##### Table of Contents



United States
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2008
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 333-116595
 LEASE EQUITY APPRECIATION FUND II, L.P.
  Delaware
    
    20-1056194(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 110 South Poplar Street, Suite 101, Wilmington Delaware 19801
(Address of principal executive offices)
 (800) 819-5556
(Registrants telephone number, including area code)
 þ o
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company þ o þ




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##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
 PAGEPART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance Sheets  June 30, 2008 (unaudited) and December 31, 2007
    
    
    3Consolidated Statements of Operations Three and Six Months Ended June 30, 2008 and 2007 (unaudited)
    
    
    4Consolidated Statement of Partners Capital and Comprehensive Loss Six Months Ended June 30, 2008 (unaudited)
    
    
    5Consolidated Statements of Cash Flows Six Months Ended June 30, 2008 and 2007 (unaudited)
    
    
    6Notes to Consolidated Financial Statements  June 30, 2008 (unaudited)
    
    
    7ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17ITEM 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    23ITEM 4.
    
    Controls and Procedures
    
    
    23PART II
    
    OTHER INFORMATIONITEM 6.
    
    Exhibits
    
    
    24SIGNATURES
    
    
    
    
    25Fifth Amendment to Secured Loan AgreementCertification of CEOCertification of CFOCertification of CEO pursuant to Section 1350Certification of CFO pursuant to Section 1350
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 LEASE EQUITY APPRECIATION FUND II, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands)
 June 30,
    
    
    December 31,2008
    
    
    2007(unaudited)
    
    
    (audited)ASSETSCash
    
    $
    465
    
    
    $
    259Restricted cash
    
    
    30,475
    
    
    
    29,442Accounts receivable
    
    
    301
    
    
    
    297Investment in direct financing leases and notes, net
    
    
    311,311
    
    
    
    331,622Investment in operating leases, net of accumulated depreciation of $8,801 and
$7,855, respectively
    
    
    8,582
    
    
    
    11,693Other assets
    
    
    4,124
    
    
    
    4,075$
    355,258
    
    
    $
    377,388LIABILITIES AND PARTNERS CAPITALLiabilities:Debt
    
    $
    299,929
    
    
    $
    324,170Accounts payable and accrued expenses
    
    
    1,511
    
    
    
    1,256Security deposits
    
    
    6,031
    
    
    
    5,143Fair value of interest rate swaps
    
    
    6,097
    
    
    
    6,623Due to related parties
    
    
    8,113
    
    
    
    3,054Total liabilities
    
    
    321,681
    
    
    
    340,246Partners Capital
    
    
    33,577
    
    
    
    37,142$
    355,258
    
    
    $
    377,388
  3




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##### Table of Contents



LEASE EQUITY APPRECIATION FUND II, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except unit data)
(unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Income:Interest on equipment financings
    
    $
    6,801
    
    
    $
    5,811
    
    
    $
    14,077
    
    
    $
    11,597Rental income
    
    
    1,168
    
    
    
    1,456
    
    
    
    2,484
    
    
    
    2,907Gain on sale of equipment and lease dispositions, net
    
    
    221
    
    
    
    345
    
    
    
    543
    
    
    
    402Other
    
    
    594
    
    
    
    455
    
    
    
    1,237
    
    
    
    9608,784
    
    
    
    8,067
    
    
    
    18,341
    
    
    
    15,866Expenses:Interest expense
    
    
    4,660
    
    
    
    4,362
    
    
    
    9,456
    
    
    
    8,593Depreciation on operating leases
    
    
    985
    
    
    
    1,218
    
    
    
    2,099
    
    
    
    2,441Provision for credit losses
    
    
    2,187
    
    
    
    587
    
    
    
    3,508
    
    
    
    1,702Management fees to related party
    
    
    979
    
    
    
    847
    
    
    
    1,963
    
    
    
    1,789Administrative expense reimbursed to related party
    
    
    763
    
    
    
    388
    
    
    
    1,206
    
    
    
    790General and administrative expenses
    
    
    842
    
    
    
