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EXCEL - IDEA: XBRL DOCUMENT - Lease Equity Appreciation Fund II, L.P.Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - Lease Equity Appreciation Fund II, L.P.ex32_1.htm
EX-31.2 - EXHIBIT 31.2 - Lease Equity Appreciation Fund II, L.P.ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - Lease Equity Appreciation Fund II, L.P.ex31_1.htm
EX-32.2 - EXHIBIT 32.2 - Lease Equity Appreciation Fund II, L.P.ex32_2.htm

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

 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2013
 
OR
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from             to            
 
Commission file number 333-116595



LEASE EQUITY APPRECIATION FUND II, L.P.
(Exact name of registrant as specified in its charter)


 
Delaware
20-1056194
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
110 South Poplar Street, Suite 101, Wilmington Delaware 19801
(Address of principal executive offices) (Zip Code)
 
(800) 819-5556
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x Yes   ¨ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x Yes   ¨ No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer 
¨
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller Reporting Company 
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨ Yes   x No
 
There is no public market for the Registrant’s securities.
 


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

PART I
FINANCIAL INFORMATION
PAGE
ITEM 1.
3
 
3
 
4
 
5
 
6
 
7
 
8
ITEM 2.
18
ITEM 3.
25
ITEM 4.
25
 
 
 
PART II
OTHER INFORMATION
26
ITEM 6.
26
 
 
 
28

2

PART1. FINANCIAL INFORMATION
 
ITEM I – FINANCIAL STATEMENTS
 
LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)

 
 
September 30, 2013
   
December 31, 2012
 
 
 
(Unaudited)
   
 
ASSETS
 
   
 
Cash
 
$
119
   
$
249
 
Restricted cash
   
49
     
762
 
Investment in leases and loans, net
   
6,259
     
14,097
 
Deferred financing costs, net
   
109
     
521
 
Other assets
   
68
     
24
 
Total assets
 
$
6,604
   
$
15,653
 
 
               
LIABILITIES AND PARTNERS’ DEFICIT
               
Liabilities:
               
Debt
 
$
522
   
$
6,509
 
Note payable to related party
   
5,924
     
6,754
 
Accounts payable and accrued expenses
   
268
     
428
 
Other liabilities
   
69
     
279
 
Derivative liabilities, at fair value
   
47
     
217
 
Due to affiliates
   
16,390
     
16,687
 
Total liabilities
   
23,220
     
30,874
 
 
               
Commitments and contingencies (Note 10)
               
 
               
Partners’ Deficit:
               
General partner
   
(677
)
   
(659
)
Limited partners
   
(15,811
)
   
(14,020
)
Accumulated other comprehensive loss
   
(128
)
   
(542
)
Total partners’ deficit
   
(16,616
)
   
(15,221
)
Total liabilities and partners' deficit
 
$
6,604
   
$
15,653
 

The accompanying notes are an integral part of these consolidated financial statements.
3

LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Consolidated Statements of Operations
 (In thousands, except unit data)
(Unaudited)

 
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
Revenues:
 
   
   
   
 
Interest on equipment financings
 
$
171
   
$
543
   
$
742
   
$
2,076
 
Rental income
   
13
     
31
     
50
     
115
 
Gains on sale of equipment and lease dispositions, net
   
329
     
53
     
432
     
122
 
Other income
   
38
     
99
     
181
     
418
 
 
   
551
     
726
     
1,405
     
2,731
 
 
                               
Expenses:
                               
Interest expense
   
154
     
589
     
658
     
1,923
 
Interest expense to related party
   
153
     
197
     
473
     
592
 
Depreciation on operating leases
   
8
     
17
     
20
     
77
 
Provision for credit losses
   
254
     
1,112
     
535
     
2,238
 
General and administrative expenses
   
65
     
104
     
303
     
635
 
Administrative expenses reimbursed to affiliate
   
24
     
59
     
81
     
223
 
Loss (gain) on derivative activities
   
34
     
59
     
245
     
(106
)
 
   
692
     
2,137
     
2,315
     
5,582
 
Net loss
 
$
(141
)
 
$
(1,411
)
 
$
(910
)
 
$
(2,851
)
Net loss allocated to limited partners
 
$
(140
)
 
$
(1,397
)
 
$
(901
)
 
$
(2,822
)
 
                               
Weighted average number of limited partner units outstanding during the period
   
592,809
     
592,809
     
592,809
     
592,809
 
Net loss per weighted average limited partner unit
 
$
(0.24
)
 
$
(2.36
)
 
$
(1.52
)
 
$
(4.76
)

The accompanying notes are an integral part of these consolidated financial statements.
4

LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Loss
(In thousands)
(Unaudited)

 
 
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
Net loss
 
$
(141
)
 
$
(1,411
)
 
$
(910
)
 
$
(2,851
)
Amortization of net loss on financial derivatives reclassified from accumulated other comprehensive loss
   
74
     
178
     
414
     
348
 
Comprehensive loss
 
$
(67
)
 
$
(1,233
)
 
$
(496
)
 
$
(2,503
)

The accompanying notes are an integral part of these consolidated financial statements.
5

LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Consolidated Statement of Changes in Partners’ Deficit
(In thousands, except unit data)
(Unaudited)

 
   
   
Accumulated
   
 
 
General
   
   
Other
   
Total
 
 
 
Partner
   
Limited Partners
   
Comprehensive
   
Partners’
 
 
 
Amount
   
Units
   
Amount
   
(Loss) Income
   
Deficit
 
 
 
   
   
   
   
 
Balance, January 1, 2013
 
$
(659
)
   
592,809
   
$
(14,020
)
 
$
(542
)
 
$
(15,221
)
Cash distributions
   
(9
)
   
-
     
(890
)
   
-
     
(899
)
Net loss
   
(9
)
   
-
     
(901
)
   
-
     
(910
)
Other comprehensive income
   
-
     
-
     
-
     
414
     
414
 
Balance, September 30, 2013
 
$
(677
)
   
592,809
   
$
(15,811
)
 
$
(128
)
 
$
(16,616
)

The accompanying notes are an integral part of this consolidated financial statement.
6

LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

 
 
Nine Months Ended
September 30,
 
 
 
2013
   
2012
 
Cash flows from operating activities:
 
   
 
Net loss
 
$
(910
)
 
$
(2,851
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Gains on sale of equipment and lease dispositions, net
   
(432
)
   
(122
)
Depreciation on operating leases
   
20
     
77
 
Provision for credit losses
   
535
     
2,238
 
Amortization of deferred financing costs
   
478
     
735
 
Net loss on derivative activities
   
245
     
422
 
Changes in operating assets and liabilities:
               
Other assets
   
(44
)
   
126
 
Accounts payable and accrued expenses, and other liabilities
   
(370
)
   
(691
)
Due to affiliates
   
(297
)
   
(410
)
Net cash used in operating activities
   
(775
)
   
(476
)
 
               
Cash flows from investing activities:
               
Proceeds from leases and loans
   
7,860
     
18,573
 
Security deposits returned
   
(146
)
   
