1
FIDUCIARY CAPITAL PARTNERS, L.P.
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---------------------------------------
ANNUAL REPORT
1997
2
CONTENTS
Fund Profile and Financial Highlights One
Message to Investors Two
Schedule of Realized Gains and Losses Five
Profiles of Portfolio Companies Six
Schedule of Investments Seven
Balance Sheets Nine
Statements of Operations Ten
Statements of Cash Flows Eleven
Statements of Changes in Net Assets Twelve
Selected Per Unit Data and Ratios Thirteen
Notes to Financial Statements Fourteen
Report of Independent Public Accountants Nineteen
Management's Discussion and Analysis of Financial
Condition and Results of Operations Twenty
3
FIDUCIARY CAPITAL PARTNERS, L.P.
FUND PROFILE
Fiduciary Capital Partners, L.P. (the "Fund") is a
Delaware limited partnership that commenced operations on
August 14, 1990. The Fund has elected to operate as a
business development company under the Investment Company
Act of 1940. The investment objective of the Fund is to
provide current income and capital appreciation by investing
primarily in subordinated debt and related equity securities
issued as the mezzanine financing of privately structured,
friendly leveraged buyouts, leveraged acquisitions and
leveraged recapitalizations.
FINANCIAL HIGHLIGHTS
As of December 31
or Year Ended December 31
1997 1996 1995 1994 1993
-----------------------------------------------------------------------
(in thousands, except per Unit amounts)
--------------------------------------------------------------------------------------------------------------------------
Total Investment Income $ 1,647 $ 1,600 $ 2,669 $ 2,802 $ 3,133
Net Investment Income 1,017 952 2,037 2,127 2,400
Net Realized and Unrealized
(Loss) Gain on Investments (314) (1,358) (2,592) 1,824 180
Cash Distributions Declared to Partners 3,707 1,673 1,815 2,995 3,228
Cash Utilized to Repurchase Units 1,364 1,719 2,355 2,949 2,165
Total Assets 17,195 20,751 24,143 29,188 31,188
Net Assets 15,457 19,825 23,623 28,347 30,339
Value of Investments 16,788 20,357 23,799 27,729 30,465
Per Unit of Limited Partnership Interest:(1)
Net Investment Income(2) .78 .68 1.33 1.26 1.33
Net Realized and Unrealized
(Loss) Gain on Investments(2) (.25) (.96) (1.70) 1.08 .10
Cash Distributions Declared to Partners(3) 2.90 1.20 1.20 1.80 1.80
Net Asset Value 12.91 15.28 16.79 18.55 17.98
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(1) Effective October 1, 1993, each $1,000 Unit was redenominated into fifty
$20 Units. All amounts shown for 1993 have been restated to give effect to
this redenomination.
(2) Calculated using the weighted average number of Units outstanding during
the years ended December 31, 1997, 1996, 1995, 1994 and 1993 of 1,288,211,
1,395,138, 1,513,503, 1,669,129 and 1,791,201, respectively.
(3) Distribution amounts are reflected during the year in which the cash for
the distribution was generated. A portion of the actual cash distributions
are paid subsequent to such year.
ONE
4
FIDUCIARY CAPITAL PARTNERS, L.P.
MESSAGE TO INVESTORS
Dear Investor:
We are pleased to provide a summary of the recent activities of Fiduciary
Capital Partners, L.P. This Annual Report includes the Fund's audited financial
statements for the year ended December 31, 1997. Unaudited interim financial
statements for the first quarter of 1998 are also enclosed along with this
Annual Report.
HIGHLIGHTS
o Distributions for 1997 totaled $2.90 per Unit, which represents an
amount equal to 14.5% of contributed capital.
o The Fund's net asset value per Unit was $12.91 at December 31, 1997
and $11.68 at March 31, 1998 as compared to $15.28 at December 31,
1996.
o The Fund redeemed 7.51% of its outstanding Units during November
1997 pursuant to its annual repurchase offer.
CUMULATIVE DISTRIBUTION AND NET ASSET VALUE PER UNIT
[GRAPH]
CASH DISTRIBUTIONS
During 1997, the Fund declared quarterly cash distributions to investors of
$.30, $.30, $1.30 and $1.00 per Unit. The 1997 cash distributions were paid out
of current net investment income (27.4%), realized gain on investments (51.4%)
and a return of capital (21.2%).
