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, 1998
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
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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,
New York, New York 10285-2900
- -------------------------------------- ----------
Address of principal executive offices Zip code
Registrant's telephone number, including area code: (212) 526-3183
--------------
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, 1998 is
incorporated by reference in PARTS I, II, III and IV of this report.
<PAGE>
2
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 participated,
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.
<PAGE>
3
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, 1998, 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. However, the Partnership will not be dissolved prior to the
resolution of the pending class action suit. A detailed discussion of this
litigation is provided in 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, 1998, filed as an exhibit under Item 14. herein.
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, 1998, 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,
1998, filed as an exhibit under Item 14).
The cranes and related equipment owned 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 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 $558,772 in sales commission from the sale of the remaining assets in the
Fleet in 1996. For the year ended December 31, 1996, an incentive management fee
of $221,513 was earned by DSEC. Due to the Liquidating Sale, no incentive
management fee was earned for the years ended December 31, 1997 and 1998.
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, 1998, filed as an exhibit under
Item 14.
<PAGE>
4
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, 1998, the Partnership,
DSC and SFN owned no assets other than cash and the General Partners are in the
process of dissolving the Partnership. However, the Partnership will not be
dissolved prior to the resolution of the pending class action suit. A detailed
discussion of this litigation is provided in 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, 1998, filed as an exhibit
under Item 14. herein.
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, 1998, 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, 1998, 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, 1998, the number
of Limited Partners was 1,841.
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.
There were no distributions in 1997 or 1998. 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, 1998, filed as an exhibit under Item 14.
<PAGE>
5
<TABLE>
Financial Highlights
(in thousands except per Unit data)
<CAPTION>
1998 1997 1996 1995 1994
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rental Revenues $ -- $ -- $ 4,239 $ 4,562 $ 4,818
Gain on Sale of Equipment -- -- 16,218 918 516
Net Income (Loss) (285) (547) 11,600 354 255
Net Income (Loss) per Unit (8.28) (15.87) 324.72 -- (.46)
Total Assets 1,586 1,910 15,584 8,422 10,534
Loans Payable -- -- -- 4,453 7,047
Cash Distributions per Unit -- -- 300.00(a) -- --
---------------------------------------------------------------------------------------
<FN>
(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.
</FN>
</TABLE>
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, 1998, 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. However, the Partnership will not be dissolved prior to the
resolution of the pending class action suit. A detailed discussion of this
litigation is provided in Note 9 of the Notes to the Consolidated Financial
Statements contained in the Partnership's Annual Report to Unitholders for the
year ended December 31, 1998, filed as an exhibit under Item 14 herein.
At December 31, 1998, the Partnership's cash and cash equivalents balance
totaled $1,585,699 compared to $1,909,899 at December 31, 1997. The decrease
primarily is due to the payment of legal expenses associated with the
Partnership's pending class action suit, continuing general and administrative
expenses for 1998 and the absence of cash flow from operations due to the
Liquidating Sale. The Partnership's remaining cash reserves will first be used
to provide for the Partnership's remaining liabilities and obligations,
including any associated with the litigation, following which any remaining cash
will be distributed to the partners upon liquidation.
Accounts payable and accrued expenses decreased from $1,605,246 at December 31,
1997 to $1,566,319 at December 31, 1998. The change is due to differences in the
timing of payments, primarily for legal and other professional fees.
Market Risk
- -----------
The Partnership's principal market risk exposure is interest rate risk. As a
result of the Liquidating Sale, the Partnership no longer has any equipment or
debt, and its sole asset consists of cash and cash equivalents. Accordingly, the
Partnership's interest risk exposure is limited to interest earned on the
Partnership's cash and cash equivalents which are invested at short-term rates.
Such risk is not considered material to the Partnership's operations.
<PAGE>
6
Year 2000 Initiatives
- ---------------------
The Year 2000 compliance issue concerns the ability of computerized information
systems to accurately calculate, store or use a date after 1999. This could
result in computer system failures or miscalculations causing disruptions of
operations. The Year 2000 issue affects almost all companies and organizations.
As noted above, all of the Partnership's properties have been sold and it is
anticipated that the Partnership will dissolve prior to December 31, 1999. In
the event that the Partnership is not liquidated prior to December 31, 1999,
potential Year 2000 issues relate primarily to outside vendors which provide the
Partnership's administrative services including accounting, tax preparation and
transfer agent services. Such services are heavily reliant on computer systems,
software products and equipment which may or may not be Year 2000 compliant. It
is anticipated that the cost of vendor compliance with Year 2000 problems will
be borne primarily by vendors. Although it is not possible at present to give an
estimate of the cost of this work to the Partnership, the General Partner does
not expect such costs to have a material adverse impact on the Partnership's
long term results of operations.