    617
    
    
    
    1,447
    
    
    
    1,29410,416
    
    
    
    8,019
    
    
    
    19,679
    
    
    
    16,609Net income (loss)
    
    $
    (1,632
    )
    
    $
    48
    
    
    $
    (1,338
    )
    
    $
    (743
    )Weighted average number of limited partner units
outstanding during the period
    
    
    595,796
    
    
    
    600,000
    
    
    
    596,646
    
    
    
    600,000Net income (loss) per weighted average limited partner unit
    
    $
    (2.71
    )
    
    $
    0.08
    
    
    $
    (2.22
    )
    
    $
    (1.23
    )
  4




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LEASE EQUITY APPRECIATION FUND II, L.P.
CONSOLIDATED STATEMENT OF PARTNERS CAPITAL
AND COMPREHENSIVE INCOME (LOSS)
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(in thousands, except unit data)
(unaudited)
 Accumulated OtherComprehensive
    
    
    
    
    
    
    ComprehensiveGeneral Partner
    
    
    Limited Partners
    
    
    Income
    
    

Partners Capital
    
    
    Income (Loss)Amount
    
    
    Units
    
    
    Amount
    
    
    (Loss)
    
    
    Total
    
    
    TotalBalance at January 1, 2008
    
    $
    (99
    )
    
    
    597,945
    
    
    $
    41,855
    
    
    $
    (4,614
    )
    
    $
    37,142Cash distributions paid
    
    
    (24
    )
    
    
    
    
    
    
    (2,362
    )
    
    
    
    
    
    
    (2,386
    )Redemption of Limited
Partners Units
    
    
    
    
    
    
    (2,402
    )
    
    
    (250
    )
    
    
    
    
    
    
    (250
    )Net Loss
    
    
    (13
    )
    
    
    
    
    
    
    (1,325
    )
    
    
    
    
    
    
    (1,338
    )
    
    $
    (1,338
    )Unrealized gain on hedging
derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    600
    
    
    
    600
    
    
    
    600Amortization of gain on
financial derivative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (191
    )
    
    
    (191
    )
    
    
    (191
    )Balance at June 30, 2008
    
    $
    (136
    )
    
    
    595,543
    
    
    $
    37,918
    
    
    $
    (4,205
    )
    
    $
    33,577
    
    
    $
    (929
    )
  5




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LEASE EQUITY APPRECIATION FUND II, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Six months endedJune 30,2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (1,338
    )
    
    $
    (743
    )Adjustments to reconcile net loss to net cash provided by
operating activities:Gain on sale of equipment and lease dispositions, net
    
    
    (543
    )
    
    
    (402
    )Depreciation
    
    
    2,099
    
    
    
    2,441Provision for credit losses
    
    
    3,508
    
    
    
    1,702Amortization of deferred financing costs
    
    
    304
    
    
    
    71Amortization of gain on financial derivative
    
    
    (191
    )
    
    
    (28
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (4
    )
    
    
    87Other assets
    
    
    481
    
    
    
    317Accounts payable and accrued expenses
    
    
    255
    
    
    
    238Due to related parties, net
    
    
    5,059
    
    
    
    1,194Net cash provided by operating activities
    
    
    9,630
    
    
    
    4,877Cash flows from investing activities:Investment in direct financing leases and notes
    
    
    (51,240
    )
    
    
    (87,637
    )Proceeds from direct financing leases, net of earned income
    
    
    63,026
    
    
    
    55,712Proceeds from (investment in) equipment under operating leases, net
    
    
    1,012
    
    
    
    (994
    )Proceeds from sale of leases to third parties
    
    
    5,560
    
    
    
    Increase in security deposits, net
    
    
    888
    
    
    
    1,000Net cash provided by (used in) investing activities
    
    
    19,246
    
    
    
    (31,919
    )Cash flows from financing activities:Borrowings of debt
    
    
    50,834
    
    
    
    94,751Repayment of debt
    
    
    (75,075
    )
    
