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
For the fiscal year ended December 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-13532
EQUIPMENT ASSET RECOVERY FUND, L.P.
Exact name of registrant as specified in its charter
Texas 11-2661586
State or other jurisdiction of I.R.S. Employer Identification
No.
incorporation or organization
Attn: Andre Anderson
3 World Financial Center, 29th Floor, 10285-2900
New York, New York Zip Code
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, 1997 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, 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
such 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 (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 was the acquisition, ownership and operation
of such assets described above. All of the Partnership's revenues, operating
profit or loss related solely to such industry segment.
c. Narrative Description of Business
The business of the Partnership was 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
such 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 such assets,
which pages are incorporated herein by reference thereto.
Investments
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 joint venture, DSC Venture ("DSC"),
which owned 49 cranes and related equipment and rented 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 were 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.
Investment in Construction Cranes
As of December 31, 1995, the Partnership owned nine cranes outright, a ninety-
nine percent interest in DSC, which owned forty-four cranes and related
equipment, and a controlling interest in SFN Corporation ("SFN"), which owned
four cranes and two pieces of related equipment. During the first nine
months of 1996, DSC and SFN sold a total of 12 cranes and two pieces of
related equipment for a total consideration of approximately $6,650,000.
Liquidating Sale
On November 27, 1996, the Partnership, DSC and SFN executed a sale (the
"Liquidating Sale") of their crane fleets, related equipment and existing
customer crane rental agreements to Western Crane Supply, Inc. ("Western"), a
Kennewick, Washington-based operator of construction cranes and an affiliate
of Neil F. Lampson, Inc., for a total consideration of $15.9 million cash. A
detailed discussion of the Liquidating Sale is contained in Item 2.
"Properties", and Note 1 and Note 6 of the Notes to the Consolidated
Financial Statements contained in the Partnership's Annual Report to
Unitholders for the year ended December 31, 1997, filed as an exhibit under
Item 14. As a result of the Liquidating Sale, the General Partners are in
the process of liquidating the Partnership. SFN was liquidated in January
1997.
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 owned by SFN Corporation (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"). A
discussion of the acquisition of the Fleet is incorporated by reference to
Notes 4, 5 and 6 of the Notes to the Consolidated Financial Statements
contained in the Partnership's Annual Report to Unitholders for the year
ended December 31, 1997, filed as an exhibit under Item 14. Dayton-Scott no
longer holds an ownership interest in DSC (please see the reference in Note 4
to the Consolidated Financial Statements contained in the Partnership's
Annual Report to Unitholders for the year ended December 31, 1997, filed as
an exhibit under Item 14).
The cranes and related equipment owned and managed by DSC were in turn
managed and operated by Dayton-Scott Equipment Company ("DSEC") pursuant to a
management agreement between DSC and DSEC dated January 1, 1990, as last
amended on November 27, 1996. DSEC had managed the cranes since their
acquisition by Dayton-Scott Corporation, a Texas corporation ("Dayton-Scott")
in early 1982 until disposition of the Fleet on November 27, 1996. The
management agreement provided 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 provided 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 $23,875 from the
sale of three cranes during 1994, $40,783 from the sale of three cranes
during 1995 and $558,772 from the sale of the remaining assets in the Fleet
during 1996.
For the years ended December 31, 1996 and 1995, an incentive management fee
of $221,513 and $55,177, respectively, was earned by DSEC. Due to the
Liquidating Sale, no incentive management fee was earned for the year ended
December 31, 1997. Additionally, DSEC was paid severance/termination fees of
$1,000,000 for the year ended December 31, 1996.
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. A discussion of DSC's debt refinancing is incorporated by
reference to Notes 5 and 7 of the Consolidated Financial Statements contained
in the Partnership's Annual Report to Unitholders for the year ended December
31, 1997, filed as an exhibit under Item 14.
Employees
The Partnership has no employees. Certain administrative and managerial
services are provided by the General Partners and certain affiliates.
Item 2. Properties
On November 27, 1996, the Partnership, DSC and SFN executed the Liquidating
Sale. The purchase price was determined by arms-length negotiations. There
is no material relationship between Western and the Partnership or any of its
affiliates, any director or officer of the Partnership, or any associate of
any such director or officer. The Partnership received net proceeds of
$2,772,051 for its crane fleet and received $7,366,940 in distributions from
DSC attributable to its interest in the proceeds from the sale of the DSC
crane fleet.
As a result of the Liquidating Sale, as of December 31, 1997, the
Partnership, DSC and SFN owned no assets other than cash and the General
Partners are in the process of liquidating the Partnership.
Item 3. Legal Proceedings
Incorporated by reference to Note 9 "Litigation" of the Notes to the
Consolidated Financial Statements contained in the Partnership's Annual
Report to Unitholders for the year ended December 31, 1997, filed as an
exhibit under Item 14.