Results of Operations
1998 vs. 1997
- -------------
For the year ended December 31, 1998, the Partnership generated a net loss of
$285,273, compared to a net loss of $546,682 in fiscal 1997. The lower net loss
in fiscal 1998 is primarily due to the minority interest expense of $492,868 for
the 1997 period. Excluding the benefit for income taxes and minority interest,
the Partnership generated losses from operations of $285,273 for the year ended
December 31, 1998, and $433,295 in fiscal 1997. The decreased loss from
operations in fiscal 1998 is attributable to a decrease in general, selling and
administrative expenses in 1998, as a result of the Liquidating Sale.
Interest income for the year ended December 31, 1998 was $149,352, compared to
$213,557 in fiscal 1997. The decrease is primarily due to the Partnership
maintaining a lower average cash balance in 1998, due to the payment of a
special cash distribution to partners in March 1997 representing the majority of
the proceeds from the Liquidating Sale, and the pending termination of the
Partnership. Other income was $-0- for the year ended December 31, 1998 compared
to $5,662 in fiscal 1997, down due to management fees no longer being earned
during 1998.
General and administrative expenses for the year ended December 31, 1998 totaled
$434,625, compared to $652,514 in fiscal 1997. The decrease is primarily due to
the absence of operating expenses during 1998 as a result of the Liquidating
Sale, partially offset by an increase in legal expenses relating to the
litigation, and other professional fees.
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.
<PAGE>
7
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.
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. 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, 47, 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
---- ------
Rocco F. Andriola Director
Michael T. Marron Director, President and Chief Financial Officer
William T. McDermott Vice President
Rocco F. Andriola, 40, is a Managing Director of Lehman Brothers in its
Diversified Asset Group and has held such position since October 1996. Since
joining Lehman in 1986, Mr. Andriola has been involved in a wide range of
restructuring and asset management activities involving real estate and other
direct investment transactions. From June 1991 through September 1996, Mr.
Andriola held the position of Senior Vice President in Lehman's Diversified
Asset Group. From June 1989 through May 1991, Mr. Andriola held the position of
First Vice President in Lehman's Capital Preservation and Restructuring Group.
From 1986 to 1989, Mr. Andriola served as a Vice President in the Corporate
Transactions Group of Shearson Lehman Brothers' office of the general counsel.
Prior to joining Lehman, Mr. Andriola practiced corporate and securities law at
Donovan Leisure Newton & Irvine in New York. Mr. Andriola received a B.A. from
Fordham University, a J.D. from New York University School of Law, and an LL.M
in Corporate Law from New York University's Graduate School of Law.
<PAGE>
8
Michael T. Marron, 35, is a Vice President of Lehman Brothers and has been a
member of the Diversified Asset Group since 1990 where he has actively managed
and restructured a diverse portfolio of syndicated limited partnerships. Prior
to joining Lehman Brothers, Mr. Marron was associated with Peat Marwick Mitchell
& Co. serving in both its audit and tax divisions from 1985 to 1989. Mr. Marron
received his B.S. degree from the State University of New York at Albany and an
M.B.A. from Columbia University.
William T. McDermott, 35, is a Vice President of Lehman Brothers and has been a
member of the Diversified Asset Group since 1998. Mr. McDermott joined Lehman
Brothers in 1993 and held various positions within the firm before joining the
Diversified Asset Group. Prior to joining Lehman Brothers, Mr. McDermott was a
financial analyst with Cantor Fitzgerald Inc. from 1991 - 1993 and was
associated with Arthur Andersen & Co. serving in both its audit and bankruptcy
consulting divisions from 1985 to 1991. Mr. McDermott received his B.B.A. degree
from the University of Notre Dame and is a Certified Public Accountant.
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, 1998,
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. 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
1998 and 1997, the General Partners earned no Management Fees or disposition
fees. 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.
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.
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.)
<PAGE>
9
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, 1998 and 1997......... (1)
Consolidated Statements of Operations - For the years ended
December 31, 1998, 1997 and 1996................................. (1)
Consolidated Statements of Partners' Capital (Deficit) -
For the years ended December 31, 1998, 1997 and 1996............. (1)
Consolidated Statements of Cash Flows - For the years ended
December 31, 1998, 1997 and 1996................................. (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, 1998.
