UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X 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, 1995
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
Commission file number: 0-13532
EQUIPMENT ASSET RECOVERY FUND, L.P.
Exact name of registrant as specified in its charter
Texas 11-2661586
State or other jurisdiction I.R.S Employer Identification
of incorporation or organization
3 World Financial Center, 29th Floor, Zip Code
New York, New York Attn: Andre Anderson 10285-2900
Address of principal executive offices
Registrant's telephone number, including area code: (212) 526-3237
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
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 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 X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
No market for the limited partnership interests exists and therefore a market
value for the interests cannot be determined.
Documents Incorporated by Reference: Portions of the Registrant's Prospectus
dated February 2, 1984 filed pursuant to
rule 424(b) are incorporated by reference
in PART I of this report.
Annual Report to Unitholders for the year
ended December 31, 1995 is incorporated by
reference in PARTS I, II, III and IV of
this report.
PART I
Item 1. Business
a. General Development of Business
Equipment Asset Recovery Fund, L.P. (the "Partnership") (formerly Hutton Asset
Recovery Fund), a Texas limited partnership, was formed to engage in the
business of acquiring various types of distressed assets in the energy and
construction industries (the "Assets"), either directly or through
partnerships, joint ventures or other forms of indirect ownership, operating
such Assets under management agreements with experienced operators (who may be
affiliated with the General Partners) or leasing such Assets to users, and
ultimately selling the Assets. The general partners of the Partnership are
Equipment Management, Inc. ("EMI") (formerly Hutton Equipment Management,
Inc.), a Delaware corporation and an affiliate of Lehman Brothers Inc.
("Lehman") (formerly Shearson Lehman Brothers Inc.) and Mr. Steven A. Webster,
an individual resident of Houston, Texas (together, the "General Partners")
(see Item 10).
On February 2, 1984, the Partnership began the offering of limited partnership
interests in the Partnership (the "Units"). As of July 31, 1984, the
termination date of the offering, the Partnership had accepted subscriptions
for 32,722 Units for an aggregate of $16,361,000 (the holders of such Units are
referred to herein as "Limited Partners"). The net proceeds of the offering
after payment of organizational and offering costs aggregated $14,114,418. The
General Partners made an aggregate cash contribution of $1,000. San Felipe
Investors, a Texas general partnership, (the "Special Limited Partner") made a
cash contribution to the Partnership of $1,000.
b. Financial Information About Industry Segments
The Partnership's sole business is the acquisition, ownership and operation of
the Assets. All of the Partnership's revenues, operating profit or loss relate
solely to such industry segment.
c. Narrative Description of Business
The business of the Partnership is the acquisition of distressed assets,
directly or indirectly, for the purpose of operating them, either directly or
through partnerships or joint ventures in which the Partnership participates,
under management agreements with experienced operators and ultimately selling
the Assets. Reference is made to the section captioned "Investment and
Operating Objectives and Policies" contained on pages 18 through 24 of the
Prospectus for a description of the Partnership's objectives and policies
regarding the selection, operation, liquidation and financing of the Assets,
which pages are incorporated herein by reference thereto.
Investments and Ability to Meet Investment Objectives
The Partnership used the net proceeds of the public offering to acquire three
types of Assets. The Partnership purchased (i) four land drilling rigs, (ii)
an interest in a Texas partnership, GCH Venture, ("GCH") that purchased five
barge drilling rigs, nine crew boats and related property, and (iii) ten
construction cranes and an interest in a partnership, DSC Venture ("DSC"),
which owned 49 cranes and related equipment and operates those cranes, the
cranes owned by the Partnership, and cranes owned by third parties. Due
primarily to the severe decline in the oil and gas drilling industry that
occurred in 1986, after the purchase of Assets in that industry, all of the
Partnership's Assets in the oil and gas industry have been either foreclosed on
or sold at a loss. During 1991, the Partnership received the final payments it
was owed by Falcon Drilling Inc. ("Falcon") from the disposition of its
interest in GCH.
The Partnership's remaining Assets are: (i) the nine construction cranes it
owns outright, which are operated by DSC, (ii) the Partnership's 99% interest
in DSC, which owned forty-four cranes and seven pieces of related equipment as
of December 31, 1995, and (iii) a controlling interest in SFN Corporation
("SFN"), which owns four cranes and two pieces of related equipment. Reference
is made to Note 5 to the Financial Statements, which is incorporated herein by
reference thereto for a description of SFN. See also "Item 2. Properties" for
additional information regarding the Partnership's assets. The Partnership
also owns certain other assets (primarily accounts receivable) and cash. While
the construction crane industry has stabilized to a certain degree, the loss of
the Partnership's investments in the oil and gas industry caused the General
Partners to believe the Partnership's original investment goals will not be
met.
Specific reasons for the Partnership's failure to meet its investment
objectives include: (a) the severe worsening in the international supply and
pricing situation for oil and gas, which occurred after the Partnership
purchased Assets used in the oil and gas industry, and consequent
under-utilization of the Partnership's drilling rigs and related equipment, (b)
the foreclosure in 1986 on four land drilling rigs owned by the Partnership,
(c) the foreclosure in 1988 on three of the five barge drilling rigs and four
of the nine crew boats owned by GCH, and (d) longer-than-anticipated depressed
conditions in the major construction markets in which the Partnership
participates through DSC. The General Partners believe that the value of the
Limited Partners' investment will be maximized by pursuing the following
objectives: (a) preserving the Partnership's liquidity, (b) continuing to
operate the Assets of DSC so as to provide cash flow sufficient to service the
indebtedness encumbering such Assets, and (c) attempting to reduce the carrying
costs of the Partnership's Assets. The General Partners will seek to maximize
cash flow from the remaining Assets, reduce the Partnership's debt burden,
provide cash distributions, and eventually sell such Assets.
Structure of DSC
Effective October 1, 1984, the Partnership purchased ten Manitowoc crawler type
cranes (the "EARF Cranes") from Dayton-Scott Corporation, a Texas corporation
("Dayton-Scott"). One EARF crane was subsequently sold. The Partnership
leased the EARF Cranes to DSC, a joint venture formed by the Partnership and
Dayton-Scott, with each having an equal interest. DSC was formed to operate
(i) the EARF Cranes, (ii) forty-nine cranes and seven pieces of related
equipment consisting of towers and Ringers (the "Venture Cranes") contributed
by Dayton-Scott to DSC, and (iii) the five cranes, one tower and one Ringer
originally owned by SFN (the "SFN Cranes") (the EARF Cranes, the Venture Cranes
and the SFN Cranes, together with all related towers, Ringers and equipment are
referred to herein as the "Fleet"). Reference is made to Notes 5 and 6 to the
Financial Statements, which are incorporated herein by reference thereto for a
discussion of the acquisition of the Fleet. Subsequently, Dayton-Scot t no
longer holds an ownership interest in DSC (please see the reference in Note 4
to the Financial Statements).
The cranes and related equipment owned and managed by DSC are in turn managed
and operated by Dayton-Scott Equipment Company ("DSEC") pursuant to a
management agreement between DSC and DSEC dated January 1, 1990. DSEC has
managed the cranes since their acquisition by Dayton-Scott Corporation, a Texas
corporation ("Dayton-Scott") in early 1982. The management agreement provides
for the reimbursement by DSC of all expenses related to the operation of the
cranes and related equipment, including salaries of DSEC's employees. The
agreement also provides for incentive compensation to DSEC and for a sales
commission to be paid to DSEC upon the sale of certain cranes. DSEC earned
sales commissions of $16,710 from the sale of a SFN-owned crane during 1993,
$23,875 from the sale of three DSC cranes during 1994 and $40,783 from the sale
of two DSC cranes and one SFN crane during 1995. For the years ended December
31, 1995 and 1994, an incentive management fee of $55,177 and $116,453, respect
ively, was earned by DSEC.
DSC's Debt to SFN
Effective April 30, 1992, SFN acquired all of the secured indebtedness of DSC
from Security Pacific (the "Security Pacific Debt") which had an aggregate
outstanding balance of principal and interest as of April 28, 1992 of
$11,968,171 (represented by four separate promissory notes). In connection
with the acquisition of the Security Pacific Debt by SFN, Security Pacific
conveyed the following assets to SFN: (i) six cranes, one Ringer, and one
tower (the "Security Pacific Equipment") previously owned by Security Pacific
and leased to DSC pursuant to an equipment lease (the "Security Pacific
Lease"), and (ii) the rights and obligations of Security Pacific under a Net
Profits Agreement ("Profits Agreement") previously entered into by and among
DSC, Security Pacific, and the Partnership. The Security Pacific Debt, the
Security Pacific Equipment, the Security Pacific Lease, and the Profits
Agreement are collectively referred to as the "Security Pacific Assets." On
August 26, 1993, a SFN -owned crane was sold pursuant to the terms of SFN's
agreement with Security Pacific to acquire the debt. A second SFN-owned crane
was sold on May 15, 1995 pursuant to the terms of SFN's agreement to acquire
the debt. Please refer to Notes 5 and 7 to the Consolidated Financial
Statements contained herein at Item 14 for a discussion of DSC's debt
refinancing.
