ITEM 1 - BUSINESS
General
We are a Delaware limited partnership formed on May 16, 2006 by our General Partner, LEAF Asset Management, LLC (the “General Partner”), which manages us. The General Partner is a Delaware limited liability company, and subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly-traded company (NASDAQ: REXI) that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate, and financial fund management segments. Through our offering termination date of April 24, 2008 we raised $120.0 million by selling 1.2 million of our limited partner units. We commenced operations in March 2007.
We are expected to have a nine-year life, consisting of an offering period of up to two years, a five year reinvestment period and a subsequent 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 loans during the liquidation period, we expect to continue to return capital to our partners as those leases and loans mature. Substantially all of our leases and loans mature by the end of 2015. We expect to enter our liquidation period beginning in April 2013. We will terminate on December 31, 2031, unless sooner dissolved or terminated as provided in our Limited Partnership Agreement.
We acquire a diversified portfolio of new, used, or reconditioned equipment that we lease to third parties. We also acquire portfolios of equipment subject to existing leases from other equipment lessors. Our financings are typically acquired from LEAF Financial Corporation (“LEAF”), an affiliate of our General Partner and a subsidiary of RAI. In addition, we may make secured loans to end users to finance their purchase of equipment. We attempt to structure our secured loans so that, in an economic sense, there is no difference to us between a secured loan and a full payout equipment lease. We finance business-essential equipment including, but not limited to computers, copiers, office furniture, water filtration systems, machinery used in manufacturing and construction, medical equipment and telecommunications equipment. We focus on the small to mid-size business market, which generally includes businesses with:
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500 or fewer employees;
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$1.0 billion or less in total assets; or
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$100.0 million or less in total annual sales.
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Our principal objective is to generate regular cash distributions to our limited partners.
Our leases consist of direct financing and operating leases as defined by accounting principles generally accepted in the United States of America (“U.S. GAAP”). Under the direct financing method of accounting, interest income (the excess of the aggregate future rentals and estimated unguaranteed residuals upon expiration of the lease over the related equipment cost) is recognized over the life of the lease using the interest method. Under the operating method, the cost of the leased equipment, including acquisition fees associated with lease placements, is recorded as an asset and depreciated on a straight-line basis over its estimated useful life. Rental income on operating leases consists primarily of monthly periodic rentals due under the terms of the leases. Generally, during the lease terms of existing operating leases, we will not recover all of the cost and related expenses of rental equipment and, therefore, we are prepared to remarket the equipment in future years. We discontinue the recognition of revenue for leases and loans for which payments are more than 90 days past due. These assets are classified as non-accrual.
As discussed further in ITEM 7, the economic recession in the United States has adversely affected our operations as a result of higher delinquencies and may continue to do so as the economy recovers.
Debt Facilities
We have augmented the proceeds of our original offering with debt, and intend to finance a significant portion of the cost of the equipment we acquire. We are not limited in the amount of debt, including financings through securitizations, we may incur. Our ability to obtain financing will, however, depend upon our General Partner’s assessment of whether funds are available at rates and upon terms that are economically advantageous to us. As a result, the amount of our financings may vary significantly from our expectations.
The tight credit markets have adversely affected our ability to obtain debt financing needed to execute our investment strategies. Specifically, we rely on both revolving and term debt facilities to fund our acquisitions of equipment financings. If our banks do not renew a revolving facility upon maturity, the debt facility would convert to a term facility and we would not be able to borrow additional amounts under the line of credit. A term debt facility is a loan that is contractually repaid over a period of time. If we are unable to obtain new debt that will allow us to invest the repayments of existing leases and loans into new investments, the volume of our leases and loans will be reduced.
Available Information
We file annual, quarterly and current reports and other information with the SEC. The public may read and copy information we file with the SEC at the SEC’s public reference room at 100 F Street, NE, Washington, D.C. 20549, on official business days during the hours of 10:00 am and 3:00 pm. The public may obtain information on the operations of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The internet address of the SEC site is http://www.sec.gov. Our General Partner’s internet address is http://www.LEAFFinancial.com. We make our SEC filings available free of charge on or through our General Partner’s internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. We are not incorporating by reference in this report any material from our General Partner’s website.
Agreements with our General Partner
We do not directly employ any persons to manage or operate our business. These functions are provided by our General Partner and employees of our General Partner and/or its affiliates. We reimburse our General Partner and/or its affiliates for all direct and indirect costs of services provided, including the cost of employees and benefits properly allocable to us and all other expenses necessary or appropriate for the conduct of our business.
Competition
The equipment leasing business is highly fragmented and competitive. We acquire equipment from our General Partner and its affiliates. Our General Partner and its affiliates compete with:
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a large number of national, regional and local banks, savings banks, leasing companies and other financial institutions;
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captive finance and leasing companies affiliated with major equipment manufacturers; and
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other sources of equipment lease financing, including other publicly-offered partnerships.
Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we have. Competition with these entities may reduce the creditworthiness of potential lessees or borrowers to whom we have access or decrease our yields. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. A lower cost of funds could enable a competitor to offer leases or loans at rates which are less than ours, potentially forcing us to lower our rates or lose origination volume.
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Employees
As is commonly the case with limited partnerships, we do not directly employ any of the persons responsible for our management or operations. Rather, the personnel of our General Partner and/or its affiliates manage and operate our business. Officers of our General Partner may spend a substantial amount of time managing the business and affairs of our General Partner and its affiliates and may face a conflict regarding the allocation of their time between our business and affairs and their other business interests. The officers of our General Partner who provide services to us are not required to work full time on our affairs. These officers may devote significant time to the affairs of our General Partner’s affiliates and be compensated by these affiliates for the services rendered to them. There may be significant conflicts between us and affiliates of our General Partner regarding the availability of these officers to manage us.
ITEM 1A
ITEM 1A - RISK FACTORS
Risk factors have been omitted as permitted under rules applicable to smaller reporting companies.
ITEM 1B
ITEM 1B - UNRESOLVED STAFF COMMENTS
None.
ITEM 2
ITEM 2 - PROPERTIES
We do not own or lease any real property.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
We are not subject to any pending material legal proceedings.
ITEM 4
ITEM 4 - MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our limited partner units are not publicly traded. There is no market for our limited partner units and it is unlikely that any will develop. The following table shows the number of equity security holders, including our General Partner with respect to limited partner units it purchased.
Total distributions paid to limited partners for the years ended December 31, 2011, 2010 and 2009 were $2.4 million, $6.9 million, and $10.2 million, respectively. These distributions were paid on a monthly basis to our limited partners at rate of approximately 2% in 2011, 6% in 2010, and 9% in 2009, of their original capital contribution to us.
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ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
The following selected financial data should be read together with our consolidated financial statements, the notes to our financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7
ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Item 1 and the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for the year ended December 31, 2011.
As used herein, the terms “we,” “us,” or “our” refer to Lease Equipment Leasing Income Fund III, L.P. and its subsidiaries.
Fund Summary
As discussed in more detail in Item 1, we acquire a diversified portfolio of new, used, or reconditioned equipment that we lease to third parties. We also acquire portfolios of equipment subject to existing leases from other equipment lessors. Our financings are typically acquired from our General Partner. In addition, we may make secured loans to end users to finance their purchase of equipment.
At the time of our commencement, the United States economy was experiencing strong growth, an abundance of liquidity in the debt markets and historically low credit losses. However, it is widely believed that the United States economy over the past few years has suffered through the worst economic recession in over 75 years. The recession has been severe and its consequences broadly felt. Many well-known major financial institutions failed and others had to be bailed out. Unemployment soared to generational highs and has remained at such levels. Bank lending was severely reduced and became more expensive. In recent years, banks became much more reluctant to lend, and when they did it became more expensive to borrow. If existing loans came up for renewal and were extended, they were written for reduced amounts and at higher interest rates. Also, lenders insisted on ever-tighter covenants around delinquencies and write-offs that made it more difficult to remain in compliance. As our primary credit facilities matured and we had to extend, renew or refinance them, our costs increased. Most significantly, we had to reduce our debt on the leases previously financed. The money to pay down the debt had to come from lease payments and those amounts were no longer available to re-invest in new leases. The lenders’ higher fees and costs also had to be paid from funds that were then unavailable to re-invest in new leases. All of this happened while losses increased. The small businesses that represent our typical leasing customer have suffered through the recession. The increase in write-offs also created an additional burden on the cash available to re-invest.