(455
)
Net cash provided by investing activities
   
7,714
     
18,118
 
 
               
Cash flows from financing activities:
               
Repayment of debt
   
(5,987
)
   
(28,078
)
Repayments of note payable to related party
   
(830
)
   
(458
)
Decrease in restricted cash
   
713
     
12,301
 
Increase in deferred financing costs
   
(66
)
   
(141
)
Cash distributions to partners
   
(899
)
   
(903
)
Net cash used in financing activities
   
(7,069
)
   
(17,279
)
 
               
(Decrease) increase in cash
   
(130
)
   
363
 
Cash, beginning of period
   
249
     
21
 
Cash, end of period
 
$
119
   
$
384
 
 
               
Supplemental cash flow disclosure:
               
Cash paid for interest
 
$
700
   
$
1,288
 

The accompanying notes are an integral part of these consolidated financial statements.
7

LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
September 30, 2013
(Unaudited)

NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS
 
Lease Equity Appreciation Fund II, L.P. (“LEAF II” or the “Fund”) is a Delaware limited partnership formed on March 30, 2004 by its General Partner, LEAF Financial Corporation (the “General Partner”). The General Partner manages the Fund. The General Partner is a subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly-traded company (NASDAQ: REXI) that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. Through its offering termination date of October 13, 2006, the Fund raised $60.0 million by selling 600,000 of its limited partner units. It commenced operations in April 2005.
 
The Fund is expected to have a minimum of a nine-year life, consisting of an offering period of up to two years, a five-year reinvestment period and a subsequent liquidation 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 secured loans during the liquidation period, the Fund is expected to continue to return capital to its partners as those leases and loans mature. All of the Fund’s leases and loans mature by the end of 2029. The Fund entered its liquidation period in October 2011. Contractually, the Fund will terminate on December 31, 2029, unless sooner dissolved or terminated as provided in the Limited Partnership Agreement (“the Partnership Agreement”).
 
Prior to entering the liquidation period, the Fund acquired diversified portfolios of equipment to finance to end users throughout the United States as well as the District of Columbia and Puerto Rico. The Fund also acquired existing portfolios of equipment subject to existing financings from other equipment finance companies, primarily an affiliate of its General Partner. The primary objective of the Fund is to generate regular cash distributions to its partners from its equipment finance portfolio over the life of the Fund.
 
As of September 30, 2013, in addition to its 1% general partnership interest, the General Partner also had invested $1.0 million for a 2.0% 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 II, LLC and LEAF II Receivables Funding, LLC.  All intercompany accounts and transactions have been eliminated in consolidation.
 
The accompanying unaudited financial statements reflect all adjustments that are, in the opinion of management, of a normal and recurring nature and necessary for a fair statement of the Fund’s financial position as of September 30, 2013, 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, 2013 are not necessarily indicative of results of the Fund’s operations for the 2013 calendar year. The financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial reporting.  Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to those rules and regulations. These interim financial statements should be read in conjunction with the Fund’s financial statements and notes thereto presented in the Fund’s Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC on March 28, 2013.

Reclassification
 
Certain reclassifications have been made to 2012 reported amounts to conform to the current year presentation.  Amortization of accumulated other comprehensive loss on the Fund’s interest rate swaps of approximately $178,000 and $348,000 for the three and nine months ended September 30, 2012 was reclassified from interest expense to loss (gain) on derivative activities.  Interest rate swap payments of approximately $134,000 and $530,000 for the three and nine months ended September 30, 2012, respectively, were reclassified from loss (gain) on derivative activities to interest expense.

Use of Estimates
 
Preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the allowance for credit losses, the estimated unguaranteed residual values of leased equipment, and the fair value of interest rate swaps. The Fund bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
8

LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - (Continued)
September 30, 2013
(Unaudited)
 
Investments in Leases and Loans
 
The Fund’s investments in leases and loans consist of direct financing leases, operating leases and loans.
 
Direct Financing Leases. Certain of the Fund’s lease transactions are accounted for as direct financing leases (as distinguished from operating leases). Such leases transfer substantially all benefits and risks of equipment ownership to the customer. The Fund’s investment in direct financing leases consists of the sum of the total future minimum lease payments receivable plus the estimated unguaranteed residual value of leased equipment, less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum lease 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 experience with respect to comparable equipment. The estimated residual values are recorded as a component of investments in leases. Residual values are reviewed periodically to determine if the current estimate of the equipment’s fair market value appears to be below its recorded estimate. If required, residual values are adjusted downward to reflect adjusted estimates of fair market values. Upward adjustments to residual values are not permitted.
 
Operating Leases. Leases not meeting any of the criteria to be classified as direct financing leases are deemed to be operating leases. Under the accounting for operating leases, the cost of the leased equipment, including acquisition fees associated with lease placements, is recorded as an asset and depreciated on a straight-line basis over the equipment’s estimated useful life, generally up to seven years. Rental income consists primarily of monthly periodic rental payments due under the terms of the leases. The Fund recognizes rental income on a straight line basis.
 
A review for impairment of operating leases is performed whenever events or changes in circumstances indicate that the carrying amount of the operating leases may not be recoverable.  The Fund writes down its rental equipment to its estimated net realizable value when it is probable that its carrying amount exceeds its fair value and the excess can be reasonably estimated; gains are only recognized upon actual sale of the rental equipment.
 
Loans. For term loans, the investment in loans consists of the sum of the total future minimum loan payments receivable less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum contracted loan payments over the cost of the related equipment. For all other loans, interest income is recorded at the stated rate on the accrual basis to the extent that such amounts are expected to be collected.
 
Allowance for credit losses. The Fund evaluates the adequacy of the allowance for credit losses (including investments in leases and loans) based upon, among other factors, 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, past due accounts are referred to the Fund internal recovery group consisting of a team of credit specialists and collectors. The group utilizes several resources in an attempt to maximize recoveries on charged-off accounts including:  1) initiating litigation against the end user customer and any personal guarantor, 2) referring the account to an outside law firm or collection agency and/or 3) repossessing and remarketing the equipment through third parties. The Fund’s policy is to charge off to the allowance those financings which are in default and for which it is probable management will be unable to collect all amounts contractually owed. Income is not recognized on leases and loans when a default on monthly payment exists for a period of 90 days or more. Generally, income recognition resumes when a lease or loan becomes less than 90 days delinquent. Fees from delinquent payments are recognized when received and are included in other income.

9

LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - (Continued)
September 30, 2013
(Unaudited)

Derivative Instruments

The Fund recognizes all derivatives at fair value as either assets or liabilities in the consolidated balance sheets. The accounting for subsequent changes in the fair value of these derivatives depended on whether the derivative had been designated and qualified for hedge accounting treatment pursuant to U. S. GAAP.

Effective October 1, 2010, the Fund discontinued the use of hedge accounting. Therefore, changes in the fair value of derivative instruments, including those that had previously been accounted for under hedge accounting, and periodic settlements of contracts, are recognized immediately in the accompanying consolidated statements of operations. While the Fund will continue to use derivative financial instruments to reduce exposure to changing interest rates, this accounting change may create volatility in the Fund’s results of operations, as the fair value of the Fund’s derivative financial instruments change.

