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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 2-72177
SEI II L.P.
(formerly Shearson Equipment Investors - II)
Exact name of registrant as specified in its charter
New York 13-3064636
State or other jurisdiction of incorporation or organization
I.R.S. Employer Identification No.
3 World Financial Center, 29th Floor
New York, NY Attn.: Andre Anderson 10285
Address of principal executive offices zip code
Registrant's telephone number, including area code: (212) 526-3237
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
LIMITED PARTNERSHIP INTERESTS
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
Documents incorporated by reference: None
PART I
Item 1. Business
(a) General development of business
SEI II L.P. (the "Partnership" or the "Registrant") (formerly
known as Shearson Equipment Investors - II) is a limited
partnership organized April 6, 1981 under the Partnership Law of
the State of New York to engage in the acquisition of various
types of equipment and other property. The Partnership acquired,
through direct forms of ownership, various types of equipment
which do not incorporate high levels of technology and are
therefore not likely to be subject to technological obsolescence.
A Registration Statement on Form S-1, Registration No. 2-72177,
filed with the Securities and Exchange Commission and relating to
the public offering (the "Offering") of the limited partnership
interests in the Partnership (the "Interests"), became effective
on June 25, 1981, the date on which the Partnership's operations
commenced. The Offering was completed as of October 2, 1981. As
of that date, there were 3,614 Interests outstanding, (including
22 Interests purchased by the general partner and two Interests
each purchased by the two initial limited partners) which
represent aggregate capital contributions to the Partnership of
$18,059,950.
The general partner of the Partnership is SEI II Equipment Inc.
(the "General Partner") (formerly Shearson Equipment Management
Corporation), a Delaware corporation which is an affiliate of
Lehman Brothers Inc. ("LB"). Under the Partnership Agreement,
the General Partner has exclusive authority to manage the
operations and affairs of the Partnership and to make all
decisions regarding the business of the Partnership; but the
acquisition, sales, financing or refinancing of any item of
equipment must be approved by a majority of the members of the
investment committee, whose members are designated by the
President of the General Partner. For a discussion of the
investment committee, see Item 10. "Directors and Executive
Officers of the Registrant."
At December 31, 1982, the Partnership had completed the
acquisition of its equipment portfolio. Equipment acquired by
the Partnership is either operated by or on behalf of the
Partnership under operating agreements.
Commencing January 1, 1993, the General Partner engaged a new
marine equipment operator, Midwest Marine Management Company
("Midwest Marine"), to manage the Partnership's barge fleet,
pursuant to the terms of a Management Agreement. The Management
Agreement expired December 31, 1996, but was renewed at maturity,
as provided for under the terms of the Management Agreement. The
Management Agreement now expires December 31, 1997.
(b) Financial information about industry segments
As of December 31, 1996, the Partnership's business consisted of
one segment, the investment in a fleet of 25 covered hopper river
barges. With the exception of such services as are provided by
the Partnership to users of its equipment, the Partnership does
not engage in sales of goods or services.
(c) Narrative description of business
See Paragraphs (a) and (b) above and Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
(d) Employees
The Partnership has no employees.
Item 2. Properties
During the period ended December 31, 1982, the Partnership
acquired various items of equipment which together constitute the
Partnership's entire equipment portfolio. No equipment purchases
were made subsequent to December 31, 1982, nor does the
Partnership expect that it will acquire any additional equipment.
All of the equipment has been pledged as collateral under the
credit agreement described in Note 4 to the Partnership's
financial statements. Commencing in 1987, the Partnership sold
the following assets: two 2 offshore supply vessels, a drilling
rig, and 82 railcars, with the proceeds being used to repay
Partnership debt. The Partnership currently owns 25 covered
river hopper barges which are engaged in the intercoastal
waterway transportation of goods.
Item 3. Legal Proceedings
In March 1996, a purported class action, on behalf of all Limited
Partners, was brought against the Partnership, Lehman Brothers
Inc., Smith Barney Holdings Inc., and a number of other limited
partnerships in New York State Supreme Court. The complaint
alleges claims of common law fraud and deceit, negligent
misrepresentation, breach of fiduciary duty and breach of implied
covenant of good faith and fair dealing. The defendants intend
to defend the action vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to the limited partners for a vote
during the fourth quarter of the year for which this report is
filed.
PART II
Item 5. Market for the Registrant's Limited Partnership
Interests and Related Security Holder Matters
(a) Market Price Information
The only outstanding or authorized securities of the Registrant
are the Interests. There is no market for the Interests, nor is
one expected to develop. The Partnership Agreement imposes
substantial restrictions on the transfer of an Interest.
