Item 1. Business a. General Development of Business Equipment Asset Recovery Fund, L.P. (the "Partnership") (formerly Hutton Asset Recovery Fund), a Texas limited partnership, was formed to engage in the business of acquiring various types of distressed assets in the energy and construction industries, either directly or through partnerships, joint ventures or other forms of indirect ownership, operating such assets under management agreements with experienced operators (who may be affiliated with the General Partners) or leasing such assets to users, and ultimately selling such assets. The general partners of the Partnership are Equipment Management, Inc. ("EMI") (formerly Hutton Equipment Management, Inc.), a Delaware corporation and an affiliate of Lehman Brothers Inc. ("Lehman") (formerly Shearson Lehman Brothers Inc.) and Mr. Steven A. Webster (together, the "General Partners") (see Item 10).
On February 2, 1984, the Partnership began the offering of limited partnership interests in the Partnership (the "Units"). As of July 31, 1984, the termination date of the offering, the Partnership had accepted subscriptions for 32,722 Units for an aggregate of $16,361,000 (the holders of such Units are referred to herein as "Limited Partners"). The net proceeds of the offering after payment of organizational and offering costs aggregated $14,114,418. The General Partners made an aggregate cash contribution of $1,000. San Felipe Investors, a Texas general partnership, (the "Special Limited Partner") made a cash contribution to the Partnership of $1,000.
b. Financial Information About Industry Segments The Partnership's sole business was the acquisition, ownership and operation of such assets described above. All of the Partnership's revenues, operating profit or loss related solely to such industry segment.
c. Narrative Description of Business The business of the Partnership was the acquisition of distressed assets, directly or indirectly, for the purpose of operating them, either directly or through partnerships or joint ventures in which the Partnership participates, under management agreements with experienced operators and ultimately selling such assets. Reference is made to the section captioned "Investment and Operating Objectives and Policies" contained on pages 18 through 24 of the Prospectus for a description of the Partnership's objectives and policies regarding the selection, operation, liquidation and financing of such assets, which pages are incorporated herein by reference thereto.
Investments The Partnership used the net proceeds of the public offering to acquire three types of assets. The Partnership purchased (i) four land drilling rigs, (ii) an interest in a Texas partnership, GCH Venture ("GCH"), that purchased five barge drilling rigs, nine crew boats and related property, and (iii) ten construction cranes and an interest in a joint venture, DSC Venture ("DSC"), which owned 49 cranes and related equipment and rented those cranes, the cranes owned by the Partnership, and cranes owned by third parties. Due primarily to the severe decline in the oil and gas drilling industry that occurred in 1986, after the purchase of assets in that industry, all of the Partnership's assets in the oil and gas industry were either foreclosed on or sold at a loss. During 1991, the Partnership received the final payments it was owed by Falcon Drilling Inc. ("Falcon") from the disposition of its interest in GCH.
Investment in Construction Cranes As of December 31, 1995, the Partnership owned nine cranes outright, a ninety- nine percent interest in DSC, which owned forty-four cranes and related equipment, and a controlling interest in SFN Corporation ("SFN"), which owned four cranes and two pieces of related equipment. During the first nine months of 1996, DSC and SFN sold a total of 12 cranes and two pieces of related equipment for a total consideration of approximately $6,650,000.
Liquidating Sale On November 27, 1996, the Partnership, DSC and SFN executed a sale (the "Liquidating Sale") of their crane fleets, related equipment and existing customer crane rental agreements to Western Crane Supply, Inc. ("Western"), a Kennewick, Washington-based operator of construction cranes and an affiliate of Neil F. Lampson, Inc., for a total consideration of $15.9 million cash. A detailed discussion of the Liquidating Sale is contained in Item 2.
Item 2. Properties
On November 27, 1996, the Partnership, DSC and SFN executed the Liquidating Sale. The purchase price was determined by arms-length negotiations. There is no material relationship between Western and the Partnership or any of its affiliates, any director or officer of the Partnership, or any associate of any such director or officer. The Partnership received net proceeds of $2,772,051 for its crane fleet and received $7,366,940 in distributions from DSC attributable to its interest in the proceeds from the sale of the DSC crane fleet.
As a result of the Liquidating Sale, as of December 31, 1997, the Partnership, DSC and SFN owned no assets other than cash and the General Partners are in the process of liquidating the Partnership.
Item 3.
Item 3. Legal Proceedings
Incorporated by reference to Note 9 "Litigation" of the Notes to the Consolidated Financial Statements contained in the Partnership's Annual Report to Unitholders for the year ended December 31, 1997, filed as an exhibit under Item 14.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders of the Partnership during the quarter ended December 31, 1997, through the solicitation of proxies or otherwise.
