<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[XX] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-19134
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American Income Partners V-C Limited Partnership
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3077437
- ----------------------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
98 N. Washington St., Fifth Floor, Boston, MA 02114
- ----------------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
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Securities registered pursuant to Section 12(b) of the Act NONE
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Title of each class Name of each exchange on which registered
- ------------------------------- ----------------------------------------------
- ------------------------------- ----------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
930,443 Units Representing Limited Partnership Interest
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(Title of class)
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes XX No
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State the aggregate market value of the voting stock held by nonaffiliates
of the registrant. Not applicable. Securities are nonvoting for this purpose.
Refer to Item 12 for further information.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to security holders for
the year ended December 31, 1996 (Part I and II)
<PAGE>
AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP
FORM 10-K
TABLE OF CONTENTS
Page
----
PART I
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for the Partnership's Securities and 6
Related Security Holder Matters
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of
Operations 7
Item 8. Financial Statements and Supplementary Data 7
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial
Disclosure 7
PART III
Item 10. Directors and Executive Officers of the Partnership 8
Item 11. Executive Compensation 10
Item 12. Security Ownership of Certain Beneficial Owners and Management 10
Item 13. Certain Relationships and Related Transactions 11
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 13-15
</TABLE>
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<PAGE>
PART I
Item 1. Business.
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(a) General Development of Business
AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP (the "Partnership") was
organized as a limited partnership under the Massachusetts Uniform Limited
Partnership Act (the "Uniform Act") on December 27, 1989 for the purpose of
acquiring and leasing to third parties a diversified portfolio of capital
equipment. Partners' capital initially consisted of contributions of $1,000
from the General Partner (AFG Leasing IV Incorporated) and $100 from the Initial
Limited Partner (AFG Assignor Corporation). On May 21, 1990, the Partnership
issued 930,443 units, representing assignments of limited partnership interests
(the "Units"), to 1,550 investors. Unitholders and Limited Partners (other than
the Initial Limited Partner) are collectively referred to as Recognized Owners.
The Partnership has one General Partner, AFG Leasing IV Incorporated, a
Massachusetts corporation and an affiliate of Equis Financial Group (formerly
American Finance Group), a Massachusetts limited partnership ("EFG"). The
common stock of the General Partner is owned by AF/AIP Programs Limited
Partnership, of which EFG and a wholly-owned subsidiary are the 99% limited
partners, and AFG Programs, Inc., which is wholly-owned by EFG, is the 1%
general partner. The General Partner is not required to make any other capital
contributions except as may be required under the Uniform Act and Section 6.1(b)
of the Amended and Restated Agreement and Certificate of Limited Partnership
(the "Restated Agreement, as amended").
(b) Financial Information About Industry Segments
The Partnership is engaged in only one industry segment: the business of
acquiring capital equipment and leasing the equipment to creditworthy lessees on
a full payout or operating lease basis. (Full payout leases are those in which
aggregate noncancellable rents exceed the Purchase Price of the leased
equipment. Operating leases are those in which the aggregate noncancellable
rental payments are less than the Purchase Price of the leased equipment.)
Industry segment data is not applicable.
(c) Narrative Description of Business
The Partnership was organized to acquire a diversified portfolio of capital
equipment subject to various full payout and operating leases and to lease the
equipment to third parties as income-producing investments. More specifically,
the Partnership's primary investment objectives are to acquire and lease
equipment which will:
1. Generate quarterly cash distributions;
2. Preserve and protect invested capital; and
3. Maintain substantial residual value for ultimate sale.
The Partnership has the additional objective of providing certain federal
income tax benefits.
The Closing Date of the Offering of Units of the Partnership was May 21,
1990. The initial purchase of equipment and the associated lease commitments
occurred on May 22, 1990. The acquisition of the equipment and its associated
leases is described in Note 3 to the financial statements included in Item 14,
herein. The Partnership is expected to terminate no later than December 31,
2000; however, the General Partner is evaluating winding-up the Partnership's
operation in 1997 or 1998.
The Partnership has no employees; however, it entered into a Management
Agreement with AF/AIP Programs Limited Partnership. At the same time, AF/AIP
Programs Limited Partnership entered into an identical Management Agreement with
EFG (the "Manager") (collectively, the "Management Agreement"). The Manager's
role, among other things, is to (i) evaluate, select, negotiate, and consummate
the acquisition of equipment, (ii) manage the leasing, re-leasing, financing,
and refinancing of equipment, and (iii) arrange the resale of equipment.
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<PAGE>
The Manager is compensated for such services as described in the Restated
Agreement, as amended, Item 13 herein, and in Note 4 to the financial
statements, included in Item 14, herein.
The Partnership's investment in equipment is, and will continue to be,
subject to various risks, including physical deterioration, technological
obsolescence and defaults by lessees. A principal business risk of owning and
leasing equipment is the possibility that aggregate lease revenues and equipment
sale proceeds will be insufficient to provide an acceptable rate of return on
invested capital after payment of all debt service costs and operating expenses.
Consequently, the success of the Partnership is largely dependent upon the
ability of the General Partner and its Affiliates to forecast technological
advances, the ability of the lessees to fulfill their lease obligations and the
quality and marketability of the equipment at the time of sale.
In addition, the leasing industry is very competitive. Although all funds
available for acquisitions have been invested in equipment, subject to
noncancellable lease agreements, the Partnership will encounter considerable
competition when equipment is re-leased or sold at the expiration of primary
lease terms. The Partnership will compete with lease programs offered directly
by manufacturers and other equipment leasing companies, including limited
partnerships and trusts organized and managed similarly to the Partnership, and
including other EFG sponsored partnerships and trusts, which may seek to re-
lease or sell equipment within their own portfolios to the same customers as the
Partnership. Many competitors have greater financial resources and more
experience than the Partnership, the General Partner and the Manager.
Default by a lessee under a lease may cause equipment to be returned to the
Partnership at a time when the General Partner or the Manager is unable to
arrange for the re-lease or sale of such equipment. This could result in the
loss of a material portion of anticipated revenues and significantly weaken the
Partnership's ability to repay related debt.
Generally, the Partnership is prohibited from reinvesting the proceeds
generated by refinancing or selling equipment. Accordingly, it is anticipated
that the Partnership will begin to liquidate its portfolio of equipment at the
expiration of the initial and renewal lease terms and to distribute the net
liquidation proceeds. As an alternative to sale, the Partnership may enter re-
lease agreements when considered advantageous by the General Partner and the
Manager. In accordance with the Partnership's stated investment objective and
policies, the General Partner is evaluating winding-up the Partnership's
operations, including the liquidation of its entire portfolio.
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1996, 1995 and 1994 is
incorporated herein by reference to Note 2 to the financial statements in the
1996 Annual Report. Refer to Item 14(a)(3) for lease agreements filed with the
Securities and Exchange Commission.
EFG is a Massachusetts limited partnership formerly known as American
Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general
partnership and succeeded American Finance Group, Inc., a Massachusetts
corporation organized in 1980. EFG and its subsidiaries (collectively, the
"Company") are engaged in various aspects of the equipment leasing business,
including EFG's role as Equipment Manager or Advisor to the Partnership and
several other Direct-Participation equipment leasing programs sponsored or co-
sponsored by EFG (the "Other Investment Programs"). The Company arranges to
broker or originate equipment leases, acts as remarketing agent and asset
manager, and provides leasing support services, such as billing, collecting, and
asset tracking.
The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President and Chief Executive Officer. Equis Corporation also
owns a controlling 1% general partner interest in EFG's 99% limited partner, GDE
Acquisition Limited Partnership ("GDE LP"). Equis Corporation and GDE LP were
established in December 1994 by Mr. Engle for the sole purpose of acquiring the
business of AFG.
In January 1996, the Company sold certain assets of AFG relating primarily
to the business of originating new leases, and the name "American Finance
Group," and its acronym, to a third party (the "Buyer"). AFG changed its name
to Equis Financial Group Limited Partnership after the sale was concluded.
Pursuant to terms
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of the sale agreements, EFG agreed not to compete with the Buyer's lease
origination business for a period of five years; however, EFG is permitted to
originate certain equipment leases, principally those involving non-investment
grade lessees and ocean-going vessels, which are not in competition with the
Buyer. In addition, the sale agreements specifically reserved to EFG the rights
to continue using the name American Finance Group and its acronym in connection
with the Partnership and the Other Investment Programs and to continue managing
all assets owned by the Partnership and the Other Investment Programs, including
the right to satisfy all required equipment acquisitions utilizing either
brokers or the Buyer. Geoffrey A. MacDonald, Chairman of Equis Corporation and
Gary D. Engle agreed not to compete with the sold business on terms and
conditions similar to those for the Company.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
Not applicable.
Item 2. Properties.
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Incorporated herein by reference to Note 3 to the financial statements in
the 1996 Annual Report.
Item 3. Legal Proceedings.
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Incorporated herein by reference to Note 7 to the financial statements in
the 1996 Annual Report.
Item 4. Submission of Matters to a Vote of Security Holders.
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None.
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<PAGE>
PART II
Item 5. Market for the Partnership's Securities and Related Security Holder
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Matters.
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(a) Market Information
There is no public market for the resale of the Units and it is not
anticipated that a public market for resale of the Units will develop.
(b) Approximate Number of Security Holders
At December 31, 1996, there were 1,422 recordholders of Units in the
Partnership.
(c) Dividend History and Restrictions
Pursuant to Article VI of the Restated Agreement, as amended, the
Partnership's Distributable Cash From Operations and Distributable Cash From
Sales or Refinancings are determined and distributed to the Partners quarterly.
Each quarter's distribution may vary in amount. Distributions may be made to
the General Partner prior to the end of the fiscal quarter; however, the amount
of such distribution reflects only amounts to which the General Partner is
entitled at the time such distribution is made. Currently, there are no
restrictions that materially limit the Partnership's ability to distribute
Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings or that the Partnership believes are likely to materially limit the
future distribution of Distributable Cash From Operations and Distributable Cash
From Sales or Refinancings. The Partnership expects to continue to distribute
all Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings on a quarterly basis.
Distributions in 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
General Recognized
Total Partner Owners
----------- --------- -----------
<S> <C> <C> <C>
Total 1996 distributions $4,870,134 $243,507 $4,626,627
Total 1995 distributions 1,958,827 97,941 1,860,886
---------- -------- ----------
Total $6,828,961 $341,448 $6,487,513
========== ======== ==========
</TABLE>
Distributions payable at December 31, 1996 and 1995 were $110,184 and
$489,707, respectively.
"Distributable Cash From Operations" means the net cash provided by the
Partnership's normal operations after general expenses and current liabilities
of the Partnership are paid, reduced by any reserves for working capital and
contingent liabilities to be funded from such cash, to the extent deemed
reasonable by the General Partner, and increased by any portion of such reserves
deemed by the General Partner not to be required for Partnership operations and
reduced by all accrued and unpaid Equipment Management Fees and, after Payout,
further reduced by all accrued and unpaid Subordinated Remarketing Fees.
Distributable Cash From Operations does not include any Distributable Cash From
Sales or Refinancings.
"Distributable Cash From Sales or Refinancings" means Cash From Sales or
Refinancings as reduced by (i)(a) amounts realized from any loss or destruction
of equipment which the General Partner determines shall be reinvested in similar
equipment for the remainder of the original lease term of the lost or destroyed
equipment, or in isolated instances, in other equipment, if the General Partner
determines that investment of such proceeds will significantly improve the
diversity of the Partnership's equipment portfolio, and subject in either case
to satisfaction of all existing indebtedness secured by such equipment to the
extent deemed necessary or appropriate by the General Partner, or (b) the
proceeds from the sale of an interest in equipment pursuant to any agreement
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<PAGE>
governing a joint venture which the General Partner determines will be invested
in additional equipment or interests in equipment and which ultimately are so
reinvested and (ii) any accrued and unpaid Equipment Management Fees and, after
Payout, any accrued and unpaid Subordinated Remarketing Fees.
"Cash From Sales or Refinancings" means cash received by the Partnership
from sale or refinancing transactions, as reduced by (i)(a) all debts and
liabilities of the Partnership required to be paid as a result of sale or
refinancing transactions, whether or not then due and payable (including any
liabilities on an item of equipment sold which are not assumed by the buyer and
any remarketing fees required to be paid to persons not affiliated with the
General Partner, but not including any Subordinated Remarketing Fees whether or
not then due and payable) and (b) any reserves for working capital and
contingent liabilities funded from such cash to the extent deemed reasonable by
the General Partner and (ii) increased by any portion of such reserves deemed by
the General Partner not to be required for Partnership operations. In the event
the Partnership accepts a note in connection with any sale or refinancing
transaction, all payments subsequently received in cash by the Partnership with
respect to such note shall be included in Cash From Sales or Refinancings,
regardless of the treatment of such payments by the Partnership for tax or
accounting purposes. If the Partnership receives purchase money obligations in
payment for equipment sold, which are secured by liens on such equipment, the
amount of such obligations shall not be included in Cash From Sales or
Refinancings until the obligations are fully satisfied.
Each distribution of Distributable Cash From Operations and Distributable
Cash From Sales or Refinancings of the Partnership shall be made 95% to the
Recognized Owners and 5% to the General Partner.
"Payout" is defined as the first time when the aggregate amount of all
distributions to the Recognized Owners of Distributable Cash From Operations and
Distributable Cash From Sales or Refinancings equals the aggregate amount of the
Recognized Owners' original capital contributions plus a cumulative annual
return of 11% (compounded quarterly and calculated beginning with the last day
of the month of the Partnership's Closing Date) on their aggregate unreturned
capital contributions. For purposes of this definition, capital contributions
shall be deemed to have been returned only to the extent that distributions of
cash to the Recognized Owners exceed the amount required to satisfy the
cumulative annual return of 11% (compounded quarterly) on the Recognized Owners'
aggregate unreturned capital contributions, such calculation to be based on the
aggregate unreturned capital contributions outstanding on the first day of each
fiscal quarter.
Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings ("Distributions") are distributed within 45 days after the
completion of each quarter, beginning with the first full fiscal quarter
following the Partnership's Closing Date. Each Distribution is described in a
statement sent to the Recognized Owners.
Item 6. Selected Financial Data.
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Incorporated herein by reference to the section entitled "Selected Financial
Data" in the 1996 Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
- --------------
Incorporated herein by reference to the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
1996 Annual Report.
Item 8. Financial Statements and Supplementary Data.
- -----------------------------------------------------
Incorporated herein by reference to the financial statements and
supplementary data included in the 1996 Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure.
- ---------------------
None.
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<PAGE>
PART III
Item 10. Directors and Executive Officers of the Partnership.
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(a-b) Identification of Directors and Executive Officers
The Partnership has no Directors or Officers. As indicated in Item 1 of
this report, AFG Leasing IV Incorporated is the sole General Partner of the
Partnership. Under the Restated Agreement, as amended, the General Partner is
solely responsible for the operation of the Partnership's properties and the
Recognized Owners have no right to participate in the control of such
operations. The names, titles and ages of the Directors and Executive Officers
of the General Partner as of March 15, 1997 are as follows:
DIRECTORS AND EXECUTIVE OFFICERS OF
THE GENERAL PARTNER (See Item 13)
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<TABLE>
<CAPTION>
Name Title Age Term
- --------------------------- ------------------------------- -------- ----------------
<S> <C> <C> <C>
Geoffrey A. MacDonald Chairman and a member of the Until a
Executive Committee of EFG successor
and President and a Director is duly
of the General Partner 48 elected
and
qualified
Gary D. Engle President and Chief Executive
Officer and member of the
Executive Committee of EFG and
a Director of the General Partner 48
Gary M. Romano Executive Vice President and
Chief Operating Officer of EFG
and Clerk of the General Partner 37
James A. Coyne Senior Vice President of EFG 36
Michael J. Butterfield Vice President, Finance and
Treasurer of EFG and Treasurer
of the General Partner 37
James F. Livesey Vice President, Aircraft and
Vessels of EFG 47
Sandra L. Simonsen Senior Vice President,
Information Systems of EFG 46
Gail D. Ofgant Vice President, Lease
Operations of EFG 31
</TABLE>
(c) Identification of Certain Significant Persons
None.
