more than 10% of lease and loan portfolio:
                
Services
     40 %     40 %
Transportation/Communication/Energy
     13 %     13 %
Retail Trade
     12 %     12 %
 
(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 original cost of the equipment.
 
We utilize debt in addition to our equity to fund the acquisitions of lease portfolios. As of March 31, 2011 and December 31, 2010, our outstanding bank debt was $156.3 million and $183.9 million, respectively.
 
 
16

The performance of our lease 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
  
   
Three Months Ended March 31,
  
               
Change
  
   
2011
    
2010
     $       %  
                           
Investment in leases and loans before allowance for credit losses
   $ 167,148     $ 311,612     $ (144,464 )     (46 )%
Less: allowance for credit losses
     9,630       10,430       (800 )     (8 )%
Investment in leases and loans, net
   $ 157,518     $ 301,182     $ (143,664 )     (48 )%
                                 
Weighted average investment in direct financing leases and loans before allowance for credit losses
   $ 176,248     $ 328,991     $ (152,743 )     (46 )%
Non-performing assets
   $ 12,170     $ 15,454     $ (3,284 )     (21 )%
Charge-offs, net of recoveries
   $ 2,529     $ 13,996     $ (11,467 )     (82 )%
As a percentage of finance receivables:
                                
Allowance for credit losses
     5.76 %     3.35 %                
Non-performing assets
     7.28 %     4.96 %                
As a percentage of weighted average finance receivables:
                                
Charge-offs, net of recoveries
     1.43 %     4.25 %                
 
Our allowance for credit losses is our estimate of losses inherent in our commercial finance receivables. The allowance is based on factors which include our historical loss experience on equipment finance portfolios we manage, an analysis of contractual delinquencies, current economic conditions and trends and equipment finance portfolio characteristics, adjusted for recoveries. In evaluating historic performance, we perform a migration analysis, which estimates the likelihood that an account progresses through delinquency stages to ultimate charge-off. Our policy is to charge - off to the allowance those financings which are in default and for which management has determined the probability of collection to be remote. Substantially all of our assets are collateral for our debt and, therefore, significantly greater delinquencies than anticipated will have an adverse impact on our cash flow and distributions to our partners.
 
We focus on financing equipment used by small to mid-sized businesses. The recent economic recession in the U.S has made it more difficult for some of our customers to make payments on their financings with us on a timely basis, which has adversely affected our operations in the form of higher delinquencies. These higher delinquencies may continue as the U.S. economy recovers. The increase in delinquencies, as well as recent economic trends has caused us to conclude that an allowance for credit losses of $9.6 million is necessary at March 31, 2011.
 
Our net charge-offs decreased in the 2011 period compared to the 2010 period due to the aging of our portfolio of leases and loans as well as the recent 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 cost and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including the allowance for credit losses, the estimated unguaranteed residual values of leased equipment, impairment of long-lived assets and the fair value and effectiveness of interest rate swaps. We base our estimates on historical experience, current economic conditions and on various other assumptions that we believe reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
For a complete discussion of our critical accounting policies and estimates, see our annual report on Form 10-K for fiscal 2010 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations- Critical Accounting Policies and Estimates.”  There have been no material changes to these policies through March 31, 2011.
 
 
17
 
Results of Operations
 
Three Months Ended March 31, 2011 compared to the Three Months Ended March 31, 2010
 
               
Increase (Decrease)
  
   
2011
    
2010
     $     %  
Revenues:
                          
Interest on equipment financings
   $ 3,734     $ 6,583     $ (2,849 )     (43 )%
Rental income
     921       1,320       (399 )     (30 )%
Gains on sales of equipment and lease dispositions, net
     (42 )     (43 )     1       (2 )%
Other
     714       857       (143 )     (17 )%
      5,327       8,717       (3,390 )     (39 )%
                                 
Expenses:
                                
Interest expense
     2,897       4,499       (1,602 )     (36 )%
Losses on derivative activities
     —       600       (600 )     —  
Depreciation on operating leases
     783       1,082       (299 )     (28 )%
Provision for credit losses
     2,979       7,026       (4,047 )     (58 )%
General and administrative expenses
     383       802       (419 )     (52 )%
Administrative expenses reimbursed to affiliate
     447       1,159       (712 )     (61 )%
Management fees to affiliate
     —       1,104       (1,104 )     —  
      7,489       16,272       (8,783 )     (54 )%
Loss before equity in loss of affiliate
     (2,162 )     (7,555 )     5,393          
Equity in loss of affiliate
     (18 )     168       (186 )        
Net loss
     (2,180 )     (7,387 )     5,207          
Net loss allocated to LEAF III’s limited partners
   $ (2,158 )   $ (7,313 )   $ 5,155          
 
