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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended September 30, 2015

 

OR

 

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

 

For the transition period from              to             

 

Commission file number 000-53667

 

LEAF EQUIPMENT FINANCE FUND 4, L.P.

(Exact Name of Registrant as Specified in Its Charter)

 

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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)

 

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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.   ☒ 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).   ☒ 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):

 

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

 

There is no public market for the Registrant’s securities.

 

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LEAF EQUIPMENT FINANCE FUND 4, L.P.

INDEX TO QUARTERLY REPORT

ON FORM 10-Q

 

PART I. FINANCIAL INFORMATION

ITEM 1.

Financial Statements

LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands)

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

 

LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except unit and per unit data)

(Unaudited)

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

 

LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Consolidated Statement of Changes in Partners’ Deficit

(In thousands, except unit data)

(Unaudited)

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

 

LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

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

 

LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

September 30, 2015

(Unaudited)

NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS

LEAF Equipment Finance Fund 4, L.P. (“LEAF 4” or the “Fund”) is a Delaware limited partnership formed on January 25, 2008 by its general partner, LEAF Asset Management, LLC (the “General Partner”), which manages the Fund.  The General Partner is a Delaware limited liability company and a subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly traded company (NASDAQ: REXI) that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. Through its offering termination date of October 30, 2009, the Fund raised $125.7 million by selling 1.3 million of its limited partnership units.  It commenced operations in September 2008.

In addition to its 1% general partnership interest, the General Partner has also invested $1.0 million for a 0.87% 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, LEAF Funding, LLC (“LEAF Funds JV1”), and LEAF Funds Joint Venture 2, LLC (“LEAF Funds JV2”) and its subsidiaries LEAF Commercial Finance Fund, LLC (“LCFF”) and LEAF Receivables Funding 6, LLC (“LRF6”).  The Fund maintains a 96% and 98% ownership interest in LEAF Funds JV1 and LEAF Funds JV2, 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, 2015, and the results of its operations and cash flows for the periods presented. The results of operations for the three and nine month periods ended September 30, 2015 are not necessarily indicative of the Fund’s operating results for the entire fiscal year. The financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial reporting.  Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to those rules and regulations. These interim financial statements should be read in conjunction with the Fund’s financial statements and notes thereto presented in the Fund’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC on March 30, 2015.

Use of Estimates

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

 

LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements – (Continued)

September 30, 2015

(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 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 Fund’s history with regard to the realization of residuals, available industry data, and the Fund’s experience with respect to comparable equipment. The estimated residual values are recorded as a component of the investment 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.

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.  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.  After an account becomes 180 or more days past due, any remaining balance is charged off.  Generally, past due accounts are referred to our internal recovery group consisting of a team of credit specialists and collectors. The group utilizes several resources in an attempt to maximize recoveries on past due 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 discontinues the recognition of revenue for leases and loans for which payments are more than 90 days past due.  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.

Other Income

Other income includes miscellaneous fees charged by the Fund such as late fee income, among others.  The Fund recognizes fee income as fees are collected.

 

LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements – (Continued)

September 30, 2015

(Unaudited)

Income Taxes

Federal and state income tax laws provide that the income or losses of the Fund are reportable by the partners on their individual income tax returns.  Accordingly, no provision for such taxes has been made in the accompanying financial statements.

Recent Accounting Standards

No Accounting Standards Updates (“ASUs”) issued during 2015 are expected to have a material impact on the Company’s consolidated financial statements.

NOTE 3 – INVESTMENTS IN LEASES AND LOANS, NET

During the nine months ended September 30, 2015, the Fund sold pools totaling 52 leases, in two separate sales, with a net investment of approximately $4.14 million to a third party for proceeds totaling approximately $4.09 million and recognized a loss on the sale of approximately $50,000.  The proceeds from the sale were used to repay a portion of the Fund’s 2011-1 term securitization.  Neither the Fund nor its affiliates continue to service the leases sold.