Our losses, while greater than projected, were still modest considering the magnitude of the economic storm. In fact, the General Partner changed its underwriting standards early in 2008, and the portfolio of leases written since then have performed as well as originally modeled. We proactively negotiated with our lender to prevent them from foreclosing on any collateral, or requiring a liquidation of leases that would have badly impaired capital. We sought new forms of capital, and were able to arrange debt at a time when lenders were not generally providing new facilities. In December of 2010, we completed a term securitization totaling approximately $202 million in which we were able to issue asset- backed notes and pay-off three of our existing lenders with the proceeds.
Our General Partner has deferred our payment of fees and reimbursement of expenses totaling approximately $15.6 million from inception through December 31, 2011, in order to preserve cash for us. Additionally, effective August 1, 2010, the General Partner has also waived all future management fees in order to preserve cash.
To date, limited partners have received total distributions ranging from approximately 21% to 31% of their original amount invested, depending upon when the investment was made. Our General Partner is working to maximize the amount that can be distributed to limited partners in the future. However, we could not continue to support 8.5% distributions, and beginning in August 2010, distributions were lowered to 2.0%.
General Economic Overview
Uncertainty and caution continue to reign in the various forecasts for the U.S. economy. However, during the fourth quarter of 2011 there was, on balance, more favorable economic news than unfavorable economic news. During the fourth quarter of 2011 there was improvement in the employment rate, reduction in jobless claims, and increases in equipment sales and business borrowing, both of which tend to be precursors to sustained economic growth. At the same time continued uncertainty and a lack of confidence in the small business community, a key driver in long term job creation, continue to be major impediments to steady and sustained economic growth. Significant economic statistics reported on fourth quarter activity are presented below.
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The National Federation of Independent Business survey showed that small business concerns over business conditions and the political climate continue to be key reasons preventing business expansion. Small businesses comprise the majority of the borrowers and lessees in the LEAF Fund’s portfolio and consequently the health of the small business community is critical to the LEAF Funds portfolio performance.
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The National Association of Realtors reported that existing home sales in December 2011 increased for the third month in a row and remained above prior year levels significantly reducing the housing inventory. At the same time the S&P Case-Shiller Home Price Index showed decreases in home prices. So while there is more sales activity (a positive), the price declines negatively impact personal wealth (a negative).
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The Federal Reserve’s Beige Book released in the fourth quarter of 2011 showed increases in consumer spending and manufacturing activity and economic activity was described as slow to moderate.
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During the fourth quarter of 2011 the unemployment rate fell to 8.5%, and the Institute of Supply Management reported an accelerating pace in U.S. manufacturing which supported employment gains.
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The Equipment Lease and Finance Foundation’s Monthly Confidence Index in December 2011 was 57.2 signifying steadying optimism about business activity among surveyed executives in the equipment lease and finance industry. Similarly the December 2011 Credit Manager’s Index published by the National Association of Credit Managers increased to 54.4 (positive territory) driven largely by gains in the service industry.
As stated previously the overall economic trends in the fourth quarter of 2011 tended to be more positive than negative. Those trends are in line with recent stability shown in our portfolio performance. However, while uncertainty in the economic outlook persists, and while the economy remains unsettled, our portfolio performance may be affected.
Finance Receivables and Asset Quality
Information about our portfolio of leases and loans is as follows (dollars in thousands):
(a)
Located in the 50 states as well as the District of Columbia and Puerto Rico. No individual end user or single piece of equipment accounted for more than 1% of our portfolio based on original cost of the equipment.
We utilize debt in addition to our equity to fund the acquisitions of lease portfolios. As of December 31, 2011 and 2010, our outstanding bank debt was $88.2 million and $183.9 million, respectively.
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The performance of our lease portfolio is a measure of our General Partner’s underwriting and collection standards, skills, policies and procedures and is an indication of asset quality. The table below provides information about our finance receivables including non-performing assets, which are those assets that are not accruing income due to non-performance or impairment (dollars in thousands):
We manage our credit risk by adhering to strict credit policies and procedures, and closely monitoring our receivables. Our General Partner, the servicer of our leases and loans, responded to the recent economic recession in part, by implementing early intervention techniques in collection procedures. Our General Partner has also increased its credit standards and limited the amount of business we do with respect to certain industries, geographic locations and equipment types. Because of the current scarcity of credit available to small and mid size businesses, we have been able to increase our credit standards without reducing the interest rate we charge on our leases and loans.
Our allowance for credit losses is our estimate of losses inherent in our commercial finance receivables. The allowance is based on factors which include our historical loss experience on equipment finance portfolios we manage, an analysis of contractual delinquencies, current economic conditions and trends and equipment finance portfolio characteristics, adjusted for recoveries. In evaluating historic performance, we perform a migration analysis, which estimates the likelihood that an account progresses through delinquency stages to ultimate charge-off. Our policy is to charge off to the allowance those financings which are in default and for which management has determined the probability of collection to be remote. Substantially all of our assets are collateral for our debt and, therefore, significantly greater delinquencies than anticipated will have an adverse impact on our cash flow and distributions to our partners.
We focus on financing equipment used by small to mid-sized businesses. The recent economic recession in the U.S has made it more difficult for some of our customers to make payments on their financings with us on a timely basis, which has adversely affected our operations in the form of higher delinquencies. However, in 2011 our non-performing assets as a percentage of finance receivables declined to 2.6% at December 31, 2011 compared to 5.7% at December 31, 2010 due to an improved aging of our portfolio. Our investments in leases and loans that were current as a percentage of our portfolio increased to 94.1% as of December 31, 2011 compared to 91.6% at December 31, 2010. We are cautiously optimistic that this trend will continue as the economy continues to recover.
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 consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and cost and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including the allowance for credit losses, the estimated unguaranteed residual values of leased equipment, impairment of long-lived assets and the fair value and effectiveness of interest rate swaps. We base our estimates on historical experience, current economic conditions and on various other assumptions that we believe reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We have identified the following policies as critical to our business operations and the understanding of our results of operations.
Investments in Leases and Loans
The Fund’s investment in leases and loans consist of direct financing leases, operating leases and loans.
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Direct Financing Leases. Certain of the Fund’s lease transactions are accounted for as direct financing leases (as distinguished from operating leases). Such leases transfer substantially all benefits and risks of equipment ownership to the customer. The Fund’s investment in direct financing leases consists of the sum of the total future minimum lease payments receivable plus the estimated unguaranteed residual value of leased equipment, less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum contracted payments plus the estimated unguaranteed residual value over the cost of the related equipment.
Unguaranteed residual value represents the estimated amount to be received at lease termination from lease extensions or ultimate disposition of the leased equipment. The estimates of residual values are based upon the General Partner’s history with regard to the realization of residuals, available industry data and the General Partner’s senior management’s experience with respect to comparable equipment. The estimated residual values are recorded as a component of investments in leases. Residual values are reviewed periodically to determine if the current estimate of the equipment’s fair market value appears to be below its recorded estimate. If required, residual values are adjusted downward to reflect adjusted estimates of fair market values. Upward adjustments to residual values are not permitted.
Operating Leases. Leases not meeting any of the criteria to be classified as direct financing leases are deemed to be operating leases. Under the accounting for operating leases, the cost of the leased equipment, including acquisition fees associated with lease placements, is recorded as an asset and depreciated on a straight-line basis over the equipment’s estimated useful life, generally up to seven years. Rental income consists primarily of monthly periodic rental payments due under the terms of the leases. The Fund recognizes rental income on a straight line basis.
Generally, during the lease terms of existing operating leases, the Fund will not recover all of the cost and related expenses of its rental equipment and, therefore, it is prepared to remarket the equipment in future years. The Fund’s policy is to review, on a quarterly basis, the expected economic life of its rental equipment in order to determine the recoverability of its undepreciated cost. The Fund writes down its rental equipment to its estimated net realizable value when it is probable that its carrying amount exceeds such value and the excess can be reasonably estimated; gains are only recognized upon actual sale of the rental equipment. There were no write-downs of equipment during the years ended December 31, 2011, 2010 and 2009.