(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).
<PAGE>
10
Exhibit
No. Description
- ------- -----------
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, 1998.
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 1998:
No reports on Form 8-K were filed during the quarter for which this
report was filed.
<PAGE>
11
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.
EQUIPMENT ASSET RECOVERY FUND
BY: Equipment Management, Inc.
General Partner
Dated: March 26, 1999
BY: /s/ Michael T. Marron
---------------------
Name: Michael T. Marron
Title: President, Director and
Chief Financial Officer
BY: /s/Steven A. Webster
--------------------
Name: Steven A. Webster
Title: General Partner
<PAGE>
12
SIGNATURES
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 26, 1999
BY: /s/Rocco F. Andriola
--------------------
Name: Rocco F. Andriola
Title: Director
Date: March 26, 1999
BY: /s/Michael T. Marron
--------------------
Name: Michael T. Marron
Title: President, Director and
Chief Financial Officer
Date: March 26, 1999
BY: /s/William T. McDermott
-----------------------
Name: William T. McDermott
Title: Vice President
EXHIBIT 13.1
Equipment Asset Recovery Fund, L.P.
1998 ANNUAL REPORT
<PAGE>
1
- --------------------------------------------------------------------------------
MESSAGE TO INVESTORS
- --------------------------------------------------------------------------------
Presented for your review is the 1998 Annual Report for Equipment Asset Recovery
Fund, L.P. (the "Partnership"), which includes the Partnership's audited
consolidated financial statements for the year ended December 31, 1998.
As you are aware, in November 1996 the Partnership, in conjunction with the DSC
Venture and SFN Corporation, sold its fleet of heavy-lift cranes, related
equipment and existing customer crane rental agreements. While it is the General
Partners' intention to expedite the liquidation process, the Partnership cannot
be liquidated until the litigation discussed below is resolved, and any
potential Partnership liabilities are determined.
As discussed in previous correspondence, on June 4, 1997, a purported class
action suit was commenced in the District Court for Harris County, Texas by a
limited partner who acquired interests through a tender offer, on behalf of,
among others, all limited partners of the Partnership against Steven A. Webster,
Equipment Management Inc., the Partnership (a nominal defendant) and others
(collectively, the "Defendants"). The suit made a number of allegations. The
Defendants filed a Motion for Summary Judgment and partial summary judgment was
granted by the Court on March 31, 1998. On August 24, 1998, the Court heard a
Motion for Summary Judgment (the "Motion") filed by a co-defendant. Although
that Motion was taken under consideration, the judge recused herself before
ruling. The case was then reassigned to another judge, and a hearing was held on
the Motion on March 8, 1999 with the Court granting the Motion in part and
overruling it in part. The Court has now set a scheduling conference for May 5,
1999, at which time all remaining deadlines will be set, including a trial date.
The Defendants believe the remaining allegations in this complaint are without
merit and intend to defend the action vigorously.
It is uncertain at this time what impact the pending class action suit will have
on the amount of the final liquidating distribution to investors or on the
timing of the Partnership's liquidation. We will update you on the status of the
litigation and 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 Partnership Investor Services. All requests
for a change of address or transfer should be submitted in writing to the
Partnership's administrative agent at P.O. Box 7090, Troy, MI 48007-7090.
Partnership Investor Services can be reached at (617) 342-4225, and the
Partnership's administrative agent can be reached at (248) 637-7900.
Very truly yours,
Michael T. Marron Steven A. Webster
President General Partner
Equipment Management Inc.
General Partner
March 26, 1999
<PAGE>
2
EQUIPMENT ASSET RECOVERY FUND, L.P.
AND CONSOLIDATED VENTURE AND SUBSIDIARY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
At December 31, At December 31,
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $1,585,699 $1,909,899
- -------------------------------------------------------------------------------
Total Assets $1,585,699 $1,909,899
===============================================================================
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses $1,566,319 $1,605,246
----------------------------
Total Liabilities 1,566,319 1,605,246
----------------------------
Commitments and Contingencies
Partners' Capital:
General Partners 775 12,186
Limited Partners 18,412 289,421
Special Limited Partner 193 3,046
----------------------------
Total Partners' Capital 19,380 304,653
- -------------------------------------------------------------------------------
Total Liabilities and Partners' Capital $ 1,585,699 $1,909,899
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
For the years ended December 31, 1998, 1997 and 1996
Special
General Limited Limited
Partners Partners Partner Total
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
Net Loss (11,411) (271,009) (2,853) (285,273)
- -------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 775 $ 18,412 $ 193 $ 19,380
=====================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
3
EQUIPMENT ASSET RECOVERY FUND, L.P.