The cash distribution for the first quarter of 1998 was paid on May 15,
1998. The per Unit distribution rate varied between $1.00 and $1.13 depending
upon the closing in which the particular Units were issued. This
disproportionate cash distribution resulted from the Units being issued on
different dates during 1990, and thus being entitled to differing Preferred
Return amounts, as defined in the Fund's Partnership Agreement. These
disproportionate distribution rates eliminated the remaining Preferred Return
amounts, leaving all Units on an equal basis going forward.
The Fund currently expects the distribution for the second quarter of 1998,
which is payable during August 1998, to be made at a rate of $1.00 per Unit for
all investors and that the remaining 1998 distributions will likely be reduced
to a rate of $.30 per Unit per quarter. A portion of the 1998 distributions will
constitute a return of capital.
The increase in the quarterly distribution rates during 1997 and 1998
represents a distribution of the proceeds from the dispositions or maturities of
investments during 1997.
PORTFOLIO ACTIVITY
ENI Holding
During August 1997, the Fund accepted an offer from ENI Holding Corp.
("ENI") management to purchase the securities comprising the Fund's investment
in ENI and its subsidiaries. The sale closed on November 5, 1997, with the Fund
receiving $9,650,632 of sales proceeds. The sales proceeds included proceeds
from (i) the prepayment of the subordinate debt, along with applicable accrued
interest and prepayment penalties, (ii) the redemption of the Fund's preferred
stock, along with all accumulated dividends, and (iii) the purchase of the
Fund's Class B common stock and warrants.
The Fund recorded a realized gain of approximately $2.5 million from the
sale of the common stock and warrants and a realized gain of approximately $0.2
million from the prepayment of the subordinated debt. The Fund had previously
accrued the interest on the subordinated debt and the dividends on the preferred
stock.
Neodata
During August 1997, Electronic Data Systems Corporation ("EDS") offered to
purchase all of Neodata Corporation's ("Neodata's") outstanding stock that it
did not already own. ▇▇▇▇▇ Muse, the owner of a majority of the Neodata common
stock, accepted the offer and the purchase by EDS closed on September 2, 1997.
The Fund received $1,427,496 of cash proceeds from the sale of its Neodata
stock, resulting in a realized gain of approximately $1.1 million.
TWO
5
FIDUCIARY CAPITAL PARTNERS, L.P.
MESSAGE TO INVESTORS (CONTINUED)
Atlas Environmental
In previous reports, we discussed the disappointing performance of this
investment. Atlas defaulted on the interest payments due to the Fund and
subsequently filed for bankruptcy. ▇▇▇▇▇ has filed a plan of reorganization with
the bankruptcy court in an effort to restructure and emerge from bankruptcy. The
plan anticipates that many of the interested parties, including the Fund, will
contribute additional capital to the company. While the Fund is generally
supportive of the plan, there are a number of significant business issues that
must be addressed before the Fund will agree to the plan or agree to make a
follow-on investment in Atlas. The Fund is also considering the possibility of
disposing of its Atlas investment, which has been written down to a nominal
amount ($2).
AR Accessories
AR Accessories Group, Inc. ("ARA") reported significantly reduced earnings
and cash flows from operations during 1997. During February 1998, ▇▇▇ hired a
crisis manager to assist it in addressing continuing significant declines in the
company's sales and profits. The hiring of the crisis manager was precipitated
by ▇▇▇'s lenders, which notified ARA of defaults under its credit lines and
demanded that ARA repay overadvances that were made during 1997. The Fund was
notified at that time that ARA was considering a number of options for dealing
with its problems, including a possible bankruptcy filing and the sale of the
company, or certain of its operations.
On March 13, 1998, ARA filed for bankruptcy protection. ARA's assets are
being liquidated and it is anticipated that the sales proceeds will be less than
ARA's total outstanding debt.
The Fund's subordinated debt investment in ARA was prepaid in a prior year.
The Fund's only remaining investment in ARA is a common equity position that was
acquired in connection with the Fund's original subordinated debt investment.
Since it is anticipated that the proceeds that will be realized from the
liquidation of ARA's assets will be insufficient to satisfy all of ARA's debt,
the Fund wrote the carrying value of its remaining equity investment down to a
nominal amount ($2) at March 31, 1998.