The Fund’s investments in leases and loans, net, consist of the following (in thousands):

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(a)

The Fund’s direct financing leases are for initial lease terms generally ranging from 36 to 180 months.

(b)

The interest rates on loans generally range from 3% to 13%.

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

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(a)

Unguaranteed residuals for direct financing leases represent the estimated amounts recoverable at lease termination from extensions or disposition of the equipment.

The Fund’s investment in operating leases, net, consists of the following (in thousands) (zero at September 30, 2015):

LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements – (Continued)

September 30, 2015

(Unaudited)

NOTE 4 – ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY

The following table is an age analysis of the Fund’s receivables from its investments in leases and loans (presented gross of an allowance for credit losses of $430,000 and $530,000 as of September 30, 2015 and December 31, 2014, respectively (dollars in thousands):

The credit quality of the Fund’s receivables from its investments in leases and loans as of September 30, 2015 and December 31, 2014 is as follows (in thousands):

The Fund’s investments in leases and loans as of September 30, 2015 and 2014 was collectively evaluated for impairment.  The following table summarizes the activity in the allowance for credit losses (in thousands):

 

LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements – (Continued)

September 30, 2015

(Unaudited)

NOTE 5 – SECURED DEBT

2011-1 Term Securitization

In January 2011, LRF6, a subsidiary of LCFF, issued six classes of asset-backed notes (the “2011-1 Term Securitization”), one with a stated maturity date of December 2018 and five with a stated maturity date of December 2023.  The notes totaled approximately $96.0 million, bore interest at fixed stated rates ranging from 1.70% to 5.50%, were issued at an original discount of approximately $6.2 million, and were collateralized by gross leases and loans and restricted cash.  Recourse was limited to the amount of collateral pledged and principal and interest were due as payments were received on the underlying leases and loans pledged as collateral.  At December 31, 2014, the $6.725 million net balance consisted of $7.189 million net of an unamortized original issue discount of $464,000.

The gain on extinguishment of debt for the nine months ended September 30, 2015 consists of the following (in thousands):

NOTE 6 – PROMISSORY NOTES PAYABLE

LCFF offered 8.25% secured recourse promissory notes (the “Notes”) to private investors in 2008.  The offering closed in February 2009 and raised approximately $9.4 million, of which about $9.3 million was outstanding as of September 30, 2015.  The Notes had a six-year term, required interest only payments until their maturity in February 2015, payable in March 2015, and are subordinated to LCFF’s secured debt.  The Notes are recourse to LCFF only and are collateralized only by LCFF’s unencumbered net assets.  LCFF failed to make the January 2015 and all future periodic interest payments to date and did not pay the principal balance when due in March 2015.  As such, LCFF was notified of its default under the terms of the Notes and began accruing interest in January 2015 at a 10% default rate.  However, no remedies or legal action against LCFF have been executed at this time as its leases and loans are collateral for outstanding debt.

 

LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements – (Continued)

September 30, 2015

(Unaudited)

NOTE 7 – FAIR VALUE MEASUREMENT

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

•

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

•

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

•

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

There were no assets or liabilities measured at fair value at September 30, 2015 or December 31, 2014.

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 fair value of the promissory notes payable at September 30, 2015 and December 31, 2014 was determined to be zero as the notes are in default and as LCFF did not pay the principal balance when due in March 2015, and does not expect to repay the balance in the future.

 

LEAF EQUIPMENT FINANCE FUND 4, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements – (Continued)

September 30, 2015

(Unaudited)

NOTE 8 – 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):

Administrative Expenses. The General Partner and its affiliates are reimbursed by the Fund for administrative services reasonably necessary to operate the Fund, which do not exceed the General Partner’s actual cost of those services.

Management Fees. The General Partner has waived management fees since August 2010 and all future management fees.  Through September 30, 2015, the General Partner has waived management fees of approximately $7.9 million, of which approximately $12,000 and $65,000 related to the three and nine month periods ended September 30, 2015, respectively.