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 $176.2 million for the three months ended March 31, 2011 as compared to $329.0 million for the three months ended March 31, 2010, a decrease of $152.7 million (46%). This decrease was primarily due to the runoff of our portfolio of leases and loans.  See “- Liquidity and Capital Resources.”
 
 
●
A decrease in rental income, which was principally the result of a decrease in our investment in operating leases in the 2011 period compared to the 2010 period.
 
 
●
A decrease in other income, which consists primarily of late fee income. Late fee income has decreased due to the decrease of the equipment financing portfolio.
 
The decrease in total expenses was primarily the result of the following:
 
 
●
A decrease in interest due to our decrease in average debt outstanding. Average borrowings for the three months ended March 31, 2011 and 2010 were $171.4 million and $299.4 million, respectively. The interest expense reduction was primarily driven by accelerated debt payments required by our lenders and due to the reduction in the size of our portfolio of leases and loans.
 
 
●
A decrease in our provision for credit losses principally due to a decrease of our equipment financing portfolio.
 
 
●
A decrease in management fees as beginning in August 1, 2010 our General Partner waived all asset management fees. The General Partner has also waived all future management fees.
 
 
●
A decrease in general and administrative expenses principally due to a decrease in professional fees.
 
The net loss per limited partner unit, after the loss allocated to our General Partner, for the three months ended March 31 2011 and 2010 was $1.81 and $6.11 respectively, based on a weighted average number of limited partner units outstanding of 1,195,631 and 1,196,631 respectively.
 
 Liquidity and Capital Resources
 
Our major source of liquidity is excess cash derived from 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.
 
 
18
 
The following table sets forth our sources and uses of cash for the periods indicated (in thousands):
 
   
Three Months Ended March 31,
  
   
2011
    
2010
  
Net cash provided by operating activities
   $ 2,567     $ 7,079  
Net cash provided by investing activities
     26,570       25,119  
Net cash used in financing activities
     (29,425 )     (32,176 )
(Decrease) increase in cash
   $ (288 )   $ 22  
 
Partners’ distributions paid for the three months ended March 31, 2011 and 2010 were $596,000 and $2.5 million, respectively. Distributions to limited partners were paid at a rate of 8.5% per annum of invested capital through July of 2010 and were lowered to 2% in August.  Cumulative partner distributions paid from our inception to March 31, 2011 were approximately $29.4 million.
 
Future cash distributions are dependent on our performance and are impacted by a number of factors which include: our ability to obtain and maintain debt financing on acceptable terms to build and maintain our equipment finance portfolio; lease and loan defaults by our customers; and prevailing economic conditions. Due to the prolonged economic recession we continue to see a scarcity of available debt on terms beneficial to the partnership and higher than expected lease and loan defaults resulting in poorer fund performance than projected.
 
Beginning August 1, 2010 our General Partner waived asset management fees of $736,000 for the three months ended March 31, 2011. It is expected that our General Partner will also waive all future management fees.  The cash savings on management fees and distributions is expected to be used to pay down our liabilities.
 
Cash decreased by $288,000 which was primarily net debt repayment of $3.1 million (net of purchases of and proceeds from leases and loans), and distributions to our partners of $596,000.  As a result of increased delinquencies, the amount of borrowing availability was reduced, resulting in a net debt repayment in 2011.
 
Borrowings
 
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 March 31, 2011 (in thousands):
 
   
Type
  
Maturity
  
Amount
Outstanding
  
Amount of
Collateral (1)
  
2010-4 Term Securitization
  
Term
     (2 )     156,292       172,480  
DZ Bank
  
Term
     N/A     $ —     $ —  
                $ 156,292     $ 172,480  
 
(1)
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 $0 as of March 31, 2011. All facilities are collateralized by specific leases and loans and related equipment.
(2)
Previous lenders were paid off on December 8, 2010 with the proceeds from the 2010-4 Term Securitization in which 6 tranches of asset-backed notes were issued, one that matures in August 2018 and 5 that mature in January 2019, respectively. The asset-backed notes total $ 201.9 million and bear interest at stated, fixed rates ranging from 1.7% to 5.5% and were issued at an original discount of approximately $ 7.2 million.
 