(d) Family Relationship
No family relationship exists among any of the foregoing Partners, Directors
or Executive Officers.
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<PAGE>
(e) Business Experience
Mr. MacDonald, age 48, is a co-founder, Chairman and a member of the
Executive Committee of EFG and President and a Director of the General Partner.
Mr. MacDonald was also a co-founder, Director and Senior Vice President of EFG's
predecessor corporation from 1980 to 1988. Mr. MacDonald is Vice President of
American Finance Group Securities Corp. and a limited partner in Atlantic
Acquisition Limited Partnership ("AALP"). Prior to co-founding EFG's
predecessors, Mr. MacDonald held various executive and management positions in
the leasing and pharmaceutical industries. Mr. MacDonald holds an M.B.A. from
Boston College and a B.A. degree from the University of Massachusetts (Amherst).
Mr. Engle, age 48, is President and Chief Executive Officer, a member of the
Executive Committee of EFG, a Director of the General Partner, and President of
AFG Realty Corporation. Mr. Engle is Vice President and a Director of certain
of EFG's affiliates. On December 16, 1994, Mr. Engle acquired control of EFG,
the General Partner and each of EFG's subsidiaries. Mr. Engle controls the
general partner of AALP and is also a limited partner in AALP. From 1987 to
1990, Mr. Engle was a principal and co-founder of Cobb Partners Development,
Inc., a real estate and mortgage banking company. From 1980 to 1987, Mr. Engle
was Senior Vice President and Chief Financial Officer of Arvida Disney Company,
a large scale community development company owned by Walt Disney Company. Prior
to 1980, Mr. Engle served in various management consulting and institutional
brokerage capacities. Mr. Engle has an M.B.A. from Harvard University and a
B.S. degree from the University of Massachusetts (Amherst).
Mr. Romano, age 37, is Executive Vice President and Chief Operating Officer
of EFG and certain of its affiliates and Clerk of the General Partner. Mr.
Romano joined EFG in November 1989 and was appointed Executive Vice President
and Chief Operating Officer in April 1996. Prior to joining EFG, Mr. Romano was
Assistant Controller for a privately-held real estate company which he joined in
1987. Mr. Romano held audit staff and manager positions at Ernst & Whinney (now
Ernst & Young LLP) from 1982 to 1986. Mr. Romano is a C.P.A. and holds a B.S.
degree from Boston College.
Mr. Coyne, age 36, is Senior Vice President of EFG. Mr. Coyne joined EFG in
1989, remained until May 1993, and rejoined EFG in November 1994. From May 1993
through November 1994, he was with the Raymond Company, a private investment
firm, where he was responsible for financing corporate and real estate
acquisitions. From 1985 through 1989, Mr. Coyne was affiliated with a real
estate investment company and an equipment leasing company. Prior to 1985 he
was with the accounting firm of Ernst & Whinney (now Ernst & Young LLP). He has
a BS in Business Administration from John Carroll University, a Masters Degree
in Accounting from Case Western Reserve University and is a Certified Public
Accountant.
Mr. Butterfield, age 37, joined EFG in June 1992 and became Vice President,
Finance and Treasurer of EFG and certain of its affiliates in April 1996 and is
Treasurer of the General Partner. Prior to joining EFG, Mr. Butterfield was an
Audit Manager with Ernst & Young LLP, which he joined in 1987. Mr. Butterfield
was employed in public accounting and industry positions in New Zealand and
London (U.K.) prior to coming to the United States in 1987. Mr. Butterfield
attained his Associate Chartered Accountant (A.C.A.) professional qualification
in New Zealand and has completed his C.P.A. requirements in the United States.
He holds a Bachelor of Commerce degree from the University of Otago, Dunedin,
New Zealand.
Mr. Livesey, age 47, is Vice President, Aircraft and Vessels, of EFG. Mr.
Livesey joined EFG in October, 1989, and was promoted to Vice President in
January 1992. Prior to joining EFG, Mr. Livesey held sales and marketing
positions with two privately-held equipment leasing firms. Mr. Livesey holds an
M.B.A. from Boston College and B.A. degree from Stonehill College.
Ms. Simonsen, age 46, joined EFG in February 1990 and was promoted to Senior
Vice President, Information Systems of EFG in April 1996. Prior to joining EFG,
Ms. Simonsen was Vice President, Information Systems with Investors Mortgage
Insurance Company which she joined in 1973. Ms. Simonsen provided systems
consulting for a subsidiary of American International Group and authored a
software program published by IBM. Ms. Simonsen holds a B.A. degree from Wilson
College.
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<PAGE>
Ms. Ofgant, age 31, is Vice President, Lease Operations of EFG and certain
of its affiliates. Ms. Ofgant joined EFG in June 1989, and was promoted to
Manager, Lease Operations in April 1994. In April 1996, Ms. Ofgant was
appointed Vice President, Lease Operations. Prior to joining EFG, Ms. Ofgant
was employed by Security Pacific National Trust Company. Ms. Ofgant holds a
B.S. degree in Finance from Providence College.
(f) Involvement in Certain Legal Proceedings
None.
(g) Promoters and Control Persons
See Item 10 (a-b) above.
Item 11. Executive Compensation.
- ---------------------------------
(a) Cash Compensation
Currently, the Partnership has no employees. However, under the terms of
the Restated Agreement, as amended, the Partnership is obligated to pay all
costs of personnel employed full or part-time by the Partnership, including
officers or employees of the General Partner or its Affiliates. There is no
plan at the present time to make any officers or employees of the General
Partner or its Affiliates employees of the Partnership. The Partnership has not
paid and does not propose to pay any options, warrants or rights to the officers
or employees of the General Partner or its Affiliates.
(b) Compensation Pursuant to Plans
None.
(c) Other Compensation
Although the Partnership has no employees, as discussed in Item 11(a),
pursuant to section 10.4 of the Restated Agreement, as amended, the Partnership
incurs a monthly charge for personnel costs of the Manager for persons engaged
in providing administrative services to the Partnership. A description of the
remuneration paid by the Partnership to the Manager for such services is
included in Item 13, herein and Note 4 to the financial statements included in
Item 14, herein.
(d) Compensation of Directors
None.
(e) Termination of Employment and Change of Control Arrangement
There exists no remuneration plan or arrangement with the General Partner or
its Affiliates which results or may result from their resignation, retirement or
any other termination.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------------------------------------------------------------------------
By virtue of its organization as a limited partnership, the Partnership has
no outstanding securities possessing traditional voting rights. However, as
provided in Section 11.2(a) of the Restated Agreement, as amended (subject to
Sections 11.2(b) and 11.3), a majority interest of the Recognized Owners have
voting rights with respect to:
1. Amendment of the Restated Agreement;
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<PAGE>
2. Termination of the Partnership;
3. Removal of the General Partner; and
4. Approval or disapproval of the sale of all, or substantially all, of the
assets of the Partnership (except in the orderly liquidation of the
Partnership upon its termination and dissolution).
As of March 1, 1997, the following person or group owns beneficially more
than 5% of the Partnership's 930,443 outstanding Units:
<TABLE>
<CAPTION>
Name and Amount Percent
Title Address of of Beneficial of
of Class Beneficial Owner Ownership Class
- --------------------------- --------------------------- ------------- -------
<S> <C> <C> <C>
Units Representing Atlantic Acquisition
Limited Partnership
Limited Partnership 98 North Washington Street 59,877 Units 6.44%
Interests Boston, MA 02114
</TABLE>
Messrs. Engle, MacDonald and Coyne have ownership interests in AALP. On
December 1, 1996, EFG purchased a Class D interest, representing a 49% economic
interest in AALP. See Items 10 and 13 of this report.
The ownership and organization of AFG is described in Item 1 of this report.
Item 13. Certain Relationships and Related Transactions.
- ---------------------------------------------------------
The General Partner of the Partnership is AFG Leasing IV Incorporated, an
affiliate of EFG.
(a) Transactions with Management and Others
All operating expenses incurred by the Partnership are paid by EFG on behalf
of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during the years ended December 31,
1996, 1995 and 1994, which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Equipment management fees $144,187 $153,107 $200,361
Administrative charges 32,746 21,000 12,000
Reimbursable operating expenses
due to third parties 142,220 129,691 80,898
-------- --------- --------
Total $319,153 $303,798 $293,259
======== ======== ========
</TABLE>
As provided under the terms of the Management Agreement, EFG is compensated
for its services to the Partnership. Such services include all aspects of
acquisition, management and sale of equipment. For acquisition services, EFG is
compensated by an amount equal to 2.23% of Equipment Base Price paid by the
Partnership. For management services, EFG is compensated by an amount equal to
the lesser of (i) 5% of gross operating lease rental revenue and 2% of gross
full payout lease rental revenue received by the Partnership or (ii) fees which
the General Partner reasonably believes to be competitive for similar services
for similar equipment. Both of these fees are subject to certain limitations
defined in the Management Agreement. Compensation to EFG for services connected
to the sale of equipment is calculated as the lesser of (i) 3% of gross sale
proceeds or (ii) one-half of reasonable brokerage fees otherwise payable under
arm's length circumstances. Payment of the remarketing fee is subordinated to
Payout and is subject to certain limitations defined in the Management
Agreement.
Administrative charges represent amounts owed to EFG, pursuant to Section
10.4 of the Restated Agreement, as amended, for persons employed by EFG who are
engaged in providing administrative services to
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<PAGE>
the Partnership. Reimbursable operating expenses due to third parties represent
costs paid by EFG on behalf of the Partnership which are reimbursed to EFG.
All equipment was acquired from EFG, one of its affiliates, including other
equipment leasing programs sponsored by EFG, or from third-party sellers. The
Partnership's Purchase Price was determined by the method described in Note 2,
to the financial statements, included in Item 14, herein.
All rents and proceeds from the sale of equipment are paid directly to
either EFG or to a lender. EFG temporarily deposits collected funds in a
separate interest-bearing escrow account prior to remittance to the Partnership.
At December 31, 1996, the Partnership was owed $76,774 by EFG for such funds and
the interest thereon. These funds were remitted to the Partnership in January
1997.
On August 18, 1995, Atlantic Acquisition Limited Partnership ("AALP"), a
newly formed Massachusetts limited partnership owned and controlled by certain
principals of EFG, commenced a voluntary cash Tender Offer (the "Offer") for up
to approximately 45% of the outstanding units of limited partner interest in
this Partnership and 20 affiliated partnerships sponsored and managed by EFG.
The Offer was subsequently amended and supplemented in order to provide
additional disclosure to unitholders; increase the offer price; reduce the
number of units sought to approximately 35% of the outstanding units; and extend
the expiration date of the Offer to October 20, 1995. Following commencement of
the Offer, certain legal actions were initiated by interested persons against
AALP, each of the general partners (4 in total) of the 21 affected programs, and
various other affiliates and related parties. One action, a class action brought
in the United States District Court for the District of Massachusetts (the
"Court") on behalf of the unitholders (Recognized Owners), sought to enjoin the
Offer and obtain unspecified monetary damages. A settlement of this litigation
was approved by the Court on November 15, 1995. The Plaintiffs filed an appeal
in this matter. On November 26, 1996, the United States Court of Appeals for the
First Circuit handed down a decision affirming the Court's approval of the
settlement. A second class action, brought in the Superior Court of the
Commonwealth of Massachusetts (the "Superior Court") seeking to enjoin the
Offer, obtain unspecified monetary damages, and intervene in the first class
action, was dismissed by the Superior Court. The Recognized Owners of the
Partnership tendered approximately 59,877 units or 6.44% of the total
outstanding units of the Partnership to AALP. The operations of the Partnership
were not adversely affected by these proceedings or settlements. On December 1,
1996, EFG purchased a Class D interest, representing a 49% economic interest in
AALP.
On September 30, 1996, the Partnership sold a 36% ownership interest,
representing its entire ownership interest, in a cargo vessel leased by Gearbulk
Shipowning Ltd. ("Gearbulk"), formerly Kristian Gerhard Jebsen Skipsrederi A/S
(the "Vessel"), having an original cost to the Partnership of $2,782,137 and a
net book value at September 30, 1996 of $1,230,287. The Partnership received
net sale proceeds of $944,213, a portion of which was used to repay the
outstanding principal balance of notes payable associated with the Vessel of
$102,818. The Partnership sold its interest in the Vessel prior to the
expiration of the related lease term. This sale was effected in connection with
a joint remarketing effort involving 15 individual equipment leasing programs
sponsored by EFG, consisting of the Partnership and 14 affiliates. In October
1996, the Partnership filed Form 8-K with the Securities and Exchange Commission
which provided a description of the remarketing process and the terms of the
sale.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management to the Partnership
None.
(d) Transactions with Promoters
See Item 13(a) above.
-12-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- -------------------------------------------------------------------------
(a) Documents filed as part of this report:
(1) Financial Statements:
Report of Independent Auditors.................................*
Statement of Financial Position
at December 31, 1996 and 1995..................................*
Statement of Operations
for the years ended December 31, 1996, 1995 and 1994...........*
Statement of Changes in Partners' Capital
for the years ended December 31, 1996, 1995 and 1994...........*
Statement of Cash Flows
for the years ended December 31, 1996, 1995 and 1994...........*
Notes to the Financial Statements..............................*
(2) Financial Statement Schedules:
None required.
(3) Exhibits:
Except as set forth below, all Exhibits to Form 10-K, as set forth
in Item 601 of Regulation S-K, are not applicable.
Exhibit
Number
-------
4 Amended and Restated Agreement and Certificate of Limited
Partnership included as Exhibit A to the Prospectus which is
included in Registration Statement on Form S-1 (No. 33-27828).
13 The 1996 Annual Report to security holders, a copy of which is
furnished for the information of the Securities and Exchange
Commission. Such Report, except for those portions thereof which
are incorporated herein by reference, is not deemed "filed" with
the Commission.
23 Consent of Independent Auditors.
99 (a) Lease agreement with Northwest Airlines, Inc. was filed in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1990 as Exhibit 28 (a) and is incorporated herein by
reference.
* Incorporated herein by reference to the appropriate portion of the 1996
Annual Report to security holders for the year ended December 31, 1996. (See
Part II)
-13-
<PAGE>
99 (b) Lease agreement with Gearbulk Shipowning Ltd. was filed in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995 and is incorporated herein by reference.
99 (c) Lease agreement with Shell Oil Company. is filed in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996 and is included herein.
(b) Reports on Form 8-K
Report on Form 8-K was filed on October 3, 1996 describing the
remarketing process and terms of sale related to certain of the
Partnership's equipment. The sale was effected in connection with a
joint remarketing effort involving 15 individual equipment leasing
programs sponsored by EFG, consisting of the Partnership and 14
affiliates. See Item 13 herein.
-14-
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of American Income Partners V-C Limited Partnership of our report dated
March 14, 1997, included in the 1996 Annual Report to Partners of American
Income Partners V-C Limited Partnership.
ERNST & YOUNG LLP
Boston, Massachusetts
March 14, 1997
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant and in the capacity and
on the date indicated.
AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP
By: AFG Leasing IV Incorporated,
a Massachusetts corporation and the
General Partner of the Registrant.
By: /s/ Geoffrey A. MacDonald By: /s/ Gary D. Engle
--------------------------------- ---------------------------------
Geoffrey A. MacDonald Gary D. Engle
Chairman and a member of the President and Chief Executive
Executive Committee of EFG and Officer and a member of the
President and a Director of the Executive Committee of EFG and a
General Partner Director of the General Partner
(Principal Executive Officer)
Date: March 31, 1997 Date: March 31, 1997
------------------------------- ----------------------------
By: /s/ Gary M. Romano By: /s/ Michael J. Butterfield
--------------------------------- ------------------------------
Gary M. Romano Michael J. Butterfield
Executive Vice President and Chief Vice President, Finance and
Operating Officer of EFG and Clerk Treasurer of EFG and Treasurer
of the General Partner of the General Partner
(Principal Financial Officer) (Principal Accounting Officer)
Date: March 31, 1997 Date: March 31, 1997
------------------------------- ----------------------------
-16-
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
No annual report has been sent to the Recognized Owners. A report will be
furnished to the Recognized Owners subsequent to the date hereof.