AND CONSOLIDATED VENTURE AND SUBSIDIARY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Rental $ -- $ -- $ 4,239,442
Interest 149,352 213,557 123,965
Other -- 5,662 22,558
-------------------------------------
Total Income 149,352 219,219 4,385,965
- ------------------------------------------------------------------------------------
Expenses
Rental -- -- 1,271,192
General, selling and administrative 434,625 652,514 4,118,219
Depreciation and amortization -- -- 1,207,668
Interest -- -- 175,855
Management fee -- -- 947,609
-------------------------------------
Total Expenses 434,625 652,514 7,720,543
-------------------------------------
Loss from Operations (285,273) (433,295) (3,334,578)
- ------------------------------------------------------------------------------------
Other Income
Gain on sales of equipment -- -- 16,217,725
Gain on extinguishment of debt -- -- 130,144
-------------------------------------
Total Other Income -- -- 16,347,869
- ------------------------------------------------------------------------------------
Net Income (Loss) before Minority Interest
and Provision for Income Taxes -- (433,295) 13,013,291
Minority Interest -- (492,868) (1,034,312)
-------------------------------------
Income (Loss) before Provision for
Income Taxes (285,273) (926,163) 11,978,979
Benefit from (Provision for) income taxes -- 379,481 (379,077)
- ------------------------------------------------------------------------------------
Net Income (Loss) $(285,273) $(546,682) $11,599,902
====================================================================================
Net Income (Loss) Allocated:
To the General Partners $ (11,411) $ (21,867) $ 862,687
To the Limited Partners (271,009) (519,348) 10,625,369
To the Special Limited Partner (2,853) (5,467) 111,846
- ------------------------------------------------------------------------------------
$(285,273) $(546,682) $11,599,902
====================================================================================
Per limited partnership unit
(32,722 outstanding) $(8.28) $(15.87) $324.72
- ------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
4
EQUIPMENT ASSET RECOVERY FUND, L.P.
AND CONSOLIDATED VENTURE AND SUBSIDIARY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Income (Loss) $ (285,273) $ (546,682) $ 11,599,902
Adjustments to reconcile net income to
net cash used for operating activities:
Gain on sales of cranes -- -- (16,217,725)
Gain on extinguishment of debt -- -- (130,144)
Minority interest -- 46,868 (680,688)
Depreciation and amortization -- -- 1,207,668
Increase (decrease) in cash arising
from changes in operating assets and
liabilities:
Accounts receivable, net -- 173,415 99,422
Other assets -- 193,397 (140,273)
Accounts payable and accrued expenses (38,927) (140,499) 1,282,615
Management fee payable -- (1,445,685) (444,133)
Due to affiliates -- -- (147,000)
Income taxes payable -- (624,065) 4,745
------------------------------------------
Net cash used for operating activities (324,200) (2,343,251) (3,565,611)
- ---------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Proceeds from sales of cranes, vehicles
and equipment -- -- 21,986,776
------------------------------------------
Net cash provided by investing activities -- -- 21,986,776
- ---------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Proceeds from long-term debt -- -- 100,000
Principal payments on long-term debt -- -- (4,422,401)
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)
- ---------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents (324,200) (13,307,696) 14,098,764
Cash and cash equivalents, beginning of period 1,909,899 15,217,595 1,118,831
------------------------------------------
Cash and cash equivalents, end of period $1,585,699 $ 1,909,899 $ 15,217,595
=============================================================================================
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest $ -- $ -- $ 175,855
Cash paid during the period for taxes $ -- $ 615,520 $ 376,998
- ---------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
5
EQUIPMENT ASSET RECOVERY FUND, L.P.
AND CONSOLIDATED VENTURE AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
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, 1998, 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.
<PAGE>
6
EQUIPMENT ASSET RECOVERY FUND, L.P.
AND CONSOLIDATED VENTURE AND SUBSIDIARY
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-venturers 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.
<PAGE>
7
EQUIPMENT ASSET RECOVERY FUND, L.P.