Loans. For term loans, the investment in loans consists of the sum of the total future minimum loan payments receivable less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum contracted loan payments over the cost of the related equipment. For all other loans, interest income is recorded at the stated rate on the accrual basis to the extent that such amounts are expected to be collected.
Allowance for Credit Losses. The Fund evaluates the adequacy of the allowance for credit losses (including investments in leases and loans) based upon, among other factors, management’s historical experience on the portfolios it manages, an analysis of contractual delinquencies, economic conditions and trends, and equipment finance portfolio characteristics, adjusted for expected recoveries. In evaluating historic performance, the Fund performs a migration analysis, which estimates the likelihood that an account progresses through delinquency stages to ultimate charge-off. After an account becomes 180 or more days past due any remaining balance is fully-reserved less an estimated recovery amount. Generally, the account is then referred to our internal recovery group consisting of a team of 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 management has determined the probability of collection to be remote.
The Fund discontinues the recognition of revenue for leases and loans for which payments are more than 90 days past due. As of December 31, 2011 and December 31, 2010, the Fund had $2.3 million and $11.3 million, respectively, of leases and loans on non-accrual status. Fees from delinquent payments are recognized when received and are included in Other income.
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Results of Operations
Year Ended December 31, 2011 compared to the Year Ended December 31, 2010
The decrease in total revenues was primarily attributable to the following:
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A decrease in interest income on equipment financings. Our weighted average net investment in financing assets decreased to $135.1 million for the year ended December 31, 2011 as compared to $267.2 million for the year ended December 31, 2010, a decrease of $132.0 million (49%).
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A decrease in rental income, which was principally the result of a decrease in our investment in operating leases in the 2011 period compared to the 2010 period.
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A decrease in other income, primarily due to a reduction in both late fee and collection fee income. Late fee and collection fee income decreased due to the decrease of the equipment financing portfolio.
The decrease in total expenses was a result of the following:
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A decrease in interest due to our decrease in average debt outstanding. Average borrowings for the year ended December 31, 2011 and December 31, 2010 were $133.8 million and $232.5 million, respectively. The interest expense reduction was also driven by accelerated debt payments required by our lenders.
Subsequent to the completion of the 2010-4 Term Securitization, all of our debt was on a fixed rate basis and accordingly, we terminated all of our interest rate swap contracts.
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A decrease in management fees. Our General Partner waived asset management fees of $2.6 million for the year ended December 31, 2011 and has waived $4.0 million on a cumulative basis. The General Partner has also waived all future management fees.
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A decrease in administrative expenses reimbursed to affiliate due to the decrease in the size of our portfolio.
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A decrease in our provision for credit losses principally due to a decrease of our equipment financing portfolio and improvement in the aging of our portfolio.
The net loss per limited partner unit, after the loss allocated to our General Partner, for the year ended December 31 2011 and 2010 was $5.45 and $21.62 respectively, based on a weighted average number of limited partner units outstanding of 1,196,001 for each period.
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Year Ended December 31, 2010 compared to the Year Ended December 31, 2009
The decrease in total revenues was primarily attributable to the following:
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A decrease in interest income on equipment financings. Our weighted average net investment in financing assets decreased to $267.2 million for the year ended December 31, 2010 as compared to $477.2 million for the year ended December 31, 2009, a decrease of $210.0 million (44%). This decrease was primarily due to the deconsolidation of LEAF Funding, LLC (“Funding LLC”) following an asset sale, coupled with runoff of our portfolio of leases and loans.
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A decrease in other income, which consists primarily of late fee income. Late fee income has decreased due to the decrease of the equipment financing portfolio.
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A decrease in gains on sales of equipment and lease dispositions. Gains and losses on sales of equipment may vary significantly from period to period.
The decrease in total expenses was primarily a result of the following:
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A decrease in interest due to our decrease in average debt outstanding. Average borrowings for the year ended December 31, 2010 and December 31, 2009 were $232.5 million and $438.4 million, respectively. This decrease was primarily due to deconsolidation of Funding LLC. The interest expense reduction was also driven by accelerated debt payments required by our lenders.
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A decrease in management fees attributable to the decrease in our portfolio of equipment financing assets, since management fees are paid based on lease payments received. In addition, beginning August 1, 2010 our General Partner waived asset management fees of $1.5 million for the year ended December 31, 2010. The General Partner has also waived all future management fees.
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A decrease in administrative expenses reimbursed to affiliate due to the decrease in the size of our portfolio.
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A decrease in general and administrative expenses principally due to a decrease in professional fees and storage expenses.
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A decrease in our provision for credit losses principally due to a decrease of our equipment financing portfolio.
These decreases in expenses were offset, in part, by the following:
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A decrease in mark to market changes on derivative liabilities. Our derivative contracts are structured that they mature simultaneously with the maturity of our debt facilities. The fair values of these contracts are also impact by the underlying variable rates associated with these contracts which can fluctuate over time.
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The net loss per limited partner unit, after the loss allocated to our General Partner, for the year ended December 31 2010 and 2009 was $21.62 and $23.81 respectively, based on a weighted average number of limited partner units outstanding of 1,196,001 and 1,197,029 respectively.
Liquidity and Capital Resources
Our major source of liquidity is excess cash derived from the collection of lease payments after payments of debt principal and interest on debt. Our primary cash requirements, in addition to normal operating expenses, are for debt service, investment in leases and loans, and distributions to partners. In addition to cash generated from operations, we plan to meet our cash requirements through borrowings from credit facilities.
The following table sets forth our sources and uses of cash for the periods indicated (in thousands):
Cash decreased by $372,000 which was primarily due to debt repayments of $99.7 million and distributions to our partners of $2.4 million, partially offset by proceeds from leases and loans of $92.7 million.
Partners’ distributions paid for the years ended December 31, 2011 and 2010 were $2.4 million and $7.0 million, respectively. Distributions to limited partners were paid at a rate of 8.5% per annum of invested capital through July of 2010 and were lowered to 2% in August 2010. Cumulative partner distributions paid from our inception to December 31, 2011 were approximately $31.2 million.
Future cash distributions are dependent on our performance and are impacted by a number of factors which include: our ability to obtain and maintain debt financing on acceptable terms to build and maintain our equipment finance portfolio; lease and loan defaults by our customers; and prevailing economic conditions. Due to the prolonged economic recession we continue to see a scarcity of available debt on terms beneficial to the partnership and higher than expected lease and loan defaults resulting in poorer fund performance than projected.
As discussed above, we recently amended our Partnership Agreement so that we have the ability to maintain or increase the size of our lease and loan portfolio through use of distributable cash. Previously, the Partnership Agreement prohibited distributable cash from being used to invest in new equipment, equipment leases or loans unless distributions had been paid cumulatively at the original rate of 8.5% per year. Maintaining or increasing our portfolio with performing leases and loans is expected to generate additional cash flow to us and ultimately may increase distributions to the limited partners.
Beginning August 1, 2010, our General Partner waived its asset management fee. The General Partner waived approximately $2.6 million for the year ended December 31, 2011 and has waived approximately $4.0 million on a cumulative basis.
Borrowings
Our borrowing relationships each require the pledging of eligible leases and loans to secure amounts advanced. Borrowings outstanding under our credit facilities were as follows as of December 31, 2011 (in thousands):
(1)
Availability under these credit facilities is subject to having eligible leases or loans (as defined in the respective agreements) to pledge as collateral, compliance with covenants and the borrowing base formula.
(2)
All facilities are collateralized by specific leases and loans and related equipment. Recourse under these facilities is limited to the amount of collateral pledged, and with respect to the DZ Bank facility, an additional 5% of the outstanding debt balance, or $0 as of December 31, 2011.
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2010-4 Term Securitization
The 2010-4 Term Securitization was issued on November 5, 2010 at $201.9 million in six tranches of asset-backed notes - one note matures in August 2018 and five notes mature in January 2019. The notes bear interest at stated, fixed rates ranging from 1.7% to 5.5% and were issued at an original discount of approximately $ 7.2 million of which approximately $2.8 million remains unamortized as of December 31, 2011. Proceeds of the 2010-4 Term Securitization were used to retire facilities with previous lenders on December 8, 2010.