DSC Venture - Investment in Construction Cranes
The Partnership's only remaining investment is its interest in construction
cranes. The Partnership owns nine cranes outright, a ninety-nine percent
interest in DSC, which owned forty-four cranes as of December 31, 1995 and
related equipment, and a controlling interest in SFN, which owns four cranes
and two pieces of related equipment. DSEC manages the cranes and equipment it
owns, the SFN cranes and the Partnership's cranes. (See "Item 2. Properties."
for a description of these Assets).
The heavy crane rental market in which DSC participates is dependent upon the
level of major capital spending by the public sector and varied industry
groups. Average annual utilization, as weighted for the revenue potential of
each crane in the Fleet, increased from 76.6% in 1994 to 77.4% in 1995.
The increasing age of the cranes and related equipment has created the need for
ongoing expenditures related to routine maintenance, though the leases on the
cranes require the lessees to be responsible for operation and routine
maintenance of the cranes during the lease term. Generally, the cranes are
leased to major companies for use in construction projects. During 1995, all
but one piece of the equipment leased out by DSEC pursuant to its management
agreement with DSC was deployed in the Continental United States. During
1995, 1994, and 1993, 24%, 25% and 21%, respectively, of net rental revenues
were received from one customer, Gulf Island Fabrication Inc. ("Gulf Island").
As of December 31, 1995, Gulf Island, whose primary business is the fabrication
of offshore drilling platforms for major oil companies, leased 12 cranes. Gulf
Island is current on all its lease payments to DSC, and DSEC anticipates a
continuing business relationship with Gulf Island in the future. Howeve r,
should Gulf Island discontinue the utilization of all or substantially all of
the equipment it leases from DSC, it could have a significant negative impact
on both DSC's and the Partnership's operations and financial condition. Nothing
has come to the attention of the General Partners to indicate that such an
event may occur.
Risks
The ownership and operation of these distressed Assets have been subject to
numerous risks including, but not limited to, those related to (i) the
condition of the economy generally and of the industry in which the
Partnership's remaining Assets compete, (ii) the ability of the managers of the
Assets to obtain contracts for the use of the Assets, (iii) the ability to
collect accounts receivable generated by the operation of the Assets, (iv) the
future value of the Assets, which may be dependent upon the condition of the
Assets or the cost of new assets of the same type, (v) the dependence on third
parties to operate or manage the Assets on behalf of the Partnership and, (vi)
the availability and cost of insurance for the Assets and their operation. The
General Partners will have little control over these factors and therefore will
be unable to completely eliminate the risks associated with the Partnership's
future operations. As a result of the severe decline in the oil and gas drill
ing industry that occurred in the mid-1980's, all of the Partnership's assets
related to the oil and gas industry have previously been either foreclosed on
or sold at a loss. Therefore, it is unlikely that the Partnership will earn a
favorable cumulative return and that its objectives will be met.
Competition
DSC, through its operating manager, DSEC, competes nationwide for crane rental
contracts, and from time to time it competes for particular major international
projects. The competition is highly fragmented, however, and DSEC estimates
that approximately 45% of the cranes in the marketplace are owned or managed by
DSC or the few other national competitors; the balance are owned by smaller
regional or local companies. The heavy crane rental industry, while a
relationship-oriented service business, is, at the same time, extremely price
sensitive. The management group at DSEC has 30 years of experience in the
crane rental industry, however, some of DSC's competitors have substantially
greater resources than DSC and, therefore, would be better prepared to
withstand a period of continued depressed economic conditions, if it should
occur.
Employees
The Partnership has no employees. Certain administrative and managerial
services are provided by the General Partners and certain affiliates.
Item 2. Properties
The Partnership has no material physical properties other than the construction
cranes it owns, its interest in the construction cranes owned by DSC and its
interest in the construction cranes owned by SFN as a result of SFN's
acquisition of the Security Pacific Assets.
The Partnership's Cranes
As of December 31, 1995, the Partnership owned nine (9) Manitowoc construction
cranes with an average age of seventeen years, as further described below.
Equipment Owned by the Partnership
Manitowoc Model 4100W S-1/S-2 200/230 ton capacity 3 units
Manitowoc Model 4000W 150 ton capacity 3 units
Manitowoc Model 3900 100 ton capacity 3 units
DSC Venture Cranes
During the year ended December 31, 1995, DSC sold two cranes (one Model 4100W
S-2, one Model 3900) for net proceeds of $931,125. Consequently, as of
December 31, 1995, DSC owned forty-four (44) cranes, four (4) Ringers and three
(3) towers. In January 1996, one Model 3900 was sold for a net selling price
of $277,875. Reference is made to Note 6 to the Consolidated Financial
Statements contained herein at Item 14 for a discussion of these crane sales.
Ringers are attachments used to increase the lifting capacity of a particular
crane, and towers are attachments used to convert the crane to a configuration
for making high lifts. The average age of the DSC's cranes is eighteen years.
The equipment owned by DSC as of December 31, 1995 is described below.
Equipment Owned by DSC
Manitowoc Model 4100W S-1/S-2 200/230 ton capacity 11 units
Manitowoc Model 4100W 200 ton capacity 3 units
Manitowoc Model 4000W 150 ton capacity 19 units
Manitowoc Model 3900 100 ton capacity 11 units
Ringers 350 ton capacity 4 units
Towers 3 units
SFN Cranes
During the year ended December 31, 1995, SFN sold its one remaining Model 4100W
S-2 crane for net proceeds of $659,427. Reference is made to Note 6 to the
Consolidated Financial Statements contained herein at Item 14 for a discussion
of this crane sale. Consequently, as of December 31, 1995, SFN owned four (4)
cranes, one (1) Ringer and one (1) tower, with an average age of fifteen years.
Equipment Owned by SFN
Manitowoc Model 4000W 150 ton capacity 2 units
Manitowoc Model 3900 100 ton capacity 2 units
Ringers 300 ton capacity 1 unit
Towers 1 unit
DSC also serves as manager and leasing agent for two (2) cranes owned by
Scott-Macon, Ltd.
Item 3. Legal Proceedings
See Note 11 to the Financial Statements, which is incorporated herein by
reference thereto, for a discussion of the Partnership's legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders of the Partnership during
the quarter ended December 31, 1995, through the solicitation of proxies or
otherwise.
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and Related
Security Holder Matters.
The Units are not traded on any market, and it is not contemplated that any
public trading for the Units will develop. As of December 31, 1995, the number
of Limited Partners was 1,864.
The Partnership did not make cash distributions to Limited Partners during 1994
and 1995. Distributions are made as required by the Partnership's Partnership
Agreement and as the Partnership's operating cash flow permits, subject to
existing debt agreements.
Item 6. Selected Financial Data.
Incorporated by reference to the "Financial Highlights" in the Partnership's
Annual Report to Unitholders for the year ended December 31, 1995.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
At December 31, 1995, the Partnership and its consolidated venture and
subsidiary's cash and cash equivalents balance totaled $1,118,831 compared to
$1,215,735 at December 31, 1994. The decrease is attributed to principal
payments made on long-term debt exceeding cash flow from operating activities
and proceeds from the sales of cranes during 1995. Notwithstanding the
foregoing, the General Partners believe that the Partnership has adequate cash
reserves at DSC, the Partnership's 99% subsidiary, and Partnership levels to
support operations and the amortization of debt for the near term. However,
there can be no assurance that existing operating levels can be maintained and
that these cash reserves will be adequate in either the near or long term. The
adequacy of the current cash position will be affected by matters over which
the Partnership and its managers have little control. This includes market
conditions which affect the utilization and rental rates at which the
Partnership' s assets are leased.
At December 31, 1995, construction cranes at cost totaled $16,307,334 as
compared to $17,436,077 at December 31, 1994. The decrease is due to the sales
of two DSC cranes, one each during the first and fourth quarters of 1995, and
the sale of one SFN crane during the second quarter of 1995. The net selling
prices of the DSC cranes were $653,250 and $277,875, respectively, resulting in
gains of $426,699 in the first quarter of 1995 and $157,391 during the fourth
quarter of 1995. The net selling price of the SFN crane was $659,427,
resulting in a gain of $334,345 during second quarter of 1995. The proceeds
from these sales were used to reduce the Partnership's debt. As a result, and
in addition to the Partnership's required monthly debt service payments, loans
payable decreased from $7,047,335 at December 31, 1994 to $4,452,545 at
December 31, 1995.