PART II
Item 5.
Item 5. Market for the Partnership's Limited Partnership Interests and Related Security Holder Matters. The Units are not traded on any market, and it is not contemplated that any public trading for the Units will develop. As of December 31, 1997, the number of Limited Partners was 1,839. The Partnership did not make cash distributions to Limited Partners during 1996. On March 6, 1997, the Partnership paid a special cash distribution, in the amount of $300 per Unit, to Unitholders of record as of November 27, 1996. Such distribution represented a substantial portion of the net sales proceeds and distributions from DSC received by the Partnership from the Liquidating Sale. The Partnership's remaining cash reserves will first be used to provide for the Partnership's remaining liabilities and obligations through dissolution following which any remaining cash will be distributed to the partners upon liquidation.
Item 6.
Item 6. Selected Financial Data. The information set forth below should be read in conjunction with Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
On November 27, 1996, the Partnership, DSC Venture ("DSC") and SFN Corporation ("SFN") executed a sale (the "Liquidating Sale") of their crane fleets, related equipment and existing customer crane rental agreements to Western Crane Supply, Inc. ("Western"), a Kennewick, Washington-based operator of construction cranes and an affiliate of Neil F. Lampson, Inc., for a total consideration of $15.9 million cash. A discussion of the terms and conditions of the Liquidating Sale is contained in Note 1 of the Notes to the Consolidated Financial Statements contained in the Partnership's Annual Report to Unitholders for the year ended December 31, 1997, filed as an exhibit under Item 14. As a result of the Liquidating Sale, the General Partners are in the process of dissolving the Partnership.
On June 4, 1997, a purported class action suit was commenced by a limited partner who acquired its interest in the Partnership through a tender offer (the "Plaintiff"), on behalf of, among others, all limited partners of the Partnership, in the 151st judicial District Court for Harris County, Houston, Texas against Steven A. Webster, Equipment Management, Inc. (the general partners of the Partnership), DSC Venture (a Texas joint venture in which the Partnership owns a 99% interest), Dayton-Scott Equipment Company (the former manager of the Partnership's construction crane fleet) and SFN Corporation (a corporation which was owned, in part, by the Partnership, which, in turn, owned construction cranes which were sold with the balance of the Partnership's crane fleet in the fourth quarter of 1996) and the Partnership (a Nominal Defendant) (collectively, the "Defendants"). The petition purports to bring a suit for breach of fiduciary duty and breach of contract with respect to the management and sale of the construction crane fleet and related equipment. The Plaintiff has requested that the court enter a judgment against the Defendants, jointly and severally, (i) declaring a proper class action; (ii) awarding unspecified compensatory damages, plus interest, expenses and attorneys fees and (iii) awarding punitive and exemplary damages. The Defendants believe the allegations in this complaint are without merit and intend to defend the action vigorously.
At December 31, 1997, the Partnership and its consolidated venture and subsidiary's cash and cash equivalents balance totaled $1,909,899 compared to $15,217,595 at December 31, 1996. The decrease is primarily due to the payment of cash distributions and to the Liquidating Sale, when operations ceased. On March 6, 1997, the Partnership paid a special cash distribution, in the amount of $300 per Unit, to Unitholders of record as of November 27, 1996. As a result, distribution payable decreased from $10,333,264 at December 31, 1996 to $0 at December 31, 1997. Such distribution represented a substantial portion of the net sales proceeds and distributions from DSC received by the Partnership from the Liquidating Sale. The Partnership's remaining cash reserve will first be used to provide for the Partnership's remaining liabilities and obligations, which include legal fees from the purported class action lawsuit, following which any remaining cash will be distributed to the partners upon liquidation.
Accounts receivable decreased from $173,415 at December 31, 1996 to $0 at December 31, 1997 due to the receipt of payment for all receivables accrued prior to the Liquidating Sale.
Other assets decreased from $193,397 at December 31, 1996 to $0 at December 31, 1997 due to the reimbursement during the first quarter of 1997 of closing costs, held in escrow, from the Liquidating Sale.
Accounts payable and accrued expenses decreased from $1,745,745 at December 31, 1996 to $1,605,246 at December 31, 1997. The change is due to differences in the timing of payments, primarily the payment of 1996 operating expenses offset by the accrual of liquidating expenses during 1997.
Management fee payable decreased from $1,445,685 at December 31, 1996 to $0 at December 31, 1997 reflecting the payment during the first quarter of 1997 of deferred management fees and property disposition fees.