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, 1997, 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, 1997, the
number of Limited Partners was 1,839.
The Partnership did not make cash distributions to Limited Partners during
1996. On March 6, 1997, the Partnership paid a special cash distribution, in
the amount of $300 per Unit, to Unitholders of record as of November 27,
1996. Such distribution represented a substantial portion of the net sales
proceeds and distributions from DSC received by the Partnership from the
Liquidating Sale. The Partnership's remaining cash reserves will first be
used to provide for the Partnership's remaining liabilities and obligations
through dissolution following which any remaining cash will be distributed to
the partners upon liquidation.
Item 6. Selected Financial Data.
The information set forth below should be read in conjunction with Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained herein, and the Notes to the Consolidated Financial
Statements contained in the Partnership's Annual Report to Unitholders for
the year ended December 31, 1997, filed as an exhibit under Item 14.
Financial Highlights
(in thousands except per Unit data)
1997 1996 1995 1994 1993
Rental Revenues $ - $ 4,239 $ 4,562 $ 4,818 $ 4,936
Gain on Sale of Equipment - 16,218 918 516 246
Net Income (Loss) (547) 11,600 354 255 (101)
Net Income (Loss) per Unit (15.87) 324.72 - (.46) (9.88)
Total Assets 1,910 15,584 8,422 10,534 11,953
Loans Payable - - 4,453 7,047 9,101
Cash Distributions per Unit - 300.00(a) - - -
(a)Paid on March 6, 1997 to Unitholders of record as of November 27, 1996.
Reflects 1996 equipment sale activity including the November 1996
Liquidating Sale. Please refer to Note 6 of the Notes to the
Consolidated Financial Statements.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
On November 27, 1996, the Partnership, DSC Venture ("DSC") and SFN
Corporation ("SFN") executed a sale (the "Liquidating Sale") of their crane
fleets, related equipment and existing customer crane rental agreements to
Western Crane Supply, Inc. ("Western"), a Kennewick, Washington-based
operator of construction cranes and an affiliate of Neil F. Lampson, Inc.,
for a total consideration of $15.9 million cash. A discussion of the terms
and conditions of the Liquidating Sale is contained in Note 1 of the Notes to
the Consolidated Financial Statements contained in the Partnership's Annual
Report to Unitholders for the year ended December 31, 1997, filed as an
exhibit under Item 14. As a result of the Liquidating Sale, the General
Partners are in the process of dissolving the Partnership.
On June 4, 1997, a purported class action suit was commenced by a limited
partner who acquired its interest in the Partnership through a tender offer
(the "Plaintiff"), on behalf of, among others, all limited partners of the
Partnership, in the 151st judicial District Court for Harris County, Houston,
Texas against Steven A. Webster, Equipment Management, Inc. (the general
partners of the Partnership), DSC Venture (a Texas joint venture in which the
Partnership owns a 99% interest), Dayton-Scott Equipment Company (the former
manager of the Partnership's construction crane fleet) and SFN Corporation (a
corporation which was owned, in part, by the Partnership, which, in turn,
owned construction cranes which were sold with the balance of the
Partnership's crane fleet in the fourth quarter of 1996) and the Partnership
(a Nominal Defendant) (collectively, the "Defendants"). The petition
purports to bring a suit for breach of fiduciary duty and breach of contract
with respect to the management and sale of the construction crane fleet and
related equipment. The Plaintiff has requested that the court enter a
judgment against the Defendants, jointly and severally, (i) declaring a
proper class action; (ii) awarding unspecified compensatory damages, plus
interest, expenses and attorneys fees and (iii) awarding punitive and
exemplary damages. The Defendants believe the allegations in this complaint
are without merit and intend to defend the action vigorously.
At December 31, 1997, the Partnership and its consolidated venture and
subsidiary's cash and cash equivalents balance totaled $1,909,899 compared to
$15,217,595 at December 31, 1996. The decrease is primarily due to the
payment of cash distributions and to the Liquidating Sale, when operations
ceased. On March 6, 1997, the Partnership paid a special cash distribution,
in the amount of $300 per Unit, to Unitholders of record as of November 27,
1996. As a result, distribution payable decreased from $10,333,264 at
December 31, 1996 to $0 at December 31, 1997. Such distribution represented
a substantial portion of the net sales proceeds and distributions from DSC
received by the Partnership from the Liquidating Sale. The Partnership's
remaining cash reserve will first be used to provide for the Partnership's
remaining liabilities and obligations, which include legal fees from the
purported class action lawsuit, following which any remaining cash will be
distributed to the partners upon liquidation.
Accounts receivable decreased from $173,415 at December 31, 1996 to $0 at
December 31, 1997 due to the receipt of payment for all receivables accrued
prior to the Liquidating Sale.
