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1996 Annual Report
Excerpts Comparison
of the Companys Operating Results The Company owns a diversified portfolio of transportation equipment from which it earns operating lease revenue and incurs operating expenses. The Companys transportation equipment held for operating leases, which consists of aircraft, marine containers, trailers, and storage equipment at December 31, 1996, is mainly equipment built prior to 1988. As equipment ages, the Company continues to monitor the performance of its assets on lease and current market conditions for leasing equipment in order to seek the best opportunities for investment. Failure to replace equipment may result in shorter lease terms and higher costs of maintaining and operating aged equipment, and, in certain instances, limited remarketability. The Company has syndicated investment programs from which it earns various fees and equity interests. The Professional Lease Management Income Fund I (Fund I) was structured as a limited liability company with a no front-end fee structure. The previously syndicated limited partnership programs allowed the Company to receive fees for the acquisition and initial lease of the equipment. The Fund I program does not provide for acquisition and lease negotiation fees. The Company invests the equity raised through syndication in transportation equipment, which is then managed on behalf of the investors. The equipment management activities for these types of programs generate equipment management fees for the Company over the life of the program, typically 10 to 12 years. The limited partnership agreements generally entitle the Company to receive a 1% or 5% interest in the cash distributions and earnings of the partnership subject to certain allocation provisions. The Fund I agreement entitles the Company to a 15% interest in the cash distributions and earnings of the program subject to certain allocation provisions, which will increase to 25% after the investors have received distributions equal to their original invested capital. On May 14, 1996, the Company announced the suspension of public syndication of equipment leasing programs with the May 13, 1996 close of Fund I. As a result of this decision, revenues earned from managed programs, which include management fees, partnership interests and other fees, and acquisition and lease negotiation fees, will be reduced in the future as the older programs begin liquidation and the managed equipment portfolio becomes permanently reduced. The Company is engaged in the funding and management of longer-term direct finance leases, operating leases, and loans through its AFG subsidiary. Master lease agreements are entered into with predominately investment-grade lessees and serve as the basis for marketing efforts. The underlying assets represent a broad range of commercial and industrial equipment, such as data processing, communications, materials handling, and construction equipment. This is an important new growth area for the Company. The investment in AFG permits the Company to apply much of the same accounting, finance, and management experience gained from its many years in the transportation sector. Through AFG, the Company is also engaged in the management of an institutional leasing investment program for which it originates leases and receives acquisition and management fees. The following analysis summarizes the operating results of the Company: The fluctuations in revenues for 1996 from 1995 are summarized and explained in the following table: As of December 31, 1996, the Company owned transportation equipment held for operating leases or held for sale with an original cost of $74.6 million, which was $39.1 million less than the original cost of equipment owned and held for operating leases or held for sale at December 31, 1995. The reduction in equipment, on an original cost basis, is a consequence of the Company's strategic decision to dispose of certain underperforming transportation assets, resulting in a 100% reduction in its marine vessel fleet and railcar portfolio, a 34% net reduction in its marine container portfolio, a 67% net reduction in its aircraft portfolio, and a 12% net reduction in its trailer portfolio, compared to 1995. The reduction in equipment available for lease is the primary reason marine vessel, railcar, trailer, marine container, and aircraft revenues were all reduced as compared to the prior year. In addition, trailer lease revenue decreased due to lower utilization. Mobile offshore drilling unit (rig) revenue increased $0.1 million in 1996, due to the purchase of the rig held for sale to an affiliated program during the fourth quarter of 1996. The decrease in operating lease revenues as a result of the reduction in transportation equipment available for lease was partially offset by a $1.7 million increase in operating lease revenues generated by commercial and industrial equipment leases on $15.9 million of purchased equipment retained and revenues generated on leased equipment purchased for $30.7 million prior to being sold to third parties. |
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