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EXCEL - IDEA: XBRL DOCUMENT - LEAF Equipment Finance Fund 4, L.P.Financial_Report.xls
EX-32.2 - EXHIBIT 32.2 - LEAF Equipment Finance Fund 4, L.P.ex32_2.htm
EX-32.1 - EXHIBIT 32.1 - LEAF Equipment Finance Fund 4, L.P.ex32_1.htm
EX-31.1 - EXHIBIT 31.1 - LEAF Equipment Finance Fund 4, L.P.ex31_1.htm
EX-31.2 - EXHIBIT 31.2 - LEAF Equipment Finance Fund 4, L.P.ex31_2.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 September 30, 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 000-53667
 

 
LEAF EQUIPMENT FINANCE FUND 4, L.P.
(Exact Name of Registrant as Specified in Its Charter)
 

 
Delaware
61-1552209
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
110 South Poplar Street, Suite 101, Wilmington Delaware 19801
(Address of principal executive offices)
 
(800) 819-5556
(Registrant’s telephone number, including area code)
 

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x Yes     ¨ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   x Yes      ¨ No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
¨
Accelerated filer
¨
       
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller Reporting Company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ¨ Yes     x No
 
There is no public market for the Registrant’s securities.

 
 

 

LEAF EQUIPMENT FINANCE FUND 4, L.P.
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
 
PART I
FINANCIAL INFORMATION
PAGE
 
ITEM 1.
3
    3
    4
    5
    6
    7
 
ITEM 2.
14 
 
ITEM 3.
23
 
ITEM 4.
23 
       
PART II
OTHER INFORMATION
 
 
ITEM 6.
24 
       
  25 
 
 
 


PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements

LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
(Unaudited)
 
   
September 30,
2011
   
December 31,
2010
 
ASSETS
           
Cash
  $ 746     $ 394  
Restricted cash
    16,196       20,505  
Investment in leases and loans, net
    218,900       334,826  
Derivative assets at fair value
    -       147  
Deferred financing costs, net
    3,066       3,487  
Other assets
    286       253  
Total assets
  $ 239,194     $ 359,612  
                 
LIABILITIES AND PARTNERS’ (DEFICIT) CAPITAL
               
Liabilities:
               
Debt
  $ 184,356     $ 296,975  
Accounts payable, accrued expenses and other liabilities
    1,163       894  
Derivative liabilities, at fair value
    -       2,856  
Due to affiliates
    66       25  
Subordinated notes payable
    9,355       9,355  
Total liabilities
    194,940       310,105  
                 
Commitments and contingencies (note 12)
               
                 
Partners’ (Deficit) Capital:
               
General partner
    (662 )     (609 )
Limited partners
    44,415       49,642  
Total LEAF 4 partners' capital
    43,753       49,033  
Noncontrolling interest
    501       474  
Total partners’ capital
    44,254       49,507  
Total liabilities and partners' capital
  $ 239,194     $ 359,612  

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

 
3


LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except unit and per unit data)
(Unaudited)
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Revenues:
                       
Interest on equipment financings
  $ 4,212     $ 8,286     $ 14,874     $ 27,337  
Rental income
    604       711       1,964       2,200  
Gains on sale of equipment and lease dispositions, net
    360       342       1,273       729  
Gain on extinguishment of debt
    -       -       13,677       -  
Other income
    277       357       831       1,129  
      5,453       9,696       32,619       31,395  
                                 
Expenses:
                               
Interest expense
    4,725       8,233       16,937       20,387  
Losses on derivative activities
    -       1,353       126       5,128  
Depreciation on operating leases
    474       600       1,568       1,850  
Provision for credit losses
    3,089       7,312       12,293       19,956  
General and administrative expenses
    256       415       1,152       1,420  
Administrative expenses reimbursed to affiliate
    609       671       1,983       2,431  
Management fees to affiliate
    -       543       -       2,932  
      9,153       19,127       34,059       54,104  
Net loss
    (3,700 )     (9,431 )     (1,440 )     (22,709 )
Less: Net loss (income) attributable to the noncontrolling interest
    22       135       (27 )     179  
Net loss attributable to LEAF 4 partners
  $ (3,678 )   $ (9,296 )   $ (1,467 )   $ (22,530 )
Net loss allocated to LEAF 4's limited partners
  $ (3,641 )   $ (9,203 )   $ (1,452 )   $ (22,305 )
Weighted average number of limited partner units outstanding during the period
    1,259,537        1,259,864       1,259,537        1,259,952  
                                 
Net loss per weighted average limited partner unit
  $ (2.89 )   $ (7.30 )   $ (1.15 )   $ (17.70 )
 
The accompanying notes are an integral part of these consolidated financial statements.

 
4


LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
Consolidated Statement of Changes in Partners’ (Deficit) Capital
(In thousands, except unit data)
(Unaudited)
 
   
General
Partner
   
Limited Partners
   
LEAF 4
Partners’
   
Non-
Controlling
   
Total
Partners'
   
Comprehensive
 
   
Amount
   
Units
   
Amount
   
(Deficit) Capital
   
Interest
   
(Deficit) Capital
   
Loss
 
Balance, at January 1, 2011
  $ (609 )     1,259,537     $ 49,642     $ 49,033     $ 474     $ 49,507        
Return of offering costs related to the sale of limited partnership units
    -       -       4       4       -       4        
Cash distributions paid
    (38 )     -       (3,779 )     (3,817 )     -       (3,817 )      
Comprehensive loss:
                                                     
Net income
    (15 )     -       (1,452 )     (1,467 )     27       (1,440 )   $ (1,440 )
Comprehensive loss attributable to noncontrolling interest
    -       -       -       -       -       -       (27 )
Comprehensive income attributable to LEAF 4
    -       -       -       -       -       -     $ (1,467 )
Balance, September 30, 2011
  $ (662 )     1,259,537     $ 44,415     $ 43,753     $ 501     $ 44,254          
 
The accompanying notes are an integral part of this consolidated financial statement.