    
    (57,498
    )Increase in restricted cash
    
    
    (1,033
    )
    
    
    (19,248
    )Increase in deferred financing costs
    
    
    (760
    )
    
    
    (2,286
    )Proceeds from termination of financial derivatives
    
    
    
    
    
    
    2,254Redemption of limited partner units
    
    
    (250
    )
    
    
    Cash distributed to partners
    
    
    (2,386
    )
    
    
    (2,461
    )Net cash (used in) provided by financing activities
    
    
    (28,670
    )
    
    
    15,512Increase (decrease) in cash
    
    
    206
    
    
    
    (11,530
    )Cash, beginning of period
    
    
    259
    
    
    
    14,210Cash, end of period
    
    $
    465
    
    
    $
    2,680
  6




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LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(unaudited)
 NOTE 1  ORGANIZATION AND NATURE OF BUSINESS
      NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
  Reclassifications
  7




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LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(unaudited)
 NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued)
 Use of Estimates
      Concentration of Credit Risk
   Revenue Recognition
  8




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LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(unaudited)
 NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued)
 Direct Financing Leases.
 Operating Leases.
 Notes Receivable.
  Income Taxes
  Supplemental Disclosure of Cash Flow Information
  Six Months EndedJune 30,2008
    
    
    2007Cash paid for:Interest
    
    $
    9,098
    
    
    $
    8,395Non-cash activities:Borrowings under 2007-1 Term Securitization
    
    $
    
    
    
    $
    (267,237
    )Repayment of Merrill Lynch and WestLB line of credit
    
    $
    
    
    
    $
    267,237
 9




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LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
JUNE 30, 2008
(unaudited)
 NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued)
 Recently Issued Accounting Pronouncements
   Transfers of Financial Assets
   Fair Value of Financial Instruments
   10




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LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
JUNE 30, 2008
(unaudited)
 NOTE 3  RESTRICTED CASH
  NOTE 4  INVESTMENT IN LEASES AND NOTES
  June 30,
    
    
    December 31,2008
    
    
    2007Direct financing leases
    
    $
    252,319
    
    
    $
    268,983Notes receivable
    
    
    60,702
    
    
    
    64,599313,021
    
    
    
    333,582Allowance for credit losses
    
    
    (1,710
    )
    
    
    (1,960
    )$
    311,311
    
    
    $
    331,622
  June 30,
    
    
    December 31,2008
    
    
    2007Total future minimum lease payments
    
    $
    280,917
    
    
    $
    301,449Unearned rental income
    
    
    (31,054
    )
    
    
    (35,846
    )Residuals, net of unearned residual income
    
    
    2,456
    
    
    
    3,380$
    252,319
    
    
    $
    268,983
  Six months endedJune 30,2008
    
    
    2007Allowance for credit losses, beginning of period
    
    $
    1,960
    
    
    $
    1,418Provision for credit losses
    
    
    3,508
    
    
    
    1,702Net write offs
    
    
    (3,758
    )
    
    
    (1,702
    )Allowance for credit losses, end of period
    
    $
    1,710
    
    
    $
    1,418
  Direct FinancingPeriods Ending June 30,
    
    Leases
    
    
    Notes
    
    
    Operating Leases
    
    
    Total2009
    
    $
    113,759
    
    
    $
    13,626
    
    
    $
    3,477
    
    
    $
    130,8622010
    
    
    80,827
    
    
    
    15,297
    
    
    
    1,997
    
    
    
    98,1212011
    
    
    49,787
    
    
    
    13,423
    
    
    
    810
    
    
    
    64,0202012
    
    
    24,323
    
    
    
    10,885
    
    
    
    224
    
    
    
    35,4322013
    
    
    8,842
    
    
    
    5,298
    
    
    
    45
    
    
    
    14,185Thereafter
    
    
    3,379
    
    
    
    2,173
    
    
    
    16
    
    
    
    5,568$
    280,917
    
    
    $
    60,702
    
    
    $
    6,569
    
    
    $
    348,188
 11




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LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
JUNE 30, 2008
(unaudited)
 NOTE 5  OTHER ASSETS
  Periods Ending June 30,2009
    