Other assets decreased from $191,048 at December 31, 1994 to $53,124 at
December 31, 1995 due to the amortization of prepaid insurance for the twelve
months ended December 31, 1995.
Deferred management fee at December 31, 1995 totalled $1,889,818 compared to
$1,715,943 at December 31, 1994. The increase of $173,875 is attributable to
the management fees earned in 1995 exceeding the $60,000 limit paid to San
Felipe Resources Company. See Item 13.
Accrued interest decreased from $50,012 at December 31, 1994 to $0 at December
31, 1995 primarily due to the timing of loan interest payments. Due to
affiliates decreased from $62,331 at December 31, 1994 to $28,331 at December
31, 1995 mainly due to the timing of payments for administrative expenses and
salaries.
Deferred income taxes increased to $619,320 at December 31, 1995 from $459,400
at December 31, 1994 resulting from deferred taxes provided on SFN's income in
1995.
Results of Operations
1995 vs. 1994
For the year ended December 31, 1995, the Partnership generated net income of
$354,222 compared to net income of $255,302 for the year ended December 31,
1994. The increase in net income is primarily due to a $918,435 gain
recognized on the sale of two DSC Venture cranes in January and December of
1995 and the sale of one SFN crane in May 1995, and decreases in both
depreciation and amortization and interest expense. These were partially
offset by a decrease in rental revenues and an increase in general, selling and
administrative expense. Excluding the gains recognized on the crane sales, the
Partnership generated losses from operations, before provision for income taxes
and minority interest, of $522,943 and $245,632 for 1995 and 1994,
respectively.
Rental revenues for the year ended December 31, 1995 decreased compared to 1994
primarily due to the sale of three cranes during 1995. Dayton-Scott Equipment
Company, the fleet's operational manager, expects rental revenues to remain
relatively steady through the remainder of 1996 as a result of stable
utilization and rental rates. There can be no assurance, however, that either
utilization rates or rental rates will remain steady.
For the year ended December 31, 1995, general, selling and administrative
expenses totalled $1,915,608 compared to $1,699,833 for 1994. The increase is
mainly due to the accrual of $300,000 in 1995 for the SFN consulting fee, 51%
of which is eliminated in consolidation, and increased salary and insurance
expense.
Interest expense for the year ended December 31, 1995 decreased compared to
1994 due to interest being calculated on lower outstanding principal balances
on the Partnership's debt resulting from principal repayments made during 1995.
1994 vs. 1993
For the year ended December 31, 1994, the Partnership earned net income of
$255,302 compared to a net loss of $100,788 for the year ended December 31,
1993. The change from net loss to net income is primarily attributable to the
gain on sales of cranes in 1994 and decreases in rental and interest
expenses. The Partnership generated income before provision for income taxes
and minority interest of $270,819 for the year ended December 31, 1994, as
compared to of $56,451 for the year ended December 31, 1993.
For the year ended December 31, 1994, the Partnership generated rental revenue
of $4,818,140 as compared to $4,936,100 for the year ended December 31, 1993.
The decrease is attributable to the sale of cranes in July and August of 1994.
Dayton-Scott expects rental revenues to remain steady or increase slightly over
the next twelve months as a result of modest increases in utilization and
rental rates. There can be no assurance, however, that either utilization
rates or rental rates will increase.
For the years ended December 31, 1994 and 1993, other income was $38,080 and
$201,132, respectively. The income in 1993 includes a lawsuit settlement for
two damaged cranes and an insurance settlement for a damaged boom point.
Rental expenses for the year ended December 31, 1994, were $1,208,155 as
compared to $1,452,764 for the year ended December 31, 1993. The decrease is
primarily the result of DSC incurring lower expenses for equipment repairs and
maintenance. For the year ended December 31, 1994, interest expense was
$651,359 as compared to $729,905 for the year ended December 31, 1993. The
decrease is due to interest being calculated on lower principal balances,
partially offset by increases in interest rates. The provision for income
taxes calculated for the Partnership's corporate consolidated subsidiary SFN
decreased from $244,300 for the year ended December 31, 1993, to $145,100 for
the year ended December 31, 1994. The decrease is primarily due to the gain on
the sale of an SFN crane recognized in 1993 and was partially offset by a
decrease in interest expense in 1994.
Item 8. Financial Statements and Supplementary Data.
See Item 14 for a listing of the financial statements filed with this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Partnership.
The Partnership does not have any officers, directors or employees. The
General Partners of the Partnership are Equipment Management Inc. (formerly
known as Hutton Equipment Management Inc.) and Steven A. Webster. The
Partnership has entered into a Management Agreement with the General Partners,
pursuant to which they will perform certain management functions for the
Partnership as well as provide certain administrative services.
Steven A. Webster, 44, is Chairman of the Board and Chief Executive Officer of
Falcon Drilling Company, Inc., a Delaware Corporation formed in 1991 to conduct
contract drilling services for the oil and gas industry. He also serves as
General Partner of two related investment partnerships, Cerrito Partners,
formed in 1984, and Cerrito Investments Limited Partnership, formed in 1988.
Mr. Webster received a B.S. from Purdue University and an M.B.A. from Harvard
Business School. Mr. Webster serves as a Director of Crown Resource
Corporation, a mining concern, and Reading & Bates Corporation, an offshore
drilling company. Mr. Webster also serves as a Trust Manager for Camden
Property Trust, a real estate investment trust.
Officers and Directors of EMI
Certain officers and directors of EMI are now serving (or in the past have
served) as officers or directors of entities which act as general partners of a
number of limited partnerships which have sought protection under the
provisions of the Federal Bankruptcy Code. These partnerships sought the
protection of the bankruptcy laws to protect the partnerships' assets from loss
through foreclosure.
The directors and executive officers of EMI are as follows:
Name Office
Moshe Braver Director and President
Daniel M. Palmier Vice President and Chief Financial Officer
Moshe Braver, 42, is currently a Managing Director of Lehman Brothers and has
held such position since October 1985. During this time, he has held positions
with the Business Analysis Group, International and Capital Markets
Administration and currently, with the Diversified Asset Group. Mr. Braver
joined Shearson Lehman Brothers in August 1983 as Senior Vice President. Prior
to joining Shearson, Mr. Braver was employed by the accounting firm of Coopers
& Lybrand from January 1975 through August 1983 as an Audit Manager. He
received a Bachelor of Business Administration degree from Bernard Baruch
College in January 1975 and is a Certified Public Accountant.
Daniel M. Palmier, 34, is a Vice President of Lehman Brothers Inc. in its
Diversified Asset Group, and has been employed by Lehman Brothers since June
1990. He is responsible for the asset management and restructuring of a
diverse portfolio of assets including commercial real estate and mortgages.
From March of 1988, Mr. Palmier worked for LJ Hooker Corporation, Inc. and held
positions of Senior Associate of Mergers and Acquisitions/Corporate Finance and
Vice President in the Real Estate division. From September 1986, Mr. Palmier
was a Real Estate Acquisitions Officer at John Anthony Associates, Inc. in New
York. From June 1983, Mr. Palmier worked in the public accounting field, most
notably for the firm Price Waterhouse. Mr. Palmier, a New York Certified
Public Accountant, earned a Masters of Science in Real Estate Degree from New
York University in 1995 and graduated from the University of Notre Dame in 1983
with a B.B.A. in Accounting.
Certain Matters Involving Affiliates of EMI
On July 31, 1993, Shearson Lehman Brothers Inc. sold certain of its domestic
retail brokerage and asset management businesses to Smith Barney, Harris Upham
& Co. Incorporated ("Smith Barney"). Subsequent to the sale, Shearson Lehman
Brothers Inc. changed its name to Lehman Brothers Inc. The transaction did not
affect the ownership of the General Partner. However, the assets acquired by
Smith Barney included the name "Hutton." Consequently, the Hutton Equipment
Management, Inc. general partner changed its name to Equipment Management Inc.
on January 13, 1994 and the name of the Partnership was changed to Equipment
Asset Recovery Fund L.P. on October 29, 1993 to delete any reference to
"Hutton."
Item 11. Executive Compensation.
The Partnership does not pay the officers or directors of EMI any remuneration.
In addition, EMI does not pay any remuneration to any of its officers or
directors, all of whom receive salaries from an affiliate of EMI. Reference is
made to Note 3 to the Financial Statements, which is incorporated herein by
reference thereto for a discussion of the allocations of Partnership income,
losses, distributions and gains from the disposition of assets.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) Security Ownership of Certain Beneficial Owners.
