1
EXHIBIT 20.1
FIDUCIARY CAPITAL PARTNERS, L.P.
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THIRD QUARTER REPORT
1996
2
FIDUCIARY CAPITAL PARTNERS, L.P.
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MESSAGE TO INVESTORS
Dear Investor:
A number of matters have required a significant amount of management time
and effort over the last several months. While the majority of our investments
continue to perform satisfactorily, three of them require special mention in
this letter. In addition, we will briefly summarize the repurchase offer and
the status of your distributions.
FOLLOW-ON INVESTMENT
LMC Operating Corp. ("LMC") The Fund has committed to provide up to
$1,967,040 of additional subordinated debt to LMC, of which $983,520 was
advanced on November 1, 1996. This follow-on investment will allow LMC to move
forward with two strategic undertakings that are expected to be very
beneficial. The first use of the funds is to finance the acquisition of a
public company through a reverse merger. Once this transaction is finalized in
early 1997, LMC, which will be the surviving entity, will be a public company.
By virtue of its being public, LMC should have increased credibility in the
marketplace. The second use of the funds is to implement a strategy of product
diversification. The company will use the funds to finalize the development and
market introduction of a new vehicle that will be utilized in a wide variety of
industries. This product will expand LMC's markets beyond seasonal snow-related
businesses and is expected to significantly increase the company's revenues
over the next few years.
INVESTMENT REVALUATIONS
Canadian's Holdings, Inc. ("Canadian's") During October 1996, the Fund
commenced an adversary proceeding in the Canadian's Chapter 11 bankruptcy case
against Finova Capital Corporation ("Finova"), ▇▇▇▇▇▇ ▇▇▇▇▇▇ and ▇▇▇▇▇▇ ▇▇▇▇▇.
The complaint seeks a declaratory judgment that sales taxes collected by
Canadian's and turned over to Finova were "trust funds" collected by Canadian's
on behalf of various state tax authorities. Through the complaint, the Fund has
objected to Finova's secured claim against Canadian's, which was guaranteed by
▇▇▇▇▇▇ ▇▇▇▇▇▇ and ▇▇▇▇▇▇
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ONE
3
FIDUCIARY CAPITAL PARTNERS, L.P.
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Eiger, and seeks to recover the sales tax and certain other amounts for the
benefit of Canadian's bankruptcy estate. As a result of this litigation and the
issues involved, the Fund accrued $429,373 for legal costs and possible
payments that may be required to settle the litigation or to fund the payment
of Canadian's outstanding sales tax liabilities.
Atlas Environmental, Inc. ("Atlas") The companies that Atlas acquired with
the proceeds of the Fund's subordinated debt investment have not performed as
well as expected. Atlas has defaulted on certain financial covenants in its
agreements with its senior lender and with the Fund. The senior lender, the
Bank of New York, has reacted to the covenant defaults by limiting Atlas'
availability under its revolving credit facility and by instructing Atlas not
to pay the quarterly interest payments that were due on the Fund's subordinated
debt during July and October 1996. In accordance with the intercreditor
agreement between the Fund and the Bank of New York, the bank can block
payments to the Fund for up to 180 days.
During August 1996, Atlas entered into a letter of intent, under the terms
of which some of the company's businesses would be sold for cash. This sale, if
consummated, would provide cash to pay the Fund's interest. As a result, the
Fund accrued the interest due on the subordinated debt as of September 30,
1996.
On November 5, 1996, the purchaser notified Atlas that it wanted to
renegotiate the terms of the transaction, including a reduction in the purchase
price. Atlas management has advised the Fund that they do not expect to be able
to reach agreement with the purchaser and therefore Atlas will remain in
default on its debt. Atlas is now determining and evaluating its options and is
involved in negotiations with its lenders and potential purchasers. As a result
of these developments, the Fund will probably not collect the accrued interest
that is due on its subordinated debt investment in the near term and the value
of the Fund's Atlas investment has become impaired. In recognition of this,
during November 1996 the Fund reversed the accrual of interest due on the Atlas
investment, which totaled $243,421 as of September 30, 1996, and recorded a
$590,112 writedown in the carrying value of its Atlas investment.
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TWO
4
FIDUCIARY CAPITAL PARTNERS, L.P.
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NET ASSET VALUE
The Fund's net asset value per Unit was $16.39 at September 30, 1996 and
$15.91 at November 14, 1996. The November 14th net asset value was used to
establish the repurchase price for the 1996 repurchase offer. These net asset
values compare to net asset values of $16.79 at December 31, 1995 and $16.70 at
June 30, 1996.
The decline in the net asset value from December 31, 1995 to September 30,
1995 resulted primarily from the accrual for legal costs and possible payments
relating to the Canadian's litigation. The decline in net asset value between
September 30, 1996 and November 14, 1996 resulted primarily from a writedown of
the Atlas investment and the reversal of accrued interest relating to the Atlas
investment.
PERIODIC UNIT REPURCHASE POLICY
Pursuant to the terms of the Periodic Unit Repurchase Policy which was
adopted by the Fund's investors during 1993, the Fund annually offers to
repurchase from investors, up to 7.5% of its outstanding Units for an amount
equal to the current net asset value per Unit, net of a 2% fee retained by the
Fund to offset expenses incurred in connection with the repurchase offer. If
more than 7.5% of the Units are tendered, then at its discretion, the Fund can
elect to repurchase up to an additional 2% of the Units.
The 1996 repurchase offer was mailed to investors during October 1996.