Due to Affiliates. Due to affiliates includes amounts owed to the General Partner and its affiliates for various items such as management fees, expense reimbursements, and the acquisition and management of equipment portfolios.  This balance also includes approximately $660,000 received in August 2015 to settle the 2011-1 term securitization as described in Note 5.  These amounts were advanced with the expectation of repayment.

Distributions. The General Partner owns a 1% general partnership interest and a 0.87% limited partnership interest in the Fund. The General Partner was paid cash distributions of $6,000 and $5,000 for its general partnership and limited partnership interests, respectively, for the nine months ended September 30, 2015 and $23,000 and $19,000 for its general partnership and limited partnership interests, respectively, for the nine months ended September 30, 2014.

NOTE 9 – COMMITMENTS AND CONTINGENCIES

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

NOTE 10 – SUBSEQUENT EVENTS

The Fund has evaluated its September 30, 2015 financial statements for subsequent events through the date the financial statements were issued.  The Fund is not aware of any subsequent events, other than the one disclosed in Note 5, which would require recognition or disclosure in the financial statements.

 

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. This 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, 2014.

As used herein, the terms “we,” “us,” or “our” refer to LEAF Equipment Finance Fund 4, L.P. and its subsidiaries (“LEAF 4” or the “Fund”).

Business

We are a Delaware limited partnership formed on January 25, 2008 by our General Partner, LEAF Asset Management, LLC (the “General Partner”), which, along with its affiliates, manages us. 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. Our offering period began on August 12, 2008. Through our offering termination date of October 30, 2009, we raised $125.7 million by selling 1.3 million of our limited partnership units. We commenced operations in September 2008.

To date, limited partners have received total distributions ranging from approximately 22% to 31% of their original investment, depending upon when it was made.  Future cash distributions are not expected.  The Fund entered its liquidation period in October 2014 and the General Partner has been actively working to wind up the partnership.  During 2015, the Fund sold a pool of leases with a net investment of approximately $4.14 million to a third party and has arranged for the repayment of its 2011-1 term securitization.  It is expected that the Fund will most likely terminate during 2016.  However, the termination of the Fund is dependent upon the repayment or sale of the remaining portfolio.

 

Finance Receivables and Asset Quality

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

 

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(a)

Located in the 50 states as well as the District of Columbia and Puerto Rico.  As of September 30, 2015, one lessee accounting for approximately 18% of the Fund’s portfolio and another accounted for approximately 12% of the Fund’s portfolio.  No other individual end user accounted for more than 10% of our portfolio.

 

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):

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 the equipment finance portfolios that we manage, an analysis of contractual delinquencies, current economic conditions and trends, and equipment finance portfolio characteristics, adjusted for expected recoveries. In evaluating historic performance, we perform a migration analysis, which estimates the likelihood that an account will progress 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-medium sized businesses.  Because the Fund is in the liquidation phase, the portfolio of outstanding leases and loans has decreased.  Also, as expected in a liquidating portfolio, the performing leases payoff as scheduled while the delinquent leases remain delinquent, resulting in an increase in the allowance for credit losses and non-performing assets as a percentage of finance receivables.

Critical Accounting Policies and Estimates

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

For a complete discussion of our critical accounting policies and estimates, see our annual report on Form 10-K for fiscal 2014 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, 2015.

 

Results of Operations

Three Months Ended September 30, 2015 as Compared to the Three Months Ended September 30, 2014 (dollars in thousands):

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

·

A decrease in interest on equipment financings and rental income. Our weighted average net investment in financing assets decreased to $2.6 million for the three months ended September 30, 2015 as compared to $13.9 million for the three months ended September 30, 2014, a decrease of $11.3 million or 81% due to the continued runoff of our equipment financing portfolio.

·

Losses on sales of equipment and lease dispositions increased $100,000 to a loss of $135,000 for the three months ended September 30, 2015 as compared to a loss of $35,000 for the three months ended September 30, 2014.  Gains and losses on sales of equipment may vary significantly from period to period.

·

Gain on extinguishment of debt of $258,000 due to the purchase of the remaining 2011-1 term securitization notes outstanding.