    $
    6612010
    
    
    6612011
    
    
    6612012
    
    
    6612013
    
    
    387Thereafter
    
    
    227$
    3,258
 NOTE 6  DEBT
  June 30, 2008
    
    
    December 31, 2007In September 2007, the
Fund closed a $276.8
million term
securitization (Series
2007-1 Notes). In
connection with the
Series 2007-1
transaction, four
tranches of notes were
issued to investors in
the form of $84 million
Class A-1 notes, $77
million Class A-2 notes,
$101.3 million Class A-3
notes and $14.5 million
Class B notes. Interest
rates and maturities on
the four tranches are as
follows: Class A-1 5.38%,
maturing in September
2008 was fully repaid in
March 2008; Class A-2 one
month LIBOR plus 0.12%,
maturing in January 2010;
Class A-3 one month LIBOR
plus 0.20%, maturing in
July 2010 and Class B
6.65%, maturing in July
2010. To mitigate
fluctuations in interest
rates on Class A-2 and
Class A-3 notes the Fund
has entered into interest
rate swap agreements. The
interest rate swap
agreements terminate at
various dates ranging
from January 2010 to July
2012 (See Note 7). As of
June 30, 2008, the
interest rate swap
agreements fix the
interest rate on Class
A-2 and Class A-3 notes
at 5.40% on a weighted
average basis
    
    $
    165,351
    
    
    $
    214,653WestLB AG, New York
Branch revolving line of
credit, with an aggregate
borrowing limit of $150
million collateralized by
specific leases and notes
receivables and related
equipment, with a 1%
credit reserve of the
outstanding line of
credit. Interest on this
facility is calculated at
LIBOR plus .95% per
annum. To mitigate
fluctuations in interest
rates the Fund has
entered into interest
rate swap agreements.
The interest rate swap
agreements terminate on
various dates ranging
from July 2013 to March
2015. As of June 30,
2008, the interest rate
swap agreements fix the
interest rate on the
outstanding balance at
5.82% on a weighted
average basis. Interest
and principal are due
monthly. The line of
credit is renewable for a
one year period in June
2009.
    
    
    134,578
    
    
    
    109,517Total outstanding debt
    
    $
    299,929
    
    
    $
    324,170
 12




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LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
JUNE 30, 2008
(unaudited)
 NOTE 6  DEBT  (Continued)
    2009
    
    $
    105,5712010
    
    
    85,1552011
    
    
    57,4152012
    
    
    32,8452013
    
    
    13,708Thereafter
    
    
    5,235$
    299,929
 NOTE 7  DERIVATIVE INSTRUMENTS
      13




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LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
JUNE 30, 2008
(unaudited)
 NOTE 8  FAIR VALUE MEASUREMENT
 ,
    Fair Value measurements Using
    
    Assets / LiabilitiesLevel 1
    
    Level 2
    
    Level 3
    
    At Fair ValueLiabilitiesInterest  Rate Swaps
    
    
    
    
    
    
    (6,097
    )
    
    
    
    
    
    
    (6,097
    )
 NOTE 9  TRANSACTIONS WITH AFFILIATES
   14




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LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
JUNE 30, 2008
(unaudited)
 NOTE 9  TRANSACTIONS WITH AFFILIATES (Continued)
     Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007Acquisition fees
    
    $
    396
    
    
    $
    940
    
    
    $
    903
    
    
    $
    1,494Asset management fees
    
    $
    979
    
    
    $
    847
    
    
    $
    1,963
    
    
    $
    1,789Reimbursed administrative expenses
    
    $
    763
    
    
    $
    388
    
    
    $
    1,206
    
    
    $
    790
  NOTE 10  ALLOCATION OF PARTNERSHIP INCOME, LOSS AND CASH DISTRIBUTIONS
   NOTE 11  COMPREHENSIVE INCOME (LOSS)
  15