(b) Holders
The number of holders of Interests as of December 31, 1996 was
1,442.
(c) Cash Distributions per Interest
To the extent that funds are available and subject to the
provisions of the Partnership Agreement, the Partnership will
make cash distributions from operations to holders of Interests
on a quarterly basis. Cash distributions from operations are
made at the sole discretion of the General Partner. The
Partnership Agreement prohibits the investment of cash available
for distributions from operations in other than temporary money
market investments or United States government securities. Cash
distributions from operations are paid 99% to the limited
partners and 1% to the General Partner and are distributed to
each limited partner entitled to such distribution in the ratio
in which the number of Interests owned by such limited partner
bears to the total number of Interests issued, outstanding and
held by limited partners entitled to such distribution.
No cash distributions have been made to the partners since the
third quarter of 1982.
Item 6. Selected Financial Data
The information set forth below should be read in conjunction
with the Partnership's financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations," also included herein.
Years Ended December 31, 1996 1995 1994 1993 1992
Operating revenues $2,579,822 $2,892,077 $1,852,384 $1,710,410 $2,268,236
Income from operations 592,153 882,829 383,191 64,416 246,662
Interest and
miscellaneous income 271,734 220,098 93,874 61,143 59,164
Other income -- -- -- -- --
Interest expense (653,375) (692,302) (547,495) (470,340) (489,937)
Net Income (Loss) 210,512 410,625 (70,430) (344,781) (184,111)
Net Income (Loss)
Per Interest 57.67 112.48 (19.29) (94.45) (50.43)
Total Assets at
Period-End 9,432,600 8,539,370 7,413,095 6,919,509 6,888,038
Long-term Debt at
Period-End 7,839,000 7,839,000 7,839,000 7,839,000 7,839,000
Accrued interest expense
due to affiliate 9,311,189 8,657,814 7,965,512 7,418,017 6,947,677
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
(a) Liquidity and Capital Resources
The interest rate of the Partnership's note payable obligation
(the "Note") was 8.25% at December 31, 1996, compared to 8.75% at
December 31, 1995. No interest was paid relating to the Note for
the 12 months ended December 31, 1996, and, as a result, the
Partnership's accrued and deferred interest increased to
$9,824,043 at December 31, 1996, compared to $9,170,668 at
December 31, 1995. Accrued and deferred interest is payable at
maturity of the Note. The Note had a maturity date of January 3,
1997, and on that date the amount of accrued and unpaid interest
on the Note was $9,829,360. On January 3, 1997, the maturity date
of the Note was extended until January 2, 1998, or the date on
which the Partnership sells the barges, and the terms of the Note
were modified as described below.
On January 3, 1997, the Partnership entered into a First Amended
and Restated Credit Note ("Amended Note") with Buttonwood Leasing
Corporation. At that time, a principal payment of $5,500,000 was
made by the Partnership reducing the principal amount from
$7,839,000 to $2,339,000.
In accordance with the Amended Note, the Partnership is required
to pay quarterly installments of principal only on April 1, 1997,
July 1, 1997, and October 1, 1997 (each a "Payment Date") in an
amount equal to the amount of interest accrued on the unpaid
principal balance from the later of January 3, 1997 or the
immediately preceding Payment Date. In addition, the Partnership
is required to pay interest on the unpaid principal balance on
the Amended Note at maturity. Interest on the outstanding
principal balance of the Amended Note shall be computed using
simple interest at a rate equal to the Prime Rate as charged by
Bank America Illinois.
In addition to the quarterly principal installments, the
Partnership is required to make a cash sweep payment, which is
applied to principal, on or before the 60th day after the end of
each calendar quarter commencing March 31, 1997. The amount of
each cash sweep payment will be equal to 90% of Net Operating
Income (as defined in the Amended Note) minus the scheduled
principal installments paid on any debt permitted by Section 9(c)
of the Credit Agreement (as defined in the Amended Note) for the
immediately preceding calendar quarter of the Partnership.