Investors tendered 299,464 Units, or approximately 21.28% of the Fund's
outstanding Units, for repurchase. The Fund repurchased 108,068 Units, or
approximately 7.68% of the Fund's outstanding Units, during November 1996 at a
net asset value per Unit of $15.91 ($15.59, net of the 2% fee).
The next opportunity to have the Fund repurchase your Units will occur
during the fourth quarter of 1997.
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THREE
5
FIDUCIARY CAPITAL PARTNERS, L.P.
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CASH DISTRIBUTIONS
The Fund made the cash distribution for the third quarter of 1996 on
November 15, 1996. This distribution of $.30 per Unit, was equal to an
annualized rate of 6% of contributed capital. This distribution consisted of
both current and accumulated net investment income and realized gain on
investments. We expect the distribution for the fourth quarter of 1996 to be
made on February 14, 1997 at the same 6% annualized rate.
The Fund's investment period ended on December 31, 1995. Although the Fund
is permitted to make additional investments in existing portfolio companies
after 1995, the Fund is no longer permitted to acquire investments in new
portfolio companies. This will impact the amount of the Fund's quarterly
distributions for subsequent years because all proceeds from future
dispositions or maturities of investments will be distributed to investors,
except to the extent cash is needed to fund the annual repurchase offer or to
fund any additional follow-on investments that the Fund may make in existing
portfolio companies.
* * * * * * * * * * *
If you have any questions regarding your investment in the Fund, please
call us at ▇▇▇-▇▇▇-▇▇▇▇.
Sincerely,
▇▇▇▇ ▇▇▇▇▇▇, Chairman
FCM Fiduciary Capital Management Company
▇. ▇▇▇▇ DeGrassi, President
FCM Fiduciary Capital Management Company
November 21, 1996
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FOUR
6
FIDUCIARY CAPITAL PARTNERS, L.P.
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SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996 (UNAUDITED)
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PRINCIPAL
AMOUNT/ INVESTMENT AMORTIZED % OF TOTAL
SHARES INVESTMENT DATE COST VALUE INVESTMENTS
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MANAGED COMPANIES:
182,453.91 sh. Neodata Corporation,
10.00% Class A Convertible 12/27/90 &
Preferred Stock - Series 2* 09/30/92 $ 337,945 $ 1
10,607.78 sh. Neodata Corporation, 12/27/90 &
Common Stock* 09/30/92 1 1
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337,946 2 0.0%
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27,944 sh. KEMET Corporation,
Common Stock(1)* 07/11/91 9,905 567,613
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9,905 567,613 2.4
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75,856 sh. ar accessories group,
incorporated, Warrants
to Purchase Class B
Common Stock(2)* 07/30/92 104,091 817,355
27,392 sh. ar accessories group,
incorporated, Class A
Common Stock(2)* 07/30/92 273,920 295,151
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378,011 1,112,506 4.8
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$6,087,185 Elgin National Industries, Inc.,
13.00% Senior Subordinated
Notes due 9/01/01(3) 09/24/93 5,972,693 5,972,693
7,119.71 sh. ENI Holding Corp.,
10.00% Preferred Stock
due 12/31/01 09/24/93 711,971 926,748
489.27 sh. ENI Holding Corp.,
Class B Common Stock* 09/24/93 48,927 48,927
510.83 sh. ENI Holding Corp.,
Warrants to Purchase Class
B Common Stock* 09/24/93 51,078 51,078
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6,784,669 6,999,446 30.0
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260,400 sh. LMCOperating Corp., 7.00%
Cumulative Redeemable
Preferred Stock* 06/10/94 2,596,621 2,596,621
27.28 sh. LMCOperating Corp.,
Common Stock* 02/09/96 545,599 4,799
52.08 sh. LMCCredit Corp.,
Common Stock* 02/09/96 1 1
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3,142,221 2,601,421 11.2
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The accompanying notes to financial statements are an
integral part of this schedule.
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FIVE
7
FIDUCIARY CAPITAL PARTNERS, L.P.
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SCHEDULE OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED)
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PRINCIPAL
AMOUNT/ INVESTMENT AMORTIZED % OF TOTAL
SHARES INVESTMENT DATE COST VALUE INVESTMENTS
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1,608 sh. MTI Holdings II, Inc.,
Common Stock* 07/06/94 & 227,438 48,306
4,272 sh. MTI Holdings II, Inc., 12/28/94
Warrants to Purchase 07/06/94 &
Common Stock(4)* 12/28/94 60,492 12,848
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287,930 61,154 0.3
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$1,460,000 R.B.M. Precision Metal
Products, Inc., 13.00%
Senior Subordinated
Secured Notes due
5/24/02(5) 05/24/95 1,366,677 1,366,677
11,060.6 sh. R.B.M. Precision Metal
Products, Inc., Warrants
to Purchase Common
Stock* 05/24/95 82,955 82,955
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1,449,632 1,449,632 6.2
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$3,934,080 Atlas Environmental, Inc.,
13.50% Senior Subordinated
Secured Notes due
1/19/03(6) 01/25/96 3,828,801 3,828,801
407,659 sh. Atlas Environmental, Inc.,
Warrants to Purchase
Common Stock(7)* 01/25/96 40,766 40,766
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3,869,567 3,869,567 16.6
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Total Investments in Managed
Companies (72.3% of net assets) 16,259,881 16,661,341 71.5
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TEMPORARY INVESTMENTS:
$3,325,000 ▇▇▇▇▇▇▇, Inc.,
5.04% Notes due 10/09/96 09/25/96 3,321,283 3,321,283
$3,325,000 General Electric
Capital Corporation,
5.08% Notes due 10/09/96 09/25/96 3,321,254 3,321,254
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Total Temporary Investments (28.8% of net assets) 6,642,537 6,642,537 28.5
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Total Investments (101.1% of net assets) $22,902,418 $23,303,878 100.0%
=================================================================================================
(1) The KEMET Corporation common stock trades on the NASDAQ National Market
System.