The decrease in total expenses was primarily attributable to and offset by the following:

·

A decrease in interest expense due to a decline in our average secured debt outstanding.  Average secured borrowings for the three months ended September 30, 2015 and 2014 were $1.4 million and $8.5 million, respectively. The interest expense reduction was driven by accelerated debt payments required by our lenders and the purchase of the remaining 2011-1 term securitization notes outstanding.

·

A decrease in the provision for credit losses due to the decrease of our equipment financing portfolio.

·

A decrease in administrative expenses reimbursed to affiliate due to the decrease in the size of our portfolio.

The net loss per limited partnership unit, after the net loss allocated to our General Partner, for the three months ended September 30, 2015 and 2014 was $0.25 and $0.81, respectively, based on the weighted average number of limited partnership units outstanding during the period of 1,237,081 and 1,259,537, respectively.

 

Nine Months Ended September 30, 2015 as Compared to the Nine Months Ended September 30, 2014 (dollars in thousands):

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

·

A decrease in interest on equipment financings and rental income. Our weighted average net investment in financing assets decreased to $5.4 million for the nine months ended September 30, 2015 as compared to $25.2 million for the nine months ended September 30, 2014, a decrease of $19.8 million or 79% due to the continued runoff of our equipment financing portfolio.

·

(Losses) gains on sales of equipment and lease dispositions decreased $281,000 to a loss of $143,000 for the nine months ended September 30, 2015 as compared to a gain of $138,000 for the nine months ended September 30, 2014.  Gains and losses on sales of equipment may vary significantly from period to period.

·

Gain on extinguishment of debt of $258,000 due to the purchase of the remaining 2011-1 term securitization notes outstanding.

·

A decrease in other income primarily due to a reduction in late fee income.  Late fee income decreased due to the decrease of our equipment financing portfolio.

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

·

A decrease in interest expense due to a decline in our average secured debt outstanding.  Average secured borrowings for the nine months ended September 30, 2015 and 2014 were $3.4 million and $14.5 million, respectively. The interest expense reduction was driven by accelerated debt payments required by our lenders and the purchase of the remaining 2011-1 term securitization notes outstanding.

·

A decrease in depreciation of operating leases due to the maturity of our operating lease portfolio.

·

A decrease in the provision for credit losses due to the decrease of our equipment financing portfolio.

·

A decrease in general and administrative expenses and administrative expenses reimbursed to affiliate due to the decrease in the size of our portfolio.

The net loss per limited partnership unit, after the net loss allocated to our General Partner, for the nine months ended September 30, 2015 and 2014 was $1.12 and $3.58, respectively, based on a weighted average number of limited partnership units outstanding during the period of 1,240,068 and 1,259,537, 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, have been for debt service and distributions to our partners.  We entered our liquidation period in October 2014, and accordingly, are prohibited from acquiring additional leases and loans under the Partnership Agreement.

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

Partner’s distributions paid for the nine months ended September 30, 2015 and September 30, 2014 were $627,000 and $2.2 million, respectively, each period. Cumulative partner distributions paid from our inception to September 30, 2015 were approximately $33.5 million.  As the cash flows and liquidity of the Fund could no longer support regular monthly distributions, the May 2015 distribution, paid in June, was the final regular monthly distribution.  No further distributions to limited partners are expected in the future.  As the Fund entered its liquidation period in October 2014, the General Partner has been active in taking steps to wind up the Fund.  It is expected that the Fund will most likely terminate during 2016.  However, the termination of the Fund is dependent upon the repayment or sale of the remaining portfolio.

Our General Partner has waived all management fees since August 2010 and all future management fees.  Through September 30, 2015, the General Partner has waived management fees of approximately $7.9 million, of which approximately $65,000 related to the nine months ended September 30, 2015.

 

Borrowings

2011-1 Term Securitization

In January 2011, LEAF Receivables Funding 6, LLC (“LRF6”), a subsidiary of LEAF Commercial Finance Fund, LLC (“LCFF”), issued six classes of asset-backed notes (the “2011-1 Term Securitization”), one with a stated maturity date of December 2018 and five with a stated maturity date of December 2023.

