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. Please see "Item 2.
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.
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. The Partnership expects to receive a final liquidating distribution, in the amount of approximately $190,000, from its interest in SFN by the end of 1997.
As a result of the Liquidating Sale, as of December 31, 1996, 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.
Item 3. Legal Proceedings
The Registrant is not a party to any material pending legal proceedings.
Item 4.
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, 1996, through the solicitation of proxies or otherwise.
PART II
Item 5.
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, 1996, the number of Limited Partners was 1,856.
The Partnership did not make cash distributions to Limited Partners during 1995 and 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 reserve 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.
Item 6. Selected Financial Data.
The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related Notes appearing elsewhere in this Form 10-K.
Financial Highlights (in thousands except per Unit data) 1996 1995 1994 1993 1992 Rental Revenues $ 4,239 $ 4,562 $ 4,818 $ 4,936 $ 4,698 Gain on Sale of Equipment 16,218(a) 918 516 246 - Net Income (Loss) 11,600(a) 354 255 (101) 1,149(b) Net Income (Loss) per Unit 324.72(a) - (.46) (9.88) 33.37(b) Total Assets 15,584(a) 8,422 10,534 11,953 13,445 Loans Payable - 4,453 7,047 9,101 10,759 Cash Distributions per Unit 300.00(a) - - - 8.88
(a) Reflects 1996 equipment sale activity including the November 1996 Liquidating Sale. Please refer to Note 6 of the Notes to the Consolidated Financial Statements. (b) Includes a $1,453,896 gain on refinancing of long-term debt, net of minority interest allocation share. Without this gain, the Partnership would have recorded a net loss of $304,424.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
At December 31, 1996, the Partnership and its consolidated venture and subsidiary's cash and cash equivalents balance totaled $15,217,595 compared to $1,118,831 at December 31, 1995. The increase is primarily due to proceeds from the Liquidating Sale exceeding cash used for Partnership operations and principal payments on long-term debt. Please see "Item 2. Properties," and Note 1 and Note 6 of the Notes to the Consolidated Financial Statements for a discussion of the Liquidating 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. 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 following which any remaining cash will be distributed to the partners upon liquidation.
At December 31, 1996, construction cranes at cost totaled $0 as compared to $16,307,334 at December 31, 1995. The decrease is due to the sale of twelve DSC Venture cranes and one Ringer attachment and one SFN Ringer attachment during the nine months ended September 30, 1996 and the Liquidating Sale. Reference is made to Note 1 and Note 6 of the Notes to the Consolidated Financial Statements for a discussion of 1996 crane sale activity. Portions of the proceeds from the above-mentioned sales activity were used to retire the Partnership's debt. As a result , and in addition to the Partnership's required monthly debt service payments, loans payable decreased from $4,452,545 at December 31, 1995 to $0 at December 31, 1996.
Accounts receivable decreased from $272,837 at December 31, 1995 to $173,415 at December 31, 1996 primarily due to the Liquidating Sale. Organization and loan closing costs decreased from $321,888 at December 31, 1995 to $0 at December 31, 1996 due to fully amortizing loan closing costs during 1996.
Accounts payable and accrued expenses increased from $463,130 at December 31, 1995 to $1,745,745 at December 31, 1996 due to accruals for expenses associated with the Partnership's liquidation.
Management fee payable decreased from $1,889,818 at December 31, 1995 to $1,445,685 at December 31, 1996 primarily due to the payment of accrued management fees to the General Partners, offset by an accrual for 1996 management fees due to DSC and the sales disposition fee payable to the General Partners.
Due to affiliates decreased from $147,000 at December 31, 1995 to $0 at December 31, 1996. The balance at December 31, 1995 primarily consisted of an accrual for SFN consulting fees and salary expenses payable to the minority stockholders.
Results of Operations
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.
1995 vs. 1994 For the year ended December 31, 1995, the Partnership generated net income of $354,222 compared to net income of $255,302 for the year ended December 31, 1994. The increase in net income was primarily due to a $918,435 gain recognized on the sale of two DSC Venture cranes in January and December of 1995 and the sale of one SFN crane in May 1995, and decreases in both depreciation and amortization and interest expense. These were partially offset by a decrease in rental revenues and an increase in general, selling and administrative expense. Excluding the gains recognized on the crane sales, the Partnership generated losses from operations, before provision for income taxes and minority interest, of $522,943 and $245,632 for 1995 and 1994, respectively.
Rental revenues for the year ended December 31, 1995 decreased compared to 1994 primarily due to the sale of three cranes during 1995.