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LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
JUNE 30, 2008
(unaudited)
 NOTE 12  NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT
  NOTE 13  FIRST QUARTER ADJUSTMENT
  16




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (unaudited)
 When used in this Form 10-Q , the words believes anticipates, expects and similar
expressions are intended to identify forward-looking statements. Such statements are subject to
certain risks and uncertainties more particularly described in Item 1A, under the caption Risks
Inherent in Our Business, in our annual report on Form 10-K for 2007. These risks and
uncertainties could cause actual results to differ materially. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the date hereof. We
undertake no obligation to publicly release the results of any revisions to forward-looking
statements which we may make to reflect events or circumstances after the date of this Form 10-Q or
to reflect the occurrence of unanticipated events.
 OVERVIEW
    
    
    500 or fewer employees;
    
    $1.0 billion or less in total assets; or
    
    $100.0 million or less in total annual sales.
      17




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Our Lease Portfolio
  Direct Financing Leases and Notes
 June 30, 2008
    
    
    December 31, 2007Net
    
    
    
    
    
    
    NetType of Equipment
    
    Investment
    
    
    Percentage
    
    
    Investment
    
    
    PercentageIndustrial Equipment
    
    $
    82,764
    
    
    
    26.4
    %
    
    $
    96,100
    
    
    
    28.8
    %Medical Equipment
    
    
    59,064
    
    
    
    18.9
    
    
    
    69,545
    
    
    
    20.8Computers
    
    
    41,536
    
    
    
    13.3
    
    
    
    53,590
    
    
    
    16.1Office Equipment
    
    
    27,030
    
    
    
    8.6
    
    
    
    20,097
    
    
    
    6.0Communications
    
    
    20,280
    
    
    
    6.5
    
    
    
    15,788
    
    
    
    4.7Restaurant Equipment
    
    
    18,018
    
    
    
    5.8
    
    
    
    19,553
    
    
    
    5.9Garment Care
    
    
    14,099
    
    
    
    4.5
    
    
    
    16,837
    
    
    
    5.0Water Purification
    
    
    12,409
    
    
    
    4.0
    
    
    
    
    
    
    
    Software
    
    
    10,204
    
    
    
    3.2
    
    
    
    13,992
    
    
    
    4.2Other
    
    
    27,617
    
    
    
    8.8
    
    
    
    28,080
    
    
    
    8.5$
    313,021
    
    
    
    100.0
    %
    
    $
    333,582
    
    
    
    100.0
    %
 Operating Leases
 June 30, 2008
    
    
    December 31, 2007Net
    
    
    
    
    
    
    NetType of Equipment
    
    Investment
    
    
    Percentage
    
    
    Investment
    
    
    PercentageIndustrial Equipment
    
    $
    2,460
    
    
    
    28.7
    %
    
    $
    3,476
    
    
    
    29.7
    %Communications
    
    
    2,013
    
    
    
    23.5
    
    
    
    2,378
    
    
    
    20.3Computers
    
    
    1,707
    
    
    
    19.9
    
    
    
    2,514
    
    
    
    21.5Office Equipment
    
    
    1,422
    
    
    
    16.6
    
    
    
    2,030
    
    
    
    17.4Building systems
    
    
    352
    
    
    
    4.1
    
    
    
    419
    
    
    
    3.6Agriculture Equipment
    
    
    339
    
    
    
    4.0
    
    
    
    360
    
    
    
    3.1Restaurant Equipment
    
    
    175
    
    
    
    2.0
    
    
    
    197
    
    
    
    1.7Medical Equipment
    
    
    71
    
    
    
    0.8
    
    
    
    262
    
    
    
    2.2Garment Care
    
    
    29
    
    
    
    0.3
    
    
    
    43
    
    
    
    0.4Software
    
    
    14
    
    
    
    0.1
    
    
    
    14
    
    
    
    0.1$
    8,582
    
    
    
    100.0
    %
    
    $
    11,693
    
    
    
    100.0
    %
 18




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##### Table of Contents



Direct Financing Leases and Notes
 June 30, 2008
    
    
    December 31, 2007Net
    
    
    