During the nine months ended September 30, 2015, the Fund sold pools totaling 52 leases, in two separate sales, with a net investment of approximately $4.14 million to a third party for proceeds totaling approximately $4.09 million and recognized a loss on the sale of approximately $50,000.  The proceeds from the sale were used to repay a portion of the Fund’s 2011-1 term securitization.  Neither the Fund nor its affiliates continue to service the leases sold.

The gain on extinguishment of debt for the nine months ended September 30, 2015 consists of the following (in thousands):

The cash used to purchase the remaining notes outstanding primarily was advanced from the General Partner and will be repaid as the remaining portfolio is collected.  In October 2015, the trustee assigned its responsibilities as the initial trustee, custodian, and back-up servicer to an affiliate of the General Partner, who then waived its right to compensation for those services.  Consequently, the $150,000 of restricted cash as of September 30, 2015 was made unrestricted and was remitted to the General Partner as partial repayment of the advance used to purchase the remaining notes outstanding.

 

As a result of this transaction, LEAF 4 is now the only noteholder of the outstanding 2011-1 term securitization notes.  Consequently, to eliminate fees paid to third parties, LEAF Financial Corporation (“LEAF Financial”), an affiliate of the General Partner and a subsidiary of RAI, agreed to act as a successor trustee and assume the roles of trustee, paying agent, custodian, and back-up servicer.  LEAF Financial then immediately agreed to waive its rights to receive any compensation in its fulfillment of such roles.

Promissory Notes Payable

LCFF offered 8.25% secured recourse promissory notes (the “Notes”) to private investors in 2008.  The offering closed in February 2009 and raised approximately $9.4 million, of which about $9.3 million was outstanding as of September 30, 2015.  The Notes had a six-year term, required interest only payments until their maturity in February 2015, payable in March 2015, and are subordinated to LCFF’s secured debt.  The Notes are recourse to LCFF only and are collateralized only by LCFF’s unencumbered net assets.  As higher than expected lease and loan defaults resulting from the Great Recession reduced its liquidity, LCFF failed to make the January 2015 and all future periodic interest payments to date and did not pay the principal balance when due in March 2015.  As such, LCFF was notified of its default under the terms of the Notes and began accruing interest in January 2015 at a 10% default rate.  However, no remedies or legal action against LCFF have been executed at this time.  It is expected that there will be no available funds to repay the promissory noteholders as its leases and loans are collateral for outstanding debt.  As the promissory notes are non-recourse to LEAF 4, the impact of the default on the future cash flow of LEAF 4 is expected to be minimal.

 

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.

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 and Procedures

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, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

LEAF Commercial Finance Fund, LLC (“LCFF”), a subsidiary of LEAF Equipment Finance Fund 4, L.P. (“LEAF 4”), offered 8.25% secured recourse promissory notes (the “Notes”) to private investors in 2008.  The offering closed in February 2009 and raised approximately $9.4 million, of which about $9.3 million was outstanding as of September 30, 2015.  The Notes had a six-year term, required interest only payments until their maturity in February 2015, payable in March 2015, and are subordinated to LCFF’s secured debt.  The Notes are recourse to LCFF only and are collateralized only by LCFF’s unencumbered net assets.  As higher than expected lease and loan defaults resulting from the Great Recession reduced its liquidity, LCFF failed to make the January 2015 and all future periodic interest payments to date and did not pay the principal balance when due in March 2015.  As such, LCFF was notified of its default under the terms of the Notes and began accruing interest in January 2015 at a 10% default rate.  However, no remedies or legal action against LCFF have been executed at this time.  It is expected that there will be no available funds to repay the promissory noteholders as its leases and loans are collateral for outstanding debt.  As the promissory notes are non-recourse to LEAF 4, the impact of the default on the future cash flow of LEAF 4 is expected to be minimal.

ITEM 6 – EXHIBITS

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

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