(2) Amity Leather Products Co. changed its corporate name to ar accessories
group, incorporated during 1996.
(3) The notes will amortize in eight equal quarterly installments of $760,898
commencing on 11/30/99.
(4) The warrants have exercise prices of $20.00 per share (1,281 shares) and
$35.00 per share (2,991 shares).
(5) The notes will amortize in three equal annual installments of $486,667
commencing on 5/24/00.
(6) The notes will amortize in five equal annual installments of $786,816
commencing on 1/19/99. (Note 5)
(7) The Atlas Environmental, Inc. common stock trades over the counter on a
limited basis with quotations provided via the OTC Bulletin Board. The
warrants have an exercise price of $8.00 per share.
* Non-income producing security.
The accompanying notes to financial statements are an
integral part of this schedule.
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SIX
8
FIDUCIARY CAPITAL PARTNERS, L.P.
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BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995 (UNAUDITED)
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1996 1995
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ASSETS:
Investments (Note 5):
Portfolio investments, at value:
Managed companies (amortized cost -
$16,259,881 and $16,677,145,
respectively) $ 16,661,341 $ 13,401,816
Temporary investments, at amortized cost 6,642,537 10,396,792
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Total investments 23,303,878 23,798,608
Cash and cash equivalents 358,042 200,969
Accrued interest
receivable (Note 5) 334,558 140,490
Other assets 2,838 3,206
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Total assets $ 23,999,316 $ 24,143,273
===============================================================================
LIABILITIES:
Payable to affiliates (Notes 2, 3 and 4) $ 57,496 $ 60,372
Accounts payable and accrued liabilities 467,145 33,177
Distributions payable to partners 426,438 426,438
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Total liabilities 951,079 519,987
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CONTINGENCIES (NOTES 5 AND 6)
NET ASSETS:
Managing General Partner (9,475) (3,725)
Limited Partners (equivalent to $16.39
and $16.79, respectively, per limited
partnership unit based on 1,407,244
units outstanding) 23,057,712 23,627,011
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Net assets 23,048,237 23,623,286
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Total liabilities and net assets $ 23,999,316 $ 24,143,273
===============================================================================
The accompanying notes to financial statements are an integral part
of these financial statements.
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SEVEN
9
FIDUCIARY CAPITAL PARTNERS, L.P.
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STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
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1996 1995 1996 1995
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INVESTMENT INCOME:
Income:
Interest $491,818 $747,069 $1,472,041 $2,180,244
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Total investment income 491,818 747,069 1,472,041 2,180,244
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Expenses:
Investment advisory fees (Note 2) 41,887 58,354 132,497 175,060
Professional fees 30,332 16,507 111,956 48,948
Fund administration fees (Note 3) 35,843 35,843 107,528 107,528
Administrative expenses (Note 3) 20,275 20,275 60,828 60,828
Independent General Partner fees
and expenses (Note 4) 12,693 12,452 44,636 45,398
Other expenses 9,048 7,945 38,253 25,846
Amortization - 2,790 - 8,370
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Total expenses 150,078 154,166 495,698 471,978
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NET INVESTMENT INCOME 341,740 592,903 976,343 1,708,266
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REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized (loss) gain on
investments, including accrual
for potential litigation
settlement (Note 5) (409,453) 640,078 (3,948,869) 3,039,855
Net change in unrealized
gain (loss) on investments 46,029 (343,821) 3,676,789 (1,071,059)
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Net (loss) gain on investments (363,424) 296,257 (272,080) 1,968,796
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NET (DECREASE) INCREASE IN NET
ASSETS RESULTING FROM OPERATIONS $ (21,684) $889,160 $ 704,263 $3,677,062
========================================================================================
The accompanying notes to financial statements are an integral part
of these financial statements.
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EIGHT
10
FIDUCIARY CAPITAL PARTNERS, L.P.
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STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED)
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1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations $ 704,263 $ 3,677,062
Adjustments to reconcile net increase
in net assets resulting from operations
to net cash provided by operating activities:
Accreted discount on portfolio investments (41,864) (66,686)
Amortization -- 8,370
Change in assets and liabilities:
Accrued interest receivable (194,068) (213,062)
Other assets 368 901
Payable to affiliates (2,876) 4,479
Accounts payable and accrued liabilities 4,595 (7,268)
Prepaid interest income -- (60,146)
Net realized loss (gain) on
investments, including accrual
for potential litigation settlement 3,948,869 (3,039,855)
Net change in unrealized (gain) loss
on investments (3,676,789) 1,071,059
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Net cash provided by operating activities 742,498 1,374,854
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of portfolio investments (4,400,998) (3,198,810)
Proceeds from dispositions of portfolio investments 1,340,631 4,729,027
Sale (purchase) of temporary investments, net 3,754,255 (1,218,340)
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Net cash provided by investing activities 693,888 311,877
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CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions paid to partners (1,279,313) (1,619,492)
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Net cash used in financing activities (1,279,313) (1,619,492)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 157,073 67,239
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 200,969 171,999
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 358,042 $ 239,238
==================================================================================
The accompanying notes to financial statements are an integral part
of these financial statements.