LMC Corporation
LMC Corporation ("LMC") recently introduced a low ground pressure
rubber-tracked dozer, loader and tool carrier called the Trackmaster (formerly,
called the Skid Trak) as a new product. The Trackmaster is a multi-purpose
machine to be used where similar machines bog down or create excessive damage to
the environment. The Trackmaster provides an environmental friendly, stable
platform with the required traction to traverse rocky, muddy, snowy or soft
terrain with minimal damage to the surface. The Trackmaster is designed to serve
numerous markets, with primary emphasis on construction, agriculture and
landscaping. This new product enables LMC to reduce its dependence on seasonal
markets related to snow grooming, while taking advantage of its years of
experience in the design and manufacture of low ground pressure, tracked
vehicles.
During February and March 1998, the Fund acquired $551,000 of LMC's Senior
Subordinated Revolving Notes due August 20, 1998 ("August 1998 Notes"). During
April 1998, the Fund agreed to restructure and further increase its aggregate
investment in LMC. In the restructuring, $1,639,200 of the Fund's LMC Senior
Subordinated Revolving Notes due October 31, 2000 ("October 2000 Notes") were
converted into additional LMC common stock. LMC will be allowed to again draw
down the $1,639,200 under the October 2000 Note agreement to fund working
capital requirements associated with the introduction of the Trackmaster and to
retire the August 1998 Notes held by the Fund. As a result of this
restructuring, the Fund's percentage ownership of LMC's common stock will
increase from approximately 27% to approximately 48%.
Mobile Technology
The Fund owns less than 0.5% of Mobile Technology, Inc.'s ("MTI's") common
equity. The Fund expected to receive approximately $201,000 from the sale of the
company during March 1998. However, at the closing a dispute arose revolving
primarily around whether the sellers or the buyer should receive the benefit of
warrant exercise proceeds, involves approximately 5% of the anticipated sales
proceeds. As a result of these developments, the MTI investment was written up
in value at March 31, 1998 to a carrying value of $172,015. The Fund expects
this sale to be finalized during the second quarter of 1998.
INVESTMENT PERFORMANCE
The following analysis reflects only the Fund's investments that have gone
full cycle, i.e., the investments that have been sold and with respect to which
the Fund has recorded a realized gain or loss. Thus, investments that the Fund
still owns, such as R.B.M. Precision Metal Products, ARA, Atlas and LMC, are not
included.
As reflected in the following graph and the schedules on page five of this
Annual Report, the Fund invested a total of $41.3 million in subordinated debt
investments and received total proceeds of $49.3 million, including interest
income, and fees and prepayment penalties, if applicable. In the aggregate,
these debt
THREE
6
FIDUCIARY CAPITAL PARTNERS, L.P.
MESSAGE TO INVESTORS (CONTINUED)
investments yielded a return on investment of 1.2 to 1 and an annualized
internal rate of return of 9.57%. The Fund also invested $3.4 million in equity
securities, from which it received total proceeds of $13.1 million. In the
aggregate, these equity investments yielded a return on investment of 3.9 to 1
and an annualized internal rate of return of 34.84%.
We believe that the Fund's performance to date has been reasonably good and
we are actively attempting to realize the greatest possible returns from the
remaining investments. The Fund has six remaining investments, which we
anticipate will be liquidated over the next two to three years.
[GRAPH]
NET UNREALIZED GAIN (LOSS) ON PORTFOLIO INVESTMENTS
The cumulative net unrealized gain (loss) on investments held by the Fund
at March 31, 1998 and December 31, 1997, consisted of the following components:
Unrealized Gain (Loss) Recorded
--------------------------------------
March 31, 1998 December 31, 1997
-------------------------------------------------------------
KEMET $ 506,186 $ 529,763
ARA (378,009) (117,787)
LMC (858,080) (858,080)
MTI (115,915) (214,907)
Atlas (3,882,246) (3,882,246)
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$ (4,728,064) $ (4,543,257)
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PERIODIC UNIT REPURCHASE POLICY
The Fund's investors adopted a periodic unit repurchase plan during 1993.
Pursuant to the terms of the repurchase policy, the Fund will annually offer 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 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. During November 1997, 97,612 Units
(7.51% if the outstanding Units) were redeemed at a net asset value per Unit of
$13.97 ($13.69, net of the 2% fee).