DZ Bank
 
 The outstanding balance of $ 72.9 million was paid off on December 8, 2010 with the proceeds from the 2010-4 Term Securitization.  This facility has not been terminated.  Interest on each borrowing on this facility is calculated at the commercial paper rate for the lender at the time of such borrowing plus 1.75% per annum.  We are subject to certain financial covenants related to our DZ Bank facility.  As of March 31, 2011, we had incurred multiple breaches under the covenants on its credit facility with DZ Bank and covenant breaches relating to the affiliate that services our leases and loans.  We have requested waivers from DZ Bank with respect to these breaches. As of March, 2011, no amounts are outstanding under this borrowing arrangement.
 
Broadpoint Products Corp./ Guggenheim Note Payable
 
In April 2010, we entered into a $5 million term loan with Broadpoint Products Corp. Interest payments were made on a monthly basis at a rate of 10% per annum.  This term loan was paid-off on December 8, 2010 in part, with proceeds from the 2010-4 Term Securitization and replaced with a note payable to Guggenheim in the amount of $1.3 million and bore interest at 12% annually and was paid off on March 21, 2011.
 
 
19
 
Liquidity Summary
 
We use debt to acquire leases and loans. Repayment of our debt is based on the payments we receive from our customers. When a lease or loan becomes delinquent we may repay our lender in order for us to maintain compliance with our debt covenants.
 
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 March 31, 2011, our credit evaluation indicated a need for an allowance for credit losses of $9.6 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 credit 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, our general partner has been successful in 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.
 
Legal Proceedings
 
We are a party to various routine legal proceedings arising out of the ordinary course of our business. Our General Partner believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.
 
 
Quantitative and Qualitative Disclosures about Market Risk have been omitted as permitted under rules applicable to smaller reporting companies.
 
 
Disclosure Controls
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
 
Under the supervision of our General Partner’s chief executive officer and chief financial officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our General Partner’s chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level discussed above.
 
Changes in Internal Control over Financial Reporting
 
There has been no change in our internal control over financial reporting that occurred during the three months ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
20
 
PART II- OTHER INFORMATION
 

Exhibit
    
No.
  
Description
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
    
Origination and Servicing Agreement among LEAF Equipment Leasing Income Fund III, L.P., LEAF Financial Corporation and LEAF Funding Inc., dated February 12, 2007 (1)
10.2
    
Receivables Loan and Security Agreement, dated as of November 21, 2008, among LEAF III C SPE, LLC, LEAF Funding, Inc., LEAF Financial Corporation, LEAF Equipment Leasing Income Fund III, L.P., Autobahn Funding Company LLC, DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main, U.S. Bank, National Association, and Lyon Financial Services, Inc. (d/b/a U.S. Bank Portfolio Services) (2)
10.3
    
Amendment No. 1 to Receivables Loan and Security Agreement, dated as of April 13, 2010 among LEAF III C SPE, LEAF Funding, Inc., LEAF Financial Corporation, LEAF Equipment Leasing Income Fund III, L.P., Autobahn Funding Company LLC, DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main (3)
10.4
    
Indenture between LEAF Receivables Funding 5, LLC and U.S. Bank National Association dated as of November 5, 2010 (4)
   
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
Certification of Chief Executive Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
Certification of Chief Financial Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
(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 Annual Report on Form 10-K for the year ended December 31, 2008 and by this reference incorporated herein.
(3)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 and by this reference incorporated herein.
(4)
Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2010 and by this reference incorporated herein.
 
 
 
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
LEAF EQUIPMENT LEASING INCOME FUND III, L.P.
 
A Delaware Limited Partnership
     
 
By:
LEAF Asset Management, LLC, the General Partner
     
May 16, 2011
By:
/s/ CRIT S. DEMENT
   
Crit S. Dement
   
Chairman and Chief Executive Officer
     
May 16, 2011
By:
/s/ ROBERT K. MOSKOVITZ
   
Robert K. Moskovitz
   
Chief Financial Officer
 
 
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LEAF Equipment Leasing Income Fund III, L.P. Reports

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