During 1996, the Partnership's fleet of 25 covered hopper river
barges continued to operate on the inland waterways of the United
States. Although Partnership operations in the first half of
1996 were relatively stronger than usual due to the lingering
effects of an abundant harvest in 1994, conditions for barge
traffic deteriorated in the second half of the year as a result
of a comparatively smaller 1995 harvest. Because the crops
harvested in one year are typically shipped in the following
year, the smaller 1995 harvest did not impact the Partnership's
operations until 1996. Additionally, many farmers had shipped
all of their previously held crop inventories by mid-1996,
further reducing the quantity of goods available for shipment in
the third and fourth quarters of last year. These factors
decreased the demand for barges and led to intensified
competition among barge owners and, consequently, lower barge
revenue rates in the second half of 1996. As a result,
Partnership operating revenues and net income were lower than the
year before. Although last year's harvest was relatively strong,
it is anticipated that it will not likely be transported until
mid-1997, after farmers have replenished their depleted crop
inventories. The General Partner is currently exploring the
potential of commencing efforts to sell the Partnership's barge
fleet during 1997. The ability to sell, however, will be
dictated by market conditions and there can be no assurance that
a sale will occur. Furthermore, it is highly unlikely that the
barges will be sold for an amount which is equal to or in excess
of the Partnership's existing indebtedness.
The Partnership's cash and cash equivalents balance totaled
$5,703,859 at December 31, 1996, compared to $4,238,441 at
December 31, 1995. The increase is primarily due to cash flow
provided by operating activities. At December 31, 1996, the
amount due from the Partnership's equipment manager was $425,549,
compared to $673,652 at December 31, 1995. The decrease is
primarily due to the timing of the distributions of net revenues
from the equipment manager.
(b) Results of Operations
1996 versus 1995
For the year ended December 31, 1996, the Partnership generated
net income of $210,512, compared to $410,625 for the year ended
December 31, 1995. The decrease in net income is mainly the
result of lower operating revenues.
Operating revenues for the year ended December 31, 1996 totaled
$2,579,822, compared to $2,892,077 for the year ended
December 31, 1995. The decrease in operating revenues was
primarily attributable to a decrease in the average barge revenue
rate during the latter half of 1996.
Interest and miscellaneous income was $271,734 for the year ended
December 31, 1996, compared to $220,098 for the year ended
December 31, 1995. The increase is mainly due to an increase in
interest income due to a higher cash balance invested.
Operating costs decreased slightly to $1,438,584 for the year
ended December 31, 1996, compared to $1,454,871 for the year
ended December 31, 1995. Interest expense for the year ended
December 31, 1996 was $653,375 compared with $692,302 for the
year ended December 31, 1995. The reduction is due to a decrease
in the prime rate charged on the outstanding principal amount of
the Note.
1995 versus 1994
For the year ended December 31, 1995, the Partnership generated
net income of $410,625, compared to a net loss of $70,430 for the
year ended December 31, 1994. The difference is primarily
attributable to increased operating revenues.
Operating revenues for the year ended December 31, 1995 totaled
$2,892,077, compared to $1,852,384 for the year ended
December 31, 1994. The increase is primarily attributable to an
increase in barge utilization. The record harvest of soybeans in
1994 positively impacted revenue during 1995 as there was a
greater quantity of goods to transport. Strong U.S. exports in
1995 also contributed to increased barge utilization.
Furthermore, revenues were lower than usual in 1994 as a result
of the 1993 floods which damaged crops and reduced utilization.
Interest and miscellaneous income increased to $220,098 for the
year ended December 31, 1995, compared to $93,874 for the year
ended December 31, 1994. The increase is mainly due to an
increase in interest income due to a higher cash balance invested
and higher interest rates.
Operating costs for the year ended December 31, 1995 were
$1,454,871, compared to $949,093 for the year ended
December 31, 1994. The increase is primarily attributable to
increased towing costs as a result of greater utilization in
1995, and lower than normal towing costs for the first three
quarters of 1994.
Interest expense for the year ended December 31, 1995 totaled to
$692,302 compared with $547,495 for the year ended
December 31, 1994. The increase is due to an increase in the
prime rate charged on the outstanding principal amount of the
Note.
Item 8. Financial Statements and Supplementary Data
See item 14 "Exhibits, Financial Statement Schedules, and Reports
on Form 8-K" 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 Registrant
The Partnership has no officers or directors and its affairs are
managed by its General Partner, SEI II Equipment Inc. Decisions
as to which items of equipment should be acquired, sold, financed
or refinanced by the Partnership and whether such acquisitions
should be direct or indirect, are made by an investment committee
designated by the President of the General Partner. The
investment committee has the right, power and authority to
utilize the services of affiliates of the General Partner for
assistance in evaluating the suitability of equipment for
investment by the Partnership.