For the forecasted transactions that are probable of occurring, the derivative gain or loss remaining in accumulated other comprehensive loss as of September 30, 2013 is being reclassified into earnings over the terms of the related forecasted borrowings, consistent with hedge accounting treatment. In the event that the related forecasted borrowing is no longer probable of occurring, the related gain or loss in accumulated other comprehensive loss will be recognized in earnings immediately.

Other Income

Other income includes miscellaneous fees charged by the Fund, such as late fee income, among others.  The Fund recognizes late fee income as fees are collected. Late fee income was $33,000 and $155,000 for the three and nine months ended September 30, 2013, respectively, and $86,000 and $362,000 for the three and nine months ended September 30, 2012, respectively.
10

LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - (Continued)
September 30, 2013
(Unaudited)

NOTE 3 – INVESTMENT IN LEASES AND LOANS
 
The Fund’s investment in leases and loans, net, consists of the following (in thousands):

 
 
September 30,
   
December 31,
 
 
 
2013
   
2012
 
Direct financing leases (a)
 
$
2,959
   
$
8,286
 
Loans (b)
   
3,593
     
6,433
 
Operating leases
   
37
     
58
 
 
   
6,589
     
14,777
 
Allowance for credit losses
   
(330
)
   
(680
)
 
 
$
6,259
   
$
14,097
 
 

(a) The Fund’s direct financing leases are for initial lease terms generally ranging from 24 to 132 months.
(b) The interest rates on loans generally range from 5% to 17%.
 
The components of direct financing leases and loans are as follows (in thousands):

 
 
September 30, 2013
   
December 31, 2012
 
 
 
Leases
   
Loans
   
Leases
   
Loans
 
Total future minimum lease payments
 
$
3,096
   
$
4,096
   
$
8,349
   
$
7,293
 
Unearned income
   
(297
)
   
(494
)
   
(666
)
   
(793
)
Residuals, net of unearned residual income
   
187
     
-
     
712
     
-
 
Security deposits
   
(27
)
   
(9
)
   
(109
)
   
(67
)
 
 
$
2,959
   
$
3,593
   
$
8,286
   
$
6,433
 

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

 
 
September 30,
   
December 31,
 
 
 
2013
   
2012
 
Equipment
 
$
277
   
$
352
 
Accumulated depreciation
   
(240
)
   
(294
)
 
 
$
37
   
$
58
 

11

LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - (Continued)
September 30, 2013
(Unaudited)

NOTE 4 – ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY

The following table is an age analysis of the Fund’s receivables from leases and loans (presented gross of allowance for credit losses of $330,000 and $680,000) as of September 30, 2013 and December 31, 2012, respectively (in thousands):

 
 
September 30, 2013
   
December 31, 2012
 
Age of receivable
 
Investment in leases and loans
   
%
   
Investment in leases and loans
   
%
 
Current
 
$
5,570
     
84.5
%
 
$
12,951
     
87.7
%
Delinquent:
                               
31 to 91 days past due
   
752
     
11.4
%
   
745
     
5.0
%
Greater than 91 days (a)
   
267
     
4.1
%
   
1,081
     
7.3
%
 
 
$
6,589
     
100.0
%
 
$
14,777
     
100.0
%


(a) Balances in this age category are collectively evaluated for impairment.

The Fund had $267,000 and $1.1 million of leases and loans on nonaccrual status as of September 30, 2013 and December 31, 2012, respectively.  The credit quality of the Fund’s investment in leases and loans is as follows (in thousands):

 
 
September 30,
2013
   
December 31,
2012
 
Performing
 
$
6,322
   
$
13,696
 
Nonperforming
   
267
     
1,081
 
 
 
$
6,589
   
$
14,777
 

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

 
 
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
Allowance for credit losses, beginning of period
 
$
90
   
$
780
   
$
680
   
$
760
 
Provision for credit losses
   
254
     
1,112
     
535
     
2,238
 
Charge-offs
   
(135
)
   
(1,491
)
   
(1,459
)
   
(2,954
)
Recoveries
   
121
     
209
     
574
     
566
 
Allowance for credit losses, end of period (a)
 
$
330
   
$
610
   
$
330
   
$
610
 


(a) End of period balances were collectively evaluated for impairment.

12

LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - (Continued)
September 30, 2013
(Unaudited)

NOTE 5 – DEFERRED FINANCING COSTS
 
As of September 30, 2013 and December 31, 2012, deferred financing costs include $109,000 and $521,000, respectively, of unamortized deferred financing costs which are being amortized over the terms of the estimated life of the related debt. Accumulated amortization as of September 30, 2013 and December 31, 2012 was $3.7 million and $3.1 million, respectively.

NOTE 6 – DEBT AND NOTE PAYABLE TO RELATED PARTY
 
The Fund has a term loan with Portigon Financial Services (Portigon or the Lender), previously known as WestLB AG, that had $522,000 and $6.5 million outstanding as of September 30, 2013 and December 31, 2012, respectively.  Interest on originations that were financed prior to March 2009 is calculated at London Interbank Offered Rate (“LIBOR”) plus 1.20% per year. Interest on originations financed under this facility after March 2009 are calculated at a rate of LIBOR plus 2.50% per year. As of September 30, 2013, $3.3 million of leases and loans and $114,000 of restricted cash were pledged as collateral under this facility. This facility is due in December, 2013.

On April 7, 2011 the Fund was notified by WestLB AG, which later became known as Portigon Financial Services (“Portigon” or the “Lender”), that it was in default on its loan agreement due to various ongoing covenant breaches.  These breaches relate to the percentage of defaulted leases in its portfolio, the percentage of defaulted leases in the overall lease portfolio serviced by the General Partner, and a required minimum credit support amount, among others.  On June 29, 2012, the Fund amended its agreement with the Lender whereby the Lender waived its right to pursue any of its rights or remedies on the existing covenant breaches.  Additionally, the agreement was amended to remove certain covenants from the loan agreement.  Accordingly, as of September 30, 2013, the Fund was in compliance with the term facility.  In exchange for the foregoing, the Fund and the parent of the Fund’s General Partner have agreed to a limited guaranty of a portion of the remaining amount due to the Lender.  The Lender has further agreed to accept a discount on the payoff of the loan, up to a maximum of $348,000, at its December 2013 maturity date, in the event that the natural runoff of the portfolio had not paid off the loan balance prior to such date.  The Fund expects to pay off the loan balance by its December 2013 maturity date.
 
Note payable to related party.  The Fund owed Resource Capital Corporation, Inc. (“RSO”), which is a related entity of the Fund through common management with RAI, $5.9 million and $6.8 million as of September 30, 2013 and December 31, 2012, respectively, on a note payable which bears interest at 10% per annum.  On February 15, 2012, the Fund incurred a 1% fee, or $77,000, to extend the maturity of the note payable for one year to February 15, 2013. On January 11, 2013 the Fund again extended the maturity date from February 15, 2013 to February 15, 2014 by paying a fee equal to 1% of the outstanding principal amount as of January 31, 2013, or $66,000, to RSO. Interest payments on the note payable were $473,000 and $592,000 for the nine months ended September 30, 2013 and 2012, respectively.

