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.
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, 1999, filed as an exhibit under Item 14. As a result of the Liquidating Sale, the General Partners are in the process of terminating the Partnership. However, the Partnership will not be terminated prior to the resolution of the pending purported class action suit. A detailed discussion of this litigation is provided in Note 8 "Litigation" of the Notes to the Consolidated Financial Statements contained in the Partnership's Annual Report to Unitholders for the year ended December 31, 1999, filed as an exhibit under Item 14. herein. SFN was liquidated in January 1997.
Employees - --------- The Partnership has no employees. Certain administrative and managerial services are provided by the General Partners and certain affiliates.
Item 2.
Item 2. Properties
On November 27, 1996, the Partnership, DSC and SFN executed the Liquidating Sale (see Item 1). 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, 1999, the Partnership, DSC and SFN owned no assets other than cash and the General Partners are in the process of terminating the Partnership. However, the Partnership will not be terminated prior to the resolution of the pending purported class action suit. A detailed discussion of this litigation is provided in Note 8 "Litigation" of the Notes to the Consolidated Financial Statements contained in the Partnership's Annual Report to Unitholders for the year ended December 31, 1999, filed as an exhibit under Item 14. herein.
Item 3.
Item 3. Legal Proceedings
Incorporated by reference to Note 8 "Litigation" of the Notes to the Consolidated Financial Statements contained in the Partnership's Annual Report to Unitholders for the year ended December 31, 1999, 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, 1999, 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 exchange, and it is not contemplated that any public trading for the Units will develop. As of December 31, 1999, the number of Limited Partners was 1,843.
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 1998 or 1999. 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.
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 in cash. Reference is made to the Partnership's 1996 annual report on Form 10-K for a discussion of the terms and conditions of the Liquidating Sale. As a result of the Liquidating Sale, the General Partners are in the process of terminating the Partnership. However, the Partnership will not be terminated prior to the resolution of the pending class action suit. A detailed discussion of this litigation is incorporated by reference to Note 8 "Litigation" of the Notes to the Consolidated Financial Statements contained in the Partnership's Annual Report to Unitholders for the year ended December 31, 1999, filed as an exhibit under Item 14.
At December 31, 1999, the Partnership's cash and cash equivalents balance totaled $1,453,153 compared to $1,585,699 at December 31, 1998. 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 1999 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 increased from $1,566,319 at December 31, 1998 to $1,640,467 at December 31, 1999. The change is due to differences in the timing of payments, primarily for administrative and legal expenses.
Results of Operations
1999 vs. 1998 - -------------
For the year ended December 31, 1999, the Partnership generated net loss of $206,694, compared to a net loss of $285,273 in fiscal 1998. The decrease in 1999 is primarily due to lower general, selling and administrative expenses.
Interest income for the year ended December 31, 1999 was $74,907, compared to $149,352 in fiscal 1998. The decrease for the 1999 period is primarily due to the Partnership maintaining lower cash balances.
General and administrative expenses for the year ended December 31, 1999 were $281,601, compared to $434,625 in fiscal 1998. The decrease is primarily due to lower legal expenses, partially offset by liquidating expenses incurred in 1999.
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.
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. ("EMI") 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, 48, currently serves as Vice Chairman of the Board of R&B Falcon Corporation, a publicly-held offshore drilling contractor. Mr. Webster is a Managing Director of Global Energy Partners, an affiliate of DLJ Merchant Banking Partners, which makes private equity investments in the energy industry. He 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; Carrizo Oil & Gas, Inc., an oil and gas exploration company, and 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 ---- ------ Michael T. Marron Director, President and Chief Financial Officer Rocco F. Andriola Director, Vice President
Michael T. Marron, 36, 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 a B.S. degree from the State University of New York at Albany and an M.B.A. degree from Columbia University and is a Certified Public Accountant.
Rocco F. Andriola, 41, is a Managing Director of Lehman Brothers in its Diversified Asset Group and has held such position since October 1996. Mr. Andriola also serves as the Director of Global Corporate Services for Lehman. 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.
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, 1999, 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. 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 1999 and 1998, 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
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, 1999 and 1998......... (1)
Consolidated Statements of Operations - For the years ended December 31, 1999, 1998 and 1997................................. (1)
Consolidated Statements of Partners' Capital (Deficit) - For the years ended December 31, 1999, 1998 and 1997................. (1)
Consolidated Statements of Cash Flows - For the years ended December 31, 1999, 1998 and 1997................................. (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, 1999.
(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).
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, 1999.
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 1999:
No reports on Form 8-K were filed during the fourth quarter of fiscal 1999.
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
Date: March 30, 2000 BY: /s/ Michael T. Marron --------------------- Name: Michael T. Marron Title: President, Director and Chief Financial Officer
Date: March 30, 2000 BY: /s/Steven A. Webster -------------------- Name: Steven A. Webster Title: General Partner
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 30, 2000 BY: /s/Michael T. Marron -------------------- Name: Michael T. Marron Title: President, Director and Chief Financial Officer
Date: March 30, 2000 BY: /s/Rocco F. Andriola -------------------- Name: Rocco F. Andriola Title: Director, Vice President