Other assets decreased from $193,397 at December 31, 1996 to $0 at December
31, 1997 due to the reimbursement during the first quarter of 1997 of closing
costs, held in escrow, from the Liquidating Sale.
Accounts payable and accrued expenses decreased from $1,745,745 at December
31, 1996 to $1,605,246 at December 31, 1997. The change is due to
differences in the timing of payments, primarily the payment of 1996
operating expenses offset by the accrual of liquidating expenses during 1997.
Management fee payable decreased from $1,445,685 at December 31, 1996 to $0
at December 31, 1997 reflecting the payment during the first quarter of 1997
of deferred management fees and property disposition fees.
Income taxes payable decreased from $624,065 at December 31, 1996 to $0 at
December 31, 1997. The decrease is primarily due to the payment of federal
income taxes during the first quarter of 1997.
Results of Operations
1997 vs. 1996
For the year ended December 31, 1997, the Partnership generated a net loss of
$546,682, compared to net income of $11,599,902 for the year ended December
31, 1996. The change is primarily due to a $16,217,725 gain recognized on
the sale of twelve cranes and two pieces of related equipment during the
first nine months of 1996 and Liquidating Sale in November 1996. Excluding
the gains recognized on the sale of equipment, the Partnership generated
losses from operations, before provision for income taxes and minority
interest, of $433,295 and $3,204,434 for 1997 and 1996, respectively. The
decreased loss from operations during 1997 is primarily attributable to the
absence of operating activity, and particularly by a decrease in total
expenses in the 1997 period, as a result of the Liquidating Sale.
Rental income decreased to $0 for the year ended December 31, 1997, compared
to $4,239,442 for the year ended December 31, 1996, reflecting the absence of
rental revenue in 1997 as a result of the Liquidating Sale.
Interest income for the year ended December 31, 1997 totaled $213,557,
compared to $123,965 for the year ended December 31, 1996. The increase is
primarily due to the Partnership maintaining a higher average cash balance
during 1997 as a result of the proceeds from the Liquidating Sale.
As a result of the Liquidating Sale, rental expenses, depreciation and
amortization, interest expense and management fee expense decreased from
their respective balances for the year ended December 31, 1996 to $0 during
the same periods in 1997.
General, selling and administrative expenses decreased to $652,514 for the
year ended December 31, 1997 from $4,118,219 for the year ended December 31,
1996. The decrease is primarily attributable to the wind down of Partnership
operations subsequent to the Liquidating Sale.
1996 vs. 1995
For the year ended December 31, 1996, the Partnership generated net income of
$11,599,902 compared to net income of $354,222 for the year ended December
31, 1995. The increase in net income is primarily due to a $16,217,725 gain
recognized on the sale of twelve cranes and two pieces of related equipment
during the first nine months of 1996 and Liquidating Sale in November 1996.
The gain was partially offset by an increase in general, selling and
administrative expense. Excluding the gains recognized on the sales of
equipment, the Partnership generated losses from operations, before provision
for income taxes and minority interest, of $3,204,434 and $522,943 for 1996
and 1995, respectively.
Rental revenues for the year ended December 31, 1996 decreased compared to
1995 primarily due to the absence of December 1996 rental revenue resulting
from the Liquidating Sale in November 1996.
Interest income for the year ended December 31, 1996 increased compared to
1995 primarily due to the Partnership's higher average cash balance as a
result of the Liquidating Sale.
For the year ended December 31, 1996, general, selling and administrative
expenses totaled $4,118,219 compared to $1,915,608 for 1995. The increase is
mainly due to increased salary expense and consulting fees paid by DSC and
SFN related to the Liquidating Sale in November 1996 and the accrual of
expenses associated with the Partnership's liquidation.
Interest expense for the year ended December 31, 1996 decreased compared to
1995 due to interest being calculated on lower outstanding principal balances
on the Partnership's debt resulting from principal repayments made during
1996 and payment in full of all outstanding debt.
Management fees increased from $233,875 for the year ended December 31, 1995
to $947,609 for the year ended December 31, 1996 due to disposition fees and
incentive management fees related to the Liquidating Sale in November 1996.
Gain on extinguishment of debt was $130,144 for the year ended December 31,
1996. SFN had executed a participation note (the "Participation Note") with
The CIT Group/Equipment Financing, Inc. ("CIT"). Pursuant to this note, CIT
was 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 Note was recorded at 25% of the fair market value of the
cranes or $700,000. The Participation Note was prepaid during 1996 resulting
in a gain on the extinguishment of the debt in the amount of $105,144. SFN
also executed a subordinated promissory note to Security Pacific Business
Credit, Inc. ("SPBC") in the amount of $1,000,000. The Note due to SPBC was
also
prepaid in 1996 resulting in a gain on the extinguishment of the debt in the
amount of $25,000.