13

LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - (Continued)
September 30, 2013
(Unaudited)

Repayments:  Estimated annual principal payments on the Fund’s aggregate borrowings over the next two annual periods ended September 30 are as follows (in thousands):

September 30, 2014
 
$
4,479
 
September 30, 2015
   
1,967
 
 
 
$
6,446
 

NOTE 7 – DERIVATIVE INSTRUMENTS

Since the Fund’s assets are structured on a fixed-rate basis and funds borrowed through bank debt are obtained on a floating-rate basis, the Fund is exposed to interest rate risk if rates rise because it will increase the Fund’s borrowing costs. To manage interest rate risk, the Fund employs a hedging strategy using derivative financial instruments such as interest rate swaps.  The Fund does not use derivative financial instruments for trading or speculative purposes. The Fund manages the credit risk of possible counterparty default in these derivative transactions by dealing primarily with counterparties with investment grade ratings. The Fund has agreements with certain of its derivative counterparties that contain a provision where if the Fund defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Fund could also be declared in default on its derivative obligations. As of September 30, 2013, the Fund has not posted any collateral related to these agreements. If the Fund had breached any of these provisions at September 30, 2013, it could be required to settle its obligations under the agreements at their termination value of $52,000.

At September 30, 2013, the Fund has 15 interest rate swaps which terminate on various dates ranging from February 2014 to August 2015 which generally coincide with the maturity period of the portfolio of lease and loans.
 
The following tables present the fair value of the Fund’s derivative financial instruments, as well as their classification on the consolidated balance sheet as of  September 30, 2013 and December 31, 2012, and on the consolidated statement of operations for the nine months ended September 30, 2013 and 2012 (dollars in thousands):

 
 
2013
   
2012
 
Fixed swaps (notional amount)
 
$
2,956
   
$
8,635
 
Range of receive rate
   
0.19% - 0.28
%
   
0.21% - 0.26
%
Range of pay rate
   
3.11% - 5.55
%
   
3.03% - 5.55
%

The following table indicates the fair value of the derivative contracts as of September 30, 2013 and December 31, 2012 (in thousands):
 
 
Balance Sheet Location
   
Derivative
Assets
     
Derivative
Liabilities
2013
Derivative liabilities, at fair value
 
$
-
   
$
47
 
2012
Derivative liabilities, at fair value
 
$
-
   
$
217
 

14

LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - (Continued)
September 30, 2013
(Unaudited)

The following table summarizes the effect of the interest rate swaps on the consolidated statements of operations and other comprehensive loss for the nine month periods ended September 30, 2013 and 2012 (in thousands):
 
   
Location of loss
reclassified from
AOCI to the
statements of
operations
   
Amount of loss
reclassified from
AOCI to the
statements of
operations
   
 
Location of loss
recognized in the
statements of
operations
   
 
Amount of loss
recognized in the
statements of
operations
 
2013
   
(a)
 
 
$
414
     
(b)
 
 
$
5
 
2012
   
(a)
 
 
$
348
     
(b)
 
 
$
75
 
 

(a) Losses reclassified from accumulated other comprehensive loss were recognized in loss (gain) on derivative activities on the accompanying statement of operations.
 
(b) All changes in fair value were recognized in loss (gain) on derivative activities and all cash payments on derivatives were recognized in interest expense. The Fund recognized an expense of $174,000 and $530,000 in interest expense for the nine month periods ended September 30, 2013 and 2012, respectively, related to cash payments on derivatives.  Changes in fair value of $169,000 and $455,000 were recognized as a reduction to expense within loss (gain) on derivative activities for the nine month periods ended September 30, 2013 and 2012, respectively.
 
As of September 30, 2013, $128,000 of the remaining balance in accumulated other comprehensive loss is expected to be charged to earnings over the next 12 months.
 
NOTE 8 – FAIR VALUE MEASUREMENT
 
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the measurement date (exit price). U.S. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.
 
Level 1 – Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 – Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
 
Level 3 – Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
 
The Fund employs a hedging strategy to manage exposure to the effects of changes in market interest rates. All derivatives are recorded on the consolidated balance sheets at their fair value as either assets or liabilities. Because the Fund’s derivatives are not listed on an exchange, these instruments are valued by a third-party pricing agent using an income approach and utilizing models that use as their primary basis readily observable market parameters. This valuation process considers factors including interest rate yield curves, time value, credit factors and volatility factors. Although the Fund has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, the Fund has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Fund has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
15

LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - (Continued)
September 30, 2013
(Unaudited)

Liabilities measured at fair value on a recurring basis included the following (in thousands):

 
 
Fair Value Measurements Using
   
Liabilities
 
 
 
Level 1
   
Level 2
   
Level 3
   
At Fair Value
 
Interest rate swaps at September 30, 2013
 
$
-
   
$
(47
)
 
$
-
   
$
(47
)
Interest rate swaps at December 31, 2012
 
$
-
   
$
(217
)
 
$
-
   
$
(217
)

The Fund is also required to disclose the fair value of financial instruments not measured at fair value for which it is practicable to estimate that value.  For cash, restricted cash, receivables, and payables, the carrying amounts approximate fair value because of the short term maturity of these instruments.
 
The Fund is also required to disclose the methods used to estimate fair value on financial instruments not measured at fair value and the level within the fair value hierarchy that those fair value measurements are categorized. The carrying value and fair value of the Fund’s debt at September 30, 2013 and December 31, 2012 is as follows:

 
 
   
Fair Value Measurements Using
   
Liabilities
 
 
 
Carrying Value
   
Level 1
   
Level 2
   
Level 3
   
At Fair Value
 
September 30, 2013:
 
   
   
   
   
 
Debt
 
$
522
   
$
-
   
$
522
   
$
-
   
$
522
 
Note payable to related party
 
$
5,924
   
$
-
   
$
5,924
   
$
-
   
$
5,924
 
 
                                       
December 31, 2012:
                                       
Debt
 
$
6,509
   
$
-
   
$
6,365
   
$
-
   
$
6,365
 
Note payable to related party
 
$
6,754
   
$
-
   
$
6,754
   
$
-
   
$
6,754
 
 
The fair value of the debt was determined using quoted prices of comparable underlying securities obtained from brokers as of the measurement date.  The fair value of the related party note payable was determined to approximate carrying value as the interest rate is comparable to current market rates.
 
NOTE 9 – CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH AFFILIATES
 
The Fund relies on the General Partner and its affiliates to manage the Fund’s operations and pays the General Partner or its affiliates fees to manage the Fund in accordance with the Partnership Agreement. The following is a summary of fees and costs of services and materials charged by the General Partner or its affiliates (in thousands):

 
 
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
Administrative expenses
 
$
24
   
$
59
   
$
81
   
$
223
 

Management Fees. The General Partner has waived all future management fees. Through September 30, 2013, the General Partner has earned and waived management fees of $4.2 million, of which $193,000 related to the nine months ended September 30, 2013.
 