    
    
    
    NetType of Business
    
    Investment
    
    
    Percentage
    
    
    Investment
    
    
    PercentageServices
    
    $
    141,120
    
    
    
    45.1
    %
    
    $
    153,981
    
    
    
    46.1
    %Retail Trade
    
    
    37,722
    
    
    
    12.0
    
    
    
    38,120
    
    
    
    11.4Manufacturing
    
    
    34,727
    
    
    
    11.1
    
    
    
    36,334
    
    
    
    10.9Agriculture/Forestry/Fishing
    
    
    24,120
    
    
    
    7.7
    
    
    
    27,260
    
    
    
    8.2Transportation/Communication/Energy
    
    
    19,034
    
    
    
    6.1
    
    
    
    20,820
    
    
    
    6.2Construction
    
    
    18,355
    
    
    
    5.9
    
    
    
    19,219
    
    
    
    5.8Wholesale Trade
    
    
    13,889
    
    
    
    4.4
    
    
    
    15,240
    
    
    
    4.6Finance/Insurance/Real Estate
    
    
    12,057
    
    
    
    3.8
    
    
    
    9,981
    
    
    
    3.0Public Administration
    
    
    1,431
    
    
    
    0.5
    
    
    
    949
    
    
    
    0.3Other
    
    
    10,566
    
    
    
    3.4
    
    
    
    11,678
    
    
    
    3.5$
    313,021
    
    
    
    100.0
    %
    
    $
    333,582
    
    
    
    100.0
    %
 Operating Leases
 June 30, 2008
    
    
    December 31, 2007Net
    
    
    
    
    
    
    NetType of Business
    
    Investment
    
    
    Percentage
    
    
    Investment
    
    
    PercentageServices
    
    $
    3,298
    
    
    
    38.4
    %
    
    $
    4,558
    
    
    
    39.0
    %Construction
    
    
    2,718
    
    
    
    31.7
    
    
    
    3,692
    
    
    
    31.6Manufacturing
    
    
    971
    
    
    
    11.3
    
    
    
    1,303
    
    
    
    11.1Finance/Insurance/Real Estate
    
    
    472
    
    
    
    5.5
    
    
    
    622
    
    
    
    5.3Wholesale Trade
    
    
    313
    
    
    
    3.6
    
    
    
    424
    
    
    
    3.6Retail Trade
    
    
    269
    
    
    
    3.1
    
    
    
    333
    
    
    
    2.9Agriculture/Forestry/Fishing
    
    
    213
    
    
    
    2.5
    
    
    
    267
    
    
    
    2.3Transportation/Communication/Energy
    
    
    195
    
    
    
    2.3
    
    
    
    273
    
    
    
    2.3Public Administration
    
    
    123
    
    
    
    1.5
    
    
    
    183
    
    
    
    1.6Other
    
    
    10
    
    
    
    0.1
    
    
    
    38
    
    
    
    0.3$
    8,582
    
    
    
    100.0
    %
    
    $
    11,693
    
    
    
    100.0
    %
  19




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##### Table of Contents



Results of Operations
 Three Months Ended June 30, 2008 Compared to the Three Months Ended June 30, 2007
  
    
    Interest income on equipment financings increased to $6.8 million for the three
months ended June 30, 2008 as compared to $5.8 million for the three months ended June
30, 2007 an increase of $990,000 (17%). Our weighted average net investment in direct
financing leases and notes increased to $323.5 million for the three months ended June
30, 2008 as compared to $306.8 million for the three months ended June 30, 2007, an
increase of $16.7 million (5%).
    
    Other income increased to $594,000 for the three months ended June 30, 2008 as
compared to $455,000 for the three months ended June 30, 2007, an increase of $139,000
(31%). Other income consists primarily of late fee income. Late fee income has
increased due to the increase of our equipment financing portfolio coupled with an
increase in payment collection efforts.
  
    
    Rental income decreased to $1.2 million for the three months ended June 30, 2008 as
compared to $1.5 million for the three months ended June 30, 2007, a decrease of
$288,000 (20%). This decrease is directly related to our decrease in operating leases.
    