 
5


LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

   
Nine Months Ended September 30,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net loss attributable to LEAF 4 partners
  $ (1,467 )   $ (22,530 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Gain on extinguishment of debt
    (13,677 )     -  
Gains on sale of equipment and lease dispositions, net
    (1,273 )     (729 )
Amortization of deferred charges and discount on debt
    9,532       8,239  
Depreciation on operating leases
    1,568       1,850  
Provision for credit losses
    12,293       19,956  
Net income (loss) attributable to the noncontrolling interest
    27       (179 )
Loss (gain) on derivative hedging activities
    166       (1 )
Changes in operating assets and liabilities:
               
Other assets
    (33 )     86  
Accounts payable, accrued expenses, other liabilities and other assets
    267       (1,738 )
Due to affiliates
    45       (195 )
Net cash provided by operating activities
    7,448       4,759  
                 
Cash flows from investing activities:
               
Purchases of leases and loans
    (411 )     (12,150 )
Proceeds from leases and loans
    102,935       116,252  
Security deposits returned, net of collections
    (1,602 )     (2,980 )
Net cash provided by investing activities
    100,922       101,122  
                 
Cash flows from financing activities:
               
Borrowings of  debt
    90,041       272,622  
Repayment of  debt
    (193,920 )     (365,092 )
Decrease in restricted cash
    4,309       2,474  
Increase in deferred financing costs
    (1,756 )     (2,875 )
Termination of financial derivatives
    (2,875 )     (6,439 )
Cash distributions to partners
    (3,817 )     (7,159 )
Redemption of limited partnership units
    -       (42 )
Net cash used in financing activities
    (108,018 )     (106,511 )
                 
Increase (decrease) in cash
    352       (630 )
Cash, beginning of period
    394       1,621  
Cash, end of period
  $ 746     $ 991  

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

 
6


LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
September 30, 2011
(Unaudited)
 
NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS
 
LEAF Equipment Finance Fund 4, L.P. (“LEAF 4” or the “Fund”), a Delaware limited partnership, was formed on January 25, 2008 by its general partner, LEAF Asset Management, LLC (the “General Partner”), which manages the Fund. The General Partner is a Delaware limited liability company and a subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly traded company (NASDAQ: REXI) that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. Through its offering termination date of October 30, 2009, the Fund raised $125.7 million by selling 1.2 million of its limited partner units. It commenced operations in September 2008.
 
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 2015. The Fund expects to enter its maturity period beginning in October 2014. Contractually, the Fund will terminate on December 31, 2032, unless sooner dissolved or terminated as provided in the Limited Partnership Agreement (the Partnership Agreement).
 
The Fund acquires diversified portfolios of equipment to finance to end users throughout the United States as well as the District of Columbia and Puerto Rico. The Fund also acquires existing portfolios of equipment subject to existing financings from other equipment finance companies, primarily an affiliate of its General Partner. The primary objective of the Fund is to generate regular cash distributions to its partners from its equipment finance portfolio over the life of the Fund.
 
In addition to its 1% general partnership interest, the General Partner has also invested $1.0 million for a 0.85% limited partnership interest in the Fund.
 
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The consolidated financial statements include the accounts of the Fund and its wholly owned subsidiaries, LEAF Receivables Funding 4, LLC and LEAF 4A SPE, LLC. The consolidated financial statements also include LEAF Funds Joint Venture 2, LLC (“LEAF Funds JV2”), Resource Capital Funding, LLC (“RCF”), and LEAF Funding, LLC (“LEAF Funds JV1”) in which the Fund maintains a 98%, 100%, and 96% interest, respectively. All intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited financial statements reflect all adjustments that are, in the opinion of management, of a normal and recurring nature and necessary for a fair statement of the Fund’s financial position as of September 30, 2011, and the results of its operations and cash flows for the periods presented. The results of operations for the three and nine months ended September 30, 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.

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

 
7


Investments in Commercial Finance Assets
 
The Fund’s investments in commercial finance assets consist of direct financing leases, operating leases, and loans.
 
Direct Financing Leases. Certain of the Fund’s lease transactions are accounted for as direct financing leases (as distinguished from operating leases). Such leases transfer substantially all benefits and risks of equipment ownership to the customer. The Fund’s investment in direct financing leases consists of the sum of the total future minimum lease payments receivable and the estimated unguaranteed residual value of leased equipment, less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum contracted payments plus the estimated unguaranteed residual value expected to be realized at the end of the lease term over the cost of the related equipment.
 
Unguaranteed residual value represents the estimated amount to be received at lease termination from lease extensions or ultimate disposition of the leased equipment. The estimates of residual values are based upon the General Partner’s history with regard to the realization of residuals, available industry data and the General Partner’s experience with respect to comparable equipment. The estimated residual values are recorded as a component of investments in leases. Residual values are reviewed periodically to determine if the current estimate of the equipment’s fair market value appears to be below its recorded estimate. If required, residual values are adjusted downward to reflect adjusted estimates of fair market values. Upward adjustments to residual values are not permitted.
 
Operating Leases. Leases not meeting the criteria to be classified as direct financing leases are deemed to be operating leases. Under the accounting for operating leases, the cost of the leased equipment, including acquisition fees associated with lease placements, is recorded as an asset and depreciated on a straight-line basis over the equipment’s estimated useful life, generally up to seven years. Rental income consists primarily of monthly periodic rental payments due under the terms of the leases. The Fund recognizes rental income on a straight line basis.
 
Generally, during the lease terms of existing operating leases, the Fund will not recover all of the cost and related expenses of its rental equipment and, therefore, it is prepared to remarket the equipment in future years. The Fund’s policy is to review, on a quarterly basis, the expected economic life of its rental equipment in order to determine the recoverability of its undepreciated cost. The Fund writes down its rental equipment to its estimated net realizable value when it is probable that its carrying amount exceeds such value and the excess can be reasonably estimated; gains are only recognized upon actual sale of the rental equipment. There were no write-downs of equipment during each of the nine month periods ended September 30, 2011 and September 30, 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 loan. For all other loans, interest income is recorded at the stated rate on the accrual basis to the extent that such amounts are expected to be collected.
 
Allowance for Credit Losses. The Fund evaluates the adequacy of the allowance for credit losses (including investments in leases and loans) based upon, among other factors, management’s historical experience on the portfolios it manages, an analysis of contractual delinquencies, economic conditions and trends and equipment finance portfolio characteristics, adjusted for expected recoveries. In evaluating historic performance, the Fund performs a migration analysis, which estimates the likelihood that an account will progress through delinquency stages to ultimate charge-off. After an account becomes 180 or more days past due, any remaining balance is fully-reserved less an estimated recovery amount. 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.
 