No person was known by the Partnership to be the beneficial owner of more than
5% of the Units of the Partnership.
(b) Security Ownership of Management.
The General Partners do not own any Units, and no officer or director of the
EMI owns any Units.
(c) Changes in Control.
None.
Item 13. Certain Relationships and Related Transactions.
The General Partners and their affiliates are entitled to receive annual
Management Fees equal to the greater of $120,000 or 5% of the gross revenues
from the operation of the Assets owned directly or indirectly by the
Partnership. During fiscal 1995, the General Partners earned $233,875 in
Management Fees, of which $60,000 has been paid. During the second quarter of
1985, the General Partners elected to defer the payment of all Management Fees,
other than the $10,000 per month payable to San Felipe Resources Company, a
partnership owned primarily for the benefit of Mr. Webster, until the cash flow
of the Partnership improves. In June 1986, the amount of fees paid currently
to San Felipe Resources Company was further reduced to $5,000 per month. (See
Note 8 to the Financial Statements contained herein at Item 14 for additional
details.)
Under the terms of the Management Agreement, the General Partners and their
affiliates are entitled to reimbursements by the Partnership for certain costs
and expenses described therein relating to certain administrative and other
services and goods provided. First Data Investor Services Group, formerly The
Shareholder Services Group, provides accounting and investor relations services
for the Partnership. Prior to May 1993, these services were provided by an
affiliate of a general partner. The Partnership's transfer agent and certain
tax reporting services are provided by Service Data Corporation. Both First
Data Investor Services Group and Service Data Corporation are unaffiliated
companies.<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
(a) (1) Financial Statements and Notes.
Independent Auditors' Report
Arthur Andersen LLP (1)
Consolidated Balance Sheets -- December 31, 1995 and 1994 (1)
Consolidated Statements of Operations -- For the years ended
December 31, 1995, 1994 and 1993 (1)
Consolidated Statements of Partners' Capital
(Deficit) -- For the years ended
December 31, 1995, 1994 and 1993 (1)
Consolidated Statements of Cash Flows -- For the years
ended December 31, 1995, 1994 and 1993 (1)
Notes to the Consolidated Financial Statements (1)
(a) (2) Schedules
Schedule II - Valuation and Qualifying Accounts F-1
Independent Auditors' Report
Arthur Andersen LLP F-3
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission have been omitted since
(1) the information required is disclosed in the financial statements and notes
there to; (2) the schedules are not required under the related instructions; or
(3) the schedules are inapplicable.
(1) Incorporated by reference to the Partnership's Annual Report to
Unitholders for the year ended December 31, 1995.
(3) Exhibits.
The following exhibits are being filed as a part of this report. Documents
other than those designated as being filed herewith are incorporated herein by
reference.
Exhibit No. Description
3 Amended and Restated Agreement and Certificate of Limited
Partnership of the Partnership (Exhibit 4.1 to the Registrant's
Registration Statement on Form S-1, File No. 2-87488 is
incorporated herein by reference).
10.1 Management Contract by and among the Partnership, Equipment
Management Inc., Steven A. Webster, and Paul B. Loyd, Jr.
(Exhibit 10.1 to the Registrant's Registration Statement on
Form S-1, File No. 2-87488, is incorporated herein by
reference).
10.2 Joint Venture Agreement dated October 9, 1984 between the
Partnership, Cerrito Partners and GD Investors, Inc. (Exhibit 4
to the Registrant's current report on Form 8-K dated October
10, 1984, File No. 2-87488, is incorporated herein by
reference).
10.3 Agreement and Plan of Merger dated December 2, 1987.
(Incorporated by reference to Form 8-K dated December 2, 1987
filed pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 by the E.F. Hutton Group Inc., commission
file number 1-7376).
10.4 Press Release, New York, New York dated December 3, 1987.
(Incorporated by reference to Form 8-K dated December 2, 1987
filed pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 by the E.F. Hutton Group Inc., commission
file number 1-7376).
10.5 DSC Venture Amended and Restated Joint Venture Agreement dated
as of October 1, 1984, executed April 2, 1987. (Exhibit 10.13
to the Registrant's report on Form 10-K for the year ended
December 31, 1987, File No. 2-87488, is incorporated herein by
reference).
10.6 Net profits agreement dated April 2, 1987 by and among Security
Pacific Business Credit Inc., DSC Venture and the Registrant.
(Exhibit 10.14 to the Registrant's report on Form 10-K for the
year ended December 31, 1987, File No. 2-87488, is incorporated
herein by reference).
10.7 Purchase Agreement dated October 23, 1989 between Falcon
Drilling Inc. and the Registrant. (Exhibit 10.11 to the
Registrant's report on Form 10-K for the year ended December
31, 1989, File No. 2-87488, is incorporated herein by
reference).
10.8 Agreement dated October 23, 1989 by and among the Registrant,
CP-1, Ltd. and GD Investors, Inc. (Exhibit 10.12 to the
Registrant's report on Form 10-K for the year ended December
31, 1989, File No. 2-87488, is incorporated herein by
reference).
10.9 Management Agreement effective January 1, 1990 between DSC
Venture and Dayton-Scott Equipment Company (Exhibit 10.9 to the
Registrant's Report on Form 10-K for the year ended December
31, 1990, File No. 2-87488, is incorporated herein by
reference).
10.10 Loan and Security Agreement by and between SFN Corporation and
the CIT Group/Equipment Financing, Inc. Dated as of April 30,
1992. (Exhibit 10.10 to the Registrant's report on Form 10-K
for the year ended December 31, 1987, File No. 2-87488, is
incorporated herein by reference).
13 Annual Report to Unitholders for the year ended December 31,
1995.
22 Subsidiaries of the Registrant: DSC Venture, a Texas joint
venture and SFN Corporation, a Delaware Corporation.
27 Financial Data Schedule
28 Portions of prospectus of Registrant dated February 2, 1984
(incorporated by reference).
(b) Reports on Form 8-K filed in the fourth quarter of fiscal 1995:
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: March 28, 1996
EQUIPMENT ASSET RECOVERY FUND
BY: Equipment Management, Inc.
General Partner
BY: /s/ Moshe Braver
Name: Moshe Braver
Title: Director and President
BY: /s/ Steven A. Webster
Name: Steven A. Webster
General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
EQUIPMENT MANAGEMENT, INC.
A General Partner
Date: March 28, 1996 BY: /s/ Moshe Braver
Moshe Braver
Director and President
Date: March 28, 1996 BY: /s/ Daniel M. Palmier
Daniel M. Palmier
Vice President and Chief
Financial Officer
EXHIBIT 13
Equipment Asset Recovery Fund, L.P.
1995 Annual Report
Equipment Asset Recovery Fund, L.P. commenced operations in 1984. The business
of the Partnership consists primarily of owning and leasing a fleet of
heavy-lift construction cranes and related equipment (the "DSC Venture"), used
on various types of construction projects. Dayton-Scott Equipment Company, a
leading crane rental specialist in Houston, Texas and the DSC Venture's
equipment manager, coordinate the leasing of the cranes.
Administrative Inquiries Performance Inquiries/Form 10-Ks
Adress Changes/Transfers First Data Investor Services Group
Service Data Corportaion P.O. Box 1527
2424 South 130th Circle Boston, Massachusetts 02104-1527
Omaha, Nebraska 68144-2596 Attn: Financial Communications
800-223-3464 (select option 1) 800-223-3464 (select option 2)
Contents
1 Message to Investors
3 Consolidated Financial Statements
7 Notes to the Consolidated Financial
Statements
14 Report of Independent Public Accountants
MESSAGE TO INVESTORS
Presented for your review is the 1995 Annual Report for Equipment Asset
Recovery Fund, L.P. (the "Partnership"). This letter includes a review of 1995
operations and crane sale activity, a financial overview and the Partnership's
audited financial statements for the year ended December 31, 1995.
1995 Review
Partnership operations during 1995 were characterized by continued steady
demand for the fleet of heavy-lift construction cranes. Through the efforts of
Dayton-Scott Equipment Company ("Dayton-Scott"), which manages the fleet, the
weighted utilization rate for the DSC Venture's equipment increased from 76.6%
at year-end 1994 to 77.4% at year-end 1995. The average monthly rental rate
charged for cranes, however, declined slightly to $7,602.43 during 1995 from
$7,662.21 in 1994. As mentioned in previous reports, lack of demand for the
Partnership's five Ringer attachments, which are used to increase a particular
crane's lifting capacity, has drastically limited opportunities to lease this
equipment and has offset improvements in the utilization rate of the cranes.
Opportunities to sell the Ringers have been equally limited and though no such
sales have been completed to date, we will continue to market the equipment for
sale both domestically and overseas.