Certain officers and directors of the General Partner 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. The partnerships which have filed
bankruptcy petitions own assets which have been adversely
affected by the economic conditions in the markets in which that
asset is located and, consequently, the partnerships sought
protection of the bankruptcy laws to protect the partnerships'
assets from loss through foreclosure.
The following is a brief description of the directors and
executive officers of the General Partner:
Name Office
Rocco F. Andriola President and Director
Regina M. Hertl Vice President and Chief Financial Officer
Michael T. Marron Vice President
Rocco F. Andriola, 38, is a Managing Director of Lehman Brothers
in its Diversified Asset Group and has held such position since
October 1996. Since joining Lehman Brothers 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-
89, 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 Brothers, 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
LLM in Corporate Law from New York University's Graduate School
of Law.
Regina M. Hertl, 38, is a First Vice President of Lehman Brothers
in its Diversified Asset Group and is responsible for the
investment management of commercial and residential real estate,
and a venture capital portfolio. From January 1988 through
December 1988, Ms. Hertl was Vice President of the Real Estate
Accounting Group within the Controller's Department of Shearson
Lehman Brothers. From September 1986 through December 1987, she
was an Assistant Vice President responsible for real estate
accounting analysis within the Controller's Department at
Shearson. From September 1981 to September 1986, Ms. Hertl was
employed by the accounting firm of Coopers & Lybrand. Ms. Hertl,
who is a Certified Public Accountant, graduated from Manhattan
College in 1981 with a B.S. degree in Accounting.
Michael T. Marron, 33, 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 in 1985 and is a Certified
Public Accountant.
Item 11. Executive Compensation
Neither of the General Partners nor any of their directors and
officers received any compensation from the Partnership. See
Item 13 below with respect to a description of certain
transactions of the General Partners and their affiliates with
the Partnership.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
(a) Security ownership of certain beneficial owners
No person (including any "group" as that term is used in Section
13(d)(3) of the Securities Exchange Act of 1934) is known to the
Partnership to be the beneficial owner of more than 5% of the
outstanding Interests as of December 31, 1996.
(b) Security ownership of management
Under the terms of the Limited Partnership Agreement, the
Partnership's affairs are managed by the General Partner. An
affiliate of the General Partner owns 22 interests and shares in
the profits, losses and distributions of the Partnership.
(c) Changes in Control
None.
Item 13. Certain Relationships and Related Transactions
Pursuant to a Management Agreement dated June 25, 1981 between
the Partnership and the General Partner, the General Partner is
entitled to receive equipment management fees for services
rendered in the management of equipment owned by the Partnership.
The amount of the equipment management fees charged is the lesser
of (i) the aggregate of amounts customarily charged by third
parties for similar services or (ii) 5% of annual gross revenues,
however, in the event the General Partner subcontracts to third
parties for services to be rendered in the management of the
equipment, any management fee paid to a third party will reduce
the fee otherwise earned by the General Partner, but not below 1%
of gross revenues. For the year ended December 31, 1996,
equipment management fees aggregating $149,771 were expensed by
the Partnership. Of this amount, $123,973 was due or paid by the
Partnership to an independent, third-party operator, and $25,798
was earned by the General Partner. The fee as earned by the
General Partner added to uncollected fees for prior years and, as
of December 31, 1996, $696,999 remains to be paid to the General
Partner. In accordance with the Partnership Agreement, the
General Partner has deferred its rights to receive such fees
until such time as the Partnership is in a position to make cash
distributions to all partners.
The General Partner is also entitled to receive, for services
rendered, a Partnership management fee equal to 5% of cash
distributions from operations. Such services relate to
decision-making as to the terms of acquisitions and dispositions
of equipment, selecting, retaining and supervising consultants,
engineers, lenders and others, maintaining the books and records
of the Partnership and otherwise generally managing the
day-to-day operations of the Partnership. The Partnership
management fees are payable at the same time as, but only if and
when, cash distributions from operations are paid to the limited
partners. Partnership management fees are in addition to all
other fees, commissions or compensation paid or permitted to be
paid to the General Partner or its affiliates. For the year
ended December 31, 1996, no Partnership management fees were paid
to the General Partner.
First Data Investor Services Group, formerly The Shareholder
Services Group, provides partnership accounting and investor
relations services for the Registrant. The Registrant's transfer
agent and certain tax reporting services are provided by Service
Data Corporation. Both First Data Investor Services Group and
Service Data Corporation are unaffiliated companies. For
additional information regarding fees paid and reimbursed to the
General Partner or its affiliates during 1996, 1995 and 1994, see
Note 4 to the Financial Statements in Item 14, "Exhibits,
Financial Statement Schedules, and Reports on Form 8-K."