DZ Bank
The outstanding balance of $72.9 million was paid off on December 8, 2010 with the proceeds from the 2010-4 Term Securitization. Interest on each borrowing on this facility is calculated at the commercial paper rate for the lender at the time of such borrowing plus 1.75% per annum. The DZ Bank facility has not been terminated but it is currently not available for use as the Fund had incurred multiple breaches under its covenants for which the Fund has requested waivers. Additionally, no cross-default provisions exist with the 2010-4 Term Securitization. As of December 31, 2011, no amounts were outstanding under this borrowing arrangement.
Broadpoint Products Corp./ Guggenheim Note Payable
In April 2010, we entered into a $5 million term loan with Broadpoint Products Corp. Interest payments were made on a monthly basis at a rate of 10% per annum. This term loan was paid-off on December 8, 2010 in part, with proceeds from the 2010-4 Term Securitization and replaced with a note payable to Guggenheim in the amount of $1.3 million which bore interest at 12% annually. The Guggenheim note was paid off on March 21, 2011.
West LB
This facility was terminated as of December 8, 2010 and the outstanding balance of $84.7 million was paid off with the proceeds from the 2010-4 Term Securitization. Interest on this facility was London Interbank Offered Rate (LIBOR) plus 2.50% per annum for all borrowings subsequent to March 2009 and at LIBOR plus 0.95% per annum for borrowings prior to March 2009.
Key Equipment Finance
This facility was terminated as of December 8, 2010 and the outstanding balance of $27.3 million was paid off with the proceeds from the 2010-4 Term Securitization. Interest on this facility was calculated at one month commercial paper rate of the lender plus 1.55% per annum.
Liquidity Summary
We use debt to acquire leases and loans. Repayment of our debt is based on the payments we receive from our customers. If a lease or loan becomes delinquent we must repay our lender, even though our customer has not paid us. Higher-than-expected lease and loan defaults will reduce our liquidity.
Our liquidity has been and could be adversely affected by higher than expected equipment lease defaults, which would result in a loss of anticipated revenues. These losses may adversely affect our ability to make distributions to our partners and, if the level of defaults is sufficiently large, may result in our inability to fully recover our investment in the underlying equipment. In evaluating our allowance for losses on uncollectible leases, we consider our contractual delinquencies, economic conditions and trends, lease portfolio characteristics and our General Partner’s management’s prior experience with similar lease assets. At December 31, 2011, our credit evaluation indicated a need for an allowance for credit losses of $1.6 million. As our lease portfolio ages, and if the economy in the United States falters for a substantial period of time, we may need to increase our allowance for credit losses.
Our liquidity is affected by our ability to leverage our portfolio through the use of credit facilities. Our ability to obtain debt financing needed to execute our investment strategies has been impacted by the continued tightening of the credit markets. Specifically, we rely on both revolving and term debt facilities to fund our acquisitions of equipment financings. If we are unable to obtain new debt that will allow us to invest the repayments of existing leases and loans into new investments, the volume of our leases and loans will be reduced.
We continue to seek additional sources of financing, including expanded bank financing that will enable us to originate investments and generate income while preserving capital. We expect that future financings may be at higher interest rates with lower leverage. As a result, our profitability may be negatively impacted if we are unable to increase our lease and loan rates to offset increases in borrowing rates.
Legal Proceedings
We are a party to various routine legal proceedings arising out of the ordinary course of our business. Our General Partner believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.
Recently Issued Accounting Pronouncements
See Note 2 of the Notes to Consolidated Financial Statements for a description of certain new accounting pronouncements that will or may affect our consolidated financial statements.
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ITEM 7A
ITEM 7A - 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.
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ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Partners
Leaf Equipment Leasing Income Fund III, L.P. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Leaf Equipment Leasing Income Fund III, L.P. (a Delaware Limited Partnership) and subsidiaries (the “Fund”), as of December 31, 2011 and 2010 and the related consolidated statements of operations, changes in partners’ capital (deficit) and cash flows for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Leaf Equipment Leasing Income Fund III, L.P. and subsidiaries as of December 31, 2011 and 2010 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Philadelphia, Pennsylvania
March 28, 2012
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LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
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LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except unit and per unit data)
The accompanying notes are an integral part of these consolidated financial statements.
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LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES
Consolidated Statements of Changes in Partners’ Capital (Deficit)
(In thousands except unit data)
The accompanying notes are an integral part of these consolidated financial statements.
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LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
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LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
December 31 2011
NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS
LEAF Equipment Leasing Income Fund III, L.P. (the “Fund”) is a Delaware limited partnership formed on May 16, 2006 by its General Partner, LEAF Asset Management, LLC (the “General Partner”), which manages the Fund. The General Partner is a Delaware limited liability company, and a subsidiary of Resource America, Inc. (“RAI”). RAI is a publicly-traded company (NASDAQ: REXI) that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through its commercial finance, real estate and financial fund management segments. Through its offering termination date of April 24, 2008, the Fund raised $120.0 million by selling 1.2 million of its limited partner units. It commenced operations in March 2007.
The Fund is expected to have a nine-year life, consisting of an offering period of up to two years, a five-year reinvestment period and a subsequent 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 loans during the liquidation period, the Fund expects to continue to return capital to its partners as those leases and loans mature. Substantially all of the Fund’s leases and loans mature by the end of 2014. The Fund expects to enter its liquidation period beginning in April 2013. The Fund will terminate on December 31, 2031, unless sooner dissolved or terminated as provided in the Limited Partnership Agreement.
The Fund acquires diversified portfolios of equipment to finance to end users throughout the United States as well as the District of Columbia and Puerto Rico. The Fund also acquires existing portfolios of equipment subject to existing financings from other equipment finance companies, primarily from LEAF Financial Corporation (“LEAF Financial”), an affiliate of its General Partner and a subsidiary of RAI. The primary objective of the Fund is to generate regular cash distributions to its partners from its equipment finance portfolio over the life of the Fund.
In addition to its 1% general partnership interest, the General Partner has also invested $1.3 million for a 1.2% limited partnership interest in the Fund.
The Fund has evaluated its December 31, 2011 consolidated financial statements for subsequent events through the date the financial statements were issued.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Fund and its wholly owned subsidiaries LEAF Fund III, LLC, LEAF III C SPE, LLC, and LEAF Receivables Funding 5, LLC. All intercompany accounts and transactions have been eliminated in consolidation.
The Fund owns approximately a 4% ownership interest in LEAF Funding, LLC (“Funding LLC”). The Fund accounts for its interest in Funding LLC under the equity method of accounting.
In March 2009, the Fund entered into an agreement with LEAF Equipment Finance Fund 4, L.P. (“LEAF 4”) to form LEAF Funds Joint Venture 2, LLC (“LEAF Funds JV2”). The Fund has invested $428,000 in LEAF Funds JV2, representing a 2% interest. The Fund accounts for its investment in LEAF Funds JV2 under the cost method of accounting. Under the cost method, the Fund does not include its share of the income or losses of LEAF Funds JV2 in the Fund’s consolidated statements of operations.
Reclassification
Certain reclassifications have been made to 2010 and 2009 reported amounts to conform to the current year presentation. In the statement of operations, renewal income of approximately $220,000 and $75,000 were reclassified to ‘Interest on equipment financings’ and ‘Rental income,’ respectively, from ‘Other Income’ for the year ended December 31, 2010. Also, renewal income of approximately $75,000 for the year ended December 31, 2009 that was previously included in ‘Other income’ has been reclassified to ‘Interest on equipment financings’ on the statement of operations. Additionally, amortization of other comprehensive income on the Fund’s interest rate swaps of approximately $4.1 million for the year ended December 2010 was reclassified from “Loss on derivative activities” to “Interest expense.”