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 Recently Adopted

Troubled Debt Restructurings - In July 2010, the Financial Accounting Standards Board (“FASB”) issued guidance that requires 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.  This guidance was effective for the Fund for the period ending September 30, 2011.  The Fund has provided the required disclosures in the notes to its consolidated financial statements.

 
8


Accounting Standards Issued But Not Yet Effective

The FASB has issued the following guidance that is not yet effective for the Fund as of September 30, 2011:

Comprehensive Income - In June 2011, the FASB issued an amendment to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity.  The amendment requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. This guidance will become effective for the Fund beginning January 1, 2012.  The Fund is currently evaluating the impact this amendment will have, if any, on its financial statements.

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

NOTE 3 – SUPPLEMENTAL CASH FLOW INFORMATION
 
Supplemental disclosure of cash flow information is as follows (in thousands):

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Cash paid for:
                       
Interest
  $ 2,163     $ 4,672     $ 7,325     $ 17,770  
                                 
Non-cash investing activities:
                               
Increase in participation in loans
  $ -     $ -     $ -     $ 4,121  

NOTE 4 – INVESTMENT IN LEASES AND LOANS
 
The Fund’s investment in leases and loans, net, consists of the following (in thousands):

   
September 30,
2011
   
December 31,
2010
 
Direct financing leases (1)
  $ 67,852     $ 108,406  
Loans (2)
    153,528       231,953  
Operating leases
    2,171       4,008  
Future payment card receivables
    268       313  
      223,819       344,680  
Allowance for credit losses
    (4,919 )     (9,854 )
    $ 218,900     $ 334,826  
 
(1)
The Fund’s direct financing leases are for initial lease terms generally ranging from 24 to 120 months.
(2)
The interest rates on loans generally range from 7% to 14%.

 
9


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

   
September 30,
2011
   
December 31,
2010
 
   
Leases
   
Loans
   
Leases
   
Loans
 
Total future minimum lease payments
  $ 70,750     $ 173,261     $ 117,370     $ 266,679  
Unearned income
    (5,450 )     (15,802 )     (11,228 )     (29,713 )
Residuals, net of unearned residual income (1)
    3,546       -       3,578       -  
Security deposits
    (994 )     (3,931 )     (1,314 )     (5,013 )
    $ 67,852     $ 153,528     $ 108,406     $ 231,953  

 
(1)
Unguaranteed residuals for direct financing leases represent the estimated amounts recoverable at lease termination from lease extensions or disposition of the equipment.
 
The Fund’s investment in operating leases, net, consists of the following (in thousands):

   
September 30,
2011
   
December 31,
2010
 
Equipment
  $ 7,368     $ 8,549  
Accumulated depreciation
    (5,197 )     (4,541 )
    $ 2,171     $ 4,008  
 
NOTE 5 – ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY

The following table is an age analysis of the Fund’s receivables from leases and loans (presented gross of allowance for credit losses of $4.9 million and $9.9 million) as of September 30, 2011 and December 31, 2010, respectively (in thousands):

   
September 30, 2011
   
December 31, 2010
 
Age of receivable
 
Investment in leases and loans
   
%
   
Investment in leases and loans
   
%
 
Current
  $ 217,026       97.0 %   $ 298,521       86.6 %
Delinquent:
                               
31 to 91 days past due
    2,295       1.0 %     32,276       9.4 %
Greater than 91 days (a)
    4,498       2.0 %     13,883       4.0 %
    $ 223,819       100.0 %   $ 344,680       100.0 %
 
(a) Balances in this age category are collectivelly evaluated for impairment.

The Fund had $4.5 million and $13.9 million of leases and loans on nonaccrual status as of September 30, 2011 and December 31, 2010, respectively.  The credit quality of the Fund’s investment in leases and loans as of September 30, 2011 and December 31, 2010 are as follows (in thousands):
 
   
September 30,
2011
   
December 31,
2010
 
Performing
  $ 219,321     $ 330,797  
Nonperforming
    4,498       13,883  
    $ 223,819     $ 344,680  

 
10


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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Allowance for credit losses, beginning of year
  $ 6,510     $ 13,740     $ 9,854     $ 15,634  
Provision for credit losses
    3,089       7,312       12,293       19,956  
Charge-offs
    (5,431 )     (7,628 )     (18,804 )     (22,509 )
Recoveries
    751       376       1,576       719  
Allowance for credit losses end of period (1)
  $ 4,919     $ 13,800     $ 4,919     $ 13,800  
 
(1) End of period balances were collectively evaluated for impairment.

Commercial financial receivables whose terms are modified are classified as troubled debt restructurings if the Fund grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring typically involve a temporary deferral of scheduled payments, an extension of a commercial financial receivable’s stated maturity date or a reduction in interest rate. Non-accrual troubled debt restructurings can be restored to accrual status if principal and interest payments, under the modified terms, become current subsequent to modification. Troubled debt restructurings are included in the Fund’s migration analysis when evaluating the allowance for credit losses.

The following table presents troubled debt restructurings of the Fund and troubled debt restructurings that subsequently defaulted during the period ended September 30, 2011 (in thousands):

   
Modifications as of September 30, 2011
 
Troubled debt restructurings:
 
Number of Contracts
   
Pre-modification outstanding recorded investment
   
Post-modification outstanding recorded investment
 
                   
Finance leases and loans
    38     $ 4,417     $ 3,935  
Operating leases
    -       -       -  
                         
                         
Troubled debt restructurings that subsequently defaulted:
 
Number of Contracts
   
Recorded investment
         
                         
Finance leases and loans
    4     $ 291          
Operating leases
    -       -          
 
NOTE 6 – DEFERRED FINANCING COSTS
 
As of September 30, 2011 and December 31, 2010, deferred financing costs include $3.1 and $3.5 million, respectively, of unamortized deferred financing costs which are being amortized over the terms of the estimated useful life of the related debt. Accumulated amortization as of September 30, 2011 and December 31, 2010 was $2.7 million, and $1.8 million, respectively. Estimated amortization expense of the Fund’s existing deferred financing costs for each of the five succeeding annual periods ending September 30, and thereafter, is as follows (in thousands):