For the year ended December 31, 1995, general, selling and administrative expenses totaled $1,915,608 compared to $1,699,833 for 1994. The increase was mainly due to the accrual of $300,000 in 1995 for the SFN consulting fee, 51% of which is eliminated in consolidation, and increased salary and insurance expense.
Interest expense for the year ended December 31, 1995 decreased compared to 1994 due to interest being calculated on lower outstanding principal balances on the Partnership's debt resulting from principal repayments made during 1995.
Item 8.
Item 8. Financial Statements and Supplementary Data.
See Item 14 for a listing of the financial statements filed with this report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.
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, 45, is Chairman of the Board and Chief Executive Officer of Falcon Drilling Company, Inc., an offshore drilling contractor. He also serves as General Partner of two related investment partnerships, Cerrito Partners, formed in 1984, and Cerrito Investments Limited Partnership, formed in 1988. Mr. Webster received a B.S. from Purdue University and an M.B.A. from Harvard Business School. Mr. Webster serves as a Director of Crown Resource Corporation, a mining concern, and DI Industries Inc., a land drilling company. Mr. Webster also serves as a Trust Manager for Camden Property Trust, a real estate investment trust.
Officers and Directors of EMI Certain officers and directors of EMI are now serving (or in the past have served) as officers or directors of entities which act as general partners of a number of limited partnerships which have sought protection under the provisions of the Federal Bankruptcy Code. These partnerships sought the protection of the bankruptcy laws to protect the partnerships' assets from loss through foreclosure.
The directors and executive officers of EMI are as follows:
Name Office Moshe Braver Director and President Daniel M. Palmier Vice President and Chief Financial Officer
Moshe Braver, 43, is currently a Managing Director of Lehman Brothers and has held such position since October 1985. During this time, he has held positions with the Business Analysis Group, International and Capital Markets Administration and currently, with the Diversified Asset Group. Mr. Braver joined Shearson Lehman Brothers in August 1983 as Senior Vice President. Prior to joining Shearson, Mr. Braver was employed by the accounting firm of Coopers & Lybrand from January 1975 through August 1983 as an Audit Manager. He received a Bachelor of Business Administration degree from Bernard Baruch College in January 1975 and is a Certified Public Accountant.
Daniel M. Palmier, 35, is a Vice President of Lehman Brothers Inc. in its Diversified Asset Group, and has been employed by Lehman Brothers since June 1990. He is responsible for the asset management and restructuring of a diverse portfolio of assets including commercial real estate and mortgages. From March of 1988, Mr. Palmier worked for LJ Hooker Corporation, Inc. and held positions of Senior Associate of Mergers and Acquisitions/Corporate Finance and Vice President in the Real Estate division. From September 1986, Mr. Palmier was a Real Estate Acquisitions Officer at John Anthony Associates, Inc. in New York. From June 1983, Mr. Palmier worked in the public accounting field, most notably for the firm Price Waterhouse. Mr. Palmier, a New York Certified Public Accountant, earned a Masters of Science in Real Estate Degree from New York University in 1995 and graduated from the University of Notre Dame in 1983 with a B.B.A. in Accounting.
Certain Matters Involving Affiliates of EMI On July 31, 1993, Shearson Lehman Brothers Inc. sold certain of its domestic retail brokerage and asset management businesses to Smith Barney, Harris Upham & Co. Incorporated ("Smith Barney"). Subsequent to the sale, Shearson Lehman Brothers Inc. changed its name to Lehman Brothers Inc. The transaction did not affect the ownership of the General Partner. However, the assets acquired by Smith Barney included the name "Hutton." Consequently, the Hutton Equipment Management, Inc. general partner changed its name to Equipment Management, Inc. on January 13, 1994 and the name of the Partnership was changed to Equipment Asset Recovery Fund L.P. on October 29, 1993 to delete any reference to "Hutton."
Item 11.
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, which is incorporated herein by reference thereto for a discussion of the allocations of Partnership income, losses, distributions and gains from the disposition of assets.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) Security Ownership of Certain Beneficial Owners. No person was known by the Partnership to be the beneficial owner of more than 5% of the Units of the Partnership.
(b) Security Ownership of Management. The General Partners do not own any Units, and no officer or director of the EMI owns any Units.
(c) Changes in Control. None.
Item 13.
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 1996, the General Partners earned $209,802 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 1996, the General Partners earned a disposition fee totaling $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
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, 1996 and 1995 (1)
Consolidated Statements of Operations - For the years ended December 31, 1996, 1995 and 1994 (1)
Consolidated Statements of Partners' Capital (Deficit) - For the years ended December 31, 1996, 1995 and 1994 (1)
Consolidated Statements of Cash Flows - For the years ended December 31, 1996, 1995 and 1994 (1)
Notes to the Consolidated Financial Statements (1)
(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.