Income taxes payable decreased from $624,065 at December 31, 1996 to $0 at December 31, 1997. The decrease is primarily due to the payment of federal income taxes during the first quarter of 1997.
Results of Operations
1997 vs. 1996 For the year ended December 31, 1997, the Partnership generated a net loss of $546,682, compared to net income of $11,599,902 for the year ended December 31, 1996. The change is primarily due to a $16,217,725 gain recognized on the sale of twelve cranes and two pieces of related equipment during the first nine months of 1996 and Liquidating Sale in November 1996. Excluding the gains recognized on the sale of equipment, the Partnership generated losses from operations, before provision for income taxes and minority interest, of $433,295 and $3,204,434 for 1997 and 1996, respectively. The decreased loss from operations during 1997 is primarily attributable to the absence of operating activity, and particularly by a decrease in total expenses in the 1997 period, as a result of the Liquidating Sale.
Rental income decreased to $0 for the year ended December 31, 1997, compared to $4,239,442 for the year ended December 31, 1996, reflecting the absence of rental revenue in 1997 as a result of the Liquidating Sale.
Interest income for the year ended December 31, 1997 totaled $213,557, compared to $123,965 for the year ended December 31, 1996. The increase is primarily due to the Partnership maintaining a higher average cash balance during 1997 as a result of the proceeds from the Liquidating Sale.
As a result of the Liquidating Sale, rental expenses, depreciation and amortization, interest expense and management fee expense decreased from their respective balances for the year ended December 31, 1996 to $0 during the same periods in 1997.
General, selling and administrative expenses decreased to $652,514 for the year ended December 31, 1997 from $4,118,219 for the year ended December 31, 1996. The decrease is primarily attributable to the wind down of Partnership operations subsequent to the Liquidating Sale.
1996 vs. 1995 For the year ended December 31, 1996, the Partnership generated net income of $11,599,902 compared to net income of $354,222 for the year ended December 31, 1995. The increase in net income is primarily due to a $16,217,725 gain recognized on the sale of twelve cranes and two pieces of related equipment during the first nine months of 1996 and Liquidating Sale in November 1996. The gain was partially offset by an increase in general, selling and administrative expense. Excluding the gains recognized on the sales of equipment, the Partnership generated losses from operations, before provision for income taxes and minority interest, of $3,204,434 and $522,943 for 1996 and 1995, respectively.
Rental revenues for the year ended December 31, 1996 decreased compared to 1995 primarily due to the absence of December 1996 rental revenue resulting from the Liquidating Sale in November 1996.
Interest income for the year ended December 31, 1996 increased compared to 1995 primarily due to the Partnership's higher average cash balance as a result of the Liquidating Sale.
For the year ended December 31, 1996, general, selling and administrative expenses totaled $4,118,219 compared to $1,915,608 for 1995. The increase is mainly due to increased salary expense and consulting fees paid by DSC and SFN related to the Liquidating Sale in November 1996 and the accrual of expenses associated with the Partnership's liquidation.
Interest expense for the year ended December 31, 1996 decreased compared to 1995 due to interest being calculated on lower outstanding principal balances on the Partnership's debt resulting from principal repayments made during 1996 and payment in full of all outstanding debt.
Management fees increased from $233,875 for the year ended December 31, 1995 to $947,609 for the year ended December 31, 1996 due to disposition fees and incentive management fees related to the Liquidating Sale in November 1996.
Gain on extinguishment of debt was $130,144 for the year ended December 31, 1996. SFN had executed a participation note (the "Participation Note") with The CIT Group/Equipment Financing, Inc. ("CIT"). Pursuant to this note, CIT was entitled to receive the greater of the accreted value of the note or 25% of the net proceeds from the sale of the cranes plus 25% of the fair market value of the cranes owned by SFN on November 30, 2000. At April 30, 1992, the Participation Note was recorded at 25% of the fair market value of the cranes or $700,000. The Participation Note was prepaid during 1996 resulting in a gain on the extinguishment of the debt in the amount of $105,144. SFN also executed a subordinated promissory note to Security Pacific Business Credit, Inc. ("SPBC") in the amount of $1,000,000. The Note due to SPBC was also prepaid in 1996 resulting in a gain on the extinguishment of the debt in the amount of $25,000. Item 8.
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, 46, currently serves as President and Chief Executive Officer of R & B Falcon Corporation, a publicly-held offshore drilling contractor, of which he is also a director. Mr. Webster serves as a director of the following publicly-held companies: Crown Resources Corporation, a precious metals mining concern; Grey Wolf, Inc., a land drilling contractor; Geokinetics, Inc., a seismic acquisition company; and Ponder Industries, Inc., an oil field service company.