Deferred Costs
     
       
September 30, 2012
  $ 1,421  
September 30, 2013
    832  
September 30, 2014
    481  
September 30, 2015
    218  
September 30, 2016
    86  
Thereafter
    28  
    $ 3,066  
 
 
11


NOTE 7 –DEBT
 
The Fund’s debt consists of the following (in thousands):
 
 
September 30, 2011
   
December  31,
2010
 
           
Outstanding
   
Interest rate per
   
Outstanding
 
 
Type
 
Maturity Date
   
Balance (1)
   
annum
   
Balance
 
Morgan Stanley
Term
    (2 )   $ -    
One month LIBOR +  3.0%
    $ 101,855  
2011-1 Term Securitization
Term
    (2 )     64,023    
1.7% to 5.5%
      -  
2010-1 Term Securitization
Term
    (3 )     27,311       5.00 %     54,638  
2010-3 Term Securitization
Term
    (4 )     93,022    
3.5% to 5.5%
      140,482  
              $ 184,356             $ 296,975  

 
(1)
Collateralized by specific leases and loans and restricted cash. As of September 30, 2011, $191.5 million of leases and loans and $14.8 million of restricted cash were pledged as collateral under the Fund’s term securitizations. Recourse under these securitizations is limited to the amount of collateral pledged.

 
(2)
The Morgan Stanley term loan matured on August 4, 2010.  This loan was terminated and paid off at a discount on January 26, 2011 with the proceeds from the 2011-1 Term Securitization, in which 6 classes of asset-backed notes were issued that  have varying maturity dates ranging  from December 2018 to December 2023. The asset-backed notes totaled $96.0 million and bear interest at fixed, stated rates ranging from 1.7% to 5.5% and were issued at an original discount of approximately $6.2 million.  As a result of the securitization and cancellation of the term loan, the Fund recognized a gain on extinguishment of debt of $13.7 million.

 
(3)
On May 18, 2010, a previous lender was paid-off with the proceeds from the 2010-1 Term Securitization in which 3 classes of asset-backed notes were issued, one that matures on October 23, 2016 and two that mature on September 23, 2018, respectively. The asset-backed notes total $92.7 million and bear interest at a fixed, stated rate of 5% and were issued at an original discount of $6.5 million.

 
(4)
On August 17, 2010, two previous lenders were paid-off with the proceeds from the 2010-3 Term Securitization in which 5 classes of asset-backed notes were issued, one that matures on June 20, 2016 and 4 that mature on February 20, 2022, respectively. The asset-backed notes total $171.4 million and bear interest at fixed, stated rates ranging from 3.5% to 5.5% and were issued at an original discount of $3.7 million.
 
Debt Repayments:  Excluding $8.2 million of  remaining unamortized discount on the term securitizations, estimated annual principal payments on the Fund’s aggregate borrowings over the next five annual periods ended September 30, and thereafter, are as follows (in thousands):

September 30, 2012
  $ 77,105  
September 30, 2013
    60,991  
September 30, 2014
    29,516  
September 30, 2015
    13,076  
September 30, 2016
    6,114  
Thereafter
    5,797  
    $ 192,599  

NOTE 8 – SUBORDINATED NOTES PAYABLE
 
LEAF Commercial Finance Fund, LLC (“LCFF”), a subsidiary of LEAF Funds JV2, has $9.4 million of its 8.25% secured subordinated promissory notes (the “Notes”) outstanding, which are recourse to LCFF only. The Notes were issued to private investors and require interest only payments until their maturity in February 2015. LCFF may call or redeem the Notes, in whole or in part, at any time during the interest only period.

 
12


NOTE 9 – DERIVATIVE INSTRUMENTS
 
Since the completion of the 2011-1 Term Securitization, all of the Fund’s debt is on a fixed-rate basis which generally mitigates the Fund’s exposure to floating-rate interest rate risk on its borrowings.  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 in accordance with the partnership agreement. The following is a summary of fees and costs of services and materials charged by the General Partner or its affiliates (in thousands):

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Acquisition fees
  $ -     $ -     $ -     $ 241  
Management fees
    -       543       -       2,932  
Administrative expenses
    609       671       1,983       2,431  
 
Acquisition Fees. An affiliate of the General Partner is entitled to receive 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. Persuant to the Partnership Agreement, the General Partner is entitled to receive 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.  August 1, 2010, the General Partner waived its asset management fees and subsequently waived all of its future management fees.
 
Administrative Expenses. The Fund reimburses the General Partner and its affiliates for certain costs of services and materials used by or for the Fund except those items covered by the above-mentioned fees.
 
Due to Affiliates. Due to affiliates includes amounts due to the General Partner and LEAF Financial related to acquiring and managing portfolios of equipment, management fees and reimbursed expenses.

 
13

 
NOTE 12 – COMMITMENTS AND CONTINGENCIES
 
The Fund is party to various routine legal proceedings arising out of the ordinary course of its business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the Fund’s financial condition or results of operations.

 
14


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

When used in this Form 10-Q, the words “believes” “anticipates,” “expects” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties more particularly described in other documents filed with the Securities and Exchange Commission. These risks and uncertainties could cause actual results to differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release the results of any revisions to forward-looking statements which we may make to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.

The following discussion provides an analysis of our operating results, an overview of our liquidity and capital resources and other items related to us. The following discussion and analysis should be read in conjunction with (i) the accompanying interim financial statements and related notes and (ii) our consolidated financial statements, related notes, and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2010.
 
As used herein, the terms “we,” “us,” or “our” refer to LEAF Equipment Finance Fund 4, L.P. and its subsidiaries.

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

We 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 assets 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 2015. We expect to enter our maturity period beginning in October 2014. We will terminate on December 31, 2032, unless sooner dissolved or terminated as provided in the 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 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 also invest in equipment, leases and secured loans through joint venture arrangements with our General Partner’s affiliated investment programs. We finance business essential equipment including, but not limited to, computers, copiers, office furniture, water filtration systems, machinery used in manufacturing and construction, medical equipment and telecommunications equipment. We focus on the small to mid-size business market, which generally includes businesses with:
 
• 500 or fewer employees;

• $1.0 billion or less in total assets;

• Or 100.0 million or less in total annual sales.