The next scheduled repurchase of Units will occur during the fourth quarter
of 1998. The repurchase offer schedule provides for a mailing to investors on
October 5, 1998. The deadline for tendering Units for repurchase will be October
30, 1998. The repurchase price will be based on the net asset value per Unit on
November 13, 1998 and payment for tendered Units will be made on November 20,
1998.
* * * * * * * * * *
If you have any questions concerning your investment in the Fund, please
call us at ▇▇▇-▇▇▇-▇▇▇▇.
Sincerely,
/s/ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇▇, Chairman
FCM Fiduciary Capital Management Company
/s/ ▇. ▇▇▇▇ DeGrassi
▇. ▇▇▇▇ ▇▇▇▇▇▇▇▇, President
FCM Fiduciary Capital Management Company
May 15, 1998
FOUR
7
FIDUCIARY CAPITAL PARTNERS, L.P.
DEBT INVESTMENTS REALIZED GAINS AND LOSSES (1)
(unaudited)
--------------------------------------------------------------------------------
Internal
Year of Year of Gain(1) Rate of
Portfolio Company(2) Investment Repayment Cost Proceeds(1) (Loss) Return
--------------------------------------------------------------------------------------------------------------------------------
▇▇▇▇-▇▇▇▇▇▇▇▇▇ Foods Co. 1990 1993 $ 2,940,260 $ 4,998,722 $2,058,462 23.56%
Midwest Dental Products
Corporation 1990 1992 5,478,467 7,946,060 2,467,593 22.63
Neodata Corporation 1990 1993 2,684,449 3,877,613 1,193,164 17.11
KEMET Corporation 1991 1993 4,014,737 5,494,046 1,479,309 17.63
Mobile Technology, Inc. 1991 1992 3,777,475 838,746 (2,938,729) N/A
Huntington Holdings, Inc. 1992 1994 5,292,479 7,561,600 2,269,121 20.40
ENI Holding Corp. 1993 1997 5,914,363 9,477,926 3,563,563 13.91
KB Alloys, Inc. 1993 1995 3,489,783 5,185,069 1,695,286 18.32
KEMET Corporation 1993(3) 1993 2,054,425 2,186,222 131,797 26.41
Protection One, Inc. 1993 1995 985,660 1,338,165 352,505 22.11
Canadian's Holdings, Inc. 1994 1996 2,876,392 367,216 (2,509,176) N/A
Canadian's Holdings, Inc. 1995(3) 1996 1,750,113 62,294 (1,687,819) N/A
-------------------------------------------------------------------------------------------------------------------------------
Totals $41,258,603 $49,333,679 $8,075,076 9.57%
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EQUITY INVESTMENTS REALIZED GAINS AND LOSSES
(unaudited)
--------------------------------------------------------------------------------------------------------------------------------
Internal
Year of Year of Gain Rate of
Portfolio Company(2) Investment Repayment Cost Proceeds (Loss) Return
--------------------------------------------------------------------------------------------------------------------------------
▇▇▇▇-▇▇▇▇▇▇▇▇▇ Foods Co. 1990 1995 $ 894,666 $ 1,450,374 $ 555,708 9.78%
Neodata Corporation 1990 1997 41,089 1,118,393 1,077,304 52.07
KEMET Corporation 1991 1994 & 1995 61,722 4,548,201 4,486,479 115.41
Mobile Technology, Inc. 1991 1992 440,586 - (440,586) N/A
Huntington Holdings, Inc. 1992 1996 103,811 1,320,711 1,216,900 68.92
Neodata Corporation 1992(3) 1997 296,858 309,103 12,245 0.81
ENI Holding Corp. 1993 1997 811,976 3,327,051 2,515,075 34.60
KEMET Corporation 1993(3) 1994 600,443 883,564 283,121 41.10
Protection One, Inc. 1993 1995 97,340 146,641 49,301 21.02
Canadian's Holdings, Inc. 1994 1996 39,782 - (39,782) N/A
--------------------------------------------------------------------------------------------------------------------------------
Totals $3,388,273 $13,104,038 $9,715,765 34.84%
--------------------------------------------------------------------------------------------------------------------------------
(1) Includes interest income, and fees and prepayment penalties, if applicable.
(2) Includes investment in subsidiaries, if applicable.