Administrative Expenses. The General Partner and its affiliates are reimbursed by the Fund for administrative services reasonably necessary to operate the Fund which do not exceed the General Partner’s actual cost of those services.
 
Due to Affiliates.  Due to affiliates includes amounts due to the General Partner and its affiliates related to acquiring and managing portfolios of equipment from its General Partner, management fees and reimbursed expenses.
16

LEASE EQUITY APPRECIATION FUND II, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - (Continued)
September 30, 2013
(Unaudited)

Distributions.  The General Partner owns a 1% general partner interest and a 2% limited partner interest in the Fund. The General Partner was paid cash distributions of $9,000 and $18,000 for its general partner interests and limited partner interests in the Fund, respectively, for the nine months ended September 30, 2013.
 
Note Payable to related party.  See Note 6 for a further discussion.
 
NOTE 10 – COMMITMENTS AND CONTINGENCIES
 
The Fund is party to various legal proceeding arising out of the ordinary course of its business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the Fund’s financial condition or results of operations.
 
NOTE 11 – SUBSEQUENT EVENTS
 
The Fund has evaluated its September 30, 2013 financial statements for subsequent events through the date the financial statements were issued.  The Fund is not aware of any additional subsequent events which would require recognition or disclosure in the financial statements.
17

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 Securities and Exchange Commission. These risks and uncertainties could cause actual results to differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release the results of any revisions to forward-looking statements which we may make to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.
 
The following discussion provides an analysis of our operating results, an overview of our liquidity and capital resources and other items related to us. The following discussion and analysis should be read in conjunction with (i) the accompanying interim financial statements and related notes and (ii) our consolidated financial statements, related notes, and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2012.
 
As used herein, the terms “we,” “us,” or “our” refer to Lease Equity Appreciation Fund II, L.P. and its subsidiaries.

Business
 
We are a Delaware limited partnership formed on March 30, 2004 by our General Partner, LEAF Financial Corporation (our “General Partner”), which manages us. Our General Partner is a subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly-traded company (NASDAQ: REXI) that uses industry specific expertise, to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. Through our offering termination date of October 13, 2006, we raised $60.0 million by selling 600,000 of our limited partner units. We commenced operations in April 2005.
 
We are expected to have a minimum of a nine-year life, consisting of an offering period of up to two years, a five year reinvestment period and a subsequent liquidation period of two years, during which our leases and secured loans will either mature or be sold. In the event we are unable to sell our leases and secured loans during the liquidation period, to the extent that there is excess cash, we expect to continue to return capital to our partners as those leases and loans mature. All of our leases and loans mature by the end of 2029. We entered our liquidation period in October 2011 and will terminate on December 31, 2029, unless sooner dissolved or terminated as provided in the Partnership Agreement.

We acquired a diversified portfolio of new, used or reconditioned equipment that we leased to third-parties. We also acquired portfolios of equipment subject to existing leases from other equipment lessors. Our financings were typically acquired from our General Partner. In addition, we made secured loans to end users to finance their purchase of equipment. We attempted to structure our secured loans so that, in an economic sense, there was no difference to us between a secured loan and a full payout equipment lease. We financed business-essential equipment including, but not limited to, computers, copiers, office furniture, water filtration systems, machinery used in manufacturing and construction, medical equipment and telecommunications equipment. We focused on the small to mid-size business market, which generally includes businesses with:
 
500 or fewer employees;
 
$1 billion or less in total assets;
 
Or $100 million or less in total annual sales.
 
To date, limited partners have received total distributions ranging from approximately 31% to 43% of their original amount invested, depending upon when the investment was made.  Management has worked to maximize the amount distributed to limited partners via regular cash distributions.  As we entered the liquidation phase of the partnership in October 2011, we are prohibited from acquiring additional leases and loans.  Accordingly, cash flows on our existing investment in leases and loans will be used to repay our obligations.  The Fund is in its liquidation process, which will continue until all of the leases are collected or sold and our debts are paid.  Distributions to our limited partners were made in 2012 and 2011 at a rate of 2.0% of their original capital invested.  As a result of the continued liquidation of the Fund’s investment portfolio, the Fund notified its limited partners that it will cease making regular cash distributions in November 2013.

18

General Economic Overview

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

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

· The National Association of Realtors Pending Home Sales Index, a forward-looking indicator based on contract signings released in September 2013, showed that pending home sales have declined recently but still remain above levels from a year ago.  Rising interest rates, rising home prices, and tight inventory are contributing to the slowing home sales.
· The S&P Case-Shiller Home Price Indices released in September 2013 for the 10- and 20-City Composites showed 12% increases year over year for the last 12 months.
· One sign that the economy continues to improve for small businesses, the number of commercial bankruptcy filings (as reported by the American Bankruptcy Institute) for the first nine months of 2013 were down 23% as compared to the same period in 2012.
· In September 2013, The Bureau of Labor Statistics reported that the unemployment rate continued to drop slightly and is now at 7.3%.
· In September 2013, The Bureau of Labor Statistics reported a continuation of monthly new jobs creation, albeit at a pace that is not sufficient to produce a significant reduction in the unemployment rate.
· The Monthly Confidence Index for the Equipment Finance Industry continued to increase, demonstrating equipment finance industry participants’ increasing optimism despite continued moderate demand for equipment.  The September 2013 Index increased to 61.3 from 61.0 in August 2013.
· The National Association of Credit Management Index for September 2013 showed continued improvement in business credit conditions. The Index takes into account activities like credit extended, credit approval rates, delinquencies, and bankruptcies. The Index measured 56.4 (any number over 50 shows improving conditions), and is at the highest level since the start of the Great Recession.
· The September 2013 Institute of Supply Management report on manufacturing showed expansion for the fourth straight month and the PMI index registered 56.2, which is the highest reading for 2013, and demonstrated that the manufacturing sector is continuing to grow in tandem with the overall economy, which has shown growth for 52 consecutive months.
· The Thomson Reuters/PayNet Small Business Lending Index, which measures the volume of lending to small businesses, rose to its highest level since August 2007.  At the same time, delinquencies of 31 to 180 days fell to an all time low as measured by the Thomson Reuters/PayNet Small Business Delinquency Index.
· The National Federation of Independent Business (NFIB) reported in September 2013 that the NFIB Small Business Optimism Index remained flat as compared to the previous month. The Index measures ten different items including small business sentiment about business expansion, hiring, and sales trends.  Of the ten items measured, five were down, four were up, and one was unchanged as compared to the prior month.
· The Equipment Leasing & Finance Foundation’s Q4 U.S. Economic Outlook indicates improving fundamentals weighed down by a number of headwinds (primarily related to monetary and fiscal policies), resulting in subpar growth. The Q4 forecast is that the U. S. economy will generate positive but slow growth.
 