Use of Estimates
Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the allowance for credit losses, the estimated unguaranteed residual values of leased equipment, and the fair value and effectiveness of interest rate swaps and caps. The Fund bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
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LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - (Continued)
December 31 2011
Restricted Cash
Restricted cash includes cash being held in reserve by the Fund’s lenders. Restricted cash also includes approximately $1.1 million of customer payments deposited into a lockbox shared with the General Partner and other entities serviced by the Fund’s General Partner. The lockbox is in the name of U.S. Bank NA as trustee under an inter-creditor agreement amongst the Fund’s General Partner, the other entities and their respective lenders. These amounts, which are recorded as restricted cash on the consolidated balance sheets, represent customer payments received by the lockbox, applied to the respective customer’s accounts, but not transferred to the Fund’s bank account.
Concentration of Credit Risk
As of December 31, 2011, 12% and 10% of the Fund’s net investment in direct financing leases and loans were located in California and Florida, respectively. No other state accounted for more than 9% of the Fund’s portfolio as of December 31, 2011.
Investments in Leases and Loans
The Fund’s investment in leases and loans consist of direct financing leases, operating leases and loans.
Direct Financing Leases. Certain of the Fund’s lease transactions are accounted for as direct financing leases (as distinguished from operating leases). Such leases transfer substantially all benefits and risks of equipment ownership to the customer. The Fund’s investment in direct financing leases consists of the sum of the total future minimum lease payments receivable plus the estimated unguaranteed residual value of leased equipment, less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum contracted payments plus the estimated unguaranteed residual value over the cost of the related equipment.
Unguaranteed residual value represents the estimated amount to be received at lease termination from lease extensions or ultimate disposition of the leased equipment. The estimates of residual values are based upon the General Partner’s history with regard to the realization of residuals, available industry data and the General Partner’s senior management’s experience with respect to comparable equipment. The estimated residual values are recorded as a component of investments in leases. Residual values are reviewed periodically to determine if the current estimate of the equipment’s fair market value appears to be below its recorded estimate. If required, residual values are adjusted downward to reflect adjusted estimates of fair market values. Upward adjustments to residual values are not permitted.
Operating Leases. Leases not meeting any of the criteria to be classified as direct financing leases are deemed to be operating leases. Under the accounting for operating leases, the cost of the leased equipment, including acquisition fees associated with lease placements, is recorded as an asset and depreciated on a straight-line basis over the equipment’s estimated useful life, generally up to seven years. Rental income consists primarily of monthly periodic rental payments due under the terms of the leases. The Fund recognizes rental income on a straight line basis.
Generally, during the lease terms of existing operating leases, the Fund will not recover all of the cost and related expenses of its rental equipment and, therefore, it is prepared to remarket the equipment in future years. The Fund’s policy is to review, on a quarterly basis, the expected economic life of its rental equipment in order to determine the recoverability of its undepreciated cost. The Fund writes down its rental equipment to its estimated net realizable value when it is probable that its carrying amount exceeds such value and the excess can be reasonably estimated; gains are only recognized upon actual sale of the rental equipment. There were no write-downs of equipment during the years ended December 31, 2011, 2010 and 2009.
Loans. For term loans, the investment in loans consists of the sum of the total future minimum loan payments receivable less unearned finance income. Unearned finance income, which is recognized as revenue over the term of the financing by the effective interest method, represents the excess of the total future minimum contracted loan payments over the cost of the related equipment. For all other loans, interest income is recorded at the stated rate on the accrual basis to the extent that such amounts are expected to be collected.
Allowance for Credit Losses. The Fund evaluates the adequacy of the allowance for credit losses (including investments in leases and loans) based upon, among other factors, management’s historical experience on the portfolios it manages, an analysis of contractual delinquencies, economic conditions and trends, and equipment finance portfolio characteristics, adjusted for expected recoveries. In evaluating historic performance, the Fund performs a migration analysis, which estimates the likelihood that an account progresses through delinquency stages to ultimate charge-off. After an account becomes 180 or more days past due any remaining balance is fully-reserved less an estimated recovery amount. Generally, the account is then referred to our internal recovery group consisting of a team of 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 management has determined the probability of collection to be remote.
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LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - (Continued)
December 31 2011
The Fund discontinues the recognition of revenue for leases and loans for which payments are more than 90 days past due. As of December 31, 2011 and December 31, 2010, the Fund had $2.3 million and $11.3 million, respectively, of leases and loans on non-accrual status. Payments received while leases and loans are on non-accrual status are recorded as a reduction of principal. 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.
Transfers of Financial Assets
In connection with establishing its credit facilities with its banks, the Fund has formed bankruptcy remote special purpose entities through which the financings are arranged. The Fund’s transfers of assets to these special purpose entities do not qualify for sales accounting treatment due to certain call provisions that the Fund maintains. Accordingly, assets and related debt of the special purpose entities are included in the Fund’s consolidated balance sheets. The Fund’s leases and restricted cash are assigned as collateral for these borrowings and there is no further recourse to the general credit of the Fund. Collateral in excess of these borrowings represents the Fund’s maximum loss exposure.
The Fund may sell leases to third parties. Leases are accounted for as sold when control of the lease is surrendered. Control over the leases are deemed surrendered when (1) the leases have been isolated from the Fund, (2) the buyer has the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the leases and (3) the Fund does not maintain effective control over the leases through either (a) an agreement that entitles and obligates the Fund to repurchase or redeem the leases before maturity, or (b) the ability to unilaterally cause the buyer to return specific leases. In connection with these sales, the Fund’s General Partner, the servicer of the leases prior to the sale, may continue to service the leases for the third party in exchange for “adequate compensation” as defined under U.S. GAAP. The Fund accrues liabilities for obligations associated with leases and loans sold which the Fund may be required to repurchase due to breaches of representations and warranties and early payment defaults. The Fund periodically evaluates the estimates used in calculating expected losses and adjustments are reported in earnings. To obtain fair values, the Fund generally estimates fair value based on the present value of future cash flows estimated using management’s best estimates of key assumptions, including credit losses and discount rates commensurate with the risks involved. As theses estimates are influenced by factors outside the Fund’s control and as uncertainty is inherent in these estimates, actual amounts charged off could differ from amounts recorded. The provision for repurchases is recorded as a component of gain on sales of leases and loans.
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 depends on whether the derivative has been designated and qualified for hedge accounting treatment pursuant to U.S. GAAP.
Prior to October 1, 2010, the Fund entered into derivative contracts, including interest rate swaps, substantially all of which were accounted for as cash flow hedges. Under hedge accounting, the effective portion of the gain or loss on a derivative designated as a cash flow hedge was reported in accumulated other comprehensive income on the Consolidated Balance Sheets and was then reclassified into earnings as an adjustment to interest expense over the term of the related borrowing.
Effective October 1, 2010, the Fund discontinued the use of hedge accounting. Therefore, any subsequent changes in the fair value of derivative instruments, including those that had previously been accounted for under hedge accounting, was recognized immediately in the accompanying statement of operations.
The Fund terminated its derivative instruments simultaneously with the pricing of the 2010-4 Term Securitization transaction in December 2010, as the 2010-4 Term Securitization is a fixed rate facility and the Fund was no longer exposed to variable interest rate risk. Accordingly, the Fund recognized the outstanding balances in accumulated other comprehensive income on the accompanying statement of operations for the period ending December 31, 2010.
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 consolidated financial statements.
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LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - (Continued)
December 31 2011
Comprehensive Income (Loss)
Comprehensive income (loss) includes net income (loss) and all other changes in the equity of a business during a period from transactions and other events and circumstances from non-owner sources. These changes, other than net income (loss) are referred to as “other comprehensive income (loss)” and for the Fund only includes unrealized changes in the fair value of hedging derivatives.
Allocation of Partnership Income, Loss and Cash Distributions
Cash available for distributions, if any, are made monthly as follows: 99% to the Limited Partners and 1% to the General Partner until the Limited Partners have received an amount equal to their unpaid cumulative return (8.5%) of their adjusted capital contribution and thereafter, for investment and reinvestment in the portfolio of investments or, if the General Partner elects not to invest or reinvest such distributable cash, 99% to the Limited Partners and 1% to the General Partner.
Net income for any fiscal period during the reinvestment period (beginning February 7, 2007) is allocated 99% to the Limited Partners and 1% to the General Partner. Income during the liquidation period, as defined in the Partnership Agreement, will be allocated first to the partners in proportion to and to the extent of the deficit balances, if any, in their respective capital accounts. Thereafter, net income will be allocated 99% to the Limited Partners and 1% to the General Partner.