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a)(1) Financial statements:
SEI II L.P.
INDEX TO FINANCIAL STATEMENTS
Page
Number
Balance Sheets at December 31, 1996 and 1995 F-1
Statements of Partners' Deficit for the years ended
December 31, 1996, 1995 and 1994 F-1
Statements of Operations for the years ended December 31,
1996, 1995, and 1994 F-2
Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994 F-2
Notes to the Financial Statements F-3
Report of Independent Public Accountants F-7
(2) Financial Statement Schedules:
No schedules are presented because the information is not
applicable or is included in the Financial Statements or the
notes thereto.
(3) Exhibits:
3.1 Agreement of Limited Partnership dated June 25, 1981 (filed
as Exhibit 3b to Registration Statement on Form S-1 as filed
with the Securities and Exchange Commission on May 7, 1981,
No. 2-72177 and incorporated herein by reference).
3.1 Certificate of Limited Partnership of the Partnership as
filed in the office of the County Clerk of New York County
on April 6, 1981(filed as Exhibit 3a to Registration
Statement on Form S-1 as filed with the Securities and
Exchange Commission on May 7, 1981, No. 2-72177 and
incorporated herein by reference).
10.1 Acquisition Services Agreement between the Partnership
and the General Partner dated June 25, 1981 (filed as
Exhibit 12c to Registration Statement on Form S-1 as filed
with the Securities and Exchange Commission on May 7, 1981,
No. 2-72177 and incorporated herein by reference).
10.2 Management Agreement between the Partnership and the
General Partner dated June 25, 1981 (filed as Exhibit 12d to
Registration Statement on Form S-1 as filed with the
Securities and Exchange Commission on May 7, 1981, No.
2-72177 and incorporated herein by reference).
10.3 Agreement for Financial Advisory Services between the
Partnership and Shearson Leasing Corporation dated June 25,
1981 (filed as Exhibit 12e to Registration Statement on Form
S-1 as filed with the Securities and Exchange Commission on
May 7, 1981, No. 2-72177 and incorporated herein by
reference).
10.4 First Amended and Restated Credit Agreement between SEI
2 L.P. and Buttonwood Leasing Corporation dated January 3, 1997.
10.5 First Amended and Restated Credit Note between SEI 2
L.P. and Buttonwood Leasing Corporation dated January 3, 1997.
27.0 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of
the year for which this report is filed.
SIGNATURES
Pursuant to the requirements 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.
SEI II L.P.
BY: SEI II EQUIPMENT INC.
General Partner
Date: March 27, 1997 BY: /s/ Rocco F. Andriola
Name: Rocco F. Andriola
Title: President and Director
Date: March 27, 1997 BY: /s/ Regina Hertl
Name: Regina Hertl
Title: Vice President and Chief Financial Officer
Date: March 27, 1997 BY: /s/ Michael T. Marron
Name: Michael T. Marron
Title: Vice President
Balance Sheets At December 31, At December 31,
1996 1995
Assets
Property:
Equipment $ 8,306,724 $8,306,724
Less accumulated depreciation (5,011,716) (4,679,447)
Net Equipment 3,295,008 3,627,277
Cash and cash equivalents 5,703,859 4,238,441
Due from equipment manager 425,549 673,652
Other assets 8,184 --
Total Assets $ 9,432,600 $8,539,370
Liabilities and Partners' Deficit
Liabilities:
Accounts payable and accrued expenses $ 34,173 $ 30,628
Accrued interest expense due to affiliate 9,311,189 8,657,814
Deferred interest payable to affiliate 512,854 512,854
Due to General Partner 696,999 671,201
Note payable to affiliate 7,839,000 7,839,000
Total Liabilities 18,394,215 17,711,497
Partners' Deficit:
General Partner (251,806) (253,911)
Limited Partners (3,614 units outstanding) (8,709,809) (8,918,216)
Total Partners' Deficit (8,961,615) (9,172,127)
Total Liabilities and Partners' Deficit $9,432,600 $8,539,370
Statements of Partners' Deficit
For the years ended December 31, 1996, 1995 and 1994
General Limited
Partner Partners Total
Balance at December 31, 1993 $(257,313) $(9,255,009) $(9,512,322)
Net Loss (704) (69,726) (70,430)
Balance at December 31, 1994 (258,017) (9,324,735) (9,582,752)
Net Income 4,106 406,519 410,625
Balance at December 31, 1995 (253,911) (8,918,216) (9,172,127)
Net Income 2,105 208,407 210,512
Balance at December 31, 1996 $(251,806) $(8,709,809) $(8,961,615)
Statements of Operations
For the years ended December 31, 1996 1995 1994
Revenues
Operating revenues $2,579,822 $2,892,077 $1,852,384