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NINE
11
FIDUCIARY CAPITAL PARTNERS, L.P.
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STATEMENTS OF CHANGES IN NET ASSETS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND
FOR THE YEAR ENDED DECEMBER 31, 1995 (UNAUDITED)
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1996 1995
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Increase in net assets resulting from operations:
Net investment income $ 976,343 $ 2,037,186
Net realized (loss) gain on investments,
including accrual for potential
litigation settlement (3,948,869) 4,588,421
Net change in unrealized gain (loss) on investments 3,676,789 (7,180,010)
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Net increase (decrease) in net assets resulting
from operations 704,263 (554,403)
Repurchase of limited partnership units -- (2,354,597)
Distributions to partners from-
Net investment income (1,198,956) (1,814,573)
Realized gain on investments (80,356) --
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Total decrease in net assets (575,049) (4,723,573)
Net assets:
Beginning of period 23,623,286 28,346,859
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End of period (including undistributed
net investment income of $0
and $222,613, respectively) $ 23,048,237 $ 23,623,286
====================================================================================
The accompanying notes to financial statements are an integral part
of these financial statements.
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TEN
12
NUMBER
FIDUCIARY CAPITAL PARTNERS, L.P.
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SELECTED PER UNIT DATA AND RATIOS (UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
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1996 1995 1996 1995
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PER UNIT DATA:
Investment income $ .35 $ .48 $ 1.04 $ 1.41
Expenses (.11) (.10) (.35) (.30)
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Net investment income .24 .38 .69 1.11
Net realized gain (loss) on investments,
including accrual for potential
litigation settlement (.29) .42 (2.78) 1.97
Net change in unrealized (loss) gain
on investments .04 (.22) 2.59 (.69)
Distributions declared to partners (.30) (.30) (.90) (.90)
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Net (decrease) increase in net asset value (.31) .28 (.40) 1.49
Net asset value:
Beginning of period 16.70 19.76 16.79 18.55
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End of period $ 16.39 $ 20.04 $ 16.39 $ 20.04
=================================================================================================================
RATIOS (ANNUALIZED):
Ratio of expenses to average net assets 2.58% 2.03% 2.82% 2.13%
Ratio of net investment income to
average net assets 5.87% 7.80% 5.55% 7.72%
Number of limited partnership units at
end of period 1,407,244 1,526,949 1,407,244 1,526,949
The accompanying notes to financial statements are an integral
part of these selected per unit data and ratios.
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ELEVEN
13
FIDUCIARY CAPITAL PARTNERS, L.P.
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NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 (UNAUDITED)
1. GENERAL
The accompanying unaudited interim financial statements include all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of FCM Fiduciary Capital Management Company ("FCM"), the Managing
General Partner of the Fund, necessary to fairly present the financial position
of the Fund as of September 30, 1996 and the results of its operations, changes
in net assets and its cash flows for the periods then ended.
These financial statements should be read in conjunction with the
Significant Accounting Policies and other Notes to Financial Statements
included in the Fund's annual audited financial statements for the year ended
December 31, 1995.
2. INVESTMENT ADVISORY FEES
As compensation for its services as investment adviser, FCM receives a
subordinated monthly fee at the annual rate of 1% of the Fund's available
capital, as defined in the Partnership Agreement. Investment advisory fees of
$132,497 were paid by the Fund for the nine months ended September 30, 1996.
3. FUND ADMINISTRATION FEES
As compensation for its services as fund administrator, FCM receives a
monthly fee at the annual rate of .45% of net proceeds available for
investment, as defined in the Partnership Agreement. Fund administration fees
of $107,528 were paid by the Fund for the nine months ended September 30, 1996.
FCM is also reimbursed, subject to various limitations, for administrative
expenses incurred in providing accounting and investor services to the Fund.
The Fund reimbursed FCM for administrative expenses of $60,828 for the nine
months ended September 30, 1996.
4. INDEPENDENT GENERAL PARTNER FEES AND EXPENSES
As compensation for services rendered to the Fund, each of the Independent
General Partners receives from the Fund and Fiduciary Capital Pension Partners,
L.P., an affiliated fund, (collectively, the "Funds") an annual fee of $30,000,
payable monthly in arrears, together with all out-of-pocket expenses. Each
Fund's allocation of these fees and expenses is based on the relative number of
outstanding Units. Fees and expenses paid by the Fund for the nine months ended
September 30, 1996 totaled $44,636.
--------------------
TWELVE
14
FIDUCIARY CAPITAL PARTNERS, L.P.
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. PORTFOLIO INVESTMENTS
Canadian's Holdings, Inc. On October 3, 1996, the Fund commenced an
adversary proceeding in the Canadian's Holdings, Inc. ("Canadian's) Chapter 11
bankruptcy case against Finova Capital Corporation ("Finova"), ▇▇▇▇▇▇ ▇▇▇▇▇▇
and ▇▇▇▇▇▇ ▇▇▇▇▇. The complaint seeks a declaratory judgment that sales taxes
collected by Canadian's and turned over to Finova were "trust funds" collected
by Canadian's on behalf of various state tax authorities. Through the
complaint, the Fund has objected to Finova's secured claim against Canadian's,
which was guaranteed by ▇▇▇▇▇▇ ▇▇▇▇▇▇ and ▇▇▇▇▇▇ ▇▇▇▇▇, and seeks to recover
the sales tax and certain other amounts for the benefit of Canadian's
bankruptcy estate.