(3) Represents a follow-on investment in an existing portfolio company.
FIVE
8
FIDUCIARY CAPITAL PARTNERS, L.P.
PROFILES OF PORTFOLIO COMPANIES
VALUE OF 1997 YEAR-END INVESTMENTS BY PORTFOLIO COMPANY
[GRAPH]
KEMET Corporation ("KEMET") KEMET, headquartered in Greenville, South
Carolina, is a leading manufacturer and distributor of both solid tantalum and
monolithic ceramic capacitors used as components in circuit boards. The KEMET
stock is listed on the NASDAQ National Market System.
AR Accessories Group, Inc. ("ARA") ARA, headquartered in West Bend,
Wisconsin, manufactures men's and ladies' fine personal leather goods and
distributes these products to department stores, mass merchandisers and
company-owned Wallet Works stores. AAG markets its products under the brand
names of ▇▇▇▇▇, ▇▇▇▇▇ and ▇▇▇▇▇▇▇.
LMC Corporation ("LMC") LMC, headquartered in Logan, Utah, is the leading
U.S. manufacturer of light ground pressure vehicles. These vehicles are used for
construction, landscaping, infrastructure development and maintenance in remote
locations, right-of-way clean-up, search and rescue, military troop deployment
and snow grooming. Primary purchasers of the vehicles include construction and
landscaping contractors, ski resorts, utility companies and various governmental
agencies.
Mobile Technology, Inc. ("MTI") MTI, headquartered in Los Angeles,
California, is a provider of magnetic resonance imaging and computed tomography
mobile shared-services.
R.B.M. Precision Metal Products, Inc. ("RBM") RBM, headquartered in
Colorado Springs, Colorado, is a manufacturer of precision sheet metal
enclosures, chassis and assemblies for business machines.
Atlas Environmental, Inc. ("Atlas") Atlas, headquartered in Plantation,
Florida, is a holding company that owns and manages companies in segments of the
environmental services industry.
SIX
9
FIDUCIARY CAPITAL PARTNERS, L.P.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
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PRINCIPAL
AMOUNT/ INVESTMENT AMORTIZED % OF TOTAL
SHARES INVESTMENT DATE COST VALUE INVESTMENTS
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MANAGED COMPANIES:
27,944 sh. KEMET Corporation,
Common Stock(1)* 07/11/91 $ 9,905 $ 539,668
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9,905 539,668 3.2%
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75,856 sh. AR Accessories Group,
Inc., Warrants to
Purchase Class B
Common Stock(2)* 07/30/92 104,091 1
27,392 sh. AR Accessories Group
Inc., Class A Common
Stock(2)* 07/30/92 273,920 260,223
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378,011 260,224 1.6
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$1,967,040 LMC Operating Corp.,
12.00% Senior Subordinated 11/01/96
Revolving Notes through
due 10/31/00 11/04/97 1,967,040 1,967,040
260,400 sh. LMC Operating Corp., 7.00%
Cumulative Redeemable
Preferred Stock* 06/10/94 2,596,621 2,284,139
27.28 sh. LMC Operating Corp.,
Common Stock* 02/09/96 545,599 1
52.08 sh. LMC Credit Corp.,
Common Stock* 02/09/96 1 1
----------------------------------------------------------------------------------------------------------------------------------
5,109,261 4,251,181 25.3
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1,608 sh. Mobile Technology, Inc., 07/06/94 &
Common Stock* 12/28/94 227,438 55,088
4,287 sh. Mobile Technology, Inc.,
Warrants to Purchase 07/06/94 &
Common Stock(3)* 12/28/94 60,492 17,935
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287,930 73,023 0.4
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$1,460,000 R.B.M. Precision Metal
Products, Inc., 13.00%
Senior Subordinated
Secured Notes due
5/24/02(4) 05/24/95 1,387,751 1,387,751
11,060.6 sh. R.B.M. Precision Metal
Products, Inc., Warrants to
Purchase Common Stock* 05/24/95 82,955 82,955
----------------------------------------------------------------------------------------------------------------------------------
1,470,706 1,470,706 8.8
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The accompanying notes to financial statements are an
integral part of this schedule.
SEVEN
10
FIDUCIARY CAPITAL PARTNERS, L.P.