Net Loss Per Limited Partner Unit
Net loss per limited partner unit is computed by dividing net loss allocated to the Fund’s Limited Partners by the weighted average number of limited partner units outstanding during the period. The weighted average number of limited partner units outstanding during the period is computed based on the number of limited partnership units issued during the period weighted for the days outstanding during the period.
Recent Accounting Standards
Accounting Standards Issued But Not Yet Effective
The FASB has issued the following guidance that is not yet effective for the Fund as of December 31, 2011:
Comprehensive Income - In June 2011, the FASB issued an amendment to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendment requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. This guidance will become effective for the Fund beginning January 1, 2012.
Fair Value Measurements - In May 2011, the FASB issued an amendment to revise the wording used to describe the requirements for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the amendments to result in a change in the application of the current requirements. Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements, such as specifying that the concepts of highest and best use and valuation premise in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements such as specifying that, in the absence of a Level 1 input, a reporting entity should apply premiums or discounts when market participants would do so when pricing the asset or liability. This guidance will become effective for the Fund beginning January 1, 2012. The Fund does not expect that adoption of this amendment will significantly impact its consolidated financial statements.
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LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - (Continued)
December 31 2011
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information (in thousands):
NOTE 4 - INVESTMENT IN LEASES AND LOANS
The Fund’s investment in leases and loans, net, consists of the following (in thousands):
(a)
The Fund’s direct financing leases are for initial lease terms generally ranging from 24 to 96 months.
(b)
The interest rates on loans generally range from 7% to 14%.
The components of direct financing leases and loans are as follows (in thousands):
(a)
Unguaranteed residuals for direct financing leases represent the estimated amounts recoverable at lease termination from extensions or disposition of the equipment.
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The Fund’s investment in operating leases, net, consists of the following (in thousands):
At December 31, 2011, the future payments scheduled to be received on non-cancelable leases and loans for each of the five succeeding annual periods ending December 31, and thereafter, are as follows (in thousands):
(a)
Operating lease amounts as shown are net of the residual value, if any, at the end of the lease term.
The Fund discontinues the recognition of revenue for leases and loans for which payments are more than 90 days past due. As of December 31, 2011 and December 31, 2010, the Fund had $2.3 million and $11.3 million, respectively, of leases and loans on non-accrual status.
NOTE 5-ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY
The following table is an age analysis of the Fund’s receivables from investments in leases and loans, presented gross of allowance for credit losses of $1.6 million and $9.2 million at December 31, 2011 and December 31, 2010, respectively, (dollars in thousands):
______________________________________
(a) Balances in this age category are collectively evaluated for impairment.
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LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - (Continued)
December 31 2011
The credit quality of the Fund’s investment in leases and loans as of December 31, 2011 and 2010 is as follows (in thousands):
The following table summarizes the annual activity in the allowance for credit losses (in thousands):
(a) End of year balances were collectively evaluated for impairment.
NOTE 6 - DEFERRED FINANCING COSTS
As of December 31, 2011 and December 31, 2010, deferred financing costs include $1.6 million and $3.1 million, respectively, of unamortized deferred financing costs which are being amortized over the estimated useful life of the related debt. Accumulated amortization as of December 31, 2011 and December 31, 2010 is $2.5 million and $965,000, respectively.
NOTE 7 -DEBT
The Fund’s bank debt consists of the following (dollars in thousands):
(1)
Six tranches of asset-backed notes were issued, one that matures in August 2018 and five that mature in January 2019, respectively. The asset-backed notes were issued at $201.9 million and bear interest at stated, fixed rates ranging from 1.7% to 5.5% and were issued at an original discount of approximately $ 7.2 million.
(2)
Availability under this loan is subject to having eligible leases or loans (as defined in the respective agreements) to pledge as collateral, compliance with covenants, and the borrowing base formula.
(3)
Collateralized by specific leases and loans and related equipment. As of December 31, 2011, $85.2 million of leases and loans and $10.1 million of restricted cash were pledged as collateral under the Fund’s credit facilities.
(4)
Interest on each borrowing on this facility was calculated at the commercial paper rate for the lender at the time of such borrowing plus 1.75% per annum.
WestLB
This facility was terminated as of December 8, 2010 and the outstanding balance of $84.7 million was paid off with the proceeds from the 2010-4 Term Securitization. Interest on this facility was LIBOR plus 2.50% per annum for all borrowings subsequent to March 2009 and at LIBOR plus 0.95% per annum for prior borrowings. This revolving line of credit was collateralized by specific leases and loans and related equipment, with a 1% credit reserve on the outstanding line of credit.
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DZ Bank
The outstanding balance of $72.9 million was paid off on December 8, 2010 with the proceeds from the 2010-4 Term Securitization. This facility has not been terminated. Interest on each borrowing on this facility is calculated at the commercial paper rate for the lender at the time of such borrowing plus 1.75% per annum.
The Fund is subject to certain financial covenants related to our DZ Bank facility. As of December 31, 2010, the Fund had incurred multiple breaches under the covenants on its credit facility with DZ Bank and covenant breaches relating to the affiliate that services the Fund’s leases and loans. The Fund has requested waivers from DZ Bank with respect to these breaches but none have been provided. As of December 31, 2011 no amounts are outstanding under this borrowing arrangement.
Key Equipment Finance
This facility was terminated as of December 8, 2010 and the outstanding balance of $27.3 million was paid off with the proceeds from the 2010-4 Term Securitization. Interest on this facility was calculated at one month commercial paper rate of the lender plus 1.55% per annum.
Debt Repayments: Estimated annual principal payments (gross of original issue discount of $2.8 million at December 31, 2011) on the Fund’s aggregate borrowings over the next five years ended December 31, are as follows (in thousands):
Average borrowings for the year ended December 31, 2011 and December 31, 2010 were $133.8 million and $232.5 million, respectively, at an effective interest rate of 6.92% and 10.78%, respectively.
NOTE 8 - NOTE PAYABLE
Guggenheim Note Payable: In April 2010, the Fund entered into a $5 million term loan with Broadpoint Products Corp. Interest payments were made on a monthly basis at a rate of 10% per annum. This term loan was paid-off on December 8, 2010 in part, with proceeds from the 2010-4 Term Securitization and replaced with a note payable to Guggenheim in the amount of $1.3 million which bore interest at 12% annually. The Guggenheim note was paid off on March 21, 2011.
NOTE 9 - DERIVATIVE INSTRUMENTS
As noted previously, the Fund terminated all of its interest rate swap agreements pursuant to issuance of the 2010-4 Term Securitization, as the 2010-4 Term Securitization is a fixed rate facility and the Fund was no longer exposed to interest rate risk. However, prior to issuance of the 2010-4 Term Securitization, the Fund’s bank debt was on a floating-rate basis, which exposed the Fund to interest rate risk if rates rose because it would increase the Fund’s borrowing costs. In addition, when the Fund acquired assets, it based its pricing in part on the spread it would expect to achieve between the interest rate it would charge its customers and the effective interest cost the Fund would pay when it funds those loans. Increases in interest rates that increase the Fund’s permanent funding costs between the time the assets were originated and the time they were funded could narrow, eliminate or even reverse this spread.
To manage interest rate risk prior to issuance of the 2010-4 Term Securitization, the Fund employed a hedging strategy using derivative financial instruments such as interest rate swaps. Effective October 1, 2010, the Fund elected to discontinue use of hedge accounting. Therefore, any subsequent changes in the fair value of derivative instruments, including those that had previously been accounted for under hedge accounting, was recognized immediately in the accompanying statement of operations. The Fund did not use derivative financial instruments for trading or speculative purposes. The Fund managed the credit risk of possible counterparty default in these derivative transactions by dealing primarily with counterparties with investment grade ratings.