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, 46, currently serves as President and Chief Executive
Officer of R & B Falcon Corporation, a publicly-held offshore drilling
contractor, of which he is also a director. Mr. Webster serves as a director
of the following publicly-held companies: Crown Resources Corporation, a
precious metals mining concern; Grey Wolf, Inc., a land drilling contractor;
Geokinetics, Inc., a seismic acquisition company; and Ponder Industries,
Inc., an oil field service company.
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
Jeffrey Carter Director, President and Chief Financial Officer
Moshe Braver Vice President and Director
Jeffrey C. Carter, 52, is a Senior Vice President of Lehman Brothers in the
Diversified Asset Group. Mr. Carter joined Lehman Brothers in September
1988. From 1972 to 1988, Mr. Carter held various positions with Helmsley-
Spear Hospitality Services, Inc. and Stephen W. Brener Associates, Inc.
including Director of Consulting Services at both firms. From 1982 through
1987, Mr. Carter was President of Keystone Hospitality Services, an
independent hotel consulting and brokerage company. Mr. Carter received his
B.S. degree in Hotel Administration from Cornell University and an M.B.A.
degree from Columbia University.
Moshe Braver, 44, 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.
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 Consolidated Financial Statements
contained in the Partnership's Annual Report to Unitholders for the year
ended December 31, 1997, filed as an exhibit under Item 14, 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 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 1997 and 1996, the General Partners earned $0 and
$209,802, respectively, in Management Fees. The General Partners are also
entitled to a disposition fee equal to 2% of the gross proceeds from the sale
of the Partnership's assets. During 1997 and 1996, the General Partners
earned disposition fees totaling $0 and $516,294. 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 improved. 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 Consolidated Financial Statements contained
herein at Item 14 for additional details.)
The Partnership also received $459,000 in management fees from SFN during
1997. In addition, the Partnership received liquidating distributions of
approximately $742,138 from SFN in 1997. (See Note 5 to the Consolidated
Financial Statements contained herein at Item 14 for additional details.)
On November 20, 1996, the Partnership paid EMI deferred management fees of
$1,331,742. Subsequent to December 31, 1996, the Partnership paid San Felipe
Resources (for the benefit of Mr. Webster) $948,197 and EMI $275,974 for
deferred management fees and the accrued disposition fee.
Under the terms of the management contract between the Partnership and the
General Partners, 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. 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. PART
IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form
8-K.
(a) (1) Financial Statements and Notes.
Page
Independent Auditors' Report
Arthur Andersen LLP (1)
Consolidated Balance Sheets - December 31, 1997 and 1996 (1)
Consolidated Statements of Operations - For the
years ended
December 31, 1997, 1996 and 1995 (1)
Consolidated Statements of Partners' Capital (Deficit) -
For the years ended
December 31, 1997, 1996 and 1995 (1)
Consolidated Statements of Cash Flows -
For the years ended
December 31, 1997, 1996 and 1995 (1)
Notes to the Consolidated Financial Statements (1)
(1) Incorporated by reference to the Partnership's
Annual Report to Unitholders for
the year ended December 31, 1997.
(a) (2) Schedules
All 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.
(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
3.1 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).
13.1 Annual Report to Unitholders for the year ended December 31,
1997.
22.1 Subsidiaries of the Registrant: DSC Venture, a Texas joint
venture and SFN Corporation, a Delaware Corporation (previously filed).
27.1 Financial Data Schedule.
28.1 Portions of prospectus of Registrant dated February 2, 1984
(incorporated by reference).
99.1 Asset Purchase & Sale Agreement dated November 20, 1996, and
accompanying exhibits, by and among Neil F. Lampson, Inc. as buyer and
DSC, EARF and SFN as Sellers (incorporated by reference to the
Partnership's Annual Report to Unitholders for the year ended December
31, 1996).
(b) Reports on Form 8-K filed in the fourth quarter of fiscal 1997:
No reports on Form 8-K were filed during the quarter for which this
report was filed.
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 30, 1998
EQUIPMENT ASSET RECOVERY FUND
BY: Equipment Management, Inc.
General Partner
BY: /s/ Jeffrey C. Carter
Name: Jeffrey C. Carter Title:
President, Director and
Chief Financial Officer
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 30, 1998
BY: /s/Jeffrey C. Carter
Name: Jeffrey C. Carter Title:
President, Director and
Chief Financial Officer
Date: March 30, 1998
BY: /s/Moshe Braver
Name: Moshe Braver Title:
Vice President and
Director
EXHIBIT 13.1
Equipment Asset Recovery Fund, L.P.