No proxy statement has been or will be sent to the Recognized Owners.
-17-
<PAGE>
AMERICAN INCOME PARTNERS V
American Income Partners V-C Limited Partnership
Annual Report to the Partners, December 31, 1996
<PAGE>
AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP
INDEX TO ANNUAL REPORT TO THE PARTNERS
Page
----
SELECTED FINANCIAL DATA 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 3-6
FINANCIAL STATEMENTS:
Report of Independent Auditors 7
Statement of Financial Position
at December 31, 1996 and 1995 8
Statement of Operations
for the years ended December 31, 1996, 1995 and 1994 9
Statement of Changes in Partners' Capital
for the years ended December 31, 1996, 1995 and 1994 10
Statement of Cash Flows
for the years ended December 31, 1996, 1995 and 1994 11
Notes to the Financial Statements 12-19
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash
Generated to Cost of Equipment Disposed 20
Statement of Cash and Distributable Cash
From Operations, Sales and Refinancings 21
Schedule of Costs Reimbursed to the
General Partner and its Affiliates as
Required by Section 10.4 of the Amended and
and Restated Agreement and Certificate of
Limited Partnership 22
-1-
<PAGE>
SELECTED FINANCIAL DATA
The following data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
financial statements.
For each of the five years in the period ended December 31, 1996:
<TABLE>
<CAPTION>
Summary of
Operations 1996 1995 1994 1993 1992
- -------------------------------- ----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Lease revenue $2,994,157 $3,617,207 $5,021,135 $ 5,756,394 $ 6,612,097
Net income (loss) before $2,350,010 $1,781,012 $ 554,771 $(3,311,187) $ 334,921
extraordinary item
Extraordinary item -- -- -- -- 235,659
----------- ----------- ----------- ------------- -----------
Net income (loss) $2,350,010 $1,781,012 $ 554,771 $(3,311,187) $ 570,580
Per Unit:
Net income (loss)
before extradordinary item $ 2.40 $ 1.82 $ 0.57 $ (3.38) $ 0.34
Extraordinary item -- -- -- -- 0.24
----------- ----------- ----------- ------------- -----------
Net income (loss) $ 2.40 $ 1.82 $ 0.57 $ (3.38) $ 0.58
Cash distributions $ 4.97 $ 2.00 $ 2.37 $ 1.56 $ 3.75
Financial Position
- --------------------------------
Total assets $2,642,076 $5,978,807 $8,276,250 $12,676,603 $21,391,932
Total long-term obligations $ 329,370 $ 786,755 $2,684,559 $ 5,374,251 $ 8,596,255
Partners' capital $2,124,515 $4,644,639 $4,822,454 $ 6,593,790 $11,435,312
</TABLE>
-2-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year ended December 31, 1996 compared to the year
ended December 31, 1995 and the year ended December 31, 1995
compared to the year ended December 31, 1994
Overview
- --------
American Income Partners V-C Limited Partnership (the "Partnership") was
organized in 1989 as a direct-participation equipment leasing program to acquire
a diversified portfolio of capital equipment subject to lease agreements with
third parties. The Partnership's stated investment objectives and policies
contemplated that the Partnership would wind-up its operations within
approximately seven years of its inception. The value of the Partnership's
equipment portfolio decreases over time due to depreciation resulting from age
and usage of the equipment, as well as technological changes and other market
factors. In addition, the Partnership does not replace equipment as it is sold;
therefore, its aggregate investment value in equipment declines from asset
disposals occurring in the normal course. As a result of the Partnership's age
and a declining equipment portfolio, the General Partner is evaluating a variety
of transactions that will reduce the Partnership's prospective costs to operate
as a publicly registered limited partnership and, therefore, enhance overall
cash distributions to the limited partners. Such a transaction might involve
the sale of the Partnership's remaining equipment or a transaction that would
allow for the consolidation of the Partnership's expenses with other similarly-
organized equipment leasing programs. In order to increase the marketability of
the Partnership's remaining equipment, the General Partner expects to use a
portion of the Partnership's available cash and future cash flow to retire
indebtedness. This may negatively effect short-term cash distributions.
Results of Operations
- ---------------------
For the year ended December 31, 1996, the Partnership recognized lease revenue
of $2,994,157 compared to $3,617,207 and $5,021,135 for the years ended December
31, 1995 and 1994, respectively. Lease revenue for the year ended December 31,
1996 includes the receipt of $872,305 of lease termination rents received in
connection with the sale of the Partnership's interest in two Boeing 727-
Advanced aircraft in July 1996 (see below). The decrease in lease revenue from
1994 to 1996 was expected and resulted principally from primary lease term
expirations and the sale of equipment. The Partnership also earns interest
income from temporary investments of rental receipts and equipment sales
proceeds in short-term instruments.
The Partnership's equipment portfolio includes certain assets in which the
Partnership holds a proportionate ownership interest. In such cases, the
remaining interests are owned by an affiliated equipment leasing program
sponsored by Equis Financial Group Limited Partnership (formerly American
Finance Group), a Massachusetts limited partnership ("EFG"). Proportionate
equipment ownership enables the Partnership to further diversify its equipment
portfolio by participating in the ownership of selected assets, thereby reducing
the general levels of risk which could result from a concentration in any single
equipment type, industry or lessee. The Partnership and each affiliate
individually report, in proportion to their respective ownership interests,
their respective shares of assets, liabilities, revenues, and expenses
associated with the equipment.
In 1996, the Partnership sold equipment having a net book value of $2,532,852
to existing lessees and third parties. These sales resulted in a net gain, for
financial statement purposes, of $710,612 compared to a net gain of $668,121 in
1995 on equipment having a net book value of $204,486 and a net gain of $233,506
in 1994 on equipment having a net book value of $612,492. The 1996 equipment
sales included the sale of the Partnership's interest in two Boeing 727-Advanced
jet aircraft with an original cost and net book value of $7,779,992 and
$1,238,414, respectively, which the Partnership sold to the existing lessee in
July 1996. In connection with these sales, the Partnership realized sale
proceeds of $2,019,055, which resulted in a net gain, for financial statement
purposes, of $780,641. These aircraft were sold prior to the expiration of the
related lease term. The Partnership also realized lease termination rents equal
to $872,305 relating to these aircraft. In addition, equipment sales in 1996
included the Partnership's interest in a vessel with an original cost and net
book value of $2,782,137 and
-3-
<PAGE>
$1,230,287, respectively, which the Partnership sold to a third party in
September 1996. In connection with this sale, the Partnership realized net sale
proceeds of $944,213, which resulted in a net loss, for financial statement
purposes, of $286,074. This equipment was sold prior to the expiration of the
related lease term. This sale was effected in connection with a joint
remarketing effort involving 15 individual leasing programs sponsored by EFG,
consisting of the Partnership and 14 affiliates. See Note 3 for further
discussion of this transaction.
It cannot be determined whether future sales of equipment will result
in a net gain or a net loss to the Partnership, as such transactions will be
dependent upon the condition and type of equipment being sold and its
marketability at the time of sale. In addition, the amount of gain or loss
reported for financial statement purposes is partly a function of the amount of
accumulated depreciation associated with the equipment being sold.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time. EFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Partnership and which will
maximize total cash returns for each asset.
The total economic value realized upon final disposition of each asset is
comprised of all primary lease term revenue generated from that asset, together
with its residual value. The latter consists of cash proceeds realized upon the
asset's sale in addition to all other cash receipts obtained from renting the
asset on a re-lease, renewal or month-to-month basis. The Partnership
classifies such residual rental payments as lease revenue. Consequently, the
amount of gain or loss reported in the financial statements is not necessarily
indicative of the total residual value the Partnership achieved from leasing the
equipment.
Depreciation and amortization expense was $1,097,986, $2,107,857 and
$4,054,163 for the years ended December 31, 1996, 1995 and 1994, respectively.
For financial reporting purposes, to the extent that an asset is held on primary
lease term, the Partnership depreciates the difference between (i) the cost of
the asset and (ii) the estimated residual value of the asset on a straight-line
basis over such term. For purposes of this policy, estimated residual values
represent estimates of equipment values at the date of primary lease expiration.
To the extent that an asset is held beyond its primary lease term, the
Partnership continues to depreciate the remaining net book value of the asset on
a straight-line basis over the asset's remaining economic life. (See Note 2 to
the financial statements herein.)
Interest expense was $51,188 or 1.7% of lease revenue in 1996, $149,961 or
4.2% of lease revenue in 1995 and $396,215 or 7.9% of lease revenue in 1994.
Interest expense in future periods will continue to decline in amount and as a
percentage of lease revenue as the principal balance of notes payable is reduced
through the application of rent receipts to outstanding debt. In addition, the
General Partner expects to use a portion of the Partnership's available cash and
future cash flow to retire indebtedness (see Overview).
Management fees were approximately 4.8%, 4.2%, and 4% of lease revenue
during the years ended December 31, 1996, 1995 and 1994, respectively.
Management fees for the year ended December 31, 1996 include $7,731, resulting
from an underaccrual in 1995. Management fees are based on 5% of gross lease
revenue generated by operating leases and 2% of gross lease revenue generated by
full payout leases.
Operating expenses consist principally of administrative charges,
professional service costs, such as audit and legal fees, as well as printing,
distribution and remarketing expenses. In certain cases, equipment storage or
repairs and maintenance costs may be incurred in connection with equipment being
remarketed. Collectively, operating expenses represented 5.8%, 4.2% and 1.9% of
lease revenue in 1996, 1995 and 1994, respectively. The increase in operating
expenses during 1995 and 1996 compared to 1994 was due primarily to heavy
maintenance and airframe overhaul costs incurred or accrued in connection with
the Partnership's interests in two Boeing 727 aircraft. During 1996, the
Partnership received $21,112 from the former lessee of these aircraft,
representing a partial reimbursement of such costs. In 1996, the Partnership
entered into a new 36-month lease agreement with Sunworld International
Airlines, Inc. to re-lease one of the aircraft at a base rent to the Partnership
of $3,900 per month (see discussion below relating to the second aircraft). The
amount of future operating expenses cannot be predicted with certainty; however,
such expenses are usually higher during the acquisition
-4-
<PAGE>
and liquidation phases of a partnership. Other fluctuations typically occur in
relation to the volume and timing of remarketing activities.
Liquidity and Capital Resources and Discussion of Cash Flows
- ------------------------------------------------------------
The Partnership by its nature is a limited life entity which was established
for specific purposes described in the preceding "Overview". As an equipment
leasing program, the Partnership's principal operating activities derive from
asset rental transactions. Accordingly, the Partnership's principal source of
cash from operations is generally provided by the collection of periodic rents.
These cash inflows are used to satisfy debt service obligations associated with
leveraged leases, and to pay management fees and operating costs. Operating
activities generated net cash inflows of $2,940,262 and $3,631,082, and
$4,349,082 for the years ended December 31, 1996, 1995, and 1994, respectively.
Future renewal, re-lease and equipment sale activities will cause a decline in
the Partnership's lease revenue and corresponding sources of operating cash.
Overall, expenses associated with rental activities, such as management fees,
and net cash flow from operating activities will also decline as the Partnership
experiences a higher frequency of remarketing events.
Ultimately, the Partnership will dispose of all assets under lease. This
will occur principally through sale transactions whereby each asset will be sold
to the existing lessee or to a third party. Generally, this will occur upon
expiration of each asset's primary or renewal/re-lease term. In certain
instances, casualty or early termination events may result in the disposal of an
asset. Such circumstances are infrequent and usually result in the collection of
stipulated cash settlements pursuant to terms and conditions contained in the
underlying lease agreements.
Cash expended for equipment acquisitions and cash realized from asset
disposal transactions are reported under investing activities on the
accompanying Statement of Cash Flows. During the year ended December 31, 1996,
the Partnership expended $65,700 to replace certain aircraft engines to
facilitate the re-lease of an aircraft, in which the Partnership has an
ownership interest, to Transmeridian Airlines (see discussion below). In 1994,
the Partnership capitalized $49,500 of refurbishment costs incurred to upgrade
equipment. Also in 1994, equipment in the amount of $161,340 was acquired in
connection with pre-existing lease agreements. During 1996, the Partnership
realized $3,243,464 in equipment sale proceeds compared to $872,607 and $845,998
in 1995 and 1994, respectively. Future inflows of cash from asset disposals will
vary in timing and amount and will be influenced by many factors including, but
not limited to, the frequency and timing of lease expirations, the type of
equipment being sold, its condition and age, and future market conditions.
On November 30, 1995, upon the expiration of its lease term, Northwest
Airlines, Inc., returned a Boeing 727-251 Advanced aircraft (the "Aircraft") in
which the Partnership has a 6% ownership interest. The aircraft had a cost and
net book value to the Partnership of approximately $649,000 and $95,000,
respectively, at December 31, 1996. The Aircraft is currently undergoing heavy
maintenance expected to cost the Partnership approximately $34,000, all of which
was incurred or accrued during the year ended December 31, 1996. The Partnership
had entered into a 28-month lease agreement with Transmeridian Airlines
effective upon completion of the heavy maintenance. However, as a result of
delays in completing the heavy maintenance, the Aircraft could not be delivered
to the lessee on the stipulated date, resulting in the cancellation of the
agreement. The General Partner is currently negotiating a new lease agreement
for the aircraft.
In 1994, the Partnership incurred and capitalized costs of $270,000 to
refurbish and improve a cargo vessel leased by Gearbulk Shipowning Ltd.
("Gearbulk"), pursuant to the terms of an extended and renegotiated lease
contract with Gearbulk. Refurbishment costs were financed by a third-party
lender and shared between the Partnership and other affiliated partnerships in
proportion to their respective ownership interests. The cargo vessel was
subsequently sold in September 1996 in connection with a joint remarketing
effort involving 15 individual equipment leasing programs sponsored by EFG,
consisting of the Partnership and 14 affiliates. See Note 3 to the financial
statements herein.
The Partnership obtained long-term financing in connection with certain
equipment leases. The repayments of principal related to such indebtedness are
reported as a component of financing activities. Each note payable is
recourse only to the specific equipment financed and to the minimum rental
payments contracted to be received during the debt amortization period (which
period generally coincides with the lease rental term). As rental
-5-
<PAGE>
payments are collected, a portion or all of the rental payment is used to repay
the associated indebtedness. The amount of cash used to repay debt obligations
is scheduled to decline as the principal balance of notes payable is reduced
through the collection and application of rents. The General Partner also
expects to use a portion of the Partnership's available cash and future cash
flow to retire indebtedness (see Overview), which will be fully amortized in
1997.
Cash distributions to the General Partner and Recognized Owners are declared
and generally paid within fifteen days following the end of each calendar
quarter. The payment of such distributions is presented as a component of
financing activities. For the year ended December 31, 1996, the Partnership
declared total cash distributions of Distributable Cash From Operations and
Distributable Cash From Sales and Refinancings of $4,870,134. In accordance
with the Amended and Restated Agreement and Certificate of Limited Partnership,
the Recognized Owners were allocated 95% of these distributions, or $4,626,627,
and the General Partner was allocated 5%, or $243,507. The fourth quarter 1996
cash distribution was paid on January 13, 1997.
Cash distributions paid to the Recognized Owners consist of both a return of
and a return on capital. Cash distributions do not represent and are not
indicative of yield on investment. Actual yield on investment cannot be
determined with any certainty until conclusion of the Partnership and will be
dependent upon the collection of all future contracted rents, the generation of
renewal and/or re-lease rents, and the residual value realized for each asset at
its disposal date. Future market conditions, technological changes, the ability
of EFG to manage and remarket the assets, and many other events and
circumstances, could enhance or detract from individual asset yields and the
collective performance of the Partnership's equipment portfolio.