The following table summarizes the effect of the interest rate swaps on the 2010 consolidated statement of operations and other comprehensive income prior to being de-designated on October 1, 2010 (in thousands):
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LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - (Continued)
December 31 2011
Swaps designated as cash flow hedges:
The following table summarizes the effect of the interest rate swaps on the 2010 consolidated statement of operations and other comprehensive income for interest rate swaps subsequent to being de-designated on October 1, 2010 and for certain interest rate swaps that were never designated as cash flow hedges for the full fiscal period (in thousands):
Swaps subsequent to designation as cash flow hedges:
___________________________________________
(a) All changes in fair value of derivatives subsequent to dedesignation as cash flow hedges were realized in Mark to market changes on derivative liabilities on the accompanying consolidated statement of operations.
NOTE 10 - FAIR VALUE MEASUREMENT
For cash, receivables and payables, the carrying amounts approximate fair values because of the short term maturity of these instruments. The carrying value of debt approximates fair market value since interest rates approximate current market rates.
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.
As discussed in Note 9, subsequent to the 2010-4 Term Securitization all of the funds debt was on as fixed rate basis and the funds interest rate swaps were terminated. Accordingly, there were no assets or liabilities measured at fair value at December 31, 2011 or December 31, 2010.
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LEAF EQUIPMENT LEASING INCOME FUND III, L.P. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - (Continued)
December 31 2011
NOTE 11 - CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH AFFILIATES
The Fund relies on the General Partner and its affiliates to manage the Fund’s operations and pays the General Partner or its affiliates fees to manage the Fund. The following is a summary of fees and costs of services charged by the General Partner or its affiliates (in thousands):
Acquisition Fees. The General Partner is paid a fee for assisting the Fund in acquiring equipment subject to existing equipment leases equal to up to 2% of the purchase price the Fund pays for the equipment or portfolio of equipment subject to existing equipment financing.
Management Fees. The General Partner was paid a subordinated annual asset management fee equal to 4% of gross rental payments for operating leases or 2% for full payout leases or a competitive fee, whichever is less. During the Fund’s five-year investment period, the management fees were subordinated to the payment to the Fund’s limited partners of a cumulative annual distribution of 8.5% of their capital contributions, as adjusted by distributions deemed to be a return of capital. Beginning August 1, 2009, the General Partner waived asset management fees. Approximately $2.6 million of management fees were waived for the year ended December 31, 2011 and $4.0 has been waived on a cumulative basis. The General Partner has also waived all future management fees.
Administrative Expenses. The General Partner and its affiliates are reimbursed by the Fund for certain costs of services and materials used by or for the Fund except those items covered by the above-mentioned fees.
Due to Affiliates. Due to affiliates includes amounts due to the General Partner related to acquiring and managing portfolios of equipment from its General Partner, management fees and reimbursed expenses.
Distributions. The General Partner owns a 1% general partner interest and a 1.2% limited partner interest in the Fund. The General Partner was paid cash distributions of $24,000 and $23,000 for its general partner and limited partner interests, respectively, for the year ended December 31, 2011 and $70,000 and $67,000 for its general partner and limited partner interests, respectively, for the year ended December 31, 2010.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
In connection with a sale of leases and loans to a third-party in July of 2008, the Fund contractually agreed to repurchase delinquent leases up to a maximum of $327,000 calculated as 7.5% of total proceeds received from the sale (“Repurchase Commitment”). As of December 31, 2011 the Fund has $212,000 remaining Repurchase Commitment of which $43,000 was recorded as a liability at December 31, 2011.
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.
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ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE.
ITEM 9A
ITEM 9A - 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.
Management’s Report on Internal Control over Financial Reporting
Our General Partner’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our General Partner’s management assessed the effectiveness of our internal control over financial reporting as of December 31, 2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in Internal Control - Integrated Framework. Based upon this assessment, our General Partner’s management concluded that, as of December 31, 2011, our internal control over financial reporting is effective.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only our General Partner’s management report in this annual report.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during the three months ended December 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B
ITEM 9B - OTHER INFORMATION
On June 8, 2011 we commenced a solicitation of our limited partners seeking their consent to amend our Limited Partnership Agreement. Upon receiving the requisite number of consents from our limited partners, on October 17, 2011, our General Partner amended our Limited Partnership Agreement to allow us to reinvest Distributable Cash into new equipment, leases and loans during the continuance of the Reinvestment Period without first having to pay the Unpaid Cumulative Return.
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PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our General Partner manages our activities. Although our limited partners have limited voting rights under our partnership agreement, they do not directly or indirectly participate in our management or operations or have actual or apparent authority to enter into contracts on our behalf or to otherwise bind us. Our General Partner will be liable, as General Partner, for all of our debts to the extent not paid, except to the extent that indebtedness or other obligations incurred by it are specifically with recourse only to our assets. Whenever possible, our General Partner intends to make any of our indebtedness or other obligations with recourse only to our assets.
As is commonly the case with limited partnerships, we do not directly employ any of the persons responsible for our management or operation. Rather, our General Partner’s personnel manage and operate our business. Officers of our General Partner may spend a substantial amount of time managing the business and affairs of our General Partner and its affiliates and may face a conflict regarding the allocation of their time between our business and affairs and their other business interests.
The following table sets forth information with respect to the directors and executive officers of our General Partner:
Crit S. DeMent was Chairman of the Board of Directors and Chief Executive Officer of LEAF Financial since November 2001 until December 14, 2011. Mr. DeMent also serves as Chairman of the Board of Directors and Chief Executive Officer of LEAF Asset Management since it was formed in August 2006, Chairman of the Board of Directors and Chief Executive Officer of LEAF Funding since March 2003, a Senior Vice President of Resource America since 2005 and Senior Vice President - Equipment Leasing of Resource Capital Corp. since March 2005. Beginning January 1, 2011, Mr. DeMent serves as the Chairman of the Board of Directors and Chief Executive Officer of LEAF Commercial Capital, Inc. Before that, he was President of Fidelity Leasing, Inc. and its successor, the Technology Finance Group of Citi-Capital Vendor Finance from 1998 to 2001. Mr. DeMent was Vice President of Marketing for Tokai Financial Services from 1987 through 1996. Mr. DeMent serves as the Chairman of the Board of Directors of the Equipment Leasing and Finance Association.
Jonathan Z. Cohen has been a Director of LEAF Financial Corporation since January 2002, and a Director of LEAF Asset Management since it was formed in August 2006. Mr. Cohen also serves, or has served, in the following positions with Resource America: a Director since 2002, President since 2003, Chief Executive Officer since 2004, Chief Operating Officer from 2002 to 2004, Executive Vice President from 2001 to 2003, and Senior Vice President from 1999 to 2001. In addition, Mr. Cohen serves as Chief Executive Officer, President and a Director of Resource Capital Corp. (a publicly-traded real estate investment trust) since its formation in 2005. Mr. Cohen also serves as Vice Chairman of the Managing Board of Atlas Pipeline Partners GP, LLC (the general partner of Atlas Pipeline Partners, L.P., a publicly-traded oil and gas pipeline limited partnership) since its formation in 1999, Chairman of the Board of Directors of Atlas Energy GP, LLC (the general partner of Atlas Energy, L.P. (f/k/a Atlas Pipeline Holdings, L.P.), a publicly-traded oil and gas limited partnership) and Vice Chairman of the Board of Directors of Atlas Resource Partners GP, LLC (the general partner of Atlas Resource Partners, L.P., a publicly-traded oil and gas E&P limited partnership) since February 2012. Mr. Cohen was also Vice Chairman of the Board of Directors of Atlas Energy, Inc. ((f/k/a Atlas America, Inc.) a publicly-traded oil and gas company) from September 2000 until February 2011 and Vice Chairman of Atlas Energy Resources, LLC from June 2006 until February 2011.
Jeffrey F. Brotman has been a Director of LEAF Financial since April 2008. Mr. Brotman has also been Executive Vice President of Resource America since June 2007. Mr. Brotman was a co-founder of Ledgewood, P.C. (a Philadelphia-based law firm) and was affiliated with the firm from 1992 until June 2007, serving as its managing partner from 1995 until March 2006. Mr. Brotman is also a non-active Certified Public Accountant and an Adjunct Professor at the University of Pennsylvania Law School. Mr. Brotman was Chairman of the Board of Directors of TRM Corporation (a publicly-traded consumer services company) from September 2006 until September 2008 and was its President and Chief Executive Officer from March 2006 through June 2007.