1997 ANNUAL REPORT
We are pleased to provide for your review the 1997 annual report for Equipment
Asset Recovery Fund, L.P. (the "Partnership"). As you are aware, during
November 1996, the Partnership, in conjunction with DSC Venture ("DSC") and SFN
Corporation ("SFN"), sold its fleet of heavy-lift cranes, related equipment and
existing customer crane rental agreements (the "Sale").
As a result of the Sale, on March 6, 1997, the Partnership paid a special cash
distribution, in the amount of $300 per Unit, to Unitholders of record as of
November 27, 1996. This cash distribution represented a substantial portion of
the net sales proceeds and distributions from DSC received by the Partnership.
The remaining net proceeds from the Sale as well as the Partnership's remaining
cash reserves, if any, will be used to pay a final liquidating distribution,
after providing for the Partnership's liabilities, which include legal fees from
the purported class action lawsuit discussed below.
As discussed in previous correspondence, on June 4, 1997, a purported class
action suit was commenced by a limited partner who acquired interests through a
tender offer, on behalf of, among others, all limited partners of the
Partnership, in the District Court for Harris County, Texas against Steven A.
Webster, Equipment Management Inc., the Partnership (a Nominal Defendant) and
others (collectively, the "Defendants"). The Defendants believe the allegations
in this complaint are without merit and intend to defend the action vigorously.
It is uncertain at this time what effect, if any, the pending class action suit
will have on the amount of the final liquidating distribution or on the timing
of the Partnership's liquidation. Although it is the General Partners'
intention to expedite the liquidation process, the Partnership cannot be
liquidated until this litigation is resolved and the Partnership's liabilities,
if any, ascertained. We will update you on the status of the Partnership's
liquidation process in future reports. In the interim, should you have any
questions regarding the Partnership, you may contact your Financial Consultant
or First Data Investor Services Group. All administrative inquiries, including
change of address, must be submitted in writing to the Partnership's transfer
agent, Service Data Corporation, 2424 South 130th Circle, Omaha, NE 68144-2596.
Both First Data Investor Services Group and Service Data Corporation can be
reached at (800) 223-3464.
Very truly yours,
/s/Jeffrey C. Carter /s/Steven A. Webster
Jeffrey C. Carter Steven A. Webster
President General Partner
Equipment Management Inc.
General Partner
March 30, 1998
Consolidated Balance Sheets At December 31, At December 31,
1997 1996
Assets
Cash and cash equivalents $1,909,899 $15,217,595
Accounts receivable, net of allowance
for doubtful accounts of $10,000 in 1996 _ 173,415
Other assets _ 193,397
Total Assets $1,909,899 $15,584,407
Liabilities and Partners'
Capital (Deficit)
Liabilities:
Accounts payable and accrued expenses $1,605,246 $1,745,745
Management fee payable _ 1,445,685
Distribution payable _ 10,333,264
Income taxes payable _ 624,065
Total Liabilities 1,605,246 14,148,759
Minority interest _ 584,313
Partners' Capital:
General Partners 12,186 34,053
Limited Partners 289,421 808,769
Special Limited Partner 3,046 8,513
Total Partners' Capital 304,653 851,335
Total Liabilities and Partners' Capital $1,909,899 $15,584,407
Consolidated Statements of Partners' Capital (Deficit)
For the years ended December 31, 1997, 1996 and 1995
Special
General Limited Limited
Partners Partners Partner Total
Balance at December 31, 1994 $(769,525) $ _ $ _ $(769,525)
Net Income 354,222 _ _ 354,222
Balance at December 31, 1995 (415,303) _ _ (415,303)
Net Income 862,687 10,625,369 111,846 11,599,902
Distributions (413,331) (9,816,600) (103,333) (10,333,264)
Balance at December 31, 1996 34,053 808,769 8,513 851,335
Net Loss (21,867) (519,348) (5,467) (546,682)
Balance at December 31, 1997 $12,186 $289,421 $ 3,046 $ 304,653
Consolidated Statements of Operations
For the years ended December 31, 1997 1996 1995
Income
Rental $ _ $4,239,442 $4,562,048
Interest 213,557 123,965 58,881
Other 5,662 22,558 25,338
Total Income 219,219 4,385,965 4,646,267
Expenses
Rental _ 1,271,192 1,284,210
General, selling and administrative 652,514 4,118,219 1,915,608
Depreciation and amortization _ 1,207,668 1,235,491
Interest _ 175,855 500,026
Management fee _ 947,609 233,875
Total Expenses 652,514 7,720,543 5,169,210
Loss from Operations (433,295) (3,334,578) (522,943)
Other Income
Gain on sales of equipment _ 16,217,725 918,435
Gain on extinguishment of debt _ 130,144 _
Total Other Income _ 16,347,869 918,435
Net Income (Loss) before
Minority Interest
and Provision for Income Taxes (433,295) 13,013,291 395,492