Taken altogether, these indicators point to an economy that is continuing to grow steadily but slowly.  It is also an economy that is facing some significant challenges.  An extended government shutdown is projected to cause a meaningful reduction in GDP.  The extent and magnitude of consequences of a government default are unknown. The outcomes, or lack of outcomes with respect to the government shutdown, debt ceiling negotiations, Affordable Care Act implementation, and a potential government default, add a great deal of uncertainty for economic performance in Q4 and beyond.  This economic uncertainty may have an effect on the performance of leases and loans which have been largely extended to small to medium-sized businesses which are particularly sensitive to economic dislocations.
19

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

 
 
September 30,
2013
   
December 31,
2012
 
Investment in leases and loans, net
 
$
6,259
   
$
14,097
 
Number of contracts
   
2,100
     
6,200
 
Number of individual end users (a)
   
2,000
     
5,400
 
Average original equipment cost
 
$
38.5
   
$
20.6
 
Average initial lease term (in months)
   
74
     
70
 
Average remaining lease term (in months)
   
26
     
23
 
 
States accounting for more than 10% of lease and loan portfolio:
               
California
   
20
%
   
17
%
Puerto Rico
   
11
%
   
4
%
 
               
Types of equipment accounting for more than 10% of lease and loan portfolio:
               
Industrial Equipment
   
47
%
   
33
%
Medical Equipment
   
26
%
   
23
%
 
               
Types of businesses accounting for more than 10% of lease and loan portfolio:
               
Services
   
39
%
   
41
%
Manufacturing
   
20
%
   
16
%
Agriculture
   
13
%
   
10
%
Retail Trade
   
8
%
   
11
%
 

(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 11% of our portfolio based on original cost of the equipment.
20

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

 
 
As of and for the
 
 
 
Nine Months Ended September 30,
 
 
 
   
   
Change
 
 
2013
2012
$
%
Investment in leases and loans before allowance for credit losses
 
$
6,589
   
$
19,750
   
$
(13,161
)
   
(67
)%
Less: allowance for credit losses
   
(330
)
   
(610
)
   
280
     
(46
)%
Investment in leases and loans, net
 
$
6,259
   
$
19,140
   
$
(12,881
)
   
(67
)%
 
                               
Weighted average investment in direct financing leases and loans before allowance for credit losses
 
$
9,699
   
$
29,457
   
$
(19,758
)
   
(67
)%
Non-performing assets
 
$
267
   
$
906
   
$
(639
)
   
(71
)%
Charge-offs, net of recoveries
 
$
885
   
$
2,388
   
$
(1,503
)
   
(63
)%
As a percentage of finance receivables:
                               
Allowance for credit losses
   
5.01
%
   
3.09
%
               
Non-performing assets
   
4.05
%
   
4.59
%
               
As a percentage of weighted average finance receivables:
                               
Charge-offs, net of recoveries
   
9.12
%
   
8.11
%
               

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

We focused on financing equipment used by small to mid-sized businesses. The recent economic recession made it more difficult for some of our customers to make payments on their financings with us on a timely basis, which adversely affected our operations in the form of higher delinquencies. These delinquencies have continued as the U.S. economy recovers, as evidenced by an increase in our charge-offs, net of recoveries, as a percentage of our weighted average finance receivables from 8.11% at September 30, 2012 to 9.12% at September 30, 2013.  Due to the percentage increase in charge-offs and the percentage decrease in our non-performing assets as a percentage of finance receivables of 4.59% at September 30, 2012 to 4.05% at September 30, 2013, our allowance for credit losses increased as a percentage of our portfolio from 3.09% at September 30, 2012 to 5.01% at September 30, 2013.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and cost and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including the allowance for credit losses, the estimated unguaranteed residual values of leased equipment, and the fair value 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 2012 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates.” There have been no material changes to these policies through September 30, 2013.
21

Results of Operations
 
Three Months Ended September 30, 2013 Compared to the Three Months Ended September 30, 2012 (dollars in thousands):

 
 
   
Increase (Decrease)
 
 
 
2013
   
2012
   
$
   
%
 
Revenues:
 
   
   
         
Interest on equipment financings
 
$
171
   
$
543
   
$
(372
)
   
(69
)%
Rental income
   
13
     
31
     
(18
)
   
(58
)%
Gains on sale of equipment and lease dispositions, net
   
329
     
53
     
276
     
521
%
Other income
   
38
     
99
     
(61
)
   
(62
)%
 
   
551
     
726
     
(175
)
   
(24
)%
 
                               
Expenses:
                               
Interest expense
   
154
     
589
     
(435
)
   
(74
)%
Interest expense to related party
   
153
     
197
     
(44
)
   
(22
)%
Depreciation on operating leases
   
8
     
17
     
(9
)
   
(53
)%
Provision for credit losses
   
254
     
1,112
     
(858
)
   
(77
)%
General and administrative expenses
   
65
     
104
     
(39
)
   
(38
)%
Administrative expenses reimbursed to affiliate
   
24
     
59
     
(35
)
   
(59
)%
Loss (gain) on derivative activities
   
34
     
59
     
(25
)
   
(42
)%
 
   
692
     
2,137
     
(1,445
)
       
Net loss
 
$
(141
)
 
$
(1,411
)
 
$
1,270
         
Net loss allocated to limited partners
 
$
(140
)
 
$
(1,397
)
 
$
1,257
         

The overall decrease in revenues is primarily a result of a decreasing lease and loan portfolio as we are in our liquidation phase whereby we are prohibited from acquiring any new leases and loans. A more specific discussion follows:
 
The decrease in total revenues was primarily attributable to the following:
 
· A decrease in interest on equipment financings and rental income. Our weighted average net investment in financing assets decreased to $7.2 million for the three months ended September 30, 2013 as compared to $23.2 million for the three months ended September 30, 2012, a decrease of $16.0 million or 69.0%. As we entered our liquidation phase in October 2011 we are not permitted under the Partnership Agreement to acquire additional leases and loans. Therefore, our revenues are expected to continue to decline as our weighted average net investment in financing assets declines.
 
· Gains on the sale of equipment and lease dispositions increased $276,000 to a gain of $329,000 for the three month period ended September 30, 2013 compared to a net gain of $53,000 for the three month period ended September 30, 2012.  Gains and losses on sales of equipment may vary significantly from period to period.
 
· Other income decreased from $99,000 for the three months ended September 30, 2012 to $38,000 for the three months ended September 30, 2013, a decrease of $61,000 or 62%.  The decrease in other income is primarily related to a decrease in late fee income, which is primarily driven by the decrease in the size of our portfolio.
 
Total expenses decreased for the three month period ended September 30, 2013 as a result of the decrease in the size of our portfolio. Our provision for credit losses decreased to $254,000 for the three month period ended September 30, 2013 compared to $1.1 million for the three month period end September 30, 2012. We provide for credit losses when losses are likely to occur based on a migration analysis of past due payments and economic conditions, in addition to various qualitative factors. The decrease in total expenses was also due to the following:
 
A decrease in interest expense primarily due to a decrease in average debt outstanding. Weighted average borrowings for three months ended September 30, 2013 were $1.1 million as compared to $16.8 million for the three months ended September 30, 2012.
 