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1997
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PRINCIPAL
AMOUNT/ INVESTMENT AMORTIZED % OF TOTAL
SHARES INVESTMENT DATE COST VALUE INVESTMENTS
-----------------------------------------------------------------------------------------------------------------------------
$3,934,080 Atlas Environmental, Inc.,
13.50% Senior Subordinated
Secured Notes due 1/19/03(5)* 01/25/96 3,841,482 1
407,659 sh. Atlas Environmental, Inc.,
Warrants to Purchase
Common Stock(6)* 01/25/96 40,766 1
-----------------------------------------------------------------------------------------------------------------------------
3,882,248 2 0.0
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Total Investments in Managed Companies (42.7% of net assets) 11,138,061 6,594,804 39.3
-----------------------------------------------------------------------------------------------------------------------------
TEMPORARY INVESTMENTS:
$5,100,000 Ford Motor Credit Corporation
5.72% Notes due 1/5/98 12/18/97 5,096,770 5,096,770
$5,100,000 General Electric Capital Corp.
5.69% Notes due 1/5/98 12/18/97 5,096,787 5,096,787
-----------------------------------------------------------------------------------------------------------------------------
Total Temporary Investments (65.9% of net assets) 10,193,557 10,193,557 60.7
-----------------------------------------------------------------------------------------------------------------------------
Total Investments (108.6% of net assets) $21,331,618 $16,788,361 100.0%
-----------------------------------------------------------------------------------------------------------------------------
(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, Inc. during 1996.
(3) The warrants have exercise prices of $19.30 per share (1,286 shares) and
$34.30 per share (3,001 shares).
(4) The notes will amortize in three equal annual installments of $486,667
commencing on May 24, 2000.
(5) The notes will amortize in five equal annual installments of $786,816
commencing on January 19, 1999. The accrual of interest on the notes was
discontinued by the Fund effective April 20, 1996. (Note 12)
(6) 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.
EIGHT
11
FIDUCIARY CAPITAL PARTNERS, L.P.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
----------------------------------------------------------------------------------------------------------------------------
1997 1996
----------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments (Notes 2, 10, 11, 12 and 13)
Portfolio investments, at fair value:
Managed companies (amortized cost -
$11,138,061 and $17,244,123, respectively) $ 6,594,804 $ 16,560,005
Temporary investments, at amortized cost 10,193,557 3,797,256
----------------------------------------------------------------------------------------------------------------------------
Total investments 16,788,361 20,357,261
Cash and cash equivalents (Note 2) 263,694 272,543
Accrued interest receivable (Note 12) 76,821 113,809
Other assets 66,060 7,648
----------------------------------------------------------------------------------------------------------------------------
Total assets $ 17,194,936 $ 20,751,261
----------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Due to affiliates (Notes 6, 7, 8 and 9) $ 39,123 $ 52,655
Accounts payable and accrued liabilities 484,837 479,745
Distributions payable to partners (Note 3) 1,213,701 393,690
----------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,737,661 926,090
----------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 13)
NET ASSETS (NOTES 3 AND 4):
Managing General Partner (54,555) (24,512)
Limited Partners (equivalent to $12.91
and $15.28, respectively, per limited
partnership unit based on 1,201,564
and 1,299,176 units outstanding) (Note 5) 15,511,830 19,849,683
----------------------------------------------------------------------------------------------------------------------------
Net assets 15,457,275 19,825,171
----------------------------------------------------------------------------------------------------------------------------
Total liabilities and net assets $ 17,194,936 $ 20,751,261
----------------------------------------------------------------------------------------------------------------------------
The accompanying notes to financial statements are an integral part
of these financial statements.
NINE
12
FIDUCIARY CAPITAL PARTNERS, L.P.