Operating Expenses
Operating costs 1,438,584 1,454,871 949,093
Depreciation 332,269 332,269 332,269
Professional and other expenses 50,201 44,660 48,422
Equipment management fee -
Operators 123,973 131,683 105,558
General Partner 25,798 28,921 18,524
Insurance 16,844 16,844 15,327
Total Operating Expenses 1,987,669 2,009,248 1,469,193
Income from operations 592,153 882,829 383,191
Other Income (Expense):
Interest and miscellaneous income 271,734 220,098 93,874
Interest expense (653,375) (692,302) (547,495)
Total Other Expense (381,641) (472,204) (453,621)
Net Income (Loss) $ 210,512 $ 410,625 $ (70,430)
Net Income (Loss) Allocated:
To the General Partner $ 2,105 $ 4,106 $ (704)
To the Limited Partners 208,407 406,519 (69,726)
$ 210,512 $ 410,625 $ (70,430)
Per limited partnership unit
(3,614 outstanding) $57.67 $112.48 $(19.29)
Statements of Cash Flows
For the years ended December 31, 1996 1995 1994
Cash Flows From Operating Activities
Net Income (Loss) $210,512 $410,625 $(70,430)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 332,269 332,269 332,269
Increase (decrease) in cash arising from
changes in operating assets and liabilities
Due from equipment manager 248,103 (151,569) (162,238)
Other assets (8,184) -- --
Accounts payable and accrued expenses 3,545 (5,573) (2,003)
Accrued interest expense due to affiliate 653,375 692,302 547,495
Due to General Partner 25,798 28,921 18,524
Net cash provided by operating activities 1,465,418 1,306,975 663,617
Net increase in cash and cash equivalents 1,465,418 1,306,975 663,617
Cash and cash equivalents,
beginning of period 4,238,441 2,931,466 2,267,849
Cash and cash equivalents,
end of period $5,703,859 $4,238,441 $2,931,466
Notes to the Financial Statements
December 31, 1996, 1995 and 1994
1. Organization
SEI II L.P. (the "Partnership") was organized under the
Partnership Act of the State of New York on April 6, 1981. The
term of the Partnership will continue through December 31, 2011,
unless terminated and dissolved sooner pursuant to the
Partnership Agreement.
The general partner is SEI II Equipment Inc. (the "General
Partner"), formerly Shearson Equipment Management Corp., an
affiliate of Lehman Brothers Inc. 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 "Shearson."
Consequently, the General Partner's name was changed to SEI II
Equipment Inc. to delete any reference to "Shearson."
The Partnership's business consists of one segment, the
investment in a fleet of 25 covered hopper river barges which are
engaged in the intercoastal waterway transportation of goods.
With the exception of such services as are provided by the
Partnership to users of its equipment, the Partnership does not
engage in the sales of goods or services.
Upon formation of the Partnership, an affiliate of the General
Partner contributed $1,000 and purchased 22 partner units for
$100,650. The initial Limited Partners contributed $18,300 for
four partner units. An additional 3,588 limited partnership
units were then sold at a price of $5,000 per unit. The offering
was completed as of October 2, 1981. As of that date, there
were 3,614 interests outstanding, (including 22 interests
purchased by an affiliate of the General Partner and two
interests each purchased by the two initial limited partners)
which represent aggregate capital contributions to the
Partnership of $18,059,950.
The General Partner has entered into an agreement with an
independent equipment manager for the operation of the
Partnership's equipment. The results of such operations are
reported to the General Partner by the independent equipment
manager and have been reflected in the accompanying financial
statements.
2. Significant Accounting Policies
Basis of Accounting - The accompanying financial statements have
been prepared on the accrual basis of accounting in accordance
with generally accepted accounting principles. Revenues are
recognized as earned and expenses are recorded as obligations are
incurred.
Equipment Manager - On January 1, 1993, the Partnership transferred
management of its assets to a new equipment manager, Midwest
Marine Management Company ("Midwest Marine"). Midwest Marine
operates the barge fleet and provides for pooling of all owners'
assets. Due to this pooling, the Partnership is entitled to a
proportion of the pooled net revenues; therefore, the Partnership
does not record operating assets or liabilities other than the
balance due from Midwest Marine.