A decrease in interest expense to related party.  Subsequent to the repayment of our 2007-1 Term Securitization in August 2012 we began to apply cash receipts on leases and loans that had been pledged as collateral on the 2007-1 Term Securitization to repayment of the related party note payable.
 
· A decrease in depreciation on operating leases due to continued maturity of our lease and loan portfolio.
22

· A decrease in general and administrative expenses and administrative expenses reimbursed to affiliates due to the decrease in the size of our portfolio.
 
The net loss per limited partner unit, after the net loss allocated to our General Partner, for the three months ended September 30, 2013 was $0.24 compared to a net loss per limited partner unit of $2.36 for the three months ended September 30, 2012, based on a weighted average number of limited partner units outstanding of 592,809 for both periods.

Nine Months Ended September 30, 2013 Compared to the Nine Months Ended September 30, 2012 (dollars in thousands):

 
 
   
Increase (Decrease)
 
 
2013
2012
$
%
Revenues:
 
   
   
         
Interest on equipment financings
 
$
742
   
$
2,076
   
$
(1,334
)
   
(64
)%
Rental income
   
50
     
115
     
(65
)
   
(57
)%
Gains on sale of equipment and lease dispositions, net
   
432
     
122
     
310
     
254
%
Other income
   
181
     
418
     
(237
)
   
(57
)%
 
   
1,405
     
2,731
     
(1,326
)
   
(49
)%
 
                               
Expenses:
                               
Interest expense
   
658
     
1,923
     
(1,265
)
   
(66
)%
Interest expense to related party
   
473
     
592
     
(119
)
   
(20
)%
Depreciation on operating leases
   
20
     
77
     
(57
)
   
(74
)%
Provision for credit losses
   
535
     
2,238
     
(1,703
)
   
(76
)%
General and administrative expenses
   
303
     
635
     
(332
)
   
(52
)%
Administrative expenses reimbursed to affiliate
   
81
     
223
     
(142
)
   
(64
)%
Loss (gain) on derivative activities
   
245
     
(106
)
   
351
     
(331
)%
 
   
2,315
     
5,582
     
(3,267
)
       
Net loss
 
$
(910
)
 
$
(2,851
)
 
$
1,941
         
Net loss allocated to limited partners
 
$
(901
)
 
$
(2,822
)
 
$
1,921
         

The overall decrease in revenues is primarily a result of a decreasing lease and loan portfolio as we are in our liquidation phase whereby we are prohibited from acquiring any new leases and loans. A more specific discussion follows:
 
The decrease in total revenues was primarily attributable to the following:
 
· A decrease in interest on equipment financings and rental income. Our weighted average net investment in financing assets decreased to $9.7 million for the nine months ended September 30, 2013 as compared to $29.5 million for the nine months ended September 30, 2012, a decrease of $19.8 million or 67%.  As we entered our liquidation phase in October 2011 we are not permitted under the Partnership Agreement to acquire additional leases and loans. Therefore, our revenues are expected to continue to decline as our weighted average net investment in financing assets declines.
 
· Gains on the sale of equipment and lease dispositions increased $310,000 to a gain of $432,000 for the nine month period ended September 30, 2013 compared to a net gain of $122,000 for the nine month period ended September 30, 2012.  Gains and losses on sales of equipment may vary significantly from period to period.
 
· Other income decreased from $418,000 for the nine months ended September 30, 2012 to $181,000 for the nine months ended September 30, 2013, a decrease of $237,000 or 57%.  The decrease in other income is primarily related to a decrease in late fee income, which is primarily driven by the decrease in the size of our portfolio.
 
Total expenses decreased for the nine month period ended September 30, 2013 as a result of the decrease in the size of our portfolio. Our provision for credit losses decreased to $535,000 for the nine month period ended September 30, 2013 compared to $2.2 million for the nine month period end September 30, 2012. We provide for credit losses when losses are likely to occur based on a migration analysis of past due payments and economic conditions, in addition to various qualitative factors. The decrease in total expenses was also due to the following:
 
A decrease in interest expense primarily due to a decrease in average debt outstanding. Weighted average borrowings for nine months ended September 30, 2013 were $2.9 million as compared to $26.1 million for the nine months ended September 30, 2012.
23

A decrease in interest expense to related party.  Subsequent to the repayment of our 2007-1 Term Securitization in August 2012 we began to apply cash receipts on leases and loans that had been pledged as collateral on the 2007-1 Term Securitization to repayment of the related party note payable.
 
· A decrease in depreciation on operating leases due to continued maturity of our lease and loan portfolio.
 
· A decrease in general and administrative expenses and administrative expenses reimbursed to affiliates due to the decrease in the size of our portfolio.
 
The net loss per limited partner unit, after the net loss allocated to our General Partner, for the nine months ended September 30, 2013 and 2012 was $1.52 and $4.76, respectively, based on a weighted average number of limited partner units outstanding of 592,809 for both periods.
 
Liquidity and Capital Resources
 
General
 
Our major source of liquidity is from the collection of lease and loan payments.  Our primary cash requirements are for debt service, normal operating expenses, and prior to November 2013, distributions to partners. As noted previously, we notified our limited partners that we will cease making regular cash distributions in November 2013.  Accordingly, we plan to fund future operating expenses from cash remaining after payments for debt service.

The following table sets forth our sources and uses of cash for the periods indicated (in thousands):
 
 
 
Nine Months Ended
September 30,
 
 
 
2013
   
2012
 
Net cash used in operating activities
 
$
(775
)
 
$
(476
)
Net cash provided by investing activities
   
7,714
     
18,118
 
Net cash used in financing activities
   
(7,069
)
   
(17,279
)
(Decrease) increase in cash
 
$
(130
)
 
$
363
 

During the nine months ended September 30, 2013 cash decreased by $130,000 primarily due to debt and affiliated note repayments of $6.0 million and $830,000 respectively, cash distributions to our partners of $899,000, and cash used in operating activities of $775,000 that exceeded our proceeds from leases and loans of $7.9 million.
 
Partners’ distributions paid for the nine months ended September 30, 2013 and 2012 were $899,000 and $903,000, respectively.  Cumulative partner distributions paid from our inception to September 30, 2013 were $21.2 million. Partners’ distributions were made at a rate of 2.0% per annum in 2013 and 2012.  However, as a result of the continued liquidation of the Fund’s investment portfolio, the Fund notified its limited partners that it will cease making regular cash distributions in November 2013.
 
The General Partner has waived all future management fees.  Through September 30, 2013, the General Partner has earned and waived management fees of $4.2 million, of which $193,000 related to the nine months ended September 30, 2013.
 
Borrowings

We have a term loan with Portigon Financial Services (Portigon or the Lender), previously known as WestLB AG, that had $522,000 outstanding as of September 30, 2013.  Interest on originations that were financed prior to March 2009 is calculated at London Interbank Offered Rate (“LIBOR”) plus 1.20% per year. Interest on originations financed under this facility after March 2009 is at a rate of LIBOR plus 2.50% per year. As of September 30, 2013, $3.3 million of leases and loans and $114,000 of restricted cash were pledged as collateral under this facility. This facility is due in December, 2013.