The future liquidity of the Partnership will be influenced by the foregoing
and will be greatly dependent upon the collection of contractual rents and the
outcome of residual activities. The General Partner anticipates that cash
proceeds resulting from these sources will satisfy the Partnership's future
expense obligations. However, the amount of cash available for distribution in
future periods will fluctuate. Equipment lease expirations and asset disposals
will cause the Partnership's net cash from operating activities to diminish over
time; and equipment sale proceeds will vary in amount and period of realization.
In addition, the Partnership may be required to incur asset refurbishment or
upgrade costs in connection with future remarketing activities. Accordingly,
fluctuations in the level of future quarterly cash distributions are
anticipated.
-6-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
To the Partners of American Income Partners V-C Limited Partnership:
We have audited the accompanying statements of financial position of
American Income Partners V-C Limited Partnership as of December 31, 1996 and
1995, and the related statements of operations, changes in partners' capital,
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
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 financial position of American Income Partners V-C
Limited Partnership at December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Additional Financial Information
identified in the Index to Annual Report to the Partners is presented for
purposes of additional analysis and is not a required part of the basic
financial statements. Such information has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ERNST & YOUNG LLP
Boston, Massachusetts
March 14, 1997
-7-
<PAGE>
AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
ASSETS
- ------
<S> <C> <C>
Cash and cash equivalents $1,584,360 $1,173,376
Rents receivable, net of allowance for
doubtful accounts of $15,000 37,611 178,631
Accounts receivable - affiliate 76,774 118,331
Equipment at cost, net of accumulated
depreciation of $7,893,295 and
$17,709,239 at December 31, 1996 and 1995,
respectively 943,331 4,508,469
---------- ----------
Total assets $2,642,076 $5,978,807
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
Notes payable $ 329,370 $ 786,755
Accrued interest 2,609 5,944
Accrued liabilities 26,950 20,000
Accrued liabilities - affiliate 14,814 6,765
Deferred rental income 33,634 24,997
Cash distributions payable to partners 110,184 489,707
---------- ----------
Total liabilities 517,561 1,334,168
---------- ----------
Partners' capital (deficit):
General Partner (925,284) (799,277)
Limited Partnership Interests
(930,443 Units; initial purchase
price of $25 each) 3,049,799 5,443,916
---------- ----------
Total partners' capital 2,124,515 4,644,639
---------- ----------
Total liabilities and partners' capital $2,642,076 $5,978,807
========== ==========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-8-
<PAGE>
AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
Income:
<S> <C> <C> <C>
Lease revenue $2,994,157 $3,617,207 $5,021,135
Interest income 113,568 57,300 43,767
Gain on sale of equipment 710,612 668,121 233,506
---------- ---------- ----------
Total income 3,818,337 4,342,628 5,298,408
---------- ---------- ----------
Expenses:
Depreciation and amortization 1,097,986 2,107,857 4,054,163
Interest expense 51,188 149,961 396,215
Equipment management fees - affiliate 144,187 153,107 200,361
Operating expenses - affiliate 174,966 150,691 92,898
---------- ---------- ----------
Total expenses 1,468,327 2,561,616 4,743,637
---------- ---------- ----------
Net income $2,350,010 $1,781,012 $ 554,771
========== ========== ==========
Net income
per limited partnership unit $ 2.40 $ 1.82 $ 0.57
========== ========== ==========
Cash distributions declared
per limited partnership unit $ 4.97 $ 2.00 $ 2.37
========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-9-
<PAGE>
AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
General Recognized Owners
Partner ---------------------
Amount Units Amount Total
----------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 $(701,821) 930,443 $ 7,295,611 $ 6,593,790
Net income - 1994 27,739 -- 527,032 554,771
Cash distributions declared (116,305) -- (2,209,802) (2,326,107)
--------- ------- ----------- -----------
Balance at December 31, 1994 (790,387) 930,443 5,612,841 4,822,454
Net income - 1995 89,051 -- 1,691,961 1,781,012
Cash distributions declared (97,941) -- (1,860,886) (1,958,827)
--------- ------- ----------- -----------
Balance at December 31, 1995 (799,277) 930,443 5,443,916 4,644,639
Net income - 1996 117,500 -- 2,232,510 2,350,010
Cash distributions declared (243,507) -- (4,626,627) (4,870,134)
--------- ------- ----------- -----------
Balance at December 31, 1996 $(925,284) 930,443 $ 3,049,799 $ 2,124,515
========= ======= =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-10-
<PAGE>
AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from (used in) operating activities:
Net income $ 2,350,010 $ 1,781,012 $ 554,771
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 1,097,986 2,107,857 4,054,163
Gain on sale of equipment (710,612) (668,121) (233,506)
Changes in assets and liabilities:
Decrease in:
Rents receivable 141,020 25,988 145,660
Accounts receivable - affiliate 41,557 483,744 73,385
Increase (decrease) in:
Accrued interest (3,335) (27,280) (71,731)
Accrued liabilities 6,950 4,500 2,000
Accrued liabilities - affiliate 8,049 (55,739) 62,504
Deferred rental income 8,637 (20,879) (238,164)
----------- ----------- -----------
Net cash from operating activities 2,940,262 3,631,082 4,349,082
----------- ----------- -----------
Cash flows from (used in) investing activities:
Purchase of equipment (65,700) -- (210,840)
Proceeds from equipment sales 3,243,464 872,607 845,998
----------- ----------- -----------
Net cash from investing activities 3,177,764 872,607 635,158
----------- ----------- -----------
Cash flows used in financing activities:
Principal payments - notes payable (457,385) (1,897,804) (2,959,692)
Distributions paid (5,249,657) (2,081,253) (2,020,041)
----------- ----------- -----------
Net cash used in financing activities (5,707,042) (3,979,057) (4,979,733)
----------- ----------- -----------
Net increase in cash and cash equivalents 410,984 524,632 4,507
Cash and cash equivalents at beginning of year 1,173,376 648,744 644,237
----------- ----------- -----------
$ 1,584,360 $ 1,173,376 $ 648,744
Cash and cash equivalents at end of year =========== =========== ===========
Supplemental disclosure of cash flow information: $ 54,523 $ 177,241 $ 467,946
Cash paid during the year for interest =========== =========== ===========
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
In 1994, the Partnership capitalized $270,000 of refurbishment costs incurred
to upgrade certain equipment, all of which was financed by a third-party
lender.
The accompanying notes are an integral part
of these financial statements.
-11-
<PAGE>
AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP
Notes to the Financial Statements
December 31, 1996
NOTE 1 - ORGANIZATION AND PARTNERSHIP MATTERS
- ---------------------------------------------
The Partnership was organized as a limited partnership under the
Massachusetts Uniform Limited Partnership Act (the "Uniform Act") on December
27, 1989 for the purpose of acquiring and leasing to third parties a diversified
portfolio of capital equipment. Partners' capital initially consisted of
contributions of $1,000 from the General Partner (AFG Leasing IV Incorporated)
and $100 from the Initial Limited Partner (AFG Assignor Corporation). On May
21, 1990, the Partnership issued 930,443 units, representing assignments of
limited partnership interests (the "Units"), to 1,550 investors. Unitholders
and Limited Partners (other than the Initial Limited Partner) are collectively
referred to as Recognized Owners. The Partnership has one General Partner, AFG
Leasing IV Incorporated, a Massachusetts corporation and an affiliate of Equis
Financial Group Limited Partnership (formerly American Finance Group), a
Massachusetts limited partnership ("EFG"). The common stock of the General
Partner is owned by AF/AIP Programs Limited Partnership, of which EFG and a
wholly-owned subsidiary are the 99% limited partners, and AFG Programs, Inc.,
which is wholly-owned by Geoffrey A. MacDonald, is the 1% general partner. The
General Partner is not required to make any other capital contributions except
as may be required under the Uniform Act and Section 6.1(b) of the Amended and
Restated Agreement and Certificate of Limited Partnership (the "Restated
Agreement, as amended").
Significant operations commenced May 22, 1990 when the Partnership made its
initial equipment purchase. Pursuant to the Restated Agreement, as amended,
Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings will be allocated 95% to the Recognized Owners and 5% to the
General Partner. Payout will occur when the Recognized Owners have received
distributions equal to their original investment plus a cumulative annual return
of 11% (compounded quarterly) on undistributed invested capital.
Under the terms of a management agreement between the Partnership and AF/AIP
Programs Limited Partnership and the terms of an identical management agreement
between AF/AIP Programs Limited Partnership and EFG (collectively, the
"Management Agreement"), management services are provided by EFG to the
Partnership at fees which the General Partner believes to be competitive for
similar services. (Also see Note 4.)
EFG is a Massachusetts limited partnership formerly known as American
Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general
partnership and succeeded American Finance Group, Inc., a Massachusetts
corporation organized in 1980. EFG and its subsidiaries (collectively, the
"Company") are engaged in various aspects of the equipment leasing business,
including EFG's role as Equipment Manager or Advisor to the Partnership and
several other Direct-Participation equipment leasing programs sponsored or co-
sponsored by EFG (the "Other Investment Programs"). The Company arranges to
broker or originate equipment leases, acts as remarketing agent and asset
manager, and provides leasing support services, such as billing, collecting, and
asset tracking.
The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President and Chief Executive Officer. Equis Corporation also
owns a controlling 1% general partner interest in EFG's 99% limited partner, GDE
Acquisition Limited Partnership ("GDE LP"). Equis Corporation and GDE LP were
established in December 1994 by Mr. Engle for the sole purpose of acquiring the
business of AFG.
In January 1996, the Company sold certain assets of AFG relating primarily
to the business of originating new leases, and the name "American Finance
Group," and its acronym, to a third party (the "Buyer"). AFG changed its name
to Equis Financial Group Limited Partnership after the sale was concluded.
Pursuant to terms of the sale agreements, EFG agreed not to compete with the
Buyer's lease origination business for a period of five years; however, EFG is
permitted to originate certain equipment leases, principally those involving
non-investment grade lessees and ocean-going vessels, which are not in
competition with the Buyer. In addition, the sale agreements specifically
reserved to EFG the rights to continue using the name American Finance Group and
its acronym in connection with the Partnership and the Other Investment Programs
and to continue managing all
-12-
<PAGE>
AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
assets owned by the Partnership and the Other Investment Programs, including the
right to satisfy all required equipment acquisitions utilizing either brokers or
the Buyer. Geoffrey A. MacDonald, Chairman of Equis Corporation and Gary D.
Engle agreed not to compete with the sold business on terms and conditions
similar to those for the Company.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Statement of Cash Flows
- -----------------------
The Partnership considers liquid investment instruments purchased with a
maturity of three months or less to be cash equivalents. From time to time, the
Partnership invests excess cash with large institutional banks in reverse
repurchase agreements with overnight maturities. Under the terms of the
agreements, title to the underlying securities passes to the Partnership. The
securities underlying the agreements are book entry securities. At December 31,
1996, the Partnership had $1,485,000 invested in reverse repurchase agreements
secured by U.S. Treasury Bills or interests in U.S. Government securities.
Revenue Recognition
- -------------------
Rents are payable to the Partnership monthly, quarterly or semi-annually and
no significant amounts are calculated on factors other than the passage of time.
The leases are accounted for as operating leases and are noncancellable. Rents
received prior to their due dates are deferred. Future minimum rents of
$1,011,709 are due as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
For the year ending December 31, 1997 $ 752,086
1998 188,415
1999 31,648
2000 31,648
2001 7,912
----------
Total $1,011,709
==========
</TABLE>
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1996, 1995, and 1994 are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Northwest Airlines, Inc. $1,581,666 $1,298,262 $1,416,059
Gearbulk Shipowning Ltd. $ 336,440 $ 498,438 --
Shell Oil Company $ 346,564 -- --
</TABLE>
Use of Estimates
- ----------------
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
-13-
<PAGE>
AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
Equipment on Lease
- ------------------
All equipment was acquired from EFG, one of its affiliates, including other
equipment leasing programs sponsored by EFG, or from third-party sellers.
Equipment cost represents asset base price plus acquisition fees and was
determined in accordance with the Restated Agreement, as amended, and certain
regulatory guidelines. Asset base price is affected by the relationship of the
seller to the Partnership as summarized herein. Where the seller of the
equipment was EFG or an affiliate, asset base price was the lower of (i) the
actual price paid for the equipment by EFG or the affiliate plus all actual
costs accrued by EFG or the affiliate while carrying the equipment less the
amount of all rents earned by EFG or the affiliate prior to selling the
equipment or (ii) fair market value as determined by the General Partner in its
best judgment, including all liens and encumbrances on the equipment and other
actual expenses. Where the seller of the equipment was a third party who did
not manufacture the equipment, asset base price was the lower of (i) the price
invoiced by the third party or (ii) fair market value as determined by the
General Partner. Where the seller of the equipment was a third party who also
manufactured the equipment, asset base price was the manufacturer's invoice
price, which price was considered to be representative of fair market value.
Depreciation and Amortization
- -----------------------------
The Partnership's depreciation policy is intended to allocate the cost of
equipment over the period during which it produces economic benefit. The
principal period of economic benefit is considered to correspond to each asset's
primary lease term, which term generally represents the period of greatest
revenue potential for each asset. Accordingly, to the extent that an asset is
held on primary lease term, the Partnership depreciates the difference between
(i) the cost of the asset and (ii) the estimated residual value of the asset on
a straight-line basis over such term. For purposes of this policy, estimated
residual values represent estimates of equipment values at the date of primary
lease expiration. To the extent that an asset is held beyond its primary lease
term, the Partnership continues to depreciate the remaining net book value of
the asset on a straight-line basis over the asset's remaining economic life.
Periodically, the General Partner evaluates the net carrying value of equipment
to determine whether it exceeds estimated net realizable value. Adjustments to
reduce the net carrying value of equipment are recorded in those instances where
estimated net realizable value is considered to be less than net carrying value.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time. EFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Partnership and which will
maximize total cash returns for each asset.
Organization costs were amortized using the straight-line method over a
period of five years.
Accrued Liabilities - Affiliate
- -------------------------------
Unpaid operating expenses paid by EFG on behalf of the Partnership and
accrued but unpaid administrative charges are reported as Accrued Liabilities -
Affiliate. (See Note 4.)
Allocation of Profits and Losses
- --------------------------------
For financial statement purposes, net income or loss is allocated to each
Partner according to their respective ownership percentages (95% to the
Recognized Owners and 5% to the General Partner). See Note 6 concerning
allocation of income or loss for income tax purposes.
-14-
<PAGE>
AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
Net Income and Cash Distributions Per Unit
- ------------------------------------------
Net income and cash distributions per Unit are based on 930,443 units
outstanding during the years ended December 31, 1996, 1995 and 1994 and computed
after allocation of the General Partner's 5% share of net income and cash
distributions.
Provision for Income Taxes
- --------------------------
No provision or benefit from income taxes is included in the accompanying
financial statements. The Partners are responsible for reporting their
proportionate shares of the Partnership's taxable income or loss and other tax
attributes on their tax returns.
Impact of Recently Issued Accounting Standards
- ----------------------------------------------
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Partnership adopted Statement 121 in the first quarter of 1996. The adoption of
Statement 121 did not have a material effect on the financial statements of the
Partnership.
NOTE 3 - EQUIPMENT
- ------------------
The following is a summary of equipment owned by the Partnership at December
31, 1996. In the opinion of EFG, the acquisition cost of the equipment did not
exceed its fair market value.