Equipment and Depreciation - The equipment balance at December 31,
1996 and 1995 consisted of 25 covered hopper river barges, stated
at cost. Depreciation for financial reporting purposes is
computed on a straight-line basis over the estimated useful lives
of 25 years.
Accounting for Impairment - In March 1995, the Financial
Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of "
("FAS 121"), which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets'
carrying amount. FAS 121 also addresses the accounting for long-
lived assets that are expected to be disposed of. The
Partnership adopted FAS 121 in the fourth quarter of 1995.
Cash Equivalents - Cash equivalents consist of short-term highly
liquid investments with maturities of three months or less from
the date of purchase. The carrying amount approximates fair
value because of the short maturity of these investments.
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
institution's insurance limits. The Partnership invests
available cash with high credit quality financial institutions.
Fair Value of Financial Instruments - Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments" ("FAS 107"), requires that the Partnership
disclose the estimated fair values of its financial instruments.
Fair values generally represent estimates of amounts at which a
financial instrument could be exchanged between willing parties
in a current transaction other than in forced liquidation.
Fair Value estimates are subjective and are dependent on a number
of significant assumptions based on management's judgment
regarding future expected loss experience, current economic
conditions, risk characteristics of various financial
instruments, and other factors. In addition, FAS 107 allows a
wide range of valuation techniques, therefore, comparisons
between entities, however similar, may be difficult.
Income Taxes - No provision for income taxes has been made in the
accompanying financial statements since such taxes are the
responsibility of the individual partners rather than that of the
Partnership.
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 reporting period. Actual results could differ from
those estimates.
3. Partnership Allocations
The Partnership Agreement substantially provides for the
following:
Distribution of Partnership Funds - Net cash from operations shall
be distributed at the discretion of the General Partner, 99% to
the Limited Partners and 1% to the General Partner.
Cash from sales or refinancings shall be allocated and paid first
to all partners until the amount of all distributions received by
them equals their positive capital account balances. Any balance
will be allocated to the Limited Partners until the cumulative
amount of distributions made to them equals their Original
Invested Capital plus a cumulative 10% per annum return as
defined. Thereafter, cash will be distributed 85% to the Limited
Partners and 15% to the General Partner. The cumulative amount
of distributions to date does not exceed the required
distributions as of December 31, 1996.
Cash distributions to the partners are presently prohibited by
the amended credit agreement with the Partnership's lender (Note
4). No cash distributions have been made by the General Partner
since the third quarter of 1982.
Allocation of Income and Losses - All operating profits and losses
and losses from sales or refinancings shall be allocated 1% to
the General Partner and 99% to the Limited Partners. Profits
from sales or refinancings shall be allocated to the General
Partner based on the greater of either 1% of such profits or the
amount distributable to the General Partner, as defined in the
Partnership Agreement. Any remaining profits shall be allocated
to the Limited Partners.
4. Related Party Transactions
General Partner Fees - The Partnership Agreement specifies that the
General Partner will receive (a) an equipment management fee in
an amount that will not exceed 5% of the annual gross revenues of
all equipment owned by the Partnership; (b) in the event the
General Partner subcontracts to third parties for services to be
rendered in the management of the equipment, any management fee
paid to a third party will reduce the fee otherwise earned by the
General Partner, but not below 1% of gross revenues. As of
December 31, 1996, $696,999 in equipment management fees earned
by the General Partner remains to be paid to the General Partner.
In accordance with the Partnership Agreement, the General Partner
has deferred its rights to receive such fees until such time as
the Partnership is in a position to make cash distributions to
all partners.
Cash and Cash Equivalents - Cash and cash equivalents reflected on
the Partnership's balance sheet at December 31, 1995 were on
deposit with an affiliate of the General Partner. As of December
31, 1996, no cash and cash equivalents were on deposit with an
affiliate of the General Partner or the Partnership.
Long-term Debt - On May 30, 1986, the Partnership restructured its
long-term debt which had been in default since June 1985.