On April 7, 2011 we were notified by Portigon that we were in default on our loan agreement due to various ongoing covenant breaches.  These breaches relate to the percentage of defaulted leases in its portfolio, the percentage of defaulted leases in the overall lease portfolio serviced by the General Partner, and a required minimum credit support amount, among others.  On June 29, 2012, we amended our agreement with the Lender whereby the Lender waived its right to pursue any of its rights or remedies on the existing covenant breaches.  Additionally, the agreement was amended to remove certain covenants from the loan agreement. Accordingly, as of September 30, 2013 we were in compliance with the term facility. The parties also agreed that the maturity date of the loan will be December 21, 2013 unless an event of default occurs.  In exchange for the foregoing, we and RAI have agreed to a limited guaranty of a portion of the remaining amount due to the Lender.  The Lender has further agreed to accept a discount on the payoff of the loan at the maturity date, up to a maximum of $348,000, in the event the natural runoff of the portfolio had not paid off the loan balance prior to such date. We expect that the lease portfolio collateralizing this loan will be sufficient to repay the debt, but due to uncertain economic conditions this cannot be assured.
24

In addition to the borrowings discussed above, we owe $5.9 million to Resource Capital Corporation, Inc. (“RSO”) as of September 30, 2013, which is a related entity of the Fund through common management with RAI, on a note payable which bears interest at 10% per annum.  On February 15, 2012, we incurred a 1% fee, or $77,000, to extend the maturity of the note payable for one year to February 15, 2013. On January 11, 2013, we again extended the maturity date from February 15, 2013 to February 15, 2014 by paying a fee equal to 1% of the outstanding principal amount as of January 31, 2013 to RSO.
 
On August 20, 2012 we fully repaid the 2007-1 Term Securitization, subsequent to which we began to apply cash receipts on leases and loans that had been pledged as collateral on the 2007-1 Term Securitization to repayment of the related party note payable.  Interest payments on the note payable were $473,000 for the nine month period ended September 30, 2013.
 
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, of which substantially all of our leases and loans are pledged as collateral. 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.
 
Legal Proceedings
 
We are a party to various routine legal proceedings arising in the ordinary course of our business. Our General Partner believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.
 
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Quantitative and Qualitative Disclosures about Market Risk have been omitted as permitted under rules applicable to smaller reporting companies.

ITEM 4 – CONTROLS AND PROCEDURES
 
Disclosure Controls
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
 
Under the supervision of our General Partner’s chief executive officer and chief financial officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our General Partner’s chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level discussed above.
 
Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
25

PART II. OTHER INFORMATION
 
ITEM 6 – EXHIBITS
 
Exhibit
No.
 
Description
3.1
 
Certificate of Limited Partnership for Lease Equity Appreciation Fund II, L.P. (1)
 
3.2
 
Amended Certificate of Limited Partnership for Lease Equity Appreciation Fund II, L.P.(2)
 
3.3
 
Amended and Restated Agreement of Limited Partnership for Lease Equity Appreciation Fund II, L.P. (4)
 
4.1
 
Forms of letters sent to limited partners confirming their investment (1)
 
10.1
 
Origination & Servicing Agreement among LEAF Financial Corporation, Lease Equity Appreciation Fund II, L.P. and LEAF Funding, Inc. dated April 15, 2005 (3)
 
10.2
 
Secured Loan Agreement dated as of June 1, 2005 with LEAF Fund II, LLC as Borrower, LEAF Funding, Inc. as Originator, Lease Equity Appreciation Fund II, L.P. as Seller, LEAF Financial Corporation as Servicer, U.S. Bank National Association, as Collateral Agent and Securities Intermediary and WestLB AG, New York Branch as Lender (3)
 
10.3
 
First Amendment to WestLB AG, New York Branch, Secured Loan Agreement (5)
 
10.4
 
Second Amendment to WestLB AG, New York Branch, Secured Loan Agreement (6)
 
10.5
 
Third Amendment to WestLB AG, New York Branch, Secured Loan Agreement (7)
 
10.6
 
Fifth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (8)
 
10.7
 
Sixth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (9)
 
10.8
 
Indenture among LEAF II Receivables Funding, LLC as issuer, and U.S. Bank National Association as trustee and custodian (9)
 
10.9
 
Seventh Amendment to WestLB AG, New York Branch, Secured Loan Agreement (10)
 
10.10
 
Eighth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (10)
 
10.11
 
Ninth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (11)
 
10.12
 
Tenth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (11)
 
10.13
 
Eleventh Amendment to WestLB AG, New York Branch, Secured Loan Agreement (11)
 
10.14
 
Twelfth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (12)
 
10.15
 
Thirteenth Amendment to WestLB AG, New York Branch, Secured Loan Agreement (12)
 
10.16
 
Fourteenth Amendment to West LB AG, New York Branch, Secured Loan Agreement (12)
 
10.17
 
Fifteenth Amendment to West LB AG, New York Branch, Secured Loan Agreement (13)
 
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
Certification of Chief Executive Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
Certification of Chief Financial Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
101
 
Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets at September 30, 2013 and December 31, 2012; (ii) the Consolidated Statements of  Operations for the three and nine month periods ended September 30, 2013 and 2012; (iii) the Consolidated Statements of Comprehensive Loss for the three and nine month periods ended September 30, 2013 and 2012; (iv) the Consolidated Statement of Changes in Partners’ Deficit for the nine months ended September 30, 2013; (iv) the Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2013 and 2012; and, (iv) the Notes to Consolidated Financial Statements.
 

 (1) Filed previously on June 17, 2004 as an exhibit to our Registration Statement and by this reference incorporated herein.
 (2) Filed previously on September 7, 2004 in Pre-Effective Amendment No. 1 as an exhibit to our Registration Statement and by this reference incorporated herein.
 (3) Filed previously as an exhibit to our Form 10-Q for the quarter ended June 30, 2005 and by this reference incorporated herein.
 
26

(4) Filed previously on December 27, 2005 as Appendix A Post-Effective Amendment No. 1 to our Registration Statement and by this reference incorporated herein.
(5) Filed previously as an exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 and by this reference incorporated herein.
(6) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 and by this reference incorporated herein.
(7) Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2007 and by this reference incorporated herein.
(8) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 and by this reference incorporated herein.
(9) 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.
(10) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 and by this reference incorporated herein.
(11) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 and by this reference incorporated herein.
(12) Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2009 and by this reference incorporated herein.
(13) Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 and by this reference incorporated herein.
 
27

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

 
LEASE EQUITY APPRECIATION FUND II, L.P.
 
 
Delaware Limited Partnership
 
 
 
 
 
 
By:
LEAF Financial Corporation, its General Partner
 
 
 
 
 
November 14, 2013
By: 
/s/ CRIT S. DEMENT
 
 
 
CRIT S. DEMENT
 
 
 
Chief Executive Officer
 
 
 
 
 
November 14, 2013
By:
/s/ ROBERT K. MOSKOVITZ
 
 
 
ROBERT K. MOSKOVITZ
 
 
 
Chief Financial Officer
 

 
28