<TABLE>
<CAPTION>
Lease Term Equipment
Equipment Type (Months) at Cost Location
- ------------------------------ ------------- ------------ -----------------------------
<S> <C> <C> <C>
Construction and mining 6-84 $ 2,550,457 AL/DE/GA/IN/WY
Aircraft 1-36 2,132,292 KY/MN/NY
Communications 12-84 1,790,243 CA/FL/MD
Retail store fixtures 12-72 1,144,958 AL/DE/GA/KY/MD/MS/NC/SC/TN/VA/WV
Materials handling 1-60 789,713 CA/GA/KY/MI/NC/NY/OH/PA/SC/TX
Motor vehicles 36 238,583 NJ
Locomotives 48-78 184,820 IL/PA
Computers and peripherals 12-60 5,560 LA
-----------
Total equipment cost 8,836,626
Accumulated depreciation (7,893,295)
-----------
Equipment, net of accumulated depreciation $ 943,331
===========
</TABLE>
-15-
<PAGE>
AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
On September 30, 1996, the Partnership sold a 36% ownership interest,
representing its entire ownership interest, in a cargo vessel leased by Gearbulk
Shipowning Ltd. ("Gearbulk"), formerly Kristian Gerhard Jebsen Skipsrederi A/S
(the "Vessel"), having an original cost to the Partnership of $2,782,137 and a
net book value at September 30, 1996 of $1,230,287. The Partnership received
net sale proceeds of $944,213, a portion of which was used to repay the
outstanding principal balance of notes payable associated with the Vessel of
$102,818. The Partnership sold its interest in the Vessel prior to the
expiration of the related lease term. This sale was effected in connection with
a joint remarketing effort involving 15 individual equipment leasing programs
sponsored by EFG, consisting of the Partnership and 14 affiliates. In October
1996, the Partnership filed Form 8-K with the Securities and Exchange Commission
which provided a description of the remarketing process and the terms of the
sale.
In 1994, the Partnership incurred and capitalized costs of $270,000 to
refurbish and improve a cargo vessel leased by Gearbulk, pursuant to the terms
of an extended and renegotiated lease contract with Gearbulk. Refurbishment
costs were financed by a third-party lender and shared between the Partnership
and other affiliated partnerships in proportion to their respective ownership
interests. The cargo vessel was subsequently sold in connection with the joint
remarketing effort described above.
In certain cases, the cost of the Partnership's equipment represents a
proportionate ownership interest. The remaining interests are owned by EFG or
an affiliated equipment leasing program sponsored by EFG. The Partnership and
each affiliate individually report, in proportion to their respective ownership
interests, their respective shares of assets, liabilities, revenues, and
expenses associated with the equipment. Proportionate equipment ownership
enables the Partnership to further diversify its equipment portfolio by
participating in the ownership of selected assets, thereby reducing the general
levels of risk which could result from a concentration in any single equipment
type, industry or lessee. At December 31, 1996, the Partnership's equipment
portfolio included equipment having a proportionate original cost of $2,317,112,
representing approximately 26% of total equipment cost.
Certain of the equipment and related lease payment streams were used to
secure term loans with third-party lenders. The preceding summary of equipment
includes leveraged equipment having an original cost of approximately $2,077,000
and a net book value of approximately $283,000 at December 31, 1996. (See Note
5.)
Generally, the costs associated with maintaining, insuring and operating the
Partnership's equipment are incurred by the respective lessees pursuant to terms
specified in their individual lease agreements with the Partnership.
As equipment is sold to third parties, or otherwise disposed of, the
Partnership recognizes a gain or loss equal to the difference between the net
book value of the equipment at the time of sale or disposition and the proceeds
realized upon sale or disposition. The ultimate realization of estimated
residual value in the equipment is dependent upon, among other things, EFG's
ability to maximize proceeds from selling or re-leasing the equipment upon the
expiration of the primary lease terms. The summary above includes equipment
held for re-lease or sale with an original cost and net book value of
approximately $818,000 and $95,000, respectively, at December 31, 1996. This
equipment includes the Partnership's proportionate interest in a Boeing 727-251
Advanced aircraft (the "Aircraft"), formerly leased to Northwest Airlines Inc.
("Northwest"), having a cost and net book value of approximately $649,000 and
$95,000, respectively at December 31, 1996. This aircraft was returned upon
expiration of its lease term on November 30, 1995 and is currently undergoing
heavy maintenance expected to cost the Partnership $34,000, all of which was
accrued or incurred during the year ended December 31, 1996. The Partnership
had entered into a 28-month lease agreement with Transmeridian Airlines
effective upon completion of the heavy maintenance. However, as a result of
delays in completing the heavy maintenance, the Aircraft could not be delivered
to the lessee on the stipulated date, resulting in the cancellation of the
agreement. The General Partner is currently negotiating a new lease agreement
for the aircraft.
-16-
<PAGE>
AMERICAN INCOME PARTNERS V-C LIMITED
Notes to the Financial Statements
(Continued)
NOTE 4 - RELATED PARTY TRANSACTIONS
- -----------------------------------
All operating expenses incurred by the Partnership are paid by EFG on behalf
of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during the years ended December 31,
1996, 1995 and 1994 which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Equipment management fees $144,187 $153,107 $200,361
Administrative charges 32,746 21,000 12,000
Reimbursable operating
expenses due to third parties 142,220 129,691 80,898
-------- -------- --------
Total $319,153 $303,798 $293,259
======== ======== ========
</TABLE>
As provided under the terms of the Management Agreement, EFG is compensated
for its services to the Partnership. Such services include all aspects of
acquisition, management and sale of equipment. For acquisition services, EFG is
compensated by an amount equal to 2.23% of Equipment Base Price paid by the
Partnership. For management services, EFG is compensated by an amount equal to
the lesser of (i) 5% of gross operating lease rental revenue and 2% of gross
full payout lease rental revenue received by the Partnership or (ii) fees which
the General Partner reasonably believes to be competitive for similar services
for similar equipment. Both of these fees are subject to certain limitations
defined in the Management Agreement. Compensation to EFG for services connected
to the sale of equipment is calculated as the lesser of (i) 3% of gross sale
proceeds or (ii) one-half of reasonable brokerage fees otherwise payable under
arm's length circumstances. Payment of the remarketing fee is subordinated to
Payout and is subject to certain limitations defined in the Management
Agreement.
Administrative charges represent amounts owed to EFG, pursuant to Section
10.4 of the Restated Agreement, as amended, for persons employed by EFG who are
engaged in providing administrative services to the Partnership. Reimbursable
operating expenses due to third parties represent costs paid by EFG on behalf of
the Partnership which are reimbursed to EFG.
All equipment was acquired from EFG, one of its affiliates, including other
equipment leasing programs sponsored by EFG, or from third-party sellers. The
Partnership's Purchase Price was determined by the method described in Note 2,
Equipment on Lease.
All rents and proceeds from the sale of equipment are paid directly to
either EFG or to a lender. EFG temporarily deposits collected funds in a
separate interest-bearing escrow account prior to remittance to the Partnership.
At December 31, 1996, the Partnership was owed $76,774 by EFG for such funds and
the interest thereon. These funds were remitted to the Partnership in January
1997.
On August 18, 1995, Atlantic Acquisition Limited Partnership ("AALP"), a
newly formed Massachusetts limited partnership owned and controlled by certain
principals of EFG, commenced a voluntary cash Tender Offer (the "Offer") for up
to approximately 45% of the outstanding units of limited partner interest in
this Partnership and 20 affiliated partnerships sponsored and managed by EFG.
The Offer was subsequently amended and supplemented in order to provide
additional disclosure to unitholders; increase the offer price; reduce the
number of units sought to approximately 35% of the outstanding units; and extend
the expiration date of the Offer to October 20, 1995. Following commencement of
the Offer, certain legal actions were initiated by interested persons against
AALP, each of the general partners (4 in total) of the 21 affected programs, and
various other affiliates and related parties. One action, a class action
brought in the United States District Court for the District
-17-
<PAGE>
AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
of Massachusetts (the "Court") on behalf of the unitholders (Recognized Owners),
sought to enjoin the Offer and obtain unspecified monetary damages. A settlement
of this litigation was approved by the Court on November 15, 1995. The
Plaintiffs filed an appeal in this matter. On November 26, 1996, the United
States Court of Appeals for the First Circuit handed down a decision affirming
the Court's approval of the settlement. A second class action, brought in the
Superior Court of the Commonwealth of Massachusetts (the "Superior Court")
seeking to enjoin the Offer, obtain unspecified monetary damages, and intervene
in the first class action, was dismissed by the Superior Court. The limited
partners of the Partnership tendered approximately 59,877 units or 6.44% of the
total outstanding units of the Partnership to AALP. The operations of the
Partnership were not adversely affected by these proceedings or settlements. On
December 1, 1996, EFG purchased a Class D interest, representing a 49% economic
interest in AALP.
NOTE 5 - NOTES PAYABLE
- ----------------------
Notes payable at December 31, 1996 consisted of an installment note of
$329,370 payable to an institutional lender. The installment note is non-
recourse, with interest rate of 9.5%. The installment note is collateralized by
the equipment and assignment of the related lease payments and will be fully
amortized by noncancellable rents in the year ending December 31, 1997.
NOTE 6 - INCOME TAXES
- ---------------------
The Partnership is not a taxable entity for federal income tax purposes.
Accordingly, no provision for income taxes has been recorded in the accounts of
the Partnership.
For financial statement purposes, the Partnership allocates net income or
loss to each class of partner according to their respective ownership
percentages (95% to the Recognized Owners and 5% to the General Partner). This
convention differs from the income or loss allocation requirements for income
tax and Dissolution Event purposes as delineated in the Restated Agreement, as
amended. For income tax purposes, the Partnership allocates net income or net
loss, in accordance with the provisions of such agreement. The Restated
Agreement, as amended, requires that upon dissolution of the Partnership, the
General Partner will be required to contribute to the Partnership an amount
equal to any negative balance which may exist in the General Partner's tax
capital account. At December 31, 1996, the General Partner had a positive tax
capital balance.
The following is a reconciliation between net income reported for financial
statement and federal income tax reporting purposes for the years ended December
31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Net income $ 2,350,010 $1,781,012 $ 544,771
Financial statement
depreciation in excess of
(less than) tax depreciation 365,958 (3,406) 1,324,124
Prepaid rental income 8,637 (20,879) (238,164)
Other (1,791,731) 176,404 45,615
----------- ---------- ----------
Net income for federal income
tax reporting purposes $ 932,874 $1,933,131 $1,686,346
=========== ========== ==========
</TABLE>
The principal component of "Other" consists of the difference between the
tax gain or loss on equipment disposals and the financial statement gain or loss
on disposals.
-18-
<PAGE>
AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
The following is a reconciliation between partners' capital reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Partners' capital $2,124,515 $4,644,639
Add back selling commissions and
organization and offering costs 2,611,871 2,611,871
Financial statement distributions in
excess of tax distributions 5,509 24,485
Cumulative difference between
federal income tax and financial (294,080) 1,123,056
statement income (loss) ---------- ----------
Partners' capital for federal income
tax reporting purposes $4,447,815 $8,404,051
========== ==========
</TABLE>
Financial statement distributions in excess of tax distributions and
cumulative difference between federal income tax and financial statement income
(loss) represent timing differences.
NOTE 7 - LEGAL PROCEEDINGS
- --------------------------
On September 22, 1995, Investors Asset Holding Corp. and First Security
Bank, N.A., trustees of the Partnership and various other affiliated investment
programs, filed an action in the United States District Court for the District
of Massachusetts against Northwest, a lessee of the Partnership. The trustees
are seeking damages from Northwest and a declaratory judgment concerning
Northwest's maintenance and return obligations for certain aircraft owned by the
Partnership. In addition to filing its Answer to the Plaintiffs' Complaint,
Northwest also filed a motion to transfer venue of this proceeding to Minnesota.
The Court denied such motion. The parties have completed the initial phase of
discovery, and motions for partial summary judgment are due on March 28, 1997.
At present, it is not possible to determine the ultimate outcome of this matter.
-19-
<PAGE>
ADDITIONAL FINANCIAL INFORMATION
<PAGE>
AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
OF EQUIPMENT DISPOSED
for the years ended December 31, 1996, 1995 and 1994
The Partnership classifies all rents from leasing equipment as lease
revenue. Upon expiration of the primary lease terms, equipment may be sold,
rented on a month-to-month basis or re-leased for a defined period under a new
or extended lease agreement. The proceeds generated from selling or re-leasing
the equipment, in addition to any month-to-month revenues, represent the total
residual value realized for each item of equipment. Therefore, the financial
statement gain or loss, which reflects the difference between the net book value
of the equipment at the time of sale or disposition and the proceeds realized
upon sale or disposition, may not reflect the aggregate residual proceeds
realized by the Partnership for such equipment.
The following is a summary of cash excess associated with equipment
dispositions occurring in the years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Rents earned prior to disposal of
equipment, net of interest
charges $12,065,562 $3,044,646 $3,986,631
Sale proceeds realized upon
disposition of equipment 3,243,464 872,607 845,998
----------- ---------- ----------
Total cash generated from rents
and equipment sale proceeds 15,309,026 3,917,253 4,832,629
Original acquisition cost of
equipment disposed 13,446,782 3,131,695 4,205,419
----------- ---------- ----------
Excess of total cash generated to
cost of equipment disposed $ 1,862,244 $ 785,558 $ 627,210
=========== ========== ==========
</TABLE>
-20-
<PAGE>
AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP
STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
SALES AND REFINANCINGS
for the year ended December 31, 1996
<TABLE>
<CAPTION>
Sales and
Operations Refinancings Total
-------------- ------------- --------------
<S> <C> <C> <C>
Net income $ 1,639,398 $ 710,612 $ 2,350,010
Add:
Depreciation 1,097,986 -- 1,097,986
Management fees 144,187 -- 144,187
Book value of disposed equipment -- 2,532,852 2,532,852
Less:
Principal reduction of notes
payable (457,385) -- (457,385)
----------- ------------ -----------
Cash from operations, sales 2,424,186 3,243,464 5,667,650
and refinancings
Less:
Management fees (144,187) -- (144,187)
----------- ------------ -----------
Distributable cash from
operations, sales and
refinancings 2,279,999 3,243,464 5,523,463
Other sources and uses of cash:
Cash at beginning of year 1,173,376 -- 1,173,376
Purchase of equipment (65,700) -- (65,700)
Net change in receivables
and accruals 202,878 -- 202,878
Less:
Cash distributions paid (2,006,193) (3,243,464) (5,249,657)
----------- ------------ -----------
Cash at end of year $ 1,584,360 -- $ 1,584,360
=========== ============ ===========
</TABLE>
-21-
<PAGE>
AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP
SCHEDULE OF COSTS REIMBURSED TO THE
GENERAL PARTNER AND ITS AFFILIATES AS REQUIRED
BY SECTION 10.4 OF THE AMENDED AND RESTATED
AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP
December 31, 1996
For the year ended December 31, 1996, the Partnership reimbursed the General
Partner and its Affiliates for the following costs:
Operating expenses $177,028
-22-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,584,360
<SECURITIES> 0
<RECEIVABLES> 129,385
<ALLOWANCES> 15,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,698,745
<PP&E> 8,836,626
<DEPRECIATION> 7,893,295
<TOTAL-ASSETS> 2,642,076
<CURRENT-LIABILITIES> 188,191
<BONDS> 329,370
0
0
<COMMON> 0
<OTHER-SE> 2,124,515
<TOTAL-LIABILITY-AND-EQUITY> 2,642,076
<SALES> 2,994,157
<TOTAL-REVENUES> 3,818,337
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,417,139
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 51,188
<INCOME-PRETAX> 2,350,0110
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,350,010
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,350,010
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
MODIFICATION OF
ADDENDUM TO MASTER EQUIPMENT
LEASE AGREEMENT NO. 8607TXG245
BETWEEN SHELL OIL COMPANY, AS LESSEE, AND
AMERICAN FINANCE GROUP, INC., AS LESSOR
Reference is made to the above-referenced Master Equipment Lease Agreement
(the "Lease") between Shell Oil Company as lessee ("Lessee") and American
Finance Group, successor-in-interest to American Finance Group, Inc., as lessor
("Lessor") and to the Addendum to the Lease entered into as of June 28, 1989,
between Lessee and Lessor. Capitalized terms used herein and not otherwise
defined shall have the meanings ascribed to them in the Lease and Addendum.