(1) Incorporated by reference to the Partnership's Annual Report to Unitholders for the year ended December 31, 1996.
(3) Exhibits
The following exhibits are being filed as a part of this report. Documents other than those designated as being filed herewith are incorporated herein by reference.
Exhibit No. Description
3 Amended and Restated Agreement and Certificate of Limited Partnership of the Partnership (Exhibit 4.1 to the Registrant's Registration Statement on Form S-1, File No. 2-87488 is incorporated herein by reference).
10.1 Management Contract by and among the Partnership, Equipment Management Inc., Steven A. Webster, and Paul B. Loyd, Jr. (Exhibit 10.1 to the Registrant's Registration Statement on Form S-1, File No. 2-87488, is incorporated herein by reference).
10.2 Joint Venture Agreement dated October 9, 1984 between the Partnership, Cerrito Partners and GD Investors, Inc. (Exhibit 4 to the Registrant's current report on Form 8-K dated October 10, 1984, File No. 2-87488, is incorporated herein by reference).
10.3 Agreement and Plan of Merger dated December 2, 1987. (Incorporated by reference to Form 8-K dated December 2, 1987 filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 by the E.F. Hutton Group Inc., commission file number 1-7376).
10.4 Press Release, New York, New York dated December 3, 1987. (Incorporated by reference to Form 8-K dated December 2, 1987 filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 by the E.F. Hutton Group Inc., commission file number 1-7376).
10.5 DSC Venture Amended and Restated Joint Venture Agreement dated as of October 1, 1984, executed April 2, 1987. (Exhibit 10.13 to the Registrant's report on Form 10-K for the year ended December 31, 1987, File No. 2-87488, is incorporated herein by reference).
10.6 Net profits agreement dated April 2, 1987 by and among Security Pacific Business Credit Inc., DSC Venture and the Registrant. (Exhibit 10.14 to the Registrant's report on Form 10-K for the year ended December 31, 1987, File No. 2-87488, is incorporated herein by reference).
10.7 Purchase Agreement dated October 23, 1989 between Falcon Drilling Inc. and the Registrant. (Exhibit 10.11 to the Registrant's report on Form 10-K for the year ended December 31, 1989, File No. 2-87488, is incorporated herein by reference).
10.8 Agreement dated October 23, 1989 by and among the Registrant, CP-1, Ltd. and GD Investors, Inc. (Exhibit 10.12 to the Registrant's report on Form 10-K for the year ended December 31, 1989, File No. 2-87488, is incorporated herein by reference).
10.9 Management Agreement effective January 1, 1990 between DSC Venture and Dayton-Scott Equipment Company (Exhibit 10.9 to the Registrant's Report on Form 10-K for the year ended December 31, 1990, File No. 2-87488, is incorporated herein by reference).
10.10 Loan and Security Agreement by and between SFN Corporation and the CIT Group/Equipment Financing, Inc. Dated as of April 30, 1992. (Exhibit 10.10 to the Registrant's report on Form 10-K for the year ended December 31, 1987, File No. 2-87488, is incorporated herein by reference).
13 Annual Report to Unitholders for the year ended December 31, 1996.
22 Subsidiaries of the Registrant: DSC Venture, a Texas joint venture and SFN Corporation, a Delaware Corporation. (previously filed)
27 Financial Data Schedule.
28 Portions of prospectus of Registrant dated February 2, 1984 (incorporated by reference).
99 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.
(b) Reports on Form 8-K filed in the fourth quarter of fiscal 1996:
On November 27, 1996, the Partnership filed a Form 8-K reporting that on November 27, 1996, the Partnership, DSC and SFN executed a bulk sale of their crane fleets, related equipment and existing customer crane rental agreements to Western Crane Supply, Inc.
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 31, 1997
EQUIPMENT ASSET RECOVERY FUND
BY: Equipment Management, Inc. General Partner
BY: /s/ Moshe Braver Name: Moshe Braver Title: Director and President
BY: /s/ Steven A. Webster Name: Steven A. Webster General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
EQUIPMENT MANAGEMENT, INC. A General Partner
Date: March 31, 1997 BY: /s/ Moshe Braver Moshe Braver Director and President
Date: March 31, 1997 BY: /s/ Daniel M. Palmier Daniel M. Palmier Vice President and Chief Financial Officer