AND CONSOLIDATED VENTURE AND SUBSIDIARY
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 ("SPBC Debt"). 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).
<PAGE>
8
EQUIPMENT ASSET RECOVERY FUND, L.P.
AND CONSOLIDATED VENTURE AND SUBSIDIARY
The following is a summary of the equipment sold for the year ended December 31,
1996:
<TABLE>
<CAPTION>
Number Net Net Gain
of Cranes Selling Price Book Value On Sale
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 66 $21,986,776 $5,769,051 $16,217,725
=============================================
</TABLE>
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,
1998, 1997 and 1996:
<TABLE>
<CAPTION>
Paid Paid Paid
During During During
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Incentive Management Fees $ -- $221,513 $ --
Sales Commissions -- -- 558,772
Severance/Termination Fees -- -- 1,000,000
- -------------------------------------------------------------------------------
$ -- $221,513 $1,558,772
================================
</TABLE>
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
amounts 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.
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.
<PAGE>
9
EQUIPMENT ASSET RECOVERY FUND, L.P.
AND CONSOLIDATED VENTURE AND SUBSIDIARY
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 CIT 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,
constituted a part of the principal and bore 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 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. 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, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Paid Paid Paid
During During During
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Administrative salaries
and expenses $ -- $ 58,192 $ 57,537
Management fees -- 1,224,172 1,391,742
- -------------------------------------------------------------------------------
$ -- $1,282,364 $1,449,279
================================
</TABLE>
As of June 1986, the General Partners had 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 $275,975.
<PAGE>
10
EQUIPMENT ASSET RECOVERY FUND, L.P.
AND CONSOLIDATED VENTURE AND SUBSIDIARY
9. Litigation
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, 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 filed a
Motion for Summary Judgment and a Partial Summary Judgment was granted by the
Court on March 31, 1998. On August 24, 1998, the Court heard a Motion for
Summary Judgment filed by a co-defendant. That Motion was taken under
consideration, but the judge recused herself before ruling. The case was then
reassigned to another judge and a hearing was held on the Motion on March 8,
1999. The Court granted the Motion in part and overruled it in part. The Court
has set a scheduling conference for May 5, 1999, at which time all remaining
deadlines will be set, including a trial date. The Defendants believe the
remaining 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 or loss reported in the financial statements for the years ended
December 31, 1998, 1997 and 1996 was less than the net income reported for
federal income tax purposes by approximately $62,000, $2,887,000 and $1,961,000,
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. Income Taxes (SFN Corporation)
The provision or benefit for income taxes resulted from the Partnership's
corporate consolidated subsidiary, SFN Corporation, which was a separate taxable
entity, and, therefore, had no effect on the limited partners' taxable income or
loss reportable for the years ended December 31, 1997 and 1996. SFN liquidated
in 1997 and therefore, no provision or benefit for income taxes has been
recorded for 1998 (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 benefit or provision for income taxes and current tax liability at December
31, 1997 and 1996 was the following:
<TABLE>
<CAPTION>
Benefit (provision) for Income Taxes 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
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)
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
11
- -------------------------------------------------------------------------------
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, 1998 and 1997, 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, 1998. 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.
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 1999. The balance sheets presented herein represent the general
partners' estimated net realizable value of all assets and liabilities as of
December 31, 1998 and 1997 and the statements of operations and cash flows
reflect the activities of the Partnership for each of the three years in the
period ended December 31, 1998, 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,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 1,585,699
<SECURITIES> 000
<RECEIVABLES> 000
<ALLOWANCES> 000
<INVENTORY> 000
<CURRENT-ASSETS> 1,585,699
<PP&E> 000
<DEPRECIATION> 000
<TOTAL-ASSETS> 1,585,699
<CURRENT-LIABILITIES> 1,566,319
<BONDS> 000
000
000
<COMMON> 000
<OTHER-SE> 19,380
<TOTAL-LIABILITY-AND-EQUITY> 1,585,699
<SALES> 000
<TOTAL-REVENUES> 149,352
<CGS> 000
<TOTAL-COSTS> 000
<OTHER-EXPENSES> 434,625
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> 000
<INCOME-PRETAX> (285,273)
<INCOME-TAX> 000
<INCOME-CONTINUING> (285,273)
<DISCONTINUED> 000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> (285,273)
<EPS-PRIMARY> (8.28)
<EPS-DILUTED> (8.28)
</TABLE>