As a result of this litigation and the issues involved, the Fund accrued
$429,373 for legal costs and possible payments that may be required to settle
the litigation or to fund the payment of Canadian's outstanding sales tax
liabilities. This accrued amount was recorded as a realized loss in the Fund's
Statements of Operations.
Atlas Environmental, Inc. The companies which Atlas Environmental, Inc.
("Atlas") acquired with the proceeds of the Fund's subordinated debt investment
have not performed as well as expected, and as a consequence, Atlas has
defaulted on certain financial covenants in its agreements with its senior
lender and with the Fund. The senior lender, the Bank of New York, has reacted
to the covenant defaults by limiting Atlas' availability under its revolving
credit facility and by instructing Atlas not to pay the $134,250 quarterly
interest payments that were due on the Fund's subordinated debt during July and
October 1996. In accordance with the intercreditor agreement between the Fund
and the Bank of New York, the bank can block payments to the Fund for up to 180
days. During August 1996, the company entered into a letter of intent, under
the terms of which some of the company's businesses would be sold for cash.
This sale, if consummated, would provide cash to pay the Fund's interest. As a
result, the Fund accrued the interest due on the subordinated debt as of
September 30, 1996.
On November 5, 1996, the purchaser notified Atlas that it wanted to
renegotiate the terms of the transaction, including a reduction in the purchase
price. Atlas management has advised the Fund that they do not expect to be able
to reach agreement with the purchaser and therefore Atlas will remain in
default. Meetings with the Bank of New York have been scheduled for the week of
November 11, 1996 and will include Atlas management and representatives of
Fiduciary Capital. As a result of these developments, it has now become
unlikely that the Fund will collect the accrued interest due on its
subordinated debt investment in the near term. The accrued interest totaled
$243,421 as of September 30, 1996 and the Fund reversed the accrual of this
interest on November 5, 1996.
--------------------
THIRTEEN
15
FIDUCIARY CAPITAL PARTNERS, L.P.
-------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
LMC Operating Corp. The Fund has committed to provide up to $1,967,040
of additional subordinated debt to LMC Operating Corp. ("LMC"), of which
$983,520 was advanced on November 1, 1996.
6. CONTINGENCIES
FCM was named as a defendant in a class action lawsuit brought in March
1995 against PaineWebber Incorporated ("PaineWebber") and a number of its
affiliates concerning the sale of 70 different limited partnerships and other
direct investment programs. During May 1995, the Court entered an order
certifying the class and dismissing the class action against FCM without
prejudice.
During January 1996, PaineWebber signed a memorandum of understanding with
the plaintiffs in the class action outlining the terms under which the parties
agreed to settle the case. Pursuant to that memorandum of understanding,
PaineWebber irrevocably deposited $125 million into an escrow fund under the
supervision of the United States District Court for the Southern District of
New York to be used to resolve the litigation. On July 17, 1996, PaineWebber
and the class plaintiffs submitted a definitive settlement agreement, which has
been preliminarily approved by the Court. The agreement provides for the
complete resolution of the class action litigation, including releases in favor
of the Fund and FCM, and the allocation of the $125 million settlement fund
among investors in the various partnerships at issue in the case. As part of
the settlement, PaineWebber also agreed to provide class members with certain
financial guarantees relating to some of the partnerships, including the Fund.
The details of the settlement were described in a notice mailed directly to
class members at the direction of the Court. A final hearing on the proposed
settlement is scheduled to continue during November 1996.
A similar, though smaller, suit was filed against PaineWebber and various
affiliated entities (not including FCM) during February 1996 in a California
state court.
FCM believes that this litigation will be resolved without any material
adverse effect on the Fund's financial condition.
--------------------
FOURTEEN
16
FIDUCIARY CAPITAL PARTNERS, L.P.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Fund held portfolio investments in eight
Managed Companies, with an aggregate cost of approximately $16.3 million. These
portfolio investments, which were made from net offering proceeds and the
reinvestment of proceeds from the sale of other portfolio investments,
represent approximately 72.3% of the Fund's net assets. When acquired, these
portfolio investments generally consisted of high-yield subordinated debt,
linked with an equity participation or a comparable participation feature in
middle market companies. These securities were typically issued in private
placement transactions and were subject to certain restrictions on transfer or
sale, thereby limiting their liquidity. A number of the portfolio companies
have prepaid their subordinated debt that the Fund held. In addition, three of
the portfolio companies have successfully completed initial public offerings
("IPOs") of their stock. The Fund has sold the stock it held in these three
companies, except for a portion of its KEMET Corporation ("KEMET") stock.
As of September 30, 1996, the Fund's remaining assets were invested in
short-term commercial paper. These funds are available to fund follow-on
investments, for distribution to the partners or to fund the annual repurchase
offer.
During January 1996, the Fund invested $3,855,398 in Atlas. The investment
consists of $3,934,080 of 13.5% Senior Subordinated Secured Notes due January
19, 2003, with warrants to acquire 407,659 shares of common stock. The warrants
have an exercise price of $8.00 per share. The Atlas common stock is currently
traded over the counter on a limited basis with quotations provided via the OTC
Bulletin Board under the symbol "ATEV".
See Note 5 to the financial statements for a discussion of significant
recent developments concerning this investment, including the fact that Atlas
is in default on its interest payments to the Fund. As a result of these
developments, this subordinated debt investment was placed on non-accrual
status on November 5, 1996.
During February 1996, the Fund sold its Huntington Holdings, Inc.
("Huntington") warrants. As discussed below, the Fund has received $1,340,631
of proceeds from this transaction. These proceeds have been reserved by the
Managing General Partner to partially fund either the Fund's 1996 repurchase
offer or any additional follow-on investments that the Fund may make in
existing portfolio companies.