Although we witnessed gradual increases over the past year in the level of
large-scale construction, the Partnership's stable operation can be credited
primarily to successful marketing efforts targeted at other industries. The
majority of leasing activity continues to be associated with work on industrial
plant and oil refinery refurbishment as well as the construction of
petro-chemical plants. The cranes are also used in states along the Gulf Coast
performing land-based fabrication and servicing of offshore oil and gas
drilling and production rigs which are based in the Gulf of Mexico and
elsewhere. A significant market for the Partnership's equipment is also in the
construction of waste water treatment plants. We continue to focus on this and
other markets for additional leasing opportunities.
We are pleased with the success in expanding our customer base. The crane
leasing industry, however, continues to be impacted by an overall shortage of
major industrial building. We remain hopeful that the strengthened U.S.
economy will eventually trigger increases in the levels of both heavy
industrial building and the power generation-related sector. Growth in these
sectors would have a favorable impact on utilization rates and rental rates for
the Partnership's equipment.
Crane Sales
The Partnership sold three cranes during the year which yielded total net
proceeds of approximately $1,591,000. In addition, the Partnership completed
the sale of one crane during the first quarter of 1996 for net proceeds of
$277,875. The proceeds generated by these crane sales were used to retire a
portion of the Partnership's outstanding debt, the balance of which was reduced
by nearly 40% during 1995. At the time of sale, these cranes were idle and off
lease. The Partnership will consider future sales of cranes if presented with
attractive sales opportunities. Please refer to Note 6 in the Notes to the
Consolidated Financial Statements for additional information regarding the
above-mentioned crane sales.
Financial Highlights
(in thousands except per Unit data)
1995 1994 1993 1992 1991
Rental Revenues $ 4,562 $ 4,818 $ 4,936 $ 4,698 $ 5,621
Gain on Sale
of Equipment 918 516 246 - -
Net Income (Loss) 354 255 (101) 1,149(a) (49)
Net Income (Loss)
per Unit - (.46) (9.88) 33.37(a) -(b)
Total Assets 8,422 10,534 11,953 13,445 12,859
Loans Payable 4,453 7,047 9,101 10,759 11,033
Cash Distributions
per Unit - - - 8.88 8.88
(a) Includes a $1,453,896 gain on refinancing of long-term debt, net of
minority interest allocation share. Without this gain, the Partnership
would have recorded a net loss of $304,424.
(b) For 1991, operating losses normally allocable to Limited Partners and the
Special Limited Partner exceeded their capital account and accordingly,
such losses were allocated to the General Partners.
Financial results for 1995 reflect the sales of cranes during the year, which
brought about decreases in rental revenues and gains on equipment sales. The
decrease in loans payable is attributable to principal payments made on the
Partnership's debt, in part utilizing the proceeds from the crane sales
discussed above.
Summary
Having stabilized the Partnership's operations and crane leasing activity, the
General Partners intend to focus on reducing or eliminating the Partnership's
debt, thereby enhancing the long-term value of your investment. As a result,
any surplus cash flow from operations and proceeds from crane sales will
continue to be used to pay down debt. Updates on industry developments and the
Partnership's operations will be included in future reports.
Very truly yours,
/s/ Moshe Braver /s/ Steven A. Webster
Moshe Braver Steven A. Webster
President General Partner
Equipment Management, Inc.
General Partner
March 28, 1996
Financial Statements
Consolidated Balance Sheets
December 31, 1995 and 1994
Assets 1995 1994
Equipment:
Construction cranes $ 16,307,334 $ 17,436,077
Vehicles and equipment 128,761 135,336
16,436,095 17,571,413
Less: Accumulated depreciation (9,781,264) (9,075,076)
6,654,831 8,496,337
Cash and cash equivalents 1,118,831 1,215,735
Accounts receivable,
net of allowance for doubtful
accounts of $10,000 in 1995
and 1994 272,837 242,668
Organization and loan closing
costs, net of accumulated
amortization of $242,372 in
1995 and $176,270 in 1994 321,888 387,990
Other assets 53,124 191,048
Total Assets $ 8,421,511 $ 10,533,778
Liabilities and Partners' Deficit
Liabilities:
Accounts payable and
accrued expenses $ 581,799 $ 584,631
Deferred management fee 1,889,818 1,715,943
Loans payable 4,452,545 7,047,335
Accrued interest - 50,012
Due to affiliates 28,331 62,331
Deferred income taxes 619,320 459,400
Total Liabilities 7,571,813 9,919,652
Minority interest 1,265,001 1,383,651
Partners' Deficit:
General Partners (415,303) (769,525)
Limited Partners - -
Special Limited Partner - -
Total Partners' Deficit (415,303) (769,525)
Total Liabilities and
Partners' Deficit $ 8,421,511 $ 10,533,778
Consolidated Statements of Operations
For the years ended December 31, 1995, 1994, and 1993
Income 1995 1994 1993
Rental revenues $ 4,562,048 $ 4,818,140 $ 4,936,100
Interest income 58,881 37,095 19,425
Other income 25,338 38,080 201,132
Total Income 4,646,267 4,893,315 5,156,657
Expenses
Rental expenses 1,284,210 1,208,155 1,452,764
General, selling and
administrative 1,915,608 1,699,833 1,531,809
Depreciation and
amortization 1,235,491 1,331,008 1,375,818
Interest expense 500,026 651,359 729,905
Management fee 233,875 248,592 255,487
Total Expenses 5,169,210 5,138,947 5,345,783
Other Income
Gain on sales of cranes 918,435 516,451 239,569
Gain on sale of vehicles - - 6,008
Total Other Income 918,435 516,451 245,577
Net Income before Provision
for Income Taxes and
Minority Interest 395,492 270,819 56,451
Provision for Income
Taxes, deferred 159,920 145,100 244,300
Net Income (Loss) before
Minority Interest 235,572 125,719 (187,849)
Minority Interest 118,650 129,583 87,061
Net Income (Loss) $ 354,222 $ 255,302 $ (100,788)
Net Income (Loss)
Allocated:
To the General Partner $ 354,222 $ 270,491 $ 225,955
To the Limited Partners - (15,032) (323,339)
To the Special
Limited Partner - (157) (3,404)
$ 354,222 $ 255,302 $ (100,788)
Net Loss per limited
partnership unit
(32,722 outstanding) $ - $ (.46) $ (9.88)
Consolidated Statements of Partners' Capital (Deficit)
For the years ended December 31, 1995, 1994 and 1993
Special
General Limited Limited
Partners Partners Partner Total
Balance at January 1, 1993 $ (1,265,971) $ 338,371 $ 3,561 $ (924,039)
Net loss 225,955 (323,339) (3,404) (100,788)
Balance at December 31, 1993 (1,040,016) 15,032 157 (1,024,827)
Net income 270,491 (15,032) (157) 255,302
Balance at December 31, 1994 (769,525) - - (769,525)
Net income 354,222 - - 354,222
Balance at December 31, 1995 $ (415,303) $ - $ - $ (415,303)
Consolidated Statements of Cash Flows
For the years ended December 31, 1995, 1994 and 1993
Cash Flows from Operating Activities:
1995 1994 1993
Net income (loss) $ 354,222 $ 255,302 $ (100,788)
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Gain on sale of cranes (918,435) (516,451) (239,569)
Gain on sale of vehicles - - (6,008)
Minority interest (118,650) (129,583) (87,061)
Depreciation and amortization 1,235,491 1,331,008 1,375,818
Increase (decrease) in cash
arising from changes in
operating assets and
liabilities:
Accounts receivable, net (30,169) 204,050 (155,616)
Other assets 137,924 (46,859) (87,127)
Accounts payable and
accrued expenses (2,832) 124,950 (58,739)
Deferred management fee 173,875 188,592 195,486
Accrued interest (50,012) 50,012 -
Due to affiliates (34,000) - (27,343)
Deferred income taxes 159,920 145,100 244,300
Net cash provided by
operating activities 907,334 1,606,121 1,053,353
Cash Flows from Investing Activities:
Proceeds from sales of cranes 1,590,552 931,125 651,683
Proceeds from sales of vehicles - - 11,800
Purchase of vehicles - - (93,998)
Net cash provided by
investing activities 1,590,552 931,125 569,485
Cash Flows from Financing
Activities:
Proceeds from long-term debt 100,000 275,503 331,307
Principal payments on
long-term debt (2,694,790) (2,329,234) (1,989,150)
Net cash used for financing
activities (2,594,790) (2,053,731) (1,657,843)
Net increase (decrease)
in cash and cash equivalents (96,904) 483,515 (35,005)
Cash and cash equivalents
at beginning of period 1,215,735 732,220 767,225
Cash and cash equivalents
at end of period $ 1,118,831 $ 1,215,735 $ 732,220
Supplemental Disclosure of
Cash Flow Information:
Cash paid during the period
for interest $ 550,038 $ 601,347 $ 729,905
Notes to the Consolidated Financial Statements
December 31, 1995, 1994 and 1993
1. Organization
Equipment Asset Recovery Fund, L.P. (the "Partnership"), formerly Hutton Asset
Recovery Fund, was organized as a Limited Partnership under the laws of Texas
pursuant to a Certificate and Agreement of Limited Partnership (the
"Partnership Agreement") dated and filed October 27, 1983. The Partnership was
inactive from its inception through December 1983. The Partnership was formed
for the primary purpose of acquiring, operating, leasing and selling various
types of assets. The Partnership's only remaining investment is its interest
in construction cranes (see Note 6). The Partnership, through its operating
manager, DSEC, competes nationwide for heavy crane rental contracts, and from
time to time it competes for particular international projects. The
Partnership derives a majority of its revenues from the southwest region of the
United States, particularly, Louisiana and Texas. The Partnership will continue
until December 31, 2007, unless sooner terminated in accordance with the terms
of the Partnership Agreement.