Our principal objective is to generate regular cash distributions to our limited partners.
Submission of Matters to a Vote of Security Holders
 
On June 8, 2011 we commenced a solicitation of our limited partners seeking their consent to amend the limited partnership agreement, as discussed below.  A majority of the limited partner units outstanding were required to vote in favor of the proposed amendment to enact the proposed changes.  Below is a further detailed explanation of the proposed changes.
 
Section 11.1(b) of our Amended and Restated Agreement of Limited Partnership (the “Limited Partnership Agreement”) provides for a period of five years (the “Reinvestment Period”) following the Final Closing Date (as such term is defined in the Limited Partnership Agreement), which was the final date of our offering period, during which we were permitted to reinvest Distributable Cash (defined below) in excess of the limited partners’ Unpaid Cumulative Return (defined below) in equipment, equipment leases and loans.  The Reinvestment Period terminates in October of 2014.  The Limited Partnership Agreement defines “Distributable Cash” generally as our gross revenue without deduction for depreciation, but after deducting cash funds used to pay all expenses, debt service, capital improvements and replacements, and less amounts allocated to reserves by our General Partner and plus amounts released from reserves by our General Partner.  The Limited Partnership Agreement defines “Unpaid Cumulative Return” as the amount of the limited partner’s Cumulative Return, reduced by aggregate distributions made to such limited partner, and defines “Cumulative Return” as an amount equal to an 8.5% annual cumulative return on the limited partner’s Adjusted Capital Contribution.  A limited partner’s “Adjusted Capital Contribution” is the aggregate initial purchase price paid for a limited partner’s units of limited partnership interest, reduced by all distributions theretofore made to a limited partner in excess of the Cumulative Return.

 
15

 
Section 11.1(b) was designed to enable us to maintain our portfolio of equipment leases and loans, and our distributions to limited partners, by replacing equipment leases and loans being paid down or paying off with new equipment leases and loans.  However our ability to generate sufficient cash flow to maintain our portfolio has been adversely affected by two principal trends:

 
·
As a result of the recession in the United States, we have experienced increased levels of default in our leases and loans.  This impacts us because when a lease or loan defaults, we do not receive the payments we anticipated, yet we still owe our financing sources the amounts we borrowed to make such lease or loan.  Additionally, the losses reduce our future revenues and thus reduce cash available for future reinvestment and distribution.

 
·
As a result of conditions in the credit markets, the lenders under our debt facilities have increased interest rates and loan fees, thereby increasing the cost of our financing.  The lenders also reduced the loan-to-value ratio (the ratio of the amount of financing to the value of the assets being financed) upon which they are willing to make loans thereby causing reductions in the size of our lease portfolio.  The lenders took these actions not only on future loans, but also in certain instances on loans that were already outstanding.  This required additional payments to such lenders, which reduced the amount of our revenue producing assets and further decreased cash available for future reinvestment and distribution.

As a result of the foregoing, we incurred net losses of $22.6 million and $22.1 million for the years ended December 31, 2009 and 2010, respectively, and a net loss of $7.2 million for the three months ended March 31, 2011.  Accordingly, we reduced distributions to limited partners from 8.5% annual cumulative return on each limited partner’s Adjusted Capital Contribution to 4.0% in August 2010.  We distributed approximately $6.2 million and $8.4 million in 2009 and 2010, respectively.

As of March 31, 2011, the date of our proxy solicitation, the Unpaid Cumulative Return was an aggregate of approximately $3.7 million.  Because of the requirement under current Section 11.1(b) that the Unpaid Cumulative Return must be paid before any Distributable Cash be used for reinvestment, the existence of the Unpaid Cumulative Return means that, instead of investing any Distributable Cash we generate in new equipment, equipment leases and loans in order to increase the total return to the limited partners, it must be distributed (to the extent of the Unpaid Cumulative Return) to the limited partners.  As a result of our inability to make new investments, our lease portfolio went from $526.7 million at September 30, 2009 to $293.0 million at March 31, 2011.

Based upon our General Partner’s best forecasts at this time, it appears unlikely that we will ever be able to pay the full amount of the Unpaid Cumulative Return.  However, our General Partner believes that, as a result of conditions currently existing in United States’ credit markets, including a reported inability of small to medium size businesses (our targeted demographic) to obtain financing, as well as an increase in the cost of such financing, we could enhance our ability to increase our revenues, and obtain a better overall return for our partners’ investments, by reinvesting Distributable Cash we generate in new equipment, equipment leases and loans.  

On October 17, 2011 our General Partner amended the Limited Partnership Agreement to allow us to reinvest Distributable Cash into new equipment, leases and loans during the continuance of the Reinvestment Period without first having to pay the Unpaid Cumulative Return.

 
16

 
General Economic Overview
 
During the third quarter of 2011, there was continuing erosion in both consumer and business confidence. The decline in confidence has negatively impacted an already uncertain economic outlook.  Confidence in the U.S. economy and capital markets is a key driver to overall economic health including the equipment finance industry.  When confidence improves consumers and business are likely to acquire goods and services including equipment.  When confidence declines the opposite is more likely.  Because the Fund’s portfolio is composed primarily of equipment leases and loans to small and medium size businesses’ declining consumer and business confidence can have a negative impact on our industry.  Of particular note, the Equipment Leasing & Finance Foundation Monthly Confidence Index continued to decline falling to 47.6 in September 2011, from 50.0 in August 2011 and 52.6 in June 2011.  Additional third quarter news reports on economic performance confirmed the economy continues to struggle.  A sampling of notable economic news items is presented below.
 
 
·
At its September 20-21 meeting, the Federal Reserve declared that there were significant downside risks to the economy and the Federal Reserve announced a new $400 billion stimulus program.
 
 
·
Both the Standard & Poor/Case-Shiller Home Price Index and the National Association of Realtors Housing Price Index reported declines.
 
 
·
Three key measures of consumer and business confidence, the University of Michigan Consumer Sentiment Index, the Conference Board Consumer Confidence Index, and the NFIB Business Optimism Index all posted declines.
 