During June 1994, the Fund invested $2,551,920 in LMC. The investment
consisted of $2,604,000 of 13.00% Senior Subordinated Notes due May 31, 1999
with warrants to acquire common stock.
During 1995, LMC's majority owner requested that the Fund participate in a
financial restructuring of LMC. The Fund agreed to the proposed restructuring,
which was
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FIDUCIARY CAPITAL PARTNERS, L.P.
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consummated during February 1996. As part of the restructuring, the Fund
converted its existing LMC subordinated debt and warrants into preferred stock
and made a follow-on investment for the purchase of $545,600 of new common
stock.
While LMC has experienced significant operating difficulties since the
Fund acquired its LMC investment during 1994, it appears to be progressing
satisfactorily under the guidance of its new management team. The major
accomplishment has been the re-engineering and modernization of the product
line. Initial responses from customers and other industry sources have been
positive. LMC is optimistic about the prospects for sales of its "utility"
models and is hopeful about fleet grooming sales.
LMC is attempting to diversify its product line to reduce the seasonality
of its business and increase the utilization of its manufacturing facility. It
is concentrating on vehicles with low ground pressure in order to utilize the
engineering and manufacturing expertise gained from snow grooming equipment.
The major project currently underway is the internal development of a tracked
utility vehicle designed for use by landscape and other contractors.
This project and other product developments necessitated an additional
follow-on investment by the Fund. LMC is exploring other possible acquisitions,
including one which would result in a reverse merger into a small public
company and a public listing for LMC shares. Any such merger or acquisition
will also require additional Fund investment. The Fund has committed to provide
up to $1,967,040 of additional subordinated debt to LMC, of which $983,520 was
advanced on November 1, 1996. The Fund currently owns 27% of LMC and our
affiliate, Fiduciary Capital Pension Partners, owns 23%.
Pursuant to the terms of the Fund's periodic unit repurchase policy that
was adopted by the Fund's Limited Partners during 1993, the Fund annually
offers to purchase from its Limited Partners up to 7.5% of its outstanding
Units for an amount equal to the current net asset value per Unit, net of a fee
(not to exceed 2%) to be retained by the Fund to offset expenses incurred in
connection with the repurchase offer. If the number of tendered Units in any
year exceeds 7.5% of the outstanding Units, the Fund's General Partners may
vote to repurchase up to an additional 2% of the outstanding Units. The 1996
repurchase offer was mailed to the Limited Partners on October 7, 1996. Limited
Partners tendered 299,464 Units for repurchase. The Fund anticipates
repurchasing approximately 7.68% of the tendered Units, or approximately
108,068 Units, at the Fund's net asset value per Unit as of November 14, 1996.
The actual redemption of tendered Units will occur on November 21, 1996.
Accrued interest receivable increased $194,068 from $140,490 at December
31, 1995 to $334,558 at September 30, 1996. This increase resulted primarily
from the accrual of interest due on the Atlas notes that were acquired during
January 1996. (See discussion above regarding delinquent status of the interest
payments due from Atlas and the reversal of this accrual subsequent to
September 30, 1996.) This increase was partially offset by a decrease, to zero,
in the accrued interest receivable attributable to the Fund's Canadian's
investment.
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FIDUCIARY CAPITAL PARTNERS, L.P.
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Accounts payable and accrued liabilities increased $433,968 from $33,177
at December 31, 1995 to $467,145 at September 30, 1996. This increase resulted
primarily from the accrual of $429,373 for possible legal costs and other
payments that may be required to settle the Canadian's litigation or to fund
the payment of Canadian's outstanding sales tax liabilities. (See further
discussion below.)
During the nine months ended September 30, 1996, the Fund paid cash
distributions pertaining to the fourth quarter of 1995 and the first and second
quarters of 1996, each in the amount of $426,438. The distribution for the
third quarter of 1996 will be paid on November 15, 1996. These quarterly
distributions are equal to $.30 per Unit and represent an annualized rate equal
to 6.0% of contributed capital.
The Fund's investment period ended on December 31, 1995. Although the Fund
is permitted to make additional investments in existing portfolio companies
after 1995, the Fund is no longer permitted to acquire investments in new
portfolio companies, except to fund commitments made prior to December 31,
1995. This will impact the amount of the Fund's quarterly distributions for
1996 and subsequent years because all proceeds from dispositions or maturities
of investments will be distributed to investors, except to the extent the cash
is needed to fund the annual repurchase offer or to fund any follow-on
investments that the Fund may make in existing portfolio companies.
As of December 31, 1995, the Fund had committed to make three new
portfolio investments. In addition, the Fund had agreed in principle to the
financial restructuring of LMC. As discussed above, one of the committed
investments, Atlas, was acquired during January 1996 and the LMC financial
restructuring was consummated during February 1996. The other two committed
investments have been abandoned. The portion of the Fund's available capital
that was reserved for these abandoned investments is now reserved to fund
either the Fund's 1996 repurchase offer or any additional follow-on investments
that the Fund may make in existing portfolio companies.
See Note 6 to the financial statements for a discussion of litigation
involving PaineWebber and a number of its affiliates concerning the sale of
limited partnerships and other direct investment programs.
RESULTS OF OPERATIONS
INVESTMENT INCOME AND EXPENSES
The Fund's net investment income was $341,740 for the three months ended
September 30, 1996 as compared to net investment income of $592,903 for the
corresponding period of the prior year. Net investment income per limited
partnership unit decreased from $.38 to $.24 and the ratio of net investment
income to average net assets decreased from 7.80% to 5.87% for the three months
ended September 30, 1996 as compared to the corresponding period of the prior
year.