Equipment Management, Inc. (formerly Hutton Equipment Management, Inc), a
wholly owned subsidiary of Lehman Brothers Inc. , and Steven A. Webster are the
General Partners of the Partnership. On July 31, 1993, certain of Shearson
Lehman Brothers Inc.'s domestic retail brokerage and management businesses were
sold to Smith Barney, Harris Upham & Co. Inc. Included in the purchase was the
name "Hutton." Consequently, the Hutton Equipment Management, Inc. General
Partner's and the Partnership's names were changed to delete any reference to
"Hutton." San Felipe Investors, a Texas general partnership, is the Special
Limited Partner.
At December 31, 1995, the Partnership's operations consisted of the operations
of a 99%-owned consolidated venture, DSC Venture ("DSC") and a 51% controlling
interest in SFN Corporation ("SFN").
2. Significant Accounting Policies
Basis of Accounting
The accompanying financial statements have been prepared on the accrual basis
of accounting in accordance with generally accepted accounting principles.
Revenues are recognized as earned and expenses are recorded as obligations are
incurred.
Reclassifications
Certain reclassifications have been made in the prior year's financial
statements to conform with the current year's presentation.
Construction Cranes
Investments in construction cranes include the initial purchase price and
related acquisition costs. Depreciation is computed using the straight-line
method based on the estimated useful lives of the respective depreciable
properties, which are generally between 10 to 20 years. Maintenance and
repairs are charged to operations as incurred and were approximately $847,000,
$757,000, and $747,000 in 1995, 1994 and 1993, respectively.
Accounting for Impairment
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, " Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"),
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. FAS 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. The Partnership adopted FAS 121 in the
fourth quarter of 1995. Based on current circumstances, adoption of FAS 121
had no impact on the financial statements.
Cash Equivalents
Cash equivalents consist of highly liquid short-term investments with
maturities of three months or less from the date of issuance. The carrying
amount approximates fair value because of the short maturity of these
instruments.
Concentration of Credit Risk
Financial instruments which potentially subject the Partnership to a
concentration of credit risk principally consist of cash in excess of the
financial institutions' insurance limits. The Partnership invests available
cash with high credit quality financial institutions.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("FAS 107"), requires that the Partnership
disclose the estimated fair values of its financial instruments. Fair values
generally represent estimates of amounts at which a financial instrument could
be exchanged between willing parties in a current transaction other than in
forced liquidation.
Fair value estimates are subjective and are dependent on a number of
significant assumptions based on management's judgement regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. In addition, FAS 107 allows
a wide range of valuation techniques, therefore, comparisons between entities,
however similar, may be difficult.
Organization and Loan Closing Costs
Organization costs are amortized on a straight-line basis over five years.
Loan closing costs are amortized over the life of the related loan.
Rental Revenues
Leases of construction cranes are generally on a month-to-month basis and are
accounted for as operating leases.
Income Taxes
No provision for income taxes has been made in the financial statements for the
Partnership and DSC since these taxes are the responsibility of the individual
partners rather than that of the Partnership. However, tax provision has been
included in the accompanying consolidated financial statements related to the
Partnership's corporate consolidated subsidiary, which is a separate taxable
entity.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual
results could differ from those estimates.
3. Partnership Allocations
Partnership income and losses will be allocated and net cash will be
distributed 4% to the General Partners, 1% to the Special Limited Partner and
95% to the Limited Partners until each of the Limited Partners has received
cash equal to his or her capital contribution plus an 8% annual cumulative
return thereon. Thereafter, such items will be distributed 85% to the Limited
Partners, 12.5% to the General Partners and 2.5% to the Special Limited
Partner.
The gain on the disposition of assets is first allocated proportionately to the
Partners who have negative capital accounts to restore these accounts to zero
and then in accordance with the aforementioned percentages. Accordingly, all
of the gain on sales of cranes was allocated to the General Partners for the
years ended December 31, 1995 and 1994.
The amount of any net loss of the Partnership, which would be allocable to a
Limited Partner in excess of a positive capital account, is allocated to the
General Partners in proportion to their relative interests in the Partnership.
In 1994, the remaining net loss (after allocation of gain on sales of cranes)
was allocated to the Limited Partners and the Special Limited Partner in amount
that reduced their capital accounts to zero. The remaining loss was allocated
to the General Partners in proportion to their relative interests in the
Partnership. During 1995, the entire net loss excluding the gains on sales of
cranes was allocated to the General Partners.
4. Joint Venture
In accordance with the October 1984 Joint Venture Agreement between the
Partnership and Dayton-Scott Corporation ("Dayton-Scott"), the Partnership
contributed $2,500,000 in cash for a 50% interest in DSC. Dayton-Scott
contributed forty-nine crawler-type cranes and seven crane attachments ("DSC
cranes"), together with all of its other assets, in exchange for assumption of
its outstanding nonrecourse Loan and Security Agreement with Security Pacific
Business Credit, Inc. ("SPBC") and a 50% interest in DSC. Subsequently, the
Partnership wrote off its initial $2,500,000 investment in DSC and additional
capital contributions of $100,000 in 1984 and $121,788 in 1986.
In April 1987, Dayton-Scott sold its entire 50% interest in DSC to the
Partnership (49%) and Dayton-Scott Equipment Company ("DSEC") (1%). DSEC
subsequently sold its 1% interest to DRA Management, Inc., an affiliate of
Equipment Management, Inc. The purchase price for the additional 49% interest
in DSC consisted of $250,000 in cash, assumption of $15,200,000 in nonrecourse
debt (see Notes 5 and 7) and a contingent payment of $250,000 based on future
events and conditions as defined in the purchase and sale agreement.
5. SFN Corporation
The Partnership acquired 51% of the shares of issued and outstanding Common
Stock of SFN and all of the issued and outstanding shares of nonvoting Class B
Redeemable Preferred Stock of SFN. The Partnership acquired such stock in
consideration for its agreement to cooperate with SFN in connection with SFN's
acquisition of certain assets from SPBC. The Partnership did not contribute
any cash to SFN for the shares of Common Stock and Class B Redeemable Preferred
Stock of SFN, however, the Partnership received a deemed capital account in the
amount of $2,397 for services rendered in connection with this transaction.
Six individuals, who are affiliated with DSEC, which currently manages the
Equipment (defined below), the cranes owned by DSC, and the cranes owned by the
Partnership, own the remaining 49% of the shares of Common Stock of SFN. These
individuals contributed cash of approximately $275,000 in the aggregate for 49%
of the issued and outstanding shares of Common Stock and all of the nonvoting
Class A Redeemable Preferred Stock of SFN. This equity contribution was used,
in part, to fund a portion of the purchase price of the SPBC Assets (defined
below) and to pay related transaction costs.
Class A Redeemable Preferred Stock received by these individuals in connection
with their investment in SFN entitles them to receive a single preferred
dividend of $275,000 in the aggregate, plus a 10% cumulative return until such
dividend is paid, prior to any distributions being made to the other
stockholders of SFN. The Class B Redeemable Preferred Stock received by the
Partnership entitles the Partnership to receive a single preferred dividend of
104% of the aggregate amount paid to the holders of the Class A Redeemable
Preferred Stock following the payment of the Class A preferred dividend. Once
these preferred dividends have been paid to the holders of the Class A and
Class B Redeemable Preferred Stock, all further distributions will be made only
to the holders of the Common Stock of SFN in accordance with the pro rata
percentage ownership of the holders of such Common Stock.