STATEMENTS OF OPERATIONS
FOR EACH OF THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
-----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Income:
Interest $ 1,329,751 $ 1,569,923 $ 2,626,521
Dividend 292,981 - -
Other income 24,064 30,564 42,325
-----------------------------------------------------------------------------------------------------------------------------
Total investment income 1,646,796 1,600,487 2,668,846
-----------------------------------------------------------------------------------------------------------------------------
Expenses:
Professional fees 169,499 159,165 71,869
Investment advisory fees (Note 6) 141,646 160,179 228,980
Fund administration fees (Note 7) 143,370 143,370 143,370
Administrative expenses (Note 7) 81,105 81,105 80,147
Independent General Partner fees
and expenses (Note 8) 55,219 55,990 58,015
Amortization - - 9,323
Other expenses 39,264 48,771 39,956
-----------------------------------------------------------------------------------------------------------------------------
Total expenses 630,103 648,580 631,660
-----------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 1,016,693 951,907 2,037,186
-----------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments (Note 10) 3,545,258 (3,948,869) 4,588,421
Net change in unrealized (loss) gain
on investments (Note 11) (3,859,138) 2,591,211 (7,180,010)
-----------------------------------------------------------------------------------------------------------------------------
Net loss on investments (313,880) (1,357,658) (2,591,589)
-----------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 702,813 $ (405,751) $ (554,403)
-----------------------------------------------------------------------------------------------------------------------------
The accompanying notes to financial statements are an integral part
of these financial statements.
TEN
13
FIDUCIARY CAPITAL PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR EACH OF THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
-----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets
resulting from operations $ 702,813 $ (405,751) $ (554,403)
Adjustments to reconcile net increase
in net assets resulting from operations
to net cash provided by operating activities:
Accreted discount on portfolio investments (39,028) (42,587) (84,359)
Amortization - - 9,323
Change in assets and liabilities:
Accrued interest receivable 36,988 26,681 487,356
Other assets (58,412) (4,442) 1,334
Due to affiliates (13,532) (7,717) 9,164
Accounts payable and accrued liabilities (20,670) 17,195 (1,511)
Prepaid interest income - - (60,146)
Net realized (gain) loss on investments (3,545,258) 3,948,869 (4,588,421)
Net change in unrealized loss (gain)
on investments 3,859,138 (2,591,211) 7,180,010
-----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 922,039 941,037 2,398,347
-----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of portfolio investments (1,005,376) (5,384,518) (3,198,810)
Proceeds from dispositions of portfolio investments 10,721,487 1,340,631 10,786,839
(Purchase) sale of temporary investments, net (6,396,301) 6,599,536 (5,520,606)
-----------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 3,319,810 2,555,649 2,067,423
-----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions paid to partners (2,887,058) (1,705,750) (2,082,203)
Repurchase of limited partnership units (1,363,640) (1,719,362) (2,354,597)
-----------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (4,250,698) (3,425,112) (4,436,800)
-----------------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (8,849) 71,574 28,970
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 272,543 200,969 171,999
-----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 263,694 $ 272,543 $ 200,969
-----------------------------------------------------------------------------------------------------------------------------
The accompanying notes to financial statements are an integral part
of these financial statements.
ELEVEN
14
FIDUCIARY CAPITAL PARTNERS, L.P.
STATEMENTS OF CHANGES IN NET ASSETS
FOR EACH OF THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
-----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------------
Increase in net assets resulting from operations:
Net investment income $ 1,016,693 $ 951,907 $ 2,037,186
Net realized gain (loss) on investments 3,545,258 (3,948,869) 4,588,421
Net change in unrealized (loss) gain
on investments (3,859,138) 2,591,211 (7,180,010)
-----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 702,813 (405,751) (554,403)
Repurchase of limited partnership units (Note 5) (1,363,640) (1,719,362) (2,354,597)
Distributions to partners from -
Net investment income (1,016,693) (1,174,520) (1,814,573)
Realized gain on investments (1,905,894) (498,482) -
Return of capital (784,482) - -
-----------------------------------------------------------------------------------------------------------------------------
Total decrease in net assets (4,367,896) (3,798,115) (4,723,573)
Net assets:
Beginning of year 19,825,171 23,623,286 28,346,859
-----------------------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $0, $0 and $222,613, respectively) $15,457,275 $ 19,825,171 $ 23,623,286
-----------------------------------------------------------------------------------------------------------------------------
The accompanying notes to financial statements are an integral part
of these financial statements.
TWELVE
15
FIDUCIARY CAPITAL PARTNERS, L.P.