Officers and Directors of EMI Certain officers and directors of EMI are now serving (or in the past have served) as officers or directors of entities which act as general partners of a number of limited partnerships which have sought protection under the provisions of the Federal Bankruptcy Code. These partnerships sought the protection of the bankruptcy laws to protect the partnerships' assets from loss through foreclosure.
The directors and executive officers of EMI are as follows:
Name Office Jeffrey Carter Director, President and Chief Financial Officer Moshe Braver Vice President and Director
Jeffrey C. Carter, 52, is a Senior Vice President of Lehman Brothers in the Diversified Asset Group. Mr. Carter joined Lehman Brothers in September 1988. From 1972 to 1988, Mr. Carter held various positions with Helmsley- Spear Hospitality Services, Inc. and Stephen W. Brener Associates, Inc. including Director of Consulting Services at both firms. From 1982 through 1987, Mr. Carter was President of Keystone Hospitality Services, an independent hotel consulting and brokerage company. Mr. Carter received his B.S. degree in Hotel Administration from Cornell University and an M.B.A. degree from Columbia University.
Moshe Braver, 44, is currently a Managing Director of Lehman Brothers and has held such position since October 1985. During this time, he has held positions with the Business Analysis Group, International and Capital Markets Administration and currently, with the Diversified Asset Group. Mr. Braver joined Shearson Lehman Brothers in August 1983 as Senior Vice President. Prior to joining Shearson, Mr. Braver was employed by the accounting firm of Coopers & Lybrand from January 1975 through August 1983 as an Audit Manager. He received a Bachelor of Business Administration degree from Bernard Baruch College in January 1975 and is a Certified Public Accountant.
Certain Matters Involving Affiliates of EMI On July 31, 1993, Shearson Lehman Brothers Inc. sold certain of its domestic retail brokerage and asset management businesses to Smith Barney, Harris Upham & Co. Incorporated ("Smith Barney"). Subsequent to the sale, Shearson Lehman Brothers Inc. changed its name to Lehman Brothers Inc. The transaction did not affect the ownership of the General Partner. However, the assets acquired by Smith Barney included the name "Hutton." Consequently, the Hutton Equipment Management, Inc. general partner changed its name to Equipment Management, Inc. on January 13, 1994 and the name of the Partnership was changed to Equipment Asset Recovery Fund, L.P. on October 29, 1993 to delete any reference to "Hutton."
Item 11.
Item 11. Executive Compensation.
The Partnership does not pay the officers or directors of EMI any remuneration. In addition, EMI does not pay any remuneration to any of its officers or directors, all of whom receive salaries from an affiliate of EMI. Reference is made to Note 3 to the Consolidated Financial Statements contained in the Partnership's Annual Report to Unitholders for the year ended December 31, 1997, filed as an exhibit under Item 14, for a discussion of the allocations of Partnership income, losses, distributions and gains from the disposition of assets.
Item 12.
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.
Item 13. Certain Relationships and Related Transactions.
The General Partners and their affiliates are entitled to receive annual Management Fees equal to the greater of $120,000 or 5% of the gross revenues from the operation of the assets owned directly or indirectly by the Partnership. During fiscal 1997 and 1996, the General Partners earned $0 and $209,802, respectively, in Management Fees. The General Partners are also entitled to a disposition fee equal to 2% of the gross proceeds from the sale of the Partnership's assets. During 1997 and 1996, the General Partners earned disposition fees totaling $0 and $516,294. During the second quarter of 1985, the General Partners elected to defer the payment of all Management Fees, other than the $10,000 per month payable to San Felipe Resources Company, a partnership owned primarily for the benefit of Mr. Webster, until the cash flow of the Partnership improved. In June 1986, the amount of fees paid currently to San Felipe Resources Company was further reduced to $5,000 per month. (See Note 8 to the Consolidated Financial Statements contained herein at Item 14
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
(a) (1) Financial Statements and Notes. Page Independent Auditors' Report Arthur Andersen LLP (1) Consolidated Balance Sheets - December 31, 1997 and 1996 (1) Consolidated Statements of Operations - For the years ended December 31, 1997, 1996 and 1995 (1)
Consolidated Statements of Partners' Capital (Deficit) - For the years ended December 31, 1997, 1996 and 1995 (1)
Consolidated Statements of Cash Flows - For the years ended December 31, 1997, 1996 and 1995 (1)
Notes to the Consolidated Financial Statements (1)
(1) Incorporated by reference to the Partnership's Annual Report to Unitholders for the year ended December 31, 1997.