This modification ("Modification") to the Addendum is needed to include
additional Subsidiaries to the list given in the Addendum.
Lessee and Lessor hereby agree to add each of the following companies as a
Subsidiary under the terms of the Addendum:
Bellaire Trucking Company
Encoal Corporation
Evergreen Mining Company
Kermit Coal Company
EXECUTED as of the 16th day of December, 1991.
AMERICAN FINANCE GROUP SHELL OIL COMPANY
By: /s/ By: /s/
----------------------------- -----------------------------
Title: Executive Vice President Title: Purchasing Manager - E&P M&FS
<PAGE>
ADDENDUM TO MASTER EQUIPMENT
LEASE AGREEMENT NO. 8607TXG245
BETWEEN SHELL OIL COMPANY, AS LESSEE, AND
AMERICAN FINANCE GROUP, INC. AS LESSOR
Reference is made to the above-referenced Master Equipment Lease Agreement
(the "Lease") between Shell Oil Company as lessee ("Lessee") and American
Finance Group, successor-in-interest to American Finance Group, Inc., as
lessor ("Lessor"). This addendum ("Addendum") is a supplement and addendum
to the Lease and is entered into as of June 28, 1989 between Lessee and Lessor.
Capitalized terms used herein and not otherwise defined shall have the meanings
ascribed to them in the lease.
WHEREAS, for purposes of Lessee's administrative convenience and in order
to facilitate asset management among Lessee and Lessee's affiliated and
subsidiary companies, Lessee has requested that the Lease be amended to provide
that such affiliated and subsidiary companies enter directly into Rental
Schedules under the lease with Lessor, all without relieving Lessor of any of
its payment or performance obligations thereunder; and
WHEREAS, Lessor has agreed to amend the Lease as requested by Lessee in
accordance with the following terms and conditions:
NOW, THEREFORE, Lessee and Lessor hereby agree as follows:
1. For purposes of this Addendum and the Lease, "Subsidiary" means any of
the following companies:
Shell Coal and Terminal Company
Marrowbone Development Company
Shipyard River Terminal Company
Triton Coal Company
Shell Mining Company
Turris Coal Company
R. & F. Coal Company
2. For all purposes under the Lease, "Lessee" shall mean Shell Oil
Company jointly and severally with any Subsidiary which shall from time
to time furnish a Rental Schedule under the Lease.
3. Lessee consents to the execution and delivery by any Subsidiary of one
or more Rental Schedules under the Lease and consents and agrees to be
bound jointly and severally by the terms thereof without any further
action on Lessee's part.
<PAGE>
4. Nothing contained herein shall in any respect limit the liability of
Shell Oil Company for the full payment and performance of Lessee's
obligations under the Lease.
This Addendum amends the Lease effective as to Rental Schedules under the
Lease dated on or after the date hereof and, as amended hereby, the Lease is
affirmed and ratified in all respects, is in full force and effect and is legal,
valid and enforceable in accordance with its terms.
EXECUTED as an instrument under seal as of this 28th day of June, 1989.
AMERICAN FINANCE GROUP SHELL OIL COMPANY
By: /S/ By: /S/
------------------------- -------------------------
Title: Vice President Title: Purch MGR - E&P M&FS
<PAGE>
BLANKET ORDER: PS-06196-CEB
MASTER EQUIPMENT LEASE AGREEMENT
NO. 8607TXG245
DATED AS OF JULY 14, 1986
between
AMERICAN FINANCE GROUP, INC.
LESSOR
AND
SHELL OIL COMPANY
LESSEE
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
SECTION PAGE
- ----------- ----
<S> <C>
1. Agreement for Lease of Equipment ............................. 1
2. Delivery and Acceptance of Equipment ......................... 1
3. No Warranties by Lessor ...................................... 1
4. Lease Term ................................................... 1
5. Rent ......................................................... 1
6. Lessee's Representations and Warranties ...................... 2
7. Titling and Registration; Identification Marks ............... 2
8. Fees and Taxes ............................................... 3
9. Indemnification by Lessee .................................... 4
10. Use of Equipment; Liens ...................................... 4
11. Equipment Maintenance, Repair, and Additions ................. 5
12. Loss, Damage or Destruction of Equipment ..................... 6
13. Reports ...................................................... 6
14. Insurance .................................................... 6
15. Return of Equipment .......................................... 7
16. Lessor's Ownership: Equipment to be and
Remain Personal Property ................................... 7
17. Events of Default ............................................ 8
18. Assignment and Transfer By Lessor ............................ 10
19. Option to Renew .............................................. 10
20. Additional Rights of Lessor .................................. 11
21. Net Lease; Non-Terminability ................................. 11
22. Lessee's Right to Sublease ................................... 12
23. Quiet Enjoyment .............................................. 12
</TABLE>
<PAGE>
<TABLE>
<S> <C>
24. Notices ...................................................... 12
25. Entire Agreement: Severability: Effect and
Modification of Lease .................................. 12
26. Governing Law ................................................ 12
27. Consent to Jurisdiction and Service .......................... 12
28. Lessor's Right to Perform for Lessee ......................... 13
29. Agreement for Lease Only ..................................... 13
30. Financial Statements ......................................... 13
31. Miscellaneous ................................................ 13
32. Definitions .................................................. 13
</TABLE>
EXHIBIT I -- Rental Schedule and Certificate of Inspection and Acceptance with
Stipulated Loss Values
<PAGE>
MASTER EQUIPMENT LEASE AGREEMENT NO. 8607TXG245 , dated as of July 14,
1986, between American Finance Group, Inc. (hereinafter called "Lessor"), a
Massachusetts corporation having its principal place of business at Exchange
Place, Boston, Massachusetts 02109, and Shell Oil Company (hereinafter called
"Lessee"), a Delaware corporation with its principal place of business at One
Shell Plaza, Houston, TX.
In consideration of the mutual covenants hereafter contained, Lessor and
Lessee agree as follows:
1. AGREEMENT FOR LEASE OF EQUIPMENT - Lessor shall lease to Lessee and
--------------------------------
Lessee shall lease from Lessor such Equipment upon the terms and conditions
specified in this Master Equipment Lease Agreement (this "Master Lease") and the
applicable Rental Schedule. Each Rental Schedule shall Incorporate the terms of
this Master Lease and shall constitute a separate lease (the term "this Lease"
shall refer collectively to the applicable Rental Schedule and this Master
Lease).
2. DELIVERY AND ACCEPTANCE OF EQUIPMENT - Lessor and Lessee understand
------------------------------------
that the vendor of the Equipment will deliver the Equipment to the location
specified in the Rental Schedule. As between Lessor and Lessee, Lessee's
acceptance for lease hereunder of any Equipment (as evidenced by its execution
and delivery to Lessor of a Certificate of Inspection and Acceptance with
respect to such Equipment) constitutes Lessee's acknowledgement that such
Equipment in all respects conforms to the requirements of this Lease and is
subject to all of the terms and conditions of this Lease. Lessor hereby
authorizes Lessee as its agent to accept for Lessor, and in Lessor's name, the
Equipment from the Manufacturer or vendor thereof upon delivery.
3. NO WARRANTIES BY LESSOR - LESSOR, EXCEPT AS PROVIDED IN PARAGRAPH 23
-----------------------
HEREOF, HEREBY MAKES NO EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS AS TO
ANY MATTER WHATSOEVER, INCLUDING WITHOUT LIMITATION THE CONDITION, SELECTION,
QUALITY, SUITABILITY OR OPERATION OF ANY EQUIPMENT, THE MERCHANTABILITY, OR
FITNESS FOR ANY PARTICULAR PURPOSE, AND THE LESSEE LEASES THE EQUIPMENT "AS IS"
AND "WHERE IS." Lessor shall not be liable to Lessee for any (a) defects in any
of the Equipment or for any direct or consequential damage therefrom; (b) loss
of use of any of the Equipment or for any Interruption in Lessee's business
occasioned by Lessee's inability to use any of the Equipment for any reason
whatsoever; and (c) damages in the event that the Manufacturer delays delivery
of the Equipment. Lessor hereby transfers and assigns to Lessee during the Lease
Term all its rights and interest in the Manufacturer's warranty with respect to
any and all of the Equipment, and agrees to execute all documents reasonably
necessary to effect such transfer and assignment. To the extent that any rights
of Lessor with respect to the Manufacturer's warranty applicable to the
Equipment may not be assigned to Lessee, Lessor will use reasonable efforts to
enforce such rights to the benefit of Lessee against the Manufacturer.
4. LEASE TERM - The Lease Term shall commence and expire on the dates
----------
set forth in the Rental Schedule applicable to the item of Equipment in
question.
<PAGE>
5. RENT - (a) This Lease is a net lease and Lessee shall pay to Lessor
----
by wire transfer in immediately available funds, as rent for the Equipment
during the Lease Term, the amount set forth in the Rental Schedule ("Basic
Rent") on the dates set forth therein ("Payment Dates"), at the location of
Lessor set forth on the applicable Rental Schedule.
(b) Lessee shall also pay to Lessor on demand, by wire transfer
in immediately available funds, all amounts which Lessee is required to pay
Lessor pursuant to this Lease (other than Basic Rent) together with every fine,
interest and cost which may be added for non-payment or late payment thereof.
Such amounts shall constitute additional rent ("Additional Rent"). If Lessee
shall fail to pay any additional Rent, Lessor shall have all rights, powers and
remedies with respect thereto as are provided herein or by law in the case of
nonpayment of Basic Rent. With respect to any amount of Basic Rent or Additional
Rent not paid when due hereunder, Lessee shall pay to Lessor interest on such
amount from the due date thereof until payment is received by Lessor at the
lower of: (i) two percent (2%) above the Prime Rate but in no event less than
two percent (2%) per annum above the permanent debt rate of the Rental
Schedule(s) applicable to such overdue amount, or (ii) the highest rate of
interest permitted by law ("Default Interest Rate"). Lessee shall perform all
its obligations under this Lease at its sole cost and expense, and shall pay all
Basic Rent and Additional Rent when due, without further notice or demand.
6. LESSEE'S REPRESENTATIONS AND WARRANTIES - Lessee represents and
---------------------------------------
warrants (and if requested by Lessor, will provide other supporting documents to
the effect) that as of the date any Equipment is accepted for lease
hereunder: (a) all items of Equipment are new and unused unless otherwise
specified in the applicable Rental Schedule; (b) Lessee is an entity validly
existing, in good standing under the laws of the jurisdiction of its
organization, with full power to enter into this Lease and to pay and perform
its obligations under this Lease, and is qualified to do business in the
location(s) where the Equipment is installed; (c) this Lease has been duly
authorized, executed and delivered by Lessee, and assuming the due
authorization, execution and delivery by Lessor is enforceable in accordance
with its terms; (d) Lessee's execution and delivery of this Lease does not and
will not result in a breach or default under any material indenture, mortgage,
deed of trust or other material agreement or instrument to which Lessee is a
party which breach or default would have a material adverse affect on the
ability of Lessee to perform the obligations under this Lease, or require the
approval of any governmental authority or agency except such as have been
obtained and are valid and sufficient for their purpose and are in full force
and effect; (e) there are no suits or proceedings pending, or to the knowledge
of Lessee threatened, in any court or any governmental agency against or
affecting Lessee, which, if decided against Lessee, would impair Lessee's
ability to perform any of its obligations under this Lease; and (f) there has
been no material adverse change to Lessee's financial condition since the date
of Lessee's most recent audited financial statement furnished Lessor.
7. TITLING AND REGISTRATION; IDENTIFICATION MARKS - (a) The Lessee will,
----------------------------------------------
on behalf of the Lessor and at the Lessee's expense, promptly obtain an
application for the Lessor's title for each item of Equipment, reflecting the
Lessor or its assignee as owner and whomever the Lessor shall designate as
first lienholder, the Manufacturer's certificate of title and a certificate of
-2-
<PAGE>
registration issued in the name of the Lessor or its assignee. Certificates of
ownership shall be delivered to the Lessor or to whomever the Lessor shall
designate. The Lessee shall, at Lessee's expense, take such action as shall be
necessary from time to time to avoid suspension or revocation of any
certificates of ownership and to renew and maintain all certificates of
registration. If the Lessee is required to obtain any new certificate of
ownership or of registration, the Lessee shall, at Lessee's sole expense and
after prior written notice to the Lessor, obtain such new certificate of
ownership or of registration in the manner provided herein. The Lessor appoints
the Lessee its attorney-in-fact for the purpose of carrying out the Lessee's
obligations pursuant to this Section 8. The Lessee shall notify the Lessor of
the state in which each item of Equipment is titled and registered, the license
plate number of each item of Equipment, and any changes of such state of license
plate number.
(b) If requested by Lessor or required by federal, state or local law, Lessor
shall furnish to Lessee and Lessee shall, at Lessee's expense, affix to
the Equipment a sign, tag or other form of notice to disclose Lessor's
ownership of the Equipment or that the Equipment is leased, and Lessee
shall keep and maintain such sign, tag or other form of notice affixed or
attached to the Equipment throughout the Lease Term. Lessee will not
allow the name of any persons other than Lessor or its assignee to be
placed on any Equipment as a claim of ownership other than that of Lessor;
provided, however, that Lessee may cause such Equipment to be lettered with
the names or initials or other insignia customarily affixed by the
manufacturer thereof or used by Lessee on equipment used by it of the
same or a similar type for convenience of identification of its
rights to use such Equipment as permitted under this Lease or normal
advertising displays.
8. FEES AND TAXES - Lessee agrees to pay promptly when due, and to
--------------
indemnify and hold Lessor harmless from, all license, title and registration
fees whatsoever, all excise and property taxes (including without limitation
all sales, use, personal property and stamp taxes) and all other
charges associated with the aforementioned excise and property taxes such as
penalties or interest, which are assessed, levied or imposed by any
governmental or taxing authority against Lessor, (unless such assessment is due
to Lessor's error, neglect, or oversight) with respect to any Equipment or the
purchase, acquisition, ownership, delivery, leasing, possession, use, operation,
control or return thereof, which accrue during the term of this Lease,
excluding, however, any taxes on, or measured by, Lessor's net income.
This obligation to indemnify and hold Lessor harmless is contingent upon
notification to Lessee, in writing, within 10 days of receipt by Lessor of any
claim for such charges by a governmental or taxing authority, and prior to any
payment of such charges to such authority.
If requested by Lessee in writing, Lessor may, at Lessee's expense, take
such action as Lessee may reasonably direct with respect to such asserted
liability, including payment under protest and granting of permission
to Lessor to file any claim or commence any action to prevent such payment or
permit Lessee to do so in Lessors' name, provided that under no circumstances
shall Lessor be requested to delay payment of such liability beyond the date for
payment of a final assessment
-3-
<PAGE>
(a) The Lessee shall not have responsibility for the following, which
are not imposts: any franchise, estate, inheritance, transfer, or taxes based
solely on or measured by the net income of Lessor. Except as stated in any
Schedule, all tax benefits arising out of ownership of the Equipment are and
shall remain vested in Lessor.
(b) Lessee shall prepare and submit all necessary filings to the
applicable taxing authorities where the incidence of such impost and/or its
related filing obligation shall be the legal responsibility of Lessee.
(c) The Lessee shall not be required to pay or discharge any claim or
demand referred to in this Section so long as the validity or the amount thereof
shall be contested in good faith and be appropriate legal proceedings in any
reasonable manner which will not result in the forfeiture, seizure, confiscation
or sale of the Equipment.
(d) Lessee shall comply with and cause the Equipment to comply with all
legal requirements applicable thereto or to the use thereof and with all
contracts (including insurance policies), agreements and restrictions applicable
therefore to the ownership or use thereof.