Effective April 30, 1992, SFN acquired all of the secured indebtedness of DSC
from SPBC. In connection with the acquisition of the SPBC Debt by SFN, SPBC
conveyed the following assets to SFN: (i) six cranes, one ringer, and one
tower (the "Equipment") previously owned by SPBC and leased to DSC pursuant to
an equipment lease ("SPBC Lease"), and (ii) the rights and obligations of SPBC
under a Net Profits Agreement ("Profits Agreement") previously entered into by
and among DSC, SPBC, and the Partnership (see Note 7).The SPBC Debt,
Equipment, Lease and Net Profits Agreement are collectively referred to as the
"SPBC Assets."
SFN paid SPBC a total consideration of $10,536,813 for the SPBC Assets,
consisting of $9,536,813 paid in cash at closing and a $1,000,000 subordinated
promissory note ("Subordinated Note") payable to SPBC and secured by a junior
lien on all the assets of SFN.
The purchase price for the SPBC Assets was allocated to the Debt and Equipment
based on the relative fair market value at the date of acquisition. In
addition, SFN paid an investment banking fee of $321,190 to Scott-Macon, Ltd.,
an affiliate of DSEC, for its role in structuring the transaction with The CIT
Group/Equipment Financing, Inc. ("CIT") and SPBC.
6. Construction Cranes
Concurrent with the formation of DSC, the Partnership purchased ten
construction type cranes (the "Partnership cranes") from Dayton-Scott for a
cash purchase price of $1,500,000 and, in 1986, sold one of these construction
cranes. In addition, Dayton-Scott contributed the DSC cranes.
In connection with SFN's acquisition of the DSC promissory notes from SPBC,
SPBC conveyed to SFN the Equipment previously owned by SPBC. The Equipment had
been leased by SPBC to DSC pursuant to the SPBC Lease since April 1987, and SFN
acquired the Equipment subject to the SPBC Lease, as amended on April 30, 1992.
The cranes were recorded on the books for $2,119,419, which represents the
allocation of the purchase price of the SPBC Assets based on the relative fair
market value of the assets. In accordance with the terms of the lease, $7,000
is due and payable to the lessor on an annual basis. The Equipment Lease has
an initial period of 10 years commencing April 2, 1987, and is automatically
renewed for successive periods of 1 year.
In January and December 1995, the Partnership sold two DSC cranes for net
proceeds of $931,125. The cranes had net book values of $226,551 and $120,484,
respectively, resulting in gains on sale of $426,699 and $157,391,
respectively. The proceeds are net of a 2.5% sales commission paid to DSEC.
The net proceeds were used to reduce the Partnership's debt on January 11,
1995, and December 21, 1995, respectively. In July and August 1994, the
Partnership sold three DSC cranes for net proceeds of $931,125. The cranes had
net book values of $140,833, $128,041, and $145,800, respectively, resulting in
gains on sale of $127,292, $140,084, and $249,075, respectively. The proceeds
were net of a 2.5% sales commission paid to DSEC. On October 31, 1994, the
net proceeds were used to reduce the Partnership's debt.
In May 1995 and August 1993, SFN received net proceeds of $659,427 and
$651,683, respectively, from the sale of two of its construction cranes in
accordance with the Mandatory Crane Sale requirement specified in the Loan and
Security Agreement between SFN and CIT (Notes 5 and 7). The proceeds from the
sales were used to pay down the Partnership's debt. The cranes had a net book
value of $325,082 and $412,114, respectively, resulting in gains on sale of
$334,345 and $239,569, respectively.
In January 1996, the Partnership sold another DSC crane for net proceeds of
$277,875 (net of DSEC's sales commission). The crane had a net book value of
$101,912, resulting in a gain on sale of $175,963. On January 17, 1996, the
proceeds were used to reduce the Partnership's debt.
DSEC manages and operates the DSC cranes, SFN cranes and the Partnership cranes
(collectively, the "Fleet") pursuant to a management agreement that reimburses
all expenses related to the operation of the Fleet, including the salaries of
DSEC's employees. The agreement also provides for incentive compensation if
certain revenue goals are attained and commission payments if certain cranes
are sold. For the years ended December 31, 1995, 1994, and 1993, sales
commissions of $40,783, $23,875 and $16,710, respectively, were earned by DSEC.
For the years ended December 31, 1995 and 1994, an incentive management fee of
$55,177 and $116,453, respectively, was earned by DSEC.
7. Loans Payable
Inter Company Debt
In April 1987, concurrent with the Partnership's acquisition of an additional
49% interest in DSC (see Note 4), the Partnership assumed three notes in the
amount of $12,000,000, $3,000,000 and $200,000, all of which were purchased by
SFN in 1992.
The $12,000,000 note accrues interest at BankAmerica's prime lending rate plus
1/2%, subject to a floor of 8% and a cap tied to the revenues of DSC. At the
end of October 1987, level principal and interest payments began based upon an
interest rate of 8% per annum and provide for full amortization of the
principal balance over 114 consecutive monthly payments. However, due to
prepayments, this note is scheduled to be paid in full in June 1996. Although
interest is to be paid based on an 8% rate, the difference between the floor
rate and the actual rate will be paid annually. During 1995, the actual
interest rate fluctuated between the floor rate and 9.50%. The cap rate was
10.9% in 1995 and 1994, and 11.2% in 1993. During 1993, the actual interest
rate was the floor rate of 8% because the prime rate plus 1/2% was below the
floor rate.
The $3,000,000 note accrues interest at a fixed rate of 7.5% per annum,
compounded annually, and payments on such note will be deferred until the $12
million note is paid in full. Thereafter, the entire sum of principal and
accrued interest will bear interest at 7.5% per annum and DSC will be
responsible for making monthly payments of $107,749 until the note is paid in
full.
The $200,000 note is noninterest-bearing, and is due in full 30 days after the
last payment is made on the $3,000,000 note. The notes are nonrecourse to DSC
and the Partnership and are collateralized by a first lien on DSC assets,
having a carrying value of approximately $5,588,086, $6,873,476 and $8,278,141
at December 31, 1995, 1994 and 1993, respectively.
Additionally, DSC agreed to pay additional interest under a Net Profits
Agreement, whereby DSC has agreed to pay to its lender 25% of future net
operating profits (as defined) and 25% of all net proceeds upon the sale or
constructive sale of the DSC cranes. For the years ended December 31, 1995,
1994, and 1993 , SFN earned $34,984, $44,430, and $71,005, respectively.
On April 30, 1992, SFN purchased all of the secured indebtedness of DSC from
SPBC (see Note 5).
Third Party Debt
In order to fund the cash portion of the purchase price for the SPBC Assets and
related transaction costs, the Partnership, through its consolidated
subsidiary, SFN, obtained loans (collectively, the "CIT Loans") from CIT in an
aggregate amount of $9,761,813, consisting of a $8,761,813 term loan (the "Term
Loan") and a $1,000,000 revolving loan (the "Revolving Loan"). The Loans are
secured by a first priority security interest in all the assets of SFN,
including the collateral securing the Notes Receivable from DSC and all the
rights under the Net Profits Agreement.
The Term Loan matures on July 31, 2000 and accrues interest at the Prime Rate
plus 1.625% per annum; monthly principal and interest payments commenced May
31, 1992. Pursuant to the terms of the agreement, SFN sold two of its
construction cranes on May 15, 1995 and August 26, 1993 (see Note 6). The
total net proceeds of $659,427 from the May 15, 1995 sale were applied to the
term loan and represent the additional principal payment due on May 31, 1995.
Of the total net proceeds from the August 26, 1993 sale, $312,500 was applied
to the Term Loan and represented the additional principal payment due on April
30, 1994. The remaining net proceeds of $339,183 were applied to the Revolving
Loan.
The $1,000,000 Revolving Loan is due and payable on March 31, 2001. Interest
accrues at the Prime Rate plus 1.625% per annum and is payable in monthly
installments that commenced May 31, 1992. Additional advances for federal,
state and local taxes and operating expenses, up to a maximum of $40,000 per
annum, shall constitute a part of the principal and shall bear interest from
the date of the advance. The loan may be prepaid, in whole or in part, at any
time without premium or penalty, except where such prepayment is being made in
connection with the full prepayment of the Term Loan, in which case, a premium
shall be paid on the Revolving Loan. The balance outstanding on the Revolving
Loan was paid in full on September 1995. The facility was available and unused
as of December 31, 1995.
SFN also executed a participation note (the "Participation Note") in the amount
of $252,200, with interest to accrue until November 30, 2000, at the rate of 8%
per annum in favor of CIT, at which time the total principal and interest shall
be $500,000. Pursuant to this note, CIT will be entitled to receive the
greater of the accreted value of the note or 25% of the net proceeds from the
sale of the cranes plus 25% of the fair market value of the cranes owned by SFN
on November 30, 2000. At April 30, 1992, the Participation Loan was recorded
at 25% of the fair market value of the cranes or $700,000.