Minority Interest (492,868) (1,034,312) 118,650
Income (Loss) before Provision for
Income Taxes (926,163) 11,978,979 514,142
Benefit from
(Provision for) income taxes 379,481 (379,077) (159,920)
Net Income (Loss) $(546,682) $11,599,902 $354,222
Net Income (Loss) Allocated:
To the General Partners $(21,867) $862,687 $354,222
To the Limited Partners (519,348) 10,625,369 _
To the Special Limited Partner (5,467) 111,846 _
$(546,682) $11,599,902 $354,222
Per limited partnership unit
(32,722 outstanding) $ (15.87) $ 324.72 $ _
Consolidated Statements of Cash Flows
For the years ended December 31, 1997 1996 1995
Cash Flows From Operating Activities
Net Income (Loss) $(546,682) $11,599,902 $354,222
Adjustments to reconcile
net income to net cash
provided by (used for)
operating activities:
Gain on sales of cranes _ (16,217,725) (918,435)
Gain on extinguishment of debt _ (130,144) _
Minority interest 46,868 (680,688) (118,650)
Depreciation and amortization _ 1,207,668 1,235,491
Increase (decrease) in
cash arising from changes
in operating assets
and liabilities:
Accounts receivable, net 173,415 99,422 (30,169)
Other assets 193,397 (140,273) 137,924
Accounts payable and
accrued expenses (140,499) 1,282,615 (183,832)
Management fee payable (1,445,685) (444,133) 173,875
Accrued interest _ _ (50,012)
Due to affiliates _ (147,000) 147,000
Income taxes payable (624,065) 4,745 159,920
Net cash provided by
(used for) operating activities (2,343,251) (3,565,611) 907,334
Cash Flows From Investing Activities
Proceeds from sales of cranes,
vehicles and equipment _ 21,986,776 1,590,552
Net cash provided by
investing activities _ 21,986,776 1,590,552
Cash Flows From
Financing Activities
Proceeds from long-term debt _ 100,000 100,000
Principal payments on
long-term debt _ (4,422,401) (2,694,790)
Distributions paid to
minority interest (631,181) _ _
Distributions paid to partners (10,333,264) _ _
Net cash used for
financing activities (10,964,445) (4,322,401) (2,594,790)
Net increase (decrease)
in cash and cash equivalents (13,307,696) 14,098,764 (96,904)
Cash and cash equivalents,
beginning of period 15,217,595 1,118,831 1,215,735
Cash and cash equivalents,
end of period $1,909,899 $15,217,595 $ 1,118,831
Supplemental Disclosure of
Cash Flow Information
Cash paid during
the period for interest $ _ $175,855 $550,038
Cash paid during
the period for taxes $615,520 $376,998 $ _
Notes to the Consolidated Financial Statements
December 31, 1997, 1996 and 1995
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.
Equipment Management, Inc. ("EMI"), formerly Hutton Equipment Management, Inc.,
an affiliate 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, 1997, the Partnership consisted of a 99%-owned consolidated
venture, DSC Venture ("DSC"). SFN Corporation ("SFN"), in which the Partnership
had held a 51% controlling interest, liquidated in January 1997.
On November 27, 1996, the Partnership, DSC and SFN completed a bulk sale of
their remaining equipment assets for $15,900,000. The Partnership received net
proceeds of $2,772,051 for its crane fleet and $7,366,940 in a distribution from
its interests in DSC. The Partnership also received $1,938,000 in management
fees from SFN during 1996 and $459,000 in January 1997. In addition, the
Partnership received initial liquidating distributions of approximately $552,138
from SFN in February 1997 and received a further distribution of $204,000 in
September 1997. The Partnership expects to receive a final liquidating
distribution from its interest in SFN pending resolution of litigation
outstanding (see Note 9). The amount of such distribution will be dependent on
any costs relating to the litigation incurred by SFN. The General Partners
declared a special cash distribution to unitholders of record as of November 27,
1996 in the amount of $10,333,264 ($300 per limited partnership unit). The
remaining sales proceeds, with the Partnership's cash, will first be used to
provide for all liabilities and obligations of the Partnership through
liquidation (including expenses associated with the pending litigation as
discussed in Note 9), following which any remaining amounts will be distributed
to the partners upon dissolution of the Partnership.
2. Significant Accounting Policies
Basis of Accounting The accompanying consolidated financial statements have been
prepared on the accrual basis of accounting in accordance with generally
accepted accounting principles. Revenues were recognized as earned and expenses
were recorded as obligations were incurred.
Construction Cranes Investments in construction cranes included the initial
purchase price and related acquisition costs. Depreciation was computed using
the straight-line method based on the estimated useful lives of the assets,
which were generally between 10 to 20 years.