The board of directors of our General Partner has not adopted specific minimum qualifications for service on the board, but rather seeks a mixture of skills that are relevant to our business. The following presents a brief summary of the attributes of each director that led to the conclusion that such person should serve as a director:
Mr. DeMent has lengthy and extensive experience in the equipment leasing and finance industry.
Mr. Cohen has extensive financial and operational experience, including as the chief executive officer of our general partner’s publicly traded parent company.
Mr. Brotman has significant experience in finance, as an attorney, and as the chief executive officer of a public company.
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Robert K. Moskovitz has been Chief Financial Officer of LEAF Financial since February 2004, Treasurer of LEAF Financial from September 2004 until April 2009 and Assistant Secretary of LEAF Financial since June 2007. Mr. Moskovitz also serves as Chief Financial Officer, and Assistant Secretary of LEAF Asset Management since it was formed in August 2006, and Chief Financial Officer and a Director of LEAF Funding since May 2004. Beginning January 1, 2011, Mr. Moskovitz serves as the Chief Financial Officer of LEAF Commercial Capital, Inc. He has over twenty years of experience as the Chief Financial Officer of both publicly and privately owned companies. From 2002 to 2004, Mr. Moskovitz was an independent consultant on performance management initiatives, primarily to the financial services industry. From 2001 to 2002 he was Executive Vice President and Chief Financial Officer of ImpactRx, Inc., which provides advanced sales and marketing intelligence to pharmaceutical companies. From 1983 to 2001 Mr. Moskovitz held senior executive level financial positions with several high growth public and privately held companies. He began his professional career with Deloitte & Touché (formerly Touché Ross & Co). Mr. Moskovitz holds a B.S. degree in Business Administration from Drexel University.
Code of Business Conduct and Ethics
Because we do not directly employ any persons, we rely on a Code of Business Conduct and Ethics adopted by Resource America, Inc. that applies to the principal executive officer and principal financial officer of our General Partner, as well as to persons performing services for us generally. You may obtain a copy of this code of ethics by a request to our General Partner at LEAF Asset Management, LLC, One Commerce Square, 2005 Market Street, 14th Floor, Philadelphia, Pennsylvania 19103.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, which we refer to as the Exchange Act, requires the directors and executive officers of our General Partner, our General Partners, and holders greater than 10% of our limited partnership interests to file reports with the SEC. SEC regulations require us to identify anyone who filed a required report late during the most recent fiscal year. Based on our review of these reports, we believe that the filing requirements for all of these reporting persons were complied with during 2011.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
We do not have, and do not expect to have, any employees as discussed in Item 10 - “Directors and Executive Officers of the Registrant.” Instead, our management and day-to-day activities are provided by the employees of our General Partner and its affiliates. No officer or director of our General Partner will receive any direct remuneration from us. Those persons will receive compensation solely from our General Partner or its affiliates other than us.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED UNIT HOLDER MATTERS
(a)
We had 2,546 limited partners as of December 31, 2011.
(b)
In 2006, our General Partner contributed $1,000 to our capital as our General Partner and received its General Partner interest in us. As of December 31, 2011, our General Partner owned 14,709 of our limited partner units. These purchases of limited partner units by our General Partner and its affiliates were at a price discounted by the 7% sales commission which was paid by most of our other limited partners.
(c)
We know of no arrangements that would, at any date subsequent to the date of this report, result in a change in control of us.
(d)
Our General Partner’s name and address is LEAF Asset Management, LLC, One Commerce Square, 2005 Market Street, 14th Floor, Philadelphia, Pennsylvania 19103.
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ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We do not directly employ any persons to manage or operate our business. These functions are provided by our General Partner and employees of our General Partner and/or its affiliates. We reimburse our General Partner and/or its affiliates for all direct and indirect costs of services provided, including the cost of employees and benefits properly allocable to us and all other expenses necessary or appropriate for the conduct of our business. The following is a summary of fees and costs of services charged by the General Partner or its affiliates (in thousands):
Acquisition Fees. The General Partner is paid a fee for assisting the Fund in acquiring equipment subject to existing equipment leases equal to up to 2% of the purchase price the Fund pays for the equipment or portfolio of equipment subject to existing equipment financing.
Management Fees. The General Partner is paid a subordinated annual asset management fee equal to 4% of gross rental payments for operating leases or 2% for full payout leases or a competitive fee, whichever is less. During the Fund’s five-year investment period, the management fees will be subordinated to the payment to the Fund’s limited partners of a cumulative annual distribution of 8.5% of their capital contributions, as adjusted by distributions deemed to be a return of capital. Beginning August 1, 2009, the General Partner waived asset management fees. Approximately $2.6 million of management fees were waived for the year ended December 31, 2011. The General Partner has also waived all future management fees.
Our General Partner may also receive up to 3% of the proceeds from the sale of our equipment for services and activities to be performed in connection with arranging for the sale of our equipment after the expiration of lease. The payment of this sales fee is deferred until the Limited Partners have received cash distributions equal to the purchase price of their units plus an 8.5% cumulative compounded priority return.
Administrative Expenses. The General Partner and its affiliates are reimbursed by the Fund for certain costs of services and materials used by or for the Fund except those items covered by the above-mentioned fees.
Due to Affiliates. Due to affiliates includes amounts due to the General Partner related to acquiring and managing portfolios of equipment from its General Partner, management fees and reimbursed expenses.
Distributions. Our General Partner owns a 1% general partner interest and a 1.2% limited partner interest in us. The General Partner was paid cash distributions of $24,000 and $23,000 respectively, for its general partner and limited partner interests in us in 2011.
Additionally, our General Partner is entitled to the following fees (if applicable):
×
Up to 3% of the proceeds from the sale of our equipment for services and activities to be performed in connection with arranging for the sale of our equipment after the expiration of lease. The payment of this sales fee is deferred until the Limited Partners have received cash distributions equal to the purchase price of their units plus an 8.5% cumulative compounded priority return.
Because we are not listed on any national securities exchange or inter-dealer quotation system, we have elected to use the Nasdaq National Stock Market’s definition of “independent director” in evaluating whether any of our General Partner’s directors are independent. Under this definition, the board of directors of our General Partner has determined that our General Partner does not have any independent directors, nor are we required to have any.
ITEM 14
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees. The aggregate fees billed by our independent auditors, Grant Thornton, LLP were $205,000 and $217,000 in the years ended December 31, 2011and 2010, respectively.
Audit-Related Fees. We did not incur fees in 2011 for other services not included above.
Tax Fees. We did not incur fees in 2011 for other services not included above.
All Other Fees. We did not incur fees in 2011 for other services not included above.
Procedures for Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditor.
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Our General Partner’s Board of Directors reviews and approves in advance any audit and any permissible non-audit engagement or relationship between us and our independent auditors.
PART IV
ITEM 15
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Annual Report on Form 10-K:
1.
Financial Statements
The financial statements required by this Item are set forth in Item 8 - “Financial Statements and Supplementary Data.”
2.
Financial Statement Schedules
No schedules are required to be presented in this report under Regulation S-X promulgated by the SEC.
3.
Exhibits
________________________________
(1)
Filed previously as an exhibit to our Registration Statement on Form S-1 filed on October 2, 2006 and by this reference incorporated herein.
(2)
Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2008 and by this reference incorporated herein.
(3)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 and by this reference incorporated herein.
(4)
Filed previously as an exhibit to our Current Report on Form 8-K Report dated October 17, 2011.
(5)
Filed previously as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2010 and by this reference incorporated herein.
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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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in capacities and on the dates indicated.
/s/ Crit S. DeMent
Chief Executive Officer of the General Partner
March 28, 2012
CRIT S. DEMENT
(Principal Executive Officer)
/s/ Robert K. Moskovitz
Chief Financial Officer
March 28, 2012
ROBERT K. MOSKOVITZ
(Principal Accounting and Financial Officer)
/s/ Jonathan Z. Cohen
Director of the General Partner
March 28, 2012
JONATHAN Z. COHEN
/s/ Jeffrey F. Brotman
Director of the General Partner
March 28, 2012
JEFFREY F. BROTMAN