    Gain on sale of equipment decreased to $221,000 for the three months ended June 30,
2008 as compared to a gain of $345,000 for the three months ended June 30, 2007, a
decrease of $124,000 (36%). Gains and losses on sales of equipment may vary
significantly from period to period. Included in gains for the three months ended June
30, 2008 is a gain of $323,000 related to the sale of a pool of leases to an unrelated
third party.
  
    
    Interest expense increased to $4.7 million for the three months ended June 30, 2008
as compared to $4.4 million for the three months ended June 30, 2007, an increase of
$298,000 (7%). The increase was due to our increase in average debt outstanding. Our
average debt increased to $318.3 million for the three months ended June 30, 2008 as
compared to $292.8 million for the three months ended June 30, 2007, an increase of
$25.5 million (9%).
    
    Our provision for credit losses increased to $2.2 million for the three months ended
June 30, 2008 as compared to $587,000 for the three months ended June 30, 2007, an
increase of $1.6 million (273%). We provide for credit losses when losses are likely
to occur based on a migration analysis of past due payments and economic conditions.
As our portfolio increases and ages, we expect that our provision for credit losses
will increase. Overall losses on our portfolio to date are within managements
expectations.
    
    Management fees increased to $979,000 for the three months ended June 30, 2008 as
compared to $847,000 for the three months ended June 30, 2007, an increase of
$132,000 (16%). This increase is directly attributable to the increase in our
portfolio of equipment financing assets, since management fees are paid based on
lease payments received.
    
    Administrative expenses reimbursed to related party increased to $763,000 for the
three months ended June 30, 2008 as compared to $388,000 for the three months ended
June 30, 2007, an increase of $375,000 (97%). This increase is due to the hiring of
additional collection personnel to minimize any impact on delinquencies resulting
from a weakened US economy.
    
    General and administrative expenses increased to $842,000 for the three months ended
June 30, 2008 as compared to $617,000 for the three months ended June 30, 2007, an
increase of $225,000 (36%). This increase is principally related to increased legal
costs associated with collection efforts.
  
    
    Depreciation on operating leases decreased to $985,000 for the three months ended
June 30, 2008 as compared to $1.2 million for the three months ended June 30, 2007, a
decrease of $233,000 (19%). This decrease is directly related to our decrease in
operating leases.
  20




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##### Table of Contents



Six Months Ended June 30, 2008 Compared to the Six Months Ended June 30, 2007
  
    
    Interest income on equipment financings increased to $14.1 million for the six
months ended June 30, 2008 as compared to $11.6 million for the six months ended June
30, 2007, an increase of $2.5 million (21%). Our average net investment in financing
assets increased to $322.0 million for the six months ended June 30, 2008 as compared
to $306.8 million for the six months ended June 30, 2007, an decrease of $15.2 million
(5%). This growth was driven by our General Partners increased sales to us and
marketing efforts supported by lines of financing.
    
    Gain on sale of equipment increased to $543,000 for the six months ended June 30,
2008 as compared to a gain of $402,000 for the six months ended June 30, 2007, an
increase of $141,000 (35%). Gains and losses on sales of equipment may vary
significantly from period to period. Included in gains for the six months ended June
30, 2008 is a gain of $323,000 related to the sale of a pool of leases to an unrelated
third party.
    
    Other income increased to $1.2 million for the six months ended June 30, 2008 as compared to
$960,000 for the six months ended June 30, 2007, an increase of $277,000 (29%). Other
income consists primarily of late fee income. Late fee income has increased due to the
increase of the equipment financing portfolio coupled with an increase in payment
collection efforts.
  
    
    Rental income decreased to $2.5 million for the six months ended June 30, 2008 as
compared to $2.9 million for the six months ended June 30, 2007, a decrease of $423,000
(15%). This decrease is directly related to our decrease in operating leases.
  