(a) (2) Schedules
All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission have been omitted since
(1) the information required is disclosed in the financial statements and
notes there to;
(2) the schedules are not required under the related instructions; or
(3) the schedules are inapplicable.
(3) Exhibits
The following exhibits are being filed as a part of this report. Documents other than those designated as being filed herewith are incorporated herein by reference.
Exhibit No. Description
3.1 Amended and Restated Agreement and Certificate of Limited Partnership of the Partnership (Exhibit 4.1 to the Registrant's Registration Statement on Form S-1, File No. 2-87488 is incorporated herein by reference).
10.1 Management Contract by and among the Partnership, Equipment Management Inc., Steven A. Webster, and Paul B. Loyd, Jr. (Exhibit 10.1 to the Registrant's Registration Statement on Form S-1, File No. 2-87488, is incorporated herein by reference).
10.2 Joint Venture Agreement dated October 9, 1984 between the Partnership, Cerrito Partners and GD Investors, Inc. (Exhibit 4 to the Registrant's current report on Form 8-K dated October 10, 1984, File No. 2-87488, is incorporated herein by reference).
10.3 Agreement and Plan of Merger dated December 2, 1987. (Incorporated by reference to Form 8-K dated December 2, 1987 filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 by the E.F. Hutton Group Inc., commission file number 1-7376).
10.4 Press Release, New York, New York dated December 3, 1987. (Incorporated by reference to Form 8-K dated December 2, 1987 filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 by the E.F. Hutton Group Inc., commission file number 1-7376).
10.5 DSC Venture Amended and Restated Joint Venture Agreement dated as of October 1, 1984, executed April 2, 1987. (Exhibit 10.13 to the Registrant's report on Form 10-K for the year ended December 31, 1987, File No. 2-87488, is incorporated herein by reference).
10.6 Net profits agreement dated April 2, 1987 by and among Security Pacific Business Credit Inc., DSC Venture and the Registrant. (Exhibit 10.14 to the Registrant's report on Form 10-K for the year ended December 31, 1987, File No. 2-87488, is incorporated herein by reference).
10.7 Purchase Agreement dated October 23, 1989 between Falcon Drilling Inc. and the Registrant. (Exhibit 10.11 to the Registrant's report on Form 10-K for the year ended December 31, 1989, File No. 2- 87488, is incorporated herein by reference).
10.8 Agreement dated October 23, 1989 by and among the Registrant, CP-1, Ltd. and GD Investors, Inc. (Exhibit 10.12 to the Registrant's report on Form 10-K for the year ended December 31, 1989, File No. 2- 87488, is incorporated herein by reference).
10.9 Management Agreement effective January 1, 1990 between DSC Venture and Dayton-Scott Equipment Company (Exhibit 10.9 to the Registrant's Report on Form 10-K for the year ended December 31, 1990, File No. 2-87488, is incorporated herein by reference).
10.10 Loan and Security Agreement by and between SFN Corporation and the CIT Group/Equipment Financing, Inc. Dated as of April 30, 1992. (Exhibit 10.10 to the Registrant's report on Form 10-K for the year ended December 31, 1987, File No. 2-87488, is incorporated herein by reference).
13.1 Annual Report to Unitholders for the year ended December 31, 1997.
22.1 Subsidiaries of the Registrant: DSC Venture, a Texas joint venture and SFN Corporation, a Delaware Corporation (previously filed). 27.1 Financial Data Schedule. 28.1 Portions of prospectus of Registrant dated February 2, 1984 (incorporated by reference).
99.1 Asset Purchase & Sale Agreement dated November 20, 1996, and accompanying exhibits, by and among Neil F. Lampson, Inc. as buyer and DSC, EARF and SFN as Sellers (incorporated by reference to the Partnership's Annual Report to Unitholders for the year ended December 31, 1996). (b) Reports on Form 8-K filed in the fourth quarter of fiscal 1997: No reports on Form 8-K were filed during the quarter for which this report was filed. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: March 30, 1998
EQUIPMENT ASSET RECOVERY FUND
BY: Equipment Management, Inc. General Partner
BY: /s/ Jeffrey C. Carter Name: Jeffrey C. Carter Title: President, Director and Chief Financial Officer
BY: /s/Steven A. Webster Name: Steven A. Webster General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
EQUIPMENT MANAGEMENT, INC. A General Partner
Date: March 30, 1998
BY: /s/Jeffrey C. Carter Name: Jeffrey C. Carter Title: President, Director and Chief Financial Officer
Date: March 30, 1998
BY: /s/Moshe Braver Name: Moshe Braver Title: Vice President and Director