The Fund's net investment income was $976,343 for the nine months ended
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SEVENTEEN
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FIDUCIARY CAPITAL PARTNERS, L.P.
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September 30, 1996 as compared to net investment income of $1,708,266 for the
corresponding period of the prior year. Net investment income per limited
partnership unit decreased from $1.11 to $.69 and the ratio of net investment
income to average net assets decreased from 7.72% to 5.55% for the nine months
ended September 30, 1996 as compared to the corresponding period of the prior
year.
Net investment income for both the three and nine month periods ended
September 30, 1996 decreased primarily as a result of decreases in investment
income.
Investment income decreased $255,251 and $708,203, or 34.2% and 32.5%, for
the three and nine month periods ended September 30, 1996, respectively, as
compared to the corresponding periods of the prior year. These decreases
resulted primarily from the conversion of the Fund's LMC debt securities into
non-dividend paying equity securities and the Canadian's bankruptcy. (Both of
these items are discussed elsewhere in this Report.) The Fund's total
investments also decreased as a result of the Fund's repurchase of 7.84% of its
Units during the fourth quarter of 1995.
Total expenses decreased $4,088, or 2.7%, for the three months ended
September 30, 1996 as compared to the corresponding period of the prior year.
This decrease resulted primarily from decreases in investment advisory fees and
amortization expense. These decreases were partially offset by increases in
professional fees and other expenses.
Total expenses increased $23,720, or 5.0%, for the nine months ended
September 30, 1996 as compared to the corresponding period of the prior year.
This increase resulted primarily from increases in professional fees and other
expenses. These increases were partially offset by decreases in investment
advisory fees and amortization expense.
For both the three and nine month periods ended September 30, 1996, the
increases in professional fees and other expenses were primarily the result of
legal fees and other costs incurred in connection with Canadian's bankruptcy
proceedings. The investment advisory fees decreased as a result of the
repurchase of Units by the Fund during the fourth quarter of 1995 and the
realization during February 1996 of the loss on the Fund's Canadian's
investment. Both the repurchase of Units and the realization of the Canadian's
loss decreased the amount of the Fund's available capital (as defined in the
Partnership Agreement), which is the base with respect to which the investment
advisory fees are calculated. The Fund amortized its organization costs over a
five year period beginning with the inception of the Fund in 1990. Therefore,
these costs became fully amortized during 1995.
NET REALIZED GAIN (LOSS) ON INVESTMENTS
Canadian's was a women's specialty retailer, which had 53 stores on the
East Coast, including stores in the New York City and Philadelphia
metropolitan areas. As widely reported in the business press, retailers almost
universally experienced extremely disappointing sales during the 1995 holiday
season. Women's specialty retailers were especially hard hit. This situation
was exacerbated by severe winter weather which hampered
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EIGHTEEN
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FIDUCIARY CAPITAL PARTNERS, L.P.
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store operations from Boston to Washington, D.C. As a result, a number of
apparel retailers filed for bankruptcy.
Canadian's did not escape the retailing downturn and experienced
significant operating problems. These problems culminated in Canadian's filing
for Chapter 11 bankruptcy protection on February 21, 1996 and ceasing all
operations during March 1996. As discussed in the Fund's previous filings,
Canadian's had embarked on a significant cost cutting program during the fall
of 1995, which included closing marginal stores and reducing general and
administrative costs. However, these measures were not sufficient to offset
the negative impact of the unusually bad holiday season.
As a result of these developments, it became evident that the Fund will
not recover any of its Canadian's investment. Accordingly, the Fund recognized
the $4,756,316 loss on its Canadian's investment as a realized loss during the
three months ended March 31, 1996. This loss recognition did not significantly
affect the Fund's total net gain (loss) on investments for the nine months
ended September 30, 1996 because all but $5 of the loss was recorded as an
unrealized loss during 1995.
On October 3, 1996, the Fund commenced an adversary proceeding in the
Canadian's Chapter 11 bankruptcy case against Finova, ▇▇▇▇▇▇ ▇▇▇▇▇▇ and ▇▇▇▇▇▇
▇▇▇▇▇. The complaint seeks a declaratory judgment that sales taxes collected
by Canadian's and turned over to Finova were "trust funds" collected by
Canadian's on behalf of various state tax authorities. Through the complaint,
the Fund has objected to Finova's secured claim against Canadian's, which was
guaranteed by ▇▇▇▇▇▇ ▇▇▇▇▇▇ and ▇▇▇▇▇▇ ▇▇▇▇▇, and seeks to recover the sales
tax and certain other amounts for the benefit of Canadian's bankruptcy estate.
As a result of this litigation and the issues involved, the Fund accrued
$429,373 for legal costs and possible payments that may be required to settle
the litigation or to fund the payment of Canadian's outstanding sales tax
liabilities. This accrued amount was recorded as a realized loss in the Fund's
Statements of Operations.
During December 1995, Huntington entered into a letter of intent, under
the terms of which all Huntington stock would be sold for cash. The sale was
consummated during February 1996. The Fund's share of the actual sales
proceeds totaled $1,511,364, of which $1,320,711 was received during February
1996 and $19,920 was received during September 1996. A portion of the escrowed
funds were used to pay various transaction expenses. The balance is still
being held in escrow to fund potential contingent purchase price adjustments,
and as collateral for potential claims of the buyer with respect to
representations made by the selling shareholders, including the Fund. While
the remaining portion of the escrow amount must be maintained for a two year
period, certain of the sellers' representations will survive for longer
periods of time, which could result in the Fund being required to reimburse
the purchaser for certain costs and expenses after the escrow is released.