 
·
FICO reported that its survey of bank risk managers shows an expectation that mortgage foreclosures will continue to rise and housing prices are unlikely to return to 2007 levels until 2020.
 
 
·
Experian reported that findings from its Business Benchmark Report showed that small businesses had an increase in severely delinquent accounts.
 
 
·
The Commerce Department reported that August 2011 sales of new homes fell for the fourth straight month and are less than half the level necessary for a sustained and healthy housing market.
 
The various consumer, business and equipment leasing indices demonstrate not just current conditions but also are strong predictors of the trend for the near term, and the prediction for the near term is not positive. The various national economic trends have an impact on the businesses that have financings with the LEAF Funds, and while the economy remains unsettled, the LEAF Funds portfolio performance may be affected.

 
17


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

   
September 30,
2011
   
December 31,
2010
 
Investment in leases and loans, net
  $ 218,900     $ 334,826  
                 
Number of contracts
    10,700       12,900  
Number of individual end users (1)
    9,500       11,500  
Average original equipment cost
  $ 62.3     $ 60.9  
Average initial lease term (in months)
    58       57  
Average remaining lease term (in months)
    22       27  
States accounting for more than 10% of lease and loan portfolio:
               
New York
    14 %     11 %
California
    12 %     14 %
                 
Types of equipment accounting for more than 10% of lease and loan portfolio:
               
Medical equipment
    23 %     23 %
Industrial equipment
    20 %     21 %
Restaurant equipment
    11 %     11 %
                 
Types of businesses accounting for more than 10% of lease and loan portfolio:
               
Services
    46 %     46 %
Retail trade
    17 %     18 %
Finance/Insurance/Real Estate
    16 %     13 %
 
(1)
Located in the 50 states as well as the District of Columbia and Puerto Rico. No other individual end user or single piece of equipment accounted for more than 10% of our portfolio based on the origination amount.

 
18


Portfolio Performance
 
The table below provides information about our commercial finance assets including non-performing assets, which are those assets that are not accruing income due to non-performance or impairment (dollars in thousands):

   
As of and for the
Nine Months Ended September 30,
 
               
Change
 
   
2011
   
2010
     $       %  
Investment in leases and loans before allowance for credit losses
  $ 223,819     $ 388,808     $ (164,989 )     (42 )%
Less: allowance for credit losses
    4,919       13,800       (8,881 )     (64 )%
Investment in leases and loans, net
  $ 218,900     $ 375,008     $ (156,108 )     (42 )%
                                 
Weighted average investment in direct financing leases and loans before allowance for credit losses
  $ 273,927     $ 441,161     $ (167,234 )     (38 )%
Non-performing assets
  $ 4,498     $ 13,385     $ (8,887 )     (66 )%
Charge-offs, net of recoveries
  $ 17,228     $ 21,790     $ (4,562 )     -  
As a percentage of finance receivables:
                               
Allowance for credit losses
    2.20 %     3.55 %                
Non-performing assets
    2.01 %     3.44 %                
As a percentage of weighted average finance receivables:
                               
Charge-offs, net of recoveries
    6.29 %     4.94 %                
 
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 $4.9 million is necessary at September 30, 2011.

Our net charge-offs decreased in the 2011 period compared to the 2010 period due to a decrease in the size of our portfolio of leases and loans.
 
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 September 30, 2011.
 
Results of Operations
 As discussed previously, the economic recession has negatively impacted our operating results primarily through increased rates of default on outstanding leases and loans and increased costs of borrowing from our lenders.  These factors have resulted in our inability to reinvest earnings in additional leases and loans, leading to a decrease in our portfolio balance and a reduction in cash generated to continue to support distributions to our limited partners.

 
19

 
Three months ended September 30, 2011 compared to three months ended September 30, 2010 (dollars in thousands):
 
         
Increase (Decrease)
 
   
2011
   
2010
    $     %  
Revenues:
                         
Interest on equipment financings
  $ 4,212     $ 8,286     $ (4,074 )     (49 )%
Rental income
    604       711       (107 )     (15 )%
Gains on sale of equipment and lease dispositions, net
    360       342       18       5 %
Other income
    277       357       (80 )     (22 )%
      5,453       9,696       (4,243 )     (44 )%
                                 
Expenses:
                               
Interest expense
    4,725       8,233       (3,508 )     (43 )%
Losses on derivative activities
    -       1,353       (1,353 )     (100 )%
Depreciation on operating leases
    474       600       (126 )     (21 )%
Provision for credit losses
    3,089       7,312       (4,223 )     (58 )%
General and administrative expenses
    256       415       (159 )     (38 )%
Administrative expenses reimbursed to affiliate
    609       671       (62 )     (9 )%
Management fees to affiliate
    -       543       (543 )     (100 )%
      9,153       19,127       (9,974 )     (52 )%
Net loss
    (3,700 )     (9,431 )     5,731          
Less: Net loss attributable to the noncontrolling interest
    22       135       (113 )        
Net loss attributable to LEAF 4 partners
  $ (3,678 )   $ (9,296 )   $ 5,618          
Net loss allocated to LEAF 4's limited partners
  $ (3,641 )   $ (9,203 )   $ 5,562          
 
The decrease in total revenues was primarily attributable to the following:
 
 
A decrease in interest on equipment financings. Our weighted average net investment in financing assets decreased to $234.7 million for the three months ended September 30, 2011 as compared to $386.6  million for the three months ended September 30, 2010, a decrease of $151.9 million or 39%.
 
 
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.
 
These decreases in total revenue were offset, in part, by the following:
 
 
An increase in gains on sales of equipment. Gains or losses we recognize on the sale of equipment vary significantly from period to period.
 
The decrease in total expenses was primarily a result of the following:
 
 
A decrease in interest due to our decrease in average debt outstanding. Average borrowings for the three months ended September 30, 2011 and 2010 were $200.6 million and $353.8 million, respectively. The interest expense reduction was primarily driven by the reduction in the size of our portfolio of leases and loans.
 
As discussed in Note 7, subsequent to the completion of the 2011-1 Term Securitization all of our debt was on a fixed rate basis and therefore we terminated all of our interest rate swap contracts.  Accordingly, we no longer own any derivative instruments.  Cash settlements on these interest rate swaps to fix a portion of our variable rate debt for the three month period ended September 30, 2010 were $880,000.
 