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.
Organization and Loan Closing Costs Organization costs were amortized on a
straight-line basis over five years. Loan closing costs were amortized over the
life of the related loan.
Rental Revenues Leases of construction cranes were generally on a month-to-month
basis and were accounted for as operating leases.
Income Taxes No provision for income taxes has been made in the consolidated
financial statements for the Partnership and DSC since these taxes are the
responsibility of the individual partners or co-ventures rather than that of
the Partnership or DSC. However, an income tax provision or benefit has been
included in the accompanying consolidated financial statements related to the
Partnership's corporate consolidated subsidiary, SFN, 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 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.
The gains on the sales of cranes were first allocated proportionately to the
Partners who had negative capital accounts to restore these accounts to zero and
then in accordance with the aforementioned percentages.
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 an
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 and 1996 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%) (the former
manager of the Partnership's construction crane fleet). DSEC subsequently sold
its 1% interest to DRA Management, Inc., an affiliate of EMI. 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. SFN
was liquidated on January 30, 1997.
Six individuals, who were affiliated with DSEC, which previously managed the
Equipment (defined below), the cranes owned by DSC, and the cranes owned by the
Partnership, owned 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.
The holders of the Class A Redeemable Preferred Stock were entitled to receive a
single preferred dividend of $275,000 in the aggregate, plus a 10% cumulative
return until such dividend was paid, prior to any distributions being made to
the other stockholders of SFN. The Class B Redeemable Preferred Stock received
by the Partnership entitled 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 were paid to the holders of the Class
A and Class B Redeemable Preferred Stock, all further distributions were 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. All such dividends
and distributions were paid during 1997.
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.
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.
On November 27, 1996, the Partnership, DSC and SFN completed a bulk sale of
their remaining equipment assets. The sales proceeds were used to reduce and
eventually extinguish the Partnership's debt (see Note 1).
The following is a summary of the equipment sold for the years ended December
31, 1996 and 1995:
Number Net Net Gain
of Cranes Selling Price Book Value On Sale
1996
EARF 9 $3,090,478 $223,359 $2,867,119
DSC 51 17,391,292 4,879,473 12,511,819
SFN 6 1,486,314 650,132 836,182
DSC Vehicles _ 18,692 16,087 2,605
Total for 1996 66 $21,986,776 $5,769,051 $16,217,725
1995
DSC 2 $931,125 $347,035 $584,090
SFN 1 659,427 325,082 334,345
Total for 1995 3 $1,590,552 $672,117 $918,435
DSEC managed and operated the DSC cranes, SFN cranes and the Partnership cranes
(collectively, the "Fleet") pursuant to a management agreement that reimbursed
all expenses related to the operation of the Fleet, including the salaries of
DSEC's employees. The agreement also provided for incentive compensation if
certain revenue goals were attained and commission payments if cranes were sold.
The following is a summary of the sales commissions, incentive management fee
and severance/termination fee paid to DSEC for the years ended December 31,
1997, 1996, and 1995:
Paid Paid Paid
During During During
1997 1996 1995
Incentive Management Fees $221,513 $ _ $55,177
Sales Commissions _ 558,772 40,783
Severance/Termination Fees _ 1,000,000 _
$221,513 $1,558,772 $95,960
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 notes were nonrecourse to DSC and the Partnership and were
collateralized by a first lien on DSC assets. This note was paid in full in
July 1996 due to prepayments made according to the terms of the note.
The $12,000,000 note accrued interest at Bank America's prime lending rate plus
1/2%, subject to a floor of 8% and a cap tied to the revenues of DSC. This note
was paid in full in June 1996 due to prepayments made according to the terms of
the note.
The $3,000,000 note accrued interest at a fixed rate of 7.5% per annum,
compounded annually, and payments on such note were deferred until the $12
million note was paid in full. This note was paid in full on October 4, 1996
due to prepayments made according to the terms of the note.
The $200,000 note was noninterest-bearing, and was due in full 30 days after the
last payment was made on the $3,000,000 note. This note was paid in full in
1996.
Additionally, in consideration for the restructuring of its debt in 1988, DSC
was required to pay additional interest under a Net Profits Agreement, in the
amount of 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, 1996, and 1995, SFN earned $2,779,189, and $34,984,
respectively, under this agreement.
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 were 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 originally matured on July 31, 2000 and accrued 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, net proceeds
from the sales of any DSC cranes or SFN cranes were applied to the Term Loan
and/or Revolving Loan. This note was paid in full in August 1996 due to
prepayments made according to the terms of the note.