9. INDEMNIFICATION BY LESSEE - (a) Lessee shall indemnify Lessor and its
-------------------------
Assignees against, and agrees to defend, protect, save and keep them harmless
from any and all liabilities, obligations, losses, damages, penalties, claims,
actions, suits, costs, expenses and disbursements, including attorneys' fees and
expenses, of whatsoever kind and nature asserted against Lessor (including,
without limitation, by way of strict or absolute liability), in any way relating
to or arising out of the construction, installation, possession, use,
maintenance, operation, control, condition, return, or other use of the
Equipment during the Lease Term and until such time the Equipment is returned to
Lessor pursuant to the provisions hereof. In case any action, suit or proceeding
is brought against Lessor or any of its Assignees by reason of any of the
foregoing, Lessee, at Lessee's expense, shall cause the claim upon which such
action, suit or proceeding is based to be discharged, or shall cause such
action, suit or proceeding to be resisted or defended by counsel designated by
Lessee and approved by Lessor (which approval shall not be unreasonably
withheld).
(b) If as a result of changes in the federal tax laws, the regulations
issued thereunder or the administrative or judicial interpretations thereof, the
reasonable after-tax benefit resulting from the ownership and lease of the
Equipment hereunder is reduced, then the amount of Basic Rent due under the
Rental Schedule in question shall be increased, not to exceed a 10% increase in
the lease rate factor, to provide Lessor the same after-tax benefit that would
have resulted from the ownership and lease of the Equipment if such changes had
not occurred.
The indemnification by Lessee under this Section 9 shall survive the
payment of all obligations under, and the termination of, this Lease.
-4-
<PAGE>
10. USE OF EQUIPMENT; LIENS - During the Lease Term, Lessee warrants and
-----------------------
agrees that the Equipment will be operated and otherwise be in compliance with
all statutes, regulations and orders of any governmental body having power to
regulate the Equipment. Lessee shall not permit the Equipment to be used for any
purpose for which, in the published opinion of the Manufacturer, the Equipment
is not designed or suited.
During the Lease Term, Lessee will not directly or indirectly create,
incur, assume or suffer to exist any mortgage, security interest, lien, or
encumbrance on the Equipment, Lessor's or any Assignee's title thereto, or
interest therein, except:
(a) the respective rights of Lessor (and its Assignees, as hereinafter
defined, if any) and Lessee as herein provided;
(b) liens or encumbrances granted or placed thereon by Lessor (or its
assigns, if any);
(c) liens or encumbrances resulting from claims against Lessor but not
against Lessee and unrelated to this Lease, and not resulting from any
default, act or omission of Lessee;
(d) liens for taxes either not yet due or being contested in good faith and
by appropriate proceedings;
(e) inchoate materialmen's, mechanics', workmen's, repairmen's, employees'
or other like liens arising in the ordinary course of business and not
delinquent; and
(f) liens arising out of judgments against Lessee with respect to which an
appeal or proceeding for review is being prosecuted in good faith and
with respect to which there has been secured a stay of execution
pending such appeal or proceeding for review; provided, however, that
-----------------
the liens referred to in clauses (d) and (f) of this Section 10 may
remain only so long as the existence thereof does not subject the
Equipment in question to forfeiture, seizure or otherwise adversely
affect the rights of Lessor or any Assignee.
Lessee, at its own expense, will promptly take such action as may be necessary
to keep the Equipment free and clear of, and to duly discharge, any such
mortgage, security interest, lien, or encumbrance not excepted above. Lessee
agrees to procure and maintain in effect all licenses, permits and other
approvals and consents required by laws in connection with Lessee's possession,
use, operation and maintenance of the Equipment. Lessee agrees that during the
Lease Term, 100% of the use of the Equipment shall be "qualified business use"
as that term is defined in Section 280F of the Code, which use shall be
calculated in accordance with Regulations promulgated thereunder and shall be
supported by records maintained in accordance with Section 280F and the
Regulations thereunder. Lessee agrees that the Equipment shall not be garaged at
any location outside the 48 contiguous states of the United States without the
prior written consent of Lessor.
-5-
<PAGE>
11. EQUIPMENT MAINTENANCE, REPAIR, AND ADDITIONS (a) During the Lease
--------------------------------------------
Term with respect thereto, Lessee, at Lessee's sole expense, will maintain the
Equipment in good and efficient operating repair, appearance and condition
except for ordinary wear and tear, and will make all necessary adjustments,
replacements and repairs. All maintenance and repairs to the Equipment shall be
made by the Manufacturer thereof or those of substantially equal skill or
knowledge in maintaining and repairing the Equipment.
(b) Provided that the value of the Equipment or any item thereof shall
not be reduced thereby, Lessee shall have the right at any time to connect
additional compatible equipment to the Equipment whether such compatible
equipment is owned by Lessee or leased from a third party. In each case, Lessee
shall disconnect or detach such equipment upon the termination of this Lease, or
such equipment shall become the property of the Lessor. Lessee agrees to
indemnify and hold Lessor harmless from any loss or damage caused to the
Equipment by the connection to, or disconnection from, any compatible equipment.
12. LOSS, DAMAGE OR DESTRUCTION OF EQUIPMENT - Lessee shall bear all
----------------------------------------
risks of damage to, taking of, or loss or destruction of, any item of Equipment
during the Lease Term thereof and until such Equipment has been returned to
Lessor.
In the event that any item of Equipment shall become lost, stolen,
destroyed or irreparably damaged from any cause whatsoever, or if any item of
Equipment or Lessor's title thereto shall be requisitioned or seized by any
governmental authority (each such occurrence being hereafter called a "Casualty
Occurrence") during its Lease Term and until it has been returned to Lessor,
Lessee shall promptly notify Lessor in writing of such fact, fully informing
Lessor of all details of the Casualty Occurrence in question, and shall pay
Lessor in cash the greater of (i) the Fair Market Value of the item of Equipment
in question as of the date of the Casualty Occurrence or (ii) the "Stipulated
Loss Value" as set forth in the Exhibit to the Rental Schedule pursuant to which
such item of Equipment is leased hereunder calculated as of the Payment Date
immediately preceding the date of the Casualty Occurrence or, if the Casualty
Occurrence occurs on a Payment Date, calculated as of the date of the Casualty
Occurrence. This payment shall be made on the next succeeding Payment Date
following the Casualty Occurrence or, if the Casualty Occurrence occurs on a
Payment Date, on the date of the Casualty Occurrence.
Upon the payment of the greater of the Stipulated Loss Value or Fair
Market Value of the Equipment in question in accordance with the terms of this
Section 12, and the payment of all Basic Rent and all other sums then due
hereunder, this Lease shall terminate with respect to the Equipment or part
thereof suffering the Casualty Occurrence and all Lessor's rights and title to
the Equipment shall pass to Lessee, "as is" and "where is" and, except for a
warranty that the Equipment is free of all liens or encumbrances granted by
Lessor or arising out of matters not within the scope of Lessee's indemnities
hereunder, without warranty or recourse, as evidenced by a duly executed bill of
sale naming Lessor as the seller and Lessee as the buyer.
-6-
<PAGE>
13. REPORTS - Lessee will cause to be furnished to Lessor, if requested,
-------
a statement showing the location, condition and such other information regarding
the Equipment as Lessor may reasonably request.
Lessor shall have the right, upon reasonable notice to Lessee, to inspect
the Equipment and Lessee's records with respect thereto.
14. INSURANCE - Lessee will procure and maintain at its expense all risk
---------
insurance on all Equipment for the related full Lease Term at the higher of the
Equipment's Stipulated Loss Value or Fair Market Value and public liability
insurance in the amount of at least $5,000,000 insuring Lessor, the Secured
Party and any Assignee, as their interests may appear, against liability for
death, bodily injury and property damage resulting from ownership, maintenance
use or operation of the Equipment. All such insurance shall name Lessor and any
Assignee as additional insureds and loss payees, shall be in such amounts and
with such insurers as are reasonably satisfactory to Lessor, and shall provide
that the same may not be altered or cancelled except after thirty (30) days
prior written notice to Lessor. Lessee shall deliver to Lessor, prior to the
beginning of the Lease Term with respect to any Equipment, or prior to the
effective date of any cancellation or expiration of such insurance, as the case
may be, a certificate or other evidence satisfactory to Lessor of the
maintenance of such insurance. Lessor shall be under no duty to examine such
policies, certificates or other evidences of insurance, or to advise Lessee in
the event that its insurance is not in compliance with this Lease. In the event
of failure on the part of the Lessee to provide such insurance, Lessor may, at
its option, provide such insurance and add the amount of the premiums to the
rents due hereunder, and Lessee shall, upon Lessor's demand pay the same as
Additional Rent. Lessee may self assume some or all of its obligations hereunder
provided it delivers to Lessor a certificate certifying that Lessee has in
effect a program of self insurance and that the coverage required above is
provided by such program.
15. RETURN OF EQUIPMENT - (a) Upon the expiration or earlier termination
-------------------
of this Lease with respect to an item of Equipment, the Lessee, at its own risk
and expense, shall return such item of Equipment to the Lessor, together with
all license plates and all registration certificates, certificates of ownership
maintenance and repair records and similar documents in the Lessee's possession,
at the place originally delivered hereunder, or such other places as the Lessor
may reasonably designate, in the condition in which such item of Equipment is
required to be maintained pursuant to Section 11 hereof and, with respect to any
items of Equipment which are tractor or trailer units, at least meeting the
following condition:
(i) All items of Equipment originally furnished with such item of
Equipment, or the substantial equivalent thereof, shall be installed, intact,
and in the condition required by Section 11 hereof at the time of return;
(ii) The cost of necessary glass, wood, fiberglass or sheet metal repairs
shall not exceed $250;
(iii) Brake linings shall have a minimum of 35%. remaining wear;
(iv) All tires shall be the ones last used by Shell on that item of
Equipment, tractor front wheels shall not be recapped casings, and shall have a
minimum of 35% remaining tread;
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(v) The power train including engine, transmission and driveline shall be
in standard operating condition, the engine shall be capable of generating its
originally rated output and tractor units shall be capable of pulling the load
for which they were originally designed; and
(vi) Each item of Equipment shall be free of any advertising and
identification of Lessee.
(b) Notwithstanding any provisions of this Lease to the contrary, Lessee
shall give Lessor at least 120 days prior written notice of its intention to
return the Equipment to Lessor on the Termination Date. In the event Lessee
shall fail to give Lessor 120 days' notice in writing, this Lease, at the sole
discretion of the Lessor, shall be extended and continue at the same rental as
the rental in effect on the last Payment Date immediately preceding the
Termination Date until 120 days after Lessor receives such notice in writing
from Lessee.
(c) In the event that Lessee fails to return the Equipment at the end of
the Primary Term or a Renewal Term (as the case may be) to Lessor as provided in
this Section 15, this Lease, at the sole discretion of the Lessor, shall be
extended and continue at the same rental rate as the rental rate in effect on
the last Payment Date of the Primary Term or Renewal Term (as the case may be)
until such time as the Equipment has been returned.
16. LESSOR'S OWNERSHIP: EQUIPMENT TO BE AND REMAIN PERSONAL PROPERTY -
----------------------------------------------------------------
Lessee acknowledges and agrees it does not have or obtain any title to the
Equipment, nor any property right or interest therein, except its rights as
Lessee hereunder and subject to the terms hereof. All of the Equipment shall be
and remain personal property notwithstanding the manner in which the Equipment
may be attached or affixed to realty, and that upon the expiration or other
termination of the Lease Term of Equipment, Lessee shall have the obligation,
and Lessor shall have the right, to remove, or cause the removal of, such
Equipment, from the premises whereon the same is then located.
If Lessee is unable to return, or is prevented from returning,
any Equipment to Lessor upon the termination of the Lease Term, for any reason
whatsoever, including, but not limited to, the assertion by any third party of
any claim (except for claims arising out of liens granted by Lessor or asserted
against Lessor and unrelated to the Equipment or this Lease) against such
Equipment, or of any right with respect thereto (but excluding failure by Lessor
or its Assignee to accept the returned Equipment as provided herein), such
Equipment shall, for all purposes of this Lease, be deemed to have been the
subject of a Casualty Occurrence, and Lessee shall pay to Lessor the amounts
provided in Section 12 hereof, with respect to such Equipment, at the time, in
the manner, and with the consequences provided in such Section.
17. EVENTS OF DEFAULT - (a) If, during the continuance of this Lease, one
-----------------
or more of the following events (hereinafter called "Events of Default") shall
occur:
(1) default shall be made in the payment of any Basic or Additional Rent
due hereunder, and any such default shall continue for more than ten (10) days
after the due date of such Basic or Additional Rent;
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(2) Lessee shall default in the observance and/or performance of any other
covenant, condition and agreement on the part of Lessee to be observed and/or
performed under this Lease and such default shall continue for thirty (30) days
after written notice from Lessor to Lessee specifying the default and demanding
the same to be remedied.
(3) any representation or warranty made by Lessee herein or in any
document or certificate furnished to Lessor in connection herewith shall at any
time prove to be incorrect when made in any material respect;
(4) Lessee shall make or permit any unauthorized assignment or transfer of
this Lease or of Lessee's rights and obligations hereunder, or Lessee shall make
or permit any unauthorized sublease or transfer of any Equipment, or the
possession of same;
(5) Lessee shall make an assignment for the benefit of creditors, or cease
doing business as a going concern, or generally fail to pay its debts as they
become due, or become insolvent or bankrupt or admit in writing its inability to
pay its debts as they mature, or consent to the appointment of a trustee or
receiver, or a trustee or a receiver shall be appointed on decree or order of a
court of competent jurisdiction, for Lessee or for a substantial part of
Lessee's property without Lessee's consent and such decree or order shall
continue undischarged and unstayed for a period of sixty (60) days;
(6) if pursuant to the merger of Lessee into another corporation where
Lessee is not the surviving corporation, or the consolidation of Lessee with one
or more other corporations and the sale or other disposition of all or
substantially all the assets of Lessee to one or more other entities, the
surviving entity or transferee of assets, as the case may be, shall not deliver
to Lessor and to any Assignee an acknowledged instrument in recordable form,
assuming all obligations, covenants and responsibilities of Lessee hereunder and
under any instrument executed by Lessee, and acknowledging the assignment of
Lessor's interest in this Lease as security for indebtedness; or
(b) then, in any such case, Lessor, at its option, may do any one or more
of the following;
(1) declare this Lease, with respect to the Rental Schedule in question,
in default upon written notice to Lessee, and proceed by appropriate court
action to enforce performance by Lessee of the covenants and terms of this Lease
and/or to recover damages for the breach thereof;
(2) terminate this Lease upon written notice to Lessee; whereupon all
right of Lessee to use the Equipment shall immediately terminate;
(3) whether or not this Lease be terminated, repossess the Equipment,
wherever found, with legal process, and for this purpose Lessor and/or its
agents may enter upon any premises of or under the control or jurisdiction of
Lessee or any agent of Lessee, and remove the Equipment therefrom;
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(4) with respect to any Equipment returned to or repossessed by Lessor,
hold or use such Equipment for any purpose whatsoever, including selling the
same at a private or public, cash or credit sale, or Lessor may re-lease such
Equipment in all the foregoing events free and clear of any rights of the Lessee
and without any duty to account to the Lessee with respect to such action or
inaction;
(5) whether or not Lessor shall have exercised, or shall thereafter at
any time exercise, any of its rights set forth above in this Section 17(b) with
respect to any item of Equipment, and upon written notice to the Lessee
specifying a payment date demand that the Lessee pay to the Lessor, and the
Lessee shall pay to the Lessor on the payment date specified in such notice, as
liquidated damages for loss of a bargain and not as a penalty (in lieu of the
Basic Rent for such Equipment due after the payment date specified in such
notice), an amount equal to the excess of the "Termination By Sale" value set
forth on the Exhibit to the Rental Schedule in question for such item of
Equipment computed as of the Payment Date next preceding the payment date
specified in such notice or if such payment date occurs on a Payment Date, then
computed as of such Payment Date over whichever of the following three amounts
the Lessor, in its sole discretion, shall specify in such notice:
(i) the present value of the fair market rental value (determined as
hereafter provided in this Section 17(b)) of such item of Equipment for
the remainder of the Lease Term as of the date of such notice, such
present value to be computed on the basis of a 7% per annum rate of
discount from the respective dates upon which such rent would be paid;
(ii) the fair market sales value (determined as hereafter provided in
this Section 17(b)) of such item of Equipment as of the date of such
notice; or
(iii) if the Lessor shall have sold any item of Equipment pursuant to
paragraph (4) above, the net proceeds of such sale; and
(6) whether or not any Equipment is returned to, or repossessed by Lessor,
as aforesaid, Lessee shall also be liable for, and Lessor may forthwith recover
from Lessee, all Basic Rent and Additional Rent that accrued prior to the date
of Lessee's default.