SFN also executed a subordinated promissory note to SPBC in the amount of
$1,000,000. Interest accrues at the rate of 7.5% per annum and is payable on a
monthly basis beginning June 5, 1992 and continues until maturity. Principal
installments are due annually beginning May 5, 1993 and ending on May 5, 1999,
at which time the entire balance of principal and accrued interest is due and
payable. This loan is subordinate to the CIT loans.
The following schedule summarizes the loans payable balance as of December 31,
1995 and 1994:
1995 1994
CIT Term Loan $ 3,318,528 $ 5,753,130
CIT Revolving Loan - 41,922
CIT Participation Loan 700,000 700,000
SPBC Subordinated Promissory Note 400,000 500,000
Vehicle Loans 34,017 52,283
$ 4,452,545 $ 7,047,335
Based on the borrowing rates currently available to the Partnership for loans
with similar and average maturities, the fair value of the CIT Term Loan, SPBC
Subordinated Promissory Note, and the vehicle loans, approximates carrying
value. It is not practicable for the Partnership to estimate fair value of the
CIT Participation Loan as no quoted market price exists and the cost of
obtaining an independent valuation appears excessive to the Partnership.
Aggregate maturities of loans payable at December 31, 1995 are as follows:
Loans
Payable
1996 $ 651,380
1997 714,430
1998 772,091
1999 1,013,997
2000 1,300,647
$ 4,452,545
8. Transactions with General Partners and Affiliates
The following is a summary of transactions with General Partners and their
affiliates during the years ended December 31, 1995, 1994 and 1993:
Unpaid Paid Paid Paid
December 31, During During During
1995 1995 1994 1993
Administrative salaries
and expenses $ 28,331 $ 103,583 $ 100,966 $ 115,418
Management fees 1,889,818 60,000 60,000 60,000
$ 1,918,149 $ 163,583 $ 160,966 $ 175,418
As of June 1986, the General Partners agreed to defer payment of monthly
management fees in excess of $5,000 until cash flow of the Partnership
improves.
At December 31, 1995 and 1994, cash in the amounts of $834,258 and $819,159,
respectively, was on deposit with an affiliate of Equipment Management Inc.,
one of the General Partners.
9. Significant Customers
During 1995, 1994 and 1993, net rental revenues from one customer amounted to
approximately $1,104,000 (24%), $1,202,000 (25%), and $1,020,000 (21%) of
rental revenues, respectively. Loss of this customer could have a significant
detrimental impact on net rental revenues.
10. Commitments and Contingencies
On August 4, 1989, a class action lawsuit was filed in United States District
Court for the Southern District of Texas, Houston Division. The plaintiffs,
who are investors in the Partnership, alleged fraud, securities law, RICO and
fiduciary duty violations by the General Partners, the Partnership and Shearson
Lehman Brothers Inc. in the formation, sale and operation of the Partnership.
From October 7, 1993 through October 15, 1993, the action entitled Baker, et.
al. vs. The E.F. Hutton Group, et. al. was tried before a jury. After hearing
all of the evidence, on October 15, 1993 the jury rendered a verdict in favor
of the defendants and dismissed all of the plaintiffs' claims. Thereafter, the
plaintiffs filed a notice that they intended to appeal the verdict. However,
on January 26, 1994, the plaintiffs advised the United States Court of Appeals,
fifth circuit, that they were withdrawing their appeal. The costs of defending
the suit was not borne by the Partnership.
At December 31, 1995, DSC is a defendant in a personal injury lawsuit and the
discovery process is ongoing. DSC is vigorously contesting the plaintiff's
claims. The Partnership believes that the outcome of this case will not have
a material impact on the Partnership.
11. Reconciliation of Net Income (Loss) to Taxable Income (Loss)
The net income reported in the financial statements for the year ended December
31, 1995, 1994, and 1993 was less than the net income reported for federal
income tax purposes by approximately $1,706,000 and $1,779,000, and 230,000,
respectively. The differences for each year were primarily the result of
differences between methods of depreciation for book and tax purposes, timing
differences in the recognition of revenues and expenses between book and tax
methods of accounting, differences in the recognition of the Partnership's
share of DSC's income and the treatment of SFN as a separate taxable entity.
12. Deferred Income Taxes (SFN Corporation)
The provision for income taxes results from the Partnership's corporate
consolidated subsidiary, SFN Corporation, which is a separate taxable entity,
and, therefore, has no effect on the limited partners, taxable income or loss
reportable for the year ended December 31, 1995 (Note 5) .
SFN Corporation's total provision for income taxes differs from that which
would have been calculated using the statutory federal income tax rate due
primarily to the net effect of the provision for state income taxes. Deferred
income taxes result from temporary differences in the recognition of revenues
and expenses for tax and financial reporting purposes primarily related to
differences in the methods of amortization of the discount on notes receivable
and methods of depreciation for book and tax purposes.
The provision for income taxes and deferred tax liability at December 31, 1995
and 1994 consists of the following:
Provision for Income Taxes 1995 1994
Federal income taxes $ 140,318 $ 127,700
State income taxes 19,602 17,400
Provision for income taxes $ 159,920 $ 145,100
Deferred Tax Liability
Estimated deferred tax asset $ 888,345 $ 885,581
Estimated deferred tax liability (1,507,665) (1,344,981)
Net deferred tax liability $ (619,320) $ (459,400)
The current net operating loss carryforward, which creates the deferred tax
asset, is expected to be offset by future income.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Equipment Asset Recovery Fund, L.P. and
Consolidated Venture and Subsidiary:
We have audited the accompanying consolidated balance sheets of Equipment Asset
Recovery Fund, L.P. (a Texas limited partnership) and Consolidated Venture and
Subsidiary as of December 31, 1995 and 1994, and the related consolidated
statements of operations, partners' capital (deficit) and cash flows for each
of the three years in the period ended December 31, 1995. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Equipment Asset
Recovery Fund, L.P. and Consolidated Venture and Subsidiary as of December 31,
1995 and 1994, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 9, 1996
Schedule II - Valuation and Qualifying Accounts
For the years ended December 31, 1995, 1994 and 1993
Column A Column B Column C
Balance at Additions Additions
Beginning of Charged to Charged to
Description Year Cost & Expenses Accounts
Year ended December 31, 1995
Allowance for doubtful accounts $ 10,000 $ - $ -
Year ended December 31, 1994
Allowance for doubtful accounts $ 50,000 $ - $ -
Year ended December 31, 1993
Allowance for doubtful accounts $ 45,300 $ 4,700 $ -
Schedule II - Valuation and Qualifying Accounts
For the years ended December 31, 1995, 1994 and 1993
Column A Column D Column E
Balance at
End of
Description Deductions Year
Year ended December 31, 1995
Allowance for doubtful accounts $ - $ 10,000
Year ended December 31, 1994
Allowance for doubtful accounts $ 40,000 $ 10,000
Year ended December 31, 1993
Allowance for doubtful accounts $ - $ 50,000
Report of Independent Public Accountants on Schedule to Consolidated Financial
Statements
To the Partners of
Equipment Asset Recovery Fund, L.P. and
Consolidated Venture Subsidiary:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements included in Equipment Asset Recovery Fund,
L.P. and Consolidated Venture and Subsidiary's annual report to unitholders
incorporated by reference in this Form 10-K, and have issued our report thereon
dated February 9, 1996. Our audit was made for the purpose of forming an
opinion on those consolidated statements taken as a whole. Schedule II is the
responsibility of the Partnership's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states, in all
material respects, the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 9, 1996
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,118,831
<SECURITIES> 000
<RECEIVABLES> 282,837
<ALLOWANCES> (10,000)
<INVENTORY> 000
<CURRENT-ASSETS> 000
<PP&E> 16,436,095
<DEPRECIATION> (9,781,264)
<TOTAL-ASSETS> 8,421,511
<CURRENT-LIABILITIES> 581,799
<BONDS> 000
<COMMON> 000
000
000
<OTHER-SE> 000
<TOTAL-LIABILITY-AND-EQUITY> 8,421,511
<SALES> 000
<TOTAL-REVENUES> 5,564,702
<CGS> 000
<TOTAL-COSTS> 000
<OTHER-EXPENSES> 4,550,534
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> 500,026
<INCOME-PRETAX> 395,492
<INCOME-TAX> 159,920
<INCOME-CONTINUING> 354,222
<DISCONTINUED> 000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> 354,222
<EPS-PRIMARY> 000
<EPS-DILUTED> 000
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