Buttonwood Leasing Corporation (the "Purchaser"), which is a
corporation affiliated with the General Partner, purchased from
the Partnership's lenders (the "Banks") the Promissory Note dated
December 9, 1981 (the "Note") originally executed by the
Partnership in favor of the Banks. The Purchaser agreed to waive
enforcement of certain financial covenants contained in the loan
documentation, covenants of which the Partnership was not in
compliance. Subsequent to the Note purchase, the Purchaser
entered into an understanding with the Partnership on the
following terms and conditions. First, the principal amount of
the loan would remain the same. Second, interest would be
charged on the outstanding principal amount of the Note at a rate
equal to the prime rate charged by Bank America Illinois,
formerly Continental Illinois National Bank, which was 8.25% at
December 31, 1996, 8.75% at December 31, 1995 and 7.75% at
December 31, 1994. Accrued and deferred interest is payable at
maturity of the Note. The Note had a maturity date of January 3,
1997, and on that date the amount of accrued and unpaid interest
on the Note was $9,829,360.
On January 3, 1997, the Partnership entered into a First Amended
and Restated Credit Note ("Amended Note") with Buttonwood Leasing
Corporation which extended the maturity date of the Note from
January 3, 1997 to the earlier of January 2, 1998, or the date on
which the Partnership sells the barges. At that time, a
principal payment of $5,500,000 was made on the Note, reducing
the principal amount from $7,839,000 to $2,339,000.
In accordance with the Amended Note, the Partnership is required
to pay quarterly installments of principal only on April 1, 1997,
July 1, 1997, and October 1, 1997 (each a "Payment Date") in an
amount equal to the amount of interest accrued on the unpaid
principal balance from the later of January 3, 1997 or the
immediately preceding Payment Date. In addition, the Partnership
is required to pay interest on the unpaid principal balance at
maturity on January 2, 1998. Interest on the outstanding
principal balance of the Amended Note shall be computed using
simple interest at a rate equal to the Prime Rate as charged by
Bank America Illinois.
In addition to the quarterly principal installments, the
Partnership is required to make a cash sweep payment, which is
applied to principal, on or before the 60th day after the end of
each calendar quarter commencing March 31, 1997. The amount of
each cash sweep payment will be equal to 90% of Net Operating
Income (as defined in the Amended Note) minus the scheduled
principal installments paid on any debt permitted by Section 9(c)
of the Credit Agreement (as defined in the Amended Note) for the
immediately preceding calendar quarter of the Partnership.
The fair market value of the Amended Note is substantially less
than its carrying amount. It is not practicable for the
Partnership to estimate the fair value of this financial
instrument as no quoted market price exists and the cost of
obtaining an independent valuation appears excessive to the
Partnership.
5. Litigation
In March 1996, a purported class action, on behalf of all Limited
Partners, was brought against the Partnership, Lehman Brothers
Inc., Smith Barney Holdings Inc., and a number of other limited
partnerships in New York State Supreme Court. The complaint
alleges claims of common law fraud and deceit, negligent
misrepresentation, breach of fiduciary duty and breach of implied
covenant of good faith and fair dealing. The defendants intend
to defend the action vigorously.
6. Reconciliation of Differences between Financial Statements and
the Partnership's Tax Return
Net income, as reported in 1996 $ 210,512
Adjustments-
Depreciation differential between the Accelerated
Cost Recovery System (ACRS) and depreciation
for financial reporting 332,269
Increase in accrued operating expenses 3,545
Management fee expense 25,798
Increase in accrued interest expense
due to affiliate 653,375
Total adjustments 1,014,987
Net income per the Partnership's 1996 tax return $ 1,225,499
Net income allocation:
Limited Partners (3,614 interests) $ 1,213,244
General Partner 12,255
$ 1,225,499
Per Limited Partnership interest $335.71
Partners' deficit, as reported December 31, 1996 $(8,961,615)
Adjustments, as above 1,014,987
Adjustments, prior years 6,245,235
Syndication expenses 1,740,961
Partners' deficit, per the Partnership's 1996 tax return $ 39,568
The partners' deficit reported on the Partnership's tax return is
allocable to the partners as follows:
Limited Partners (3,614 interests) $ (159,695)
General Partner 199,263
$ 39,568
The Partnership's tax returns and the amounts of distributable
Partnership income or loss are subject to examination by federal
and state taxing authorities. In the event of an examination of
the Partnership's tax return, the tax liability of the partners
could be changed if an adjustment in the Partnership's income or
loss is ultimately sustained by the taxing authorities.
Report of Independent Public Accountants
To the Partners of
SEI II L.P.:
We have audited the accompanying statements of financial
condition of SEI II L.P. (a New York limited partnership) as of
December 31, 1996 and 1995, and the related statements of
operations, partners' deficit and cash flows for each of the
three years in the period ended December 31, 1996. 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.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of SEI II L.P. as of December 31, 1996 and 1995, and the results
of its operations and its cash flows for each of the three years
in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 7, 1997