The $1,000,000 Revolving Loan was due and payable on March 31, 2001. Interest
accrued at the Prime Rate plus 1.625% per annum and was 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 balance outstanding on the Revolving Loan was paid in
full in September 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 were
to be $500,000. Pursuant to this note, CIT was 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 FMV 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. On July 25, 1996 SFN paid $594,856 to CIT in
full satisfaction of this note and recorded a gain on extinguishment of debt of
$105,144.
SFN also executed a subordinated promissory note to SPBC in the amount of
$1,000,000. Interest accrued at the rate of 7.5% per annum and was payable on a
monthly basis beginning June 5, 1992. Principal installments were due annually
beginning May 5, 1993 and ending on May 5, 1999. On August 30, 1996 SFN paid
$276,962 to SPBC in full satisfaction of this note and recorded a gain on
extinguishment of debt of $25,000.
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, 1997, 1996 and 1995:
Paid Paid Paid
During During During
1997 1996 1995
Administrative salaries
and expenses $58,192 $57,537 $103,583
Management fees 1,224,172 1,391,742 60,000
$1,282,364 $1,449,279 $163,583
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
improved. On November 20, 1996, the Partnership paid deferred management fees
totaling $1,331,742 to EMI. On February 3, 1997, the Partnership paid to San
Felipe Resources (for the benefit of Mr. Webster) $948,197 and EMI $275,974.
9. Litigation
On June 4, 1997, a purported class action suit was commenced by a limited
partner who acquired his interest in the Partnership through a tender offer (the
"Plaintiff"), on behalf of, among others, all limited partners of the
Partnership, in the 151st judicial District Court for Harris County, Houston,
Texas against Steven A. Webster, EMI, DSC, DSEC, SFN and the Partnership (a
nominal defendant) (collectively, the "Defendants"). The petition purports to
bring a suit for breach of fiduciary duty and breach of contract with respect to
the management and sale of the construction crane fleet and related equipment.
The Plaintiff has requested that the court enter a judgment against the
Defendants, jointly and severally, (i) declaring a proper class action; (ii)
awarding unspecified compensatory damages, plus interest, expenses and attorneys
fees and (iii) awarding punitive and exemplary damages. The Defendants believe
the allegations in this complaint are without merit and
intend to defend the action vigorously.
10. Reconciliation of Net Income to Taxable Income
The net income reported in the financial statements for the year ended December
31, 1997, 1996 and 1995 was less than the net income reported for federal income
tax purposes by approximately $2,887,000, $1,961,000 and $1,706,000,
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.
11. Current Income Taxes (SFN Corporation)
The provision or benefit 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, 1997 (see Note 5) .
SFN Corporation's total benefit for income taxes for 1997 differs from that
which would have been calculated using the statutory federal income tax rate due
primarily to recognition of federal income tax benefits carried back to the
prior year and reductions in tax reserves no longer required due to the
liquidation of SFN in 1997. SFN's total provision for income taxes for 1996
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. The current tax liability as of December 31, 1996 resulted 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 current tax liability at December 31, 1997
and 1996 consists of the following:
Benefit (provision) for Income Taxes 1997 1996
Federal income taxes $369,931 $(345,347)
State taxes 9,550 (33,730)
Benefit (provision) for income taxes $379,481 $(379,077)
Current Tax Liability $ _ $(624,065)
Report of Independent 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, 1997 and 1996, 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, 1997.
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 accounting
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.
As described in Note 1 to the financial statements, the Partnership sold all
of its equipment assets on November 27, 1996. The Partnership anticipates
settling and liquidating its remaining assets and liabilities and dissolving
the Partnership in 1998. The balance sheets presented herein represent the
general partners' estimated net realizable value of all assets and liabilities
as of December 31, 1997 and 1996 and the statements of operations and cash
flows reflect the activities of the Partnership for the year ended December
31, 1997, including the operations related to the equipment assets through
November 26, 1996.
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, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 9, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Dec-31-1997
<CASH> 1,909,899
<SECURITIES> 000
<RECEIVABLES> 000
<ALLOWANCES> 000
<INVENTORY> 000
<CURRENT-ASSETS> 1,909,899
<PP&E> 000
<DEPRECIATION> 000
<TOTAL-ASSETS> 1,909,899
<CURRENT-LIABILITIES> 1,605,246
<BONDS> 000
<COMMON> 000
000
000
<OTHER-SE> 304,653
<TOTAL-LIABILITY-AND-EQUITY> 1,909,899
<SALES> 000
<TOTAL-REVENUES> 219,219
<CGS> 000
<TOTAL-COSTS> 000
<OTHER-EXPENSES> 652,514
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> 000
<INCOME-PRETAX> (926,163)
<INCOME-TAX> (379,481)
<INCOME-CONTINUING> (546,682)
<DISCONTINUED> 000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> (546,682)
<EPS-PRIMARY> (15.87)
<EPS-DILUTED> (15.87)
</TABLE>