In addition to the foregoing, Lessor may also recover from Lessee all
costs and expenses arising out of Lessee's default, including without limitation
expenses of repossession of the Equipment and the storage, repairs,
reconditioning, sale and releasing thereof, and reasonable attorneys' fees
incurred by Lessor in exercising any of its rights or remedies hereunder. For
the purposes of this Section 17, "fair market rental value" and "fair market
sales value" shall be determined by an appraisal of an independent appraiser
chosen by the Lessor, and the cost of any such appraisal shall be borne by
Lessee.
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<PAGE>
18. ASSIGNMENT AND TRANSFER BY LESSOR. - (a) Lessor may assign this Lease,
---------------------------------
any item of Equipment, and all sums at any time due and to become due, by the
Lessee to Lessor under this Lease without notice to or consent of Lessee to a
security assignee (the "Secured Party") for the purpose of securing a loan to
the Lessor for the purchase of the Equipment. The Secured Party shall not be
obligated to perform any duty, covenant or condition required to be performed by
Lessor under this Lease. Lessor, at its sole discretion, may also sell or
transfer the Equipment and/or this Lease to a partnership, trust or other person
or entity (the "Transferee" and collectively with the Secured Party an
("Assignee") subject to the rights of the Lessee under this Lease.
(b) Lessee agrees that notwithstanding any assignment to a Secured Party,
each and every covenant, agreement, representation and warranty of Lessor under
this lease shall be and remain the sole liability of the Lessor and of every
successor in interest of Lessor or, in the case of assignment to a Transferee,
shall become and remain the sole liability of the Transferee. Lessee further
acknowledges and agrees that from and after the receipt by Lessee of written
notice of such an assignment from Lessor, Lessee shall comply with the
directions or demands given in writing by the Secured Party consistent with
Lessee's obligations under the Lease and the Secured Party shall have the right
to exercise (either in its own name or in the name of the Lessor) such rights,
privileges and remedies of Lessor provided for herein. Lessee shall not assert
against the Secured Party any defense, counterclaim, set-off, abatement,
reduction or recoupment that Lessee may have against Lessor or any Transferee.
After any assignment to the Secured Party, this Lease may not be amended or
modified without the prior written consent of any such Secured Party.
19. OPTION TO RENEW - (a) Upon the expiration of the Primary Term of
---------------
this Lease, and provided that no Event of Default, and no event which with the
giving of notice or lapse of time, or both, would constitute an Event of
Default, has occurred and then remains unremedied to Lessor's satisfaction,
Lessee shall have the option, exercisable on at least 180 days prior written
notice to Lessor to renew the Lease Term with respect to all, but not less than
all items of Equipment whose Primary Term or Renewal Term, as the case may be,
have the same Lease Expiration Date, either:
(1) on a month-to-month renewal basis, terminable by either Lessor or
Lessee upon thirty days written notice, at the same rate, terms and
conditions as described herein; or
(2) up to three (3) successive additional terms (each of which being herein
called a "Renewal Term") for one year each at a rental for each such
Renewal Term at a rate that would be obtained in an arms-length
transaction between an Informed and willing prospective lessee and an
informed and willing lessor under no compulsion to lease (said rate
being herein called the "Fair Rental Rate").
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<PAGE>
(b) If, on or before a date 60 days prior to the expiration of the Lease
Term with respect to each Rental Schedule for which notice of Renewal has been
given, Lessor and Lessee are unable to agree upon a determination of the Fair
Rental Rate for the Equipment, Lessee shall have no obligation to renew this
Lease. However, if Lessee wishes to proceed with its option, Lessee shall give
written notice to Lessor to that effect and the Equipment shall be leased during
the Renewal Term at the Fair Rental Rate determined in accordance with the
procedure for Appraisal below provided that the total term of the Lease,
including any Renewal Term(s) entered into pursuant to this Section 19 hereof,
shall not exceed 75%. of the useful life of the item of Equipment in question.
(c) "Appraisal" shall mean a procedure whereby two recognized independent
equipment appraisers, one chosen by Lessee and one by Lessor shall mutually
agree upon the amount in question. Lessor or Lessee, as the case may be, shall
deliver a written notice to the other party appointing its appraiser within 15
days after receipt from the other party of a notice appointing that party's
appraiser. If within 15 days after appointment of the two appraisers as
described above, the two appraisers are unable to agree upon the amount in
question, a third recognized independent appraiser shall be chosen within five
days thereafter by the mutual agreement of such first two appraisers, or if such
first two appraisers fail to agree upon the appointment of a third appraiser,
such appointment shall be made by an authorized representative of the American
Arbitration Association, and the appraisal of the third appraiser so appointed
and chosen shall be given within a period of ten (10) days after the selection
of such third appraiser. The average of the three appraisals arrived at by said
three appraisers shall be binding and conclusive on Lessor and Lessee. Lessor
and Lessee shall pay the fees of the respective appraisers appointed by them and
shall share equally the fees and expenses of the third-appraiser, if any, and
those of the American Arbitration Association, if applicable.
(d) After a determination of the Fair Rental Rate of the Equipment has
been made in accordance with the procedure described above, Lessee's exercise of
its option shall be effective upon the expiration of the Primary Term or
Renewal Term as the case may be.
20. ADDITIONAL RIGHTS OF LESSOR. - Receipt by Lessor of any Basic Rent or
---------------------------
Additional Rent with knowledge of the breach of any provision hereof shall not
constitute a waiver of such breach and no waiver by Lessor of any provision
hereof shall be deemed to have been made unless made in writing. Lessor shall be
entitled to injunctive relief in case of the violation, or attempted or
threatened violation, of any of the provisions hereof, or to a decree compelling
performance of any of the provisions hereof or to any other remedy allowed to
Lessor by law.
21. NET LEASE; NON-TERMINABILITY. - This Lease is an absolutely net lease
----------------------------
and, except as otherwise expressly provided herein (including any right of early
termination set forth in any Rental Schedule), shall not terminate, nor shall
Lessee be entitled to any abatement, reduction, set-off, counterclaim, defense
or deduction with respect to any Basic Rent or Additional Rent nor shall the
obligations of Lessee hereunder be affected, other than as expressly set forth
in this Lease, by reason of any damage to or destruction of any item
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of the Equipment or any taking of any item of the Equipment by condemnation or
otherwise. Nothing contained in this Lease shall prevent Lessee from bringing a
separate action for damages suffered by Lessee as a result of the breach by
Lessor of any obligation owed by it to Lessee or for equitable relief to obtain
compliance with such obligation.
22. LESSEE'S RIGHT TO SUBLEASE - Provided that no Event of Default has
---------------------------
occurred and is continuing, Lessee shall have the right to sublease the
Equipment for a term or terms expiring no later than the day prior to the
Termination Date of this Lease subject to the prior written approval of the
Lessor, which approval shall not be unreasonably withheld. No sublease of the
Equipment by Lessee shall relieve Lessee of any of its obligations hereunder.
23. QUIET ENJOYMENT - So long as no Event of Default has occurred and is
---------------
continuing hereunder, Lessee shall have peaceful and quiet use and enjoyment of
the Equipment against acts of Lessor or anyone claiming solely by, through, or
under Lessor.
24. NOTICES - Any notice required or permitted to be given under this
-------
Lease shall be deemed to have been given upon its receipt, in writing, by the
receiving party at its address set forth below, or to such other address as
either party shall hereafter furnish to the other in writing.
1. If to Lessee: Bruce Frazier
Manager Light Oil
Shell Land Transportation
Shell Oil Company
One Shell Plaza
P.O. Box 2463
Houston, TX 77001
(713) 241-4184 (4159)
2. If to Lessor: American Finance Group, Inc.
ATT: Treasurer
Exchange Place
Boston, MA 02109
25. ENTIRE AGREEMENT, SEVERABILITY, EFFECT AND MODIFICATION OF LEASE - This
----------------------------------------------------------------
Lease constitutes the entire agreement between the parties with respect to the
leasing of the Equipment. Any provision of this Lease which is unenforceable in
any jurisdiction, shall be, as to such jurisdiction, ineffective to the extent
of such unenforceability without invalidating the remaining provisions hereof.
No variation or modification of this Lease and no waiver of any of its
provisions or conditions shall be valid unless in writing and signed by a duly
authorized representative of the party against whom enforcement is sought.
26. GOVERNING LAW - Lessor and Lessee agree that this Lease shall be
--------------
governed by and construed in accordance with the laws of the Commonwealth of
Massachusetts.
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27. CONSENT TO JURISDICTION AND SERVICE - The Lessee agrees that
---------------------------------------
any legal action or proceeding against it arising out of this Lease may be
brought in any state or federal court sitting in the city of Boston in the
Commonwealth of Massachusetts and it hereby irrevocably consents and submits to
the nonexclusive in personam jurisdiction of the said courts and irrevocably
agrees that all claims in any such action or proceeding may be heard, determined
in and enforced by any such court. Lessee irrevocably consents to the service of
summons, notice, or other process relating to any such action or proceeding by
delivery thereof to it by hand or by mail in the manner set forth in Section 25
hereof.
28. LESSOR'S RIGHT TO PERFORM FOR LESSEE - If Lessee fails to duly and
------------------------------------
promptly perform any of its obligations under this Lease or fails to comply with
any of the covenants or agreements contained herein, Lessor may itself perform
such obligations or comply with such covenants or agreements, for the account of
Lessee without thereby waiving any default, and any amount paid or expense
(including reasonable attorneys' fees) reasonably incurred by Lessor in
connection with such performance or compliance shall, together with interest
thereon at the Default Interest Rate be, payable by Lessee to Lessor on demand.
29. AGREEMENT FOR LEASE ONLY - Lessor and Lessee agree that this Lease is
------------------------
and is intended to be a true lease (and not a lease in the nature of a security
interest) and further agree to treat this Lease as a true lease for all
purposes, including without limitation, tax purposes.
30. FINANCIAL STATEMENTS - Lessee agrees to furnish, upon Lessor's
--------------------
request such financial information available thru public record concerning
Lessee as Lessor or any Assignee may reasonably require during the term of this
Lease.
31. MISCELLANEOUS. The captions in this Master Lease and this Lease are
-------------
for convenience of reference only. This Lease may be executed in separate
counterparts, all of which together shall constitute one instrument. Lessor and
Lessee agree that to the extent that this Lease constitutes chattel paper under
the Uniform Commercial Code, no security interest on this Lease may be created
through the transfer or possession of any counterpart of this Lease but only
through transfer and possession of that counterpart of the Rental Schedule to
this Lease marked "Lender's Original".
32. DEFINITIONS - The following terms shall have the following meanings
-----------
for all purposes of this Lease:
"ACQUISITION COST" of any item of Equipment means an amount equal to the
sum of (i) the purchase price of such item of Equipment paid by Lessor, plus,
(ii) any excise, sales or use tax paid by Lessor on or with respect to such
item of Equipment, plus (iii) any reasonable costs, expenses and fees paid or
incurred by Lessor in obtaining, delivering and installing such item of
Equipment.
"ADDITIONAL RENT" shall have the meaning specified in Section 5(b)
hereof.
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"APPRAISAL" shall have the meaning specified in Section 19(c) hereof.
"ASSIGNEE" shall have the meaning specified in Section 18(a) hereof.
"BASIC RENT" shall have the meaning specified in Section 5(a) hereof.
"CASUALTY OCCURRENCE" shall have the meaning specified in Section 12
hereof.
"CERTIFICATE OF INSPECTION AND ACCEPTANCE" means the certification
contained in or which is an Exhibit to each Rental Schedule to be executed by
Lessee, substantially in the form of "Exhibit 1" attached hereto whereby Lessee
evidences its acceptance of an item of Equipment for lease hereunder.
"DEFAULT INTEREST RATE" shall mean the rate of interest set forth in
Section 5(b) hereof.
"EQUIPMENT" means the equipment described on each Rental Schedule
executed pursuant to this Master Lease, and owned by Lessor and leased by Lessor
to Lessee or ordered by Lessor for lease to Lessee as provided herein and any
attachments, accessories, or additions thereto or substitutions therefor.
"EVENTS OF DEFAULT" shall have the meaning specified in Section 17(a)
hereof.
"FAIR MARKET VALUE" means the appraised value of the Equipment in
question determined by the procedure for Appraisal.
"FAIR RENTAL RATE" shall have the meaning specified in Section 19(a)(2)
hereof.
"INTERIM TERM" for this Lease shall commence upon the commencement date
set forth in the applicable Rental Schedule and shall end on the commencement
date of the Primary Term.
"INVESTMENT TAX CREDIT" shall mean any investment tax credit provided for
in Section 38 et seq. of the Internal Revenue Code of 1954, as amended.
"LEASE" shall have the meaning specified in Section 1 hereof.
"LEASE COMMENCEMENT DATE" with respect to an item of Equipment means the
date of the commencement of the Lease Term of such item and shall be the date
such item is accepted by Lessee for lease hereunder.
"LEASE EXPIRATION DATE" with respect to an item of Equipment means the date
of the expiration of the Lease Term of such item as provided in the Rental
Schedule.
"LEASE TERM" with respect to an item of Equipment shall mean the
"Interim Term" plus the "Primary Term", including any period of renewal provided
for herein.
"MANUFACTURER(S)" shall mean the manufacturer(s) of each item of Equipment.
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<PAGE>
"MASTER LEASE" shall have the meaning specified in Section 1 hereof.
"PAYMENT DATES" shall have the meaning specified in Section 5(a) hereof.
"PRIMARY TERM" for this Lease shall commence and shall end on the
respective dates set forth in the Rental Schedule.
"PRIME RATE" shall mean the rate of interest per annum announced from time
to time as its "Prime Rate" by the lending institution providing the permanent
debt financing with respect to the Rental Schedule in question; if there is no
permanent debt financing or if the lending institution in question has no PRIME
RATE, then Lessor and Lessee agree that the Prime Rate announced from time to
time by Morgan Guaranty Trust Company of New York, in New York City shall apply
hereunder.
"RENEWAL TERM" shall have the meaning specified in Section 19(a)(2)
hereof.
"RENTAL SCHEDULE" means each schedule, substantially in the form of
"Exhibit 1" attached hereto, executed by Lessor and Lessee pursuant to this
Master Lease, setting forth a description of Equipment to be leased hereunder,
its location, its Acquisition Cost, the amount of Basic Rent payable by Lessee
with respect thereto, the lease term thereof, the Lease Commencement Date with
respect thereto, and such other matters as Lessor and Lessee may agree upon.
"SECURED PARTY" shall have the meaning specified in Section 18(a) hereof.
"STIPULATED LOSS VALUE" shall have the meaning specified in Section 12(a)
hereof.
"TERMINATION DATE" means the expiration or termination of the Primary Term
or Renewal Term of any item of Equipment, whether by the passage of time or
otherwise.
"TRANSFEREE" shall have the meaning specified in Section 18(a) hereof.
IN WITNESS WHEREOF, the duly authorized representatives of Lessor and
Lessee have executed this Master Lease as of the date first above written.
LESSOR: AMERICAN FINANCE GROUP, INC. LESSEE: SHELL OIL CORPORATION
By: /S/ By: /S/
--------------------------------- ---------------------------------
Title: Vice President Title: Purchasing Manager
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