 
A decrease in our provision for credit losses principally is due to a decrease of our equipment financing portfolio and an improvement in the aging of our receivables.
 
 
A decrease in our management fees.  Beginning August 1, 2010, our General Partner waived the current quarter’s asset management fees and subsequently waived all future management fees. Refer to ‘Liquidity and Capital Resources’ section for further discussion.
 
The net loss per limited partner unit, after the net loss allocated to our General Partner, for the three months ended September 30, 2011 and 2010 was $2.89 and $7.30, respectively, based on a weighted average number of limited partner units outstanding of 1,259,537 and 1,259,864, respectively.

 
20

 
Nine Months Ended September 30, 2011 compared to the Nine Months Ended September 30, 2010 (dollars in thousands):

         
Increase (Decrease)
 
   
2011
   
2010
    $     %  
Revenues:
                         
Interest on equipment financings
  $ 14,874     $ 27,337     $ (12,463 )     (46 )%
Rental income
    1,964       2,200       (236 )     (11 )%
Gains on sale of equipment and lease dispositions, net
    1,273       729       544       75 %
Gain on extinguishment of debt
    13,677       -       13,677       100 %
Other income
    831       1,129       (298 )     (26 )%
      32,619       31,395       1,224       4 %
                                 
Expenses:
                               
Interest expense
    16,937       20,387       (3,450 )     (17 )%
Losses on derivative activities
    126       5,128       (5,002 )     (98 )%
Depreciation on operating leases
    1,568       1,850       (282 )     (15 )%
Provision for credit losses
    12,293       19,956       (7,663 )     (38 )%
General and administrative expenses
    1,152       1,420       (268 )     (19 )%
Administrative expenses reimbursed to affiliate
    1,983       2,431       (448 )     (18 )%
Management fees to affiliate
    -       2,932       (2,932 )     (100 )%
      34,059       54,104       (20,045 )     (37 )%
Net loss
    (1,440 )     (22,709 )     21,269          
Less: Net (income) loss attributable to the noncontrolling interest
    (27 )     179       (206 )        
Net loss attributable to LEAF 4 partners
  $ (1,467 )   $ (22,530 )   $ 21,063          
Net loss allocated to LEAF 4's limited partners
  $ (1,452 )   $ (22,305 )   $ 20,853          
 
The overall increase in total revenues was primarily due to a non-recurring gain on the extinguishment of debt of $13.7 million related to the payoff and termination of our Morgan Stanley facility. This gain increased limited partner’s earnings per unit for the nine month period by $10.86.  This gain was significantly offset by the following:
 
 
A decrease in interest income on equipment financings. Our weighted average net investment in financing assets decreased to $273.9 million for the nine months ended September 30, 2011 as compared to $441.2 million for the nine months ended September 30, 2010, a decrease of $167.3 million or 38%.
 
 
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, due primarily to a decrease in late fee, handling, and collection administrative fee income. These decreases were due to the decrease of the equipment financing portfolio.
 
The decrease in total expenses was primarily a result of the following:
 
 
A decrease in interest due to our decrease in average debt outstanding. Average borrowings for the nine months ended September 30, 2011 and 2010 were $237.5 million and $383.8 million, respectively. The interest expense reduction was primarily driven by the reduction in the size of our portfolio of leases and loans.
 
As discussed in Note 7, subsequent to the completion of the 2011-1 Term Securitization all of our debt was on a fixed rate basis and therefore we terminated all of our interest rate swap contracts.  Accordingly, we longer own any derivative instruments.  Cash settlements on these interest rate swaps to fix a portion of our variable rate debt for the nine month period ended September 30, 2010 were $5.4 million.
 
 
A decrease in depreciation on operating leases related to our decrease in our investment in operating leases.

 
21

 
 
A decrease in our provision for credit losses. Our provision for credit losses has decreased due to the decrease in size of the portfolio and an improvement in the aging of our receivables.
 
 
A decrease in our management fees.  Beginning August 1, 2010, our General Partner waived the current quarter’s asset management fees and subsequently waived all future management fees. Refer to ‘Liquidity and Capital Resources’ section for further discussion.
 
The net loss per limited partner unit, after the net loss allocated to our General Partner, for the nine months ended September 30, 2011 and 2010 was $1.15 and $17.70, respectively, based on a weighted average number of limited partner units outstanding of 1,259,537 and 1,259,952, respectively.
 
Liquidity and Capital Resources
 
General
 
Our major source of liquidity is from the collection of lease and loan payments.  Our primary cash requirements, in addition to normal operating expenses, are for debt service, investment in leases and loans and distributions to partners.
 
We believe at this time that future net cash inflows will be sufficient to either finance operations or meet debt service payments. The following table sets forth our sources and uses of cash for the periods indicated (in thousands):

   
Nine Months Ended September 30,
 
   
2011
   
2010
 
Net cash provided by operating activities
  $ 7,448     $ 4,759  
Net cash provided by investing activities
    100,922       101,122  
Net cash used in financing activities
    (108,018 )     (106,511 )
Increase (decrease) in cash
  $ 352     $ (630 )
 
Cash increased by $352,000 due to a decrease in expenses and net proceeds from commercial finance assets of $100.9 million; offset by net debt repayments of $103.9 million and distributions to partners of $3.8 million.
 
Partner’s distributions paid for the nine months ended September 30, 2011 and September 30, 2010 were $3.8 million and $7.2 million, respectively. Cumulative partner distributions paid from our inception to September 30, 2011 were approximately $18.8 million. To date, limited partners have received total distributions of approximately 15% of their original amount invested, depending upon when the investment was made.   Management is working to maximize the amount that can be distributed to limited partners in the future. However, we could not continue to support the historical 8.5% distributions, and beginning in August 2010, distributions were lowered to 4.0%.
 
Future cash distributions are not guaranteed and are solely 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 recent economic recession, we continue to see a scarcity of available debt on terms beneficial to us and higher than expected loan defaults, resulting in poorer fund performance than projected.
 