    
    Interest expense increased to $9.5 million for the six months ended June 30, 2008 as
compared to $8.6 million for the six months ended June 30, 2007, an increase of
$863,000 (10%) due to our increase in average debt outstanding. Our average debt
increased to $317.7 million for the six months ended June 30, 2008 as compared to
$292.6 million for the six months ended June 30, 2007, an increase of $25.1 million
(9%).
    
    Our provision for credit losses increased to $3.5 million for the six months ended
June 30, 2008 as compared to $1.7 million for the six months ended June 30, 2007, an
increase of $1.8 million (106%). We provide for credit losses when losses are likely
to occur based on a migration analysis of past due payments and economic conditions.
As our portfolio increases and ages, we expect that our provision for credit losses
will increase. Overall losses on our portfolio to date are within managements
expectations.
    
    Management fees increased to $2.0 million for the six months ended June 30, 2008 as
compared to $1.8 million for the six months ended June 30, 2007, an increase of
$174,000 (10%). This increase is directly attributable to the increase in our
portfolio of equipment financing assets, since management fees are paid based on lease
payments received.
    
    Administrative expenses reimbursed to related party increased to $1.2 million for
the six months ended June 30, 2008 as compared to $790,000 for the six months ended
June 30, 2007, an increase of $416,000 (53%). This increase is due to the hiring of
additional collection personnel to minimize any impact on delinquencies resulting from
a weakened US economy.
    
    General and administrative expenses increased to $1.5 million for the six months
ended June 30, 2008 as compared to $1.3 million for the six months ended June 30, 2007,
an increase of $153,000 (12%). This increase is principally related to increased legal
costs associated with collection efforts.
  
    
    Depreciation on operating leases decreased to $2.1 million for the six months ended
June 30, 2008 as compared to $2.4 million for the six months ended June 30, 2007, a
decrease of $342,000 (14%). This decrease is directly related to our decrease in
operating leases.
  21




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##### Table of Contents



Liquidity and Capital Resources
    Six Months EndedJune 30,2008
    
    
    2007Net cash provided by operating activities
    
    $
    9,630
    
    
    $
    4,877Net cash provided by (used in) investing activities
    
    
    19,246
    
    
    
    (31,919
    )Net cash (used in) provided by financing activities
    
    
    (28,670
    )
    
    
    15,512Increase (decrease) in cash
    
    $
    206
    
    
    $
    (11,530
    )
      22




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##### Table of Contents



ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4.
    
    CONTROLS AND PROCEDURES
    23




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 6.
    
    EXHIBITS
 Exhibit No.
    
    Description3.1
    
    Amended and Restated Agreement of Limited Partnership (1)3.2
    
    Certificate of Limited Partnership (2)4.1
    
    Forms of letters sent to limited partners confirming their investment (2)10.1
    
    Fifth Amendment to Secured Loan Agreement with WestLB AG, New York Branch, dated
June 1, 200831.1
    
    Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.31.2
    
    Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer.32.1
    
    Certification of Chief Executive Officer pursuant to Section 1350 of Chapter 63 of
Title 18 of the United States Code.32.2
    
    Certification of Chief Financial Officer pursuant to Section 1350 of Chapter 63 of
Title 18 of the United States Code.
 
 (1)
    
    Filed previously as Appendix A to our Post-Effective Amendment
No. 3 to our Registration Statement on Form S-1, filed on January 24, 2004.(2)
    
    Filed previously as an Exhibit to Amendment No. 1 to our
Registration Statement on Form S-1 filed on June 7, 2002. 24




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##### Table of Contents



SIGNATURES
  LEASE EQUITY APPRECIATION FUND II, L.P.
A Delaware Limited Partnership
By: LEAF Financial Corporation, its General PartnerAugust 14, 2008
    /s/ Crit DeMentCRIT DEMENTChairman and Chief Executive OfficerAugust 14, 2008
    /s/ Robert K. MoskovitzROBERT K. MOSKOVITZChief Financial OfficerAugust 14, 2008
    /s/ Tonya L. ZweierTONYA L. ZWEIERChief Accounting Officer 25