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FIDUCIARY CAPITAL PARTNERS, L.P.
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The Fund recognized a realized gain of $1,216,901 from this transaction
when it was consummated during February 1996. The Fund did not assign any value
to its $190,653 share of the escrow at that time because it was uncertain how
much, if any, of the escrowed funds would ultimately be received by the Fund.
During September 1996, the Fund received a distribution of $19,920 of the
escrowed funds and recognized a corresponding amount of additional realized
gain. Additional gain will be recognized if the Fund actually receives a
distribution of any of the remaining escrowed funds.
NET UNREALIZED GAIN (LOSS) ON INVESTMENTS
FCM values the Fund's portfolio investments on a weekly basis utilizing a
variety of methods. For securities that are publicly traded and for which
market quotations are available, valuations are set by the closing sales, or an
average of the closing bid and ask prices, as of the valuation date.
Fair value for securities that are not traded in any liquid public markets
or that are privately held are determined pursuant to valuation policies and
procedures that have been approved by the Independent General Partners and
subject to their supervision. There is a range of values that are reasonable
for such investments at any particular time. Each such investment is valued
initially based upon its original cost to the Fund ("cost method"). The cost
method is used until significant developments affecting the portfolio company
provide a basis for use of an appraisal valuation. Appraisal valuations are
based upon such factors as the portfolio company's earnings, cash flow and net
worth, the market prices for similar securities of comparable companies and an
assessment of the portfolio company's future financial prospects. In a case of
unsuccessful operations, the appraisal may be based upon liquidation value.
Appraisal valuations are necessarily subjective. The Fund also may use, when
available, third-party transactions in a portfolio company's securities as the
basis of valuation ("private market method"). The private market method is used
only with respect to completed transactions or firm offers made by
sophisticated, independent investors.
As of December 31, 1995, the Fund had recorded $2,609,492 of unrealized
gain and $5,884,821 of unrealized loss on investments. Therefore, as of
December 31, 1995, the Fund had recorded a total net unrealized loss on
investments of $3,275,329.
The net increase in unrealized gain (loss) of investments during the three
and nine month periods ended September 30, 1996 and the cumulative net
unrealized gain on investments as of September 30, 1996, consisted of the
following components:
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FIDUCIARY CAPITAL PARTNERS, L.P.
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Unrealized Gain (Loss) Recorded
During the Three During the Nine
Months Ended Months Ended As of
Portfolio Company September 30, 1996 September 30, 1996 September 30, 1996
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Unrealized net loss recorded
during prior periods with
respect to investments
disposed of during the period $ - $3,841,121 $ -
Neodata - - (337,944)
KEMET 5,240 (103,043) 557,708
AAG - (137,677) 734,495
Elgin / ENI 17,799 53,398 214,777
LMC - - - (540,800)
MTI II 22,990 22,990 (226,776)
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$46,029 $3,676,789 $401,460
=============================================================================================
The Neodata Corporation ("Neodata") stock was written down to a negligible
amount during 1995. The Partnership has consistently valued this investment
based upon a multiple of Neodata's cash flow. Because Neodata's long-term debt
presently provides for the accrual, rather than current payment, of interest,
the company's debt has grown to a level which exceeds the Fund's valuation.
KEMET completed an IPO of its common stock during 1992. The stock, which
trades on the NASDAQ National Market System, closed at $20.3125 (an average of
the closing bid and ask prices) on September 30, 1996. This price is down from
the closing price of $34.125 on December 31, 1995 and up slightly from the
closing price of $20.125 on June 30, 1996. Based on the $20.3125 closing
trading price of the common stock, the 27,944 shares of common stock that the
Fund held at September 30, 1996 had a market value of $567,613.
Amity Leather Products Co. recently changed its corporate name to ar
accessories group, incorporated ("AAG"). The AAG warrants and common stock were
written down in value at March 31, 1996 to bring AAG's valuation more in line
with the valuation of other comparable companies in its industry.
The ENI Holding Corp. preferred stock is being written up in value
quarterly to reflect the amount of the cumulative 10% preferential dividend
that has accrued with respect to the preferred stock.
LMC experienced significant operating problems after the Fund acquired its
LMC investment during 1994 and the Fund was involved in a restructuring of its
LMC investment during 1995. In the restructuring, the Fund's existing LMC
subordinated debt and warrants were converted into preferred stock and the Fund
purchased $545,600 of new common stock.
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FIDUCIARY CAPITAL PARTNERS, L.P.
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As a result of LMC's operational difficulties and the fact that the Fund now
owns equity securities rather than debt securities, the Fund wrote its LMC
investment down by $540,800 during 1995.
The MTI II investment was written down in value during 1994 based upon an
independent third party valuation of the company that was obtained by MTI II's
management. During August 1996, MTI II consummated a financial restructuring
pursuant to which a substantial amount of its corporate debt was converted to
equity. In the restructuring, the existing shareholders, including the Fund,
received a reduced number of shares of common stock, along with warrants to
purchase additional common stock. The Fund's investment in MTI II was written
up in value at September 30, 1996 by $22,990 based upon an analysis of MTI II's
earnings and cash flows.
FCM continually monitors both the Fund's portfolio companies and the
markets, and continually evaluates the decision to hold or sell its traded
securities.
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TWENTY-TWO