As discussed above, we recently amended our Partnership Agreement so that we have the ability to maintain or increase the size of our lease and loan portfolio through use of distributable cash.  Previously, the Partnership Agreement prohibited distributable cash from being used to invest in new equipment, equipment leases or loans unless distributions had been paid cumulatively at the original rate of 8.5% per year.
 
Maintaining or increasing our portfolio with performing leases and loans is expected to generate additional cash flow to us and ultimately may increase distributions to the limited partners.
 
Beginning August 1, 2010, our General Partner waived its asset management fee. Through September 30, 2011, the General Partner has waived $4.0 million of asset management fees, of which $2.5 million related to the nine months ended September 30, 2011.

 
22

 
 Borrowings
Our borrowing relationships each require the pledging of eligible leases and loans to secure amounts advanced. Borrowings outstanding under our debt facilities as of September 30, 2011 were as follows (in thousands):

 
Type
 
Maturity
   
Amount
Outstanding
   
Amount of
Collateral (1)
 
2011-1 Term Securitization
Term
    (2 )   $ 64,023     $ 69,232  
2010-1 Term Securitization
Term
    (3 )     27,311       32,223  
2010-3 Term Securitization
Term
    (4 )     93,022       104,815  
              $ 184,356     $ 206,270  
 
(1)
Collateralized by specific leases and loans and restricted cash. As of September 30, 2011, $191.5 million of leases and loans and $14.8 million of restricted cash were pledged as collateral under the Fund’s term securitizations. Recourse under these securitizations is limited to the amount of collateral pledged.

(2)
Our Morgan Stanley term loan matured on August 4, 2010. This loan was terminated and paid off at a discount on January 26, 2011 with the proceeds from the 2011-1 Term Securitization, in which 6 classes of asset-backed notes were issued that  have varying maturity dates ranging  from December 2018 to December 2023. The asset-backed notes totaled $96.0 million and bear interest at fixed, stated rates ranging from 1.7% to 5.5% and were issued at an original discount of approximately $6.2 million.  As a result of the securitization and cancellation of the term loan, we recognized a gain on extinguishment of debt of $13.7 million.

(3)
On May 18, 2010, a previous lender was paid-off with the proceeds from the 2010-1 Term Securitization in which 3 classes of asset-backed notes were issued that mature on October 23, 2016 and September 23, 2018, respectively. The asset-backed notes totaled $92.7 million and bear interest at a fixed, stated rate of 5% and were issued at an original issue discount of $6.5 million.

(4)
On August 17, 2010, two previous lenders were paid-off with the proceeds from the 2010-3 Term Securitization in which 5 classes of asset-backed notes were issued that mature on June 20, 2016 and February 20, 2022, respectively. The asset-backed notes total $171.4 million and bear interest at fixed, stated rates ranging from 3.5% to 5.5 % and were issued at an original issue discount of $3.7 million.
 
Liquidity Summary
 
Our primary source of liquidity comes from payments on our lease and loan portfolio. Our liquidity has been and could be further adversely affected by higher than expected equipment lease defaults, which results in a loss of revenues. These losses may adversely affect our ability to make distributions to our partners and, if the level of defaults is sufficiently large, may result in our inability to fully recover our investment in the underlying equipment. As our lease portfolio ages, and if the recovery in the United States economy falters for a substantial period of time, we anticipate the need to increase our allowance for credit losses.
 
Our primary use of cash is for debt service. Substantially all of our leases and loans are collateral for our debt, however, all of our debt is non-recourse to the partnership which limit our financial exposure. Repayment of our debt is based on the payments we receive from our customers. If a lease or loan becomes delinquent our lender uses the excess collateral from performing leases to repay our loan, even though our customer has not paid us. Therefore, higher than expected lease and loan defaults will reduce our liquidity.
 
As discussed above, provided the partnership amendments are adopted and we are able to acquire new leases and loans, the tightening of credit markets has and may continue to adversely affect our liquidity, particularly our ability to obtain or renew debt financing needed to execute our investment strategies. Historically, we have utilized both revolving and term debt facilities to fund our acquisitions of equipment financings.  If we are unable to obtain new debt that will allow us to invest the repayments of existing leases and loans into new investments, then our portfolio of leases and loans will continue to decline.
 
Legal Proceedings
 
We are a party to various routine legal proceedings arising out of the ordinary course of our business. Our General Partner believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.

 
23

 
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Quantitative and Qualitative Disclosures about Market Risk have been omitted as permitted under rules applicable to smaller reporting companies.
 
ITEM 4 – CONTROLS AND PROCEDURES
 
Disclosure Controls
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
 
Under the supervision of our General Partner’s chief executive officer and chief financial officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our General Partner’s chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level discussed above.
 
Changes in Internal Control over Financial Reporting
 
There has been no change in our internal control over financial reporting that occurred during the three months ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 
24

 
PART II. OTHER INFORMATION
 
ITEM 6 – EXHIBITS
 
Exhibit
No.
 
Description
  3.1
 
Certificate of Limited Partnership (1)
  3.2
 
Amended and Restated Agreement of Limited Partnership (2)
  4.1
 
Forms of letters sent to limited partners confirming their investment (1)
10.1
 
Form of Origination and Servicing Agreement Among LEAF Financial Corporation, LEAF Equipment Finance Fund 4, LP and LEAF Funding, Inc. (1)
10.2
 
Indenture by and between LEAF Commercial Finance Fund, LLC and U.S. Bank National Association (3)
10.3
 
Amended and Restated Limited Liability Company Agreement of LEAF Commercial Finance Fund, LLC(3)
10.4
 
Limited Liability Company Agreement of LEAF Funds Joint Venture 2, LLC (3)
10.5
 
Indenture between LEAF Receivables Funding 2, LLC and U.S. Bank National Association dated as of May 1, 2010 (4)
10.6
 
Indenture between LEAF Receivables Funding 4, LLC and U.S. Bank National Association dated as of July 4, 2010 (5)
10.7
 
Indenture between LEAF Receivables Funding 6, LLC and U.S. Bank National Association dated as of January 6, 2011 (6)
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Certification of Chief Executive Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
Certification of Chief Financial Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
 
The following materials from LEAF Equipment Finance Fund 4, L.P.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) the Consolidated Statements of Changes in Partners’ (Deficit) Capital, (iv) Consolidated Statements of Cash Flows, and (v) related financial notes.
 

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