SELECTED PER UNIT DATA AND RATIOS(1)
FOR EACH OF THE YEARS ENDED DECEMBER 31, 1997, 1996, 1995, 1994 AND 1993
-----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------------------------------------------------------------------------
PER UNIT DATA:
Investment income(2) $ 1.26 $ 1.14 $ 1.74 $ 1.66 $ 1.73
Expenses(2) (.48) (.46) (.41) (.40) (.40)
Net investment income(2) .78 .68 1.33 1.26 1.33
Net realized gain (loss) on investments(2) 2.72 (2.80) 3.00 (1.50) .60
Net change in unrealized (loss) gain
on investments(2) (2.97) 1.84 (4.70) 2.58 (.50)
Effect of unit repurchases on
net asset value - (.03) (.19) .03 (.01)
Distributions declared to partners (2.90) (1.20) (1.20) (1.80) (1.80)
-----------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in net asset value (2.37) (1.51) (1.76) .57 (.38)
Net asset value:
Beginning of year 15.28 16.79 18.55 17.98 18.36
-----------------------------------------------------------------------------------------------------------------------------------
End of year $ 12.91 $ 15.28 $ 16.79 $ 18.55 $ 17.98
-----------------------------------------------------------------------------------------------------------------------------------
RATIOS:
Ratio of expenses to average net assets 3.53% 2.85% 2.23% 2.24% 2.24%
Ratio of net investment income to
average net assets 5.69% 4.19% 7.19% 7.06% 7.34%
Number of limited partnership units
at end of year(1) 1,201,564 1,299,176 1,407,244 1,526,949 1,687,121
----------
(1) Effective October 1, 1993, each $1,000 limited partnership unit was
redenominated into fifty $20 limited partnership units. All amounts shown
for 1993 have been restated to give effect to this redenomination.
(2) Calculated using the weighted average number of limited partnership units
outstanding during the years ended December 31, 1997, 1996, 1995, 1994 and
1993 of 1,288,211, 1,395,138, 1,513,503, 1,669,129 and 1,791,201,
respectively.
The accompanying notes to financial statements are an integral part of
these selected per unit data and ratios.
THIRTEEN
16
FIDUCIARY CAPITAL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. ORGANIZATION AND PURPOSE
Fiduciary Capital Partners, L.P. (the "Fund"), a Delaware limited
partnership, was formed on October 20, 1988 to operate as a business development
company under the Investment Company Act of 1940. The Fund's operations
commenced on August 14, 1990.
FCM Fiduciary Capital Management Company ("FCM"), the Managing General
Partner of, and the investment adviser to, the Fund, is responsible, subject to
the supervision of the Independent General Partners, for overseeing and
monitoring the Fund's investments.
The investment objective of the Fund is to provide current income and
capital appreciation by investing primarily in subordinated debt and related
equity securities issued as the mezzanine financing of privately structured,
friendly leveraged buyouts, leveraged acquisitions and leveraged
recapitalizations. These investments are referred to herein as "portfolio
investments". Managed companies are those to which significant managerial
assistance is offered.
As set forth in the Partnership Agreement, the Fund's investment period
ended on December 31, 1995. Although the Fund is permitted to make additional
investments in existing portfolio companies, the Fund is no longer permitted to
acquire investments in new portfolio companies.
A separate fund, Fiduciary Capital Pension Partners, L.P. ("FCPP"), was
also formed on October 20, 1988 for tax-exempt investors with investment
objectives, policies and restrictions similar to those of the Fund. While the
Fund and FCPP have co-invested in each of the portfolio investments, each fund
is accounted for separately. Each fund's participation in the portfolio
investments is in proportion to the amount of capital that each fund had
available for investment at the time each investment was acquired. Certain
expenses are allocated between the funds based on the amount of each fund's
total capital. The accompanying financial statements include only the activities
of the Fund.
2. SIGNIFICANT ACCOUNTING POLICIES
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.
Accounting Method The Fund maintains its accounting records, prepares
financial statements and files its tax returns using the accrual method of
accounting.
Realized and Unrealized Gain or Loss on Investments Realized gains and
losses are recorded upon disposition of investments and are calculated based
upon the difference between the proceeds and the cost basis determined using the
specific identification method. All other changes in the valuation of
investments, as determined by FCM, are included as changes in the unrealized
appreciation or depreciation of investments in the Fund's Statements of
Operations.
Valuation of Investments FCM values the Fund's 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 asked prices, as of the valuation
date. The Fund discounts these closing market prices between 5% and 20% to
reflect lack of liquidity, if the Fund's securities are subject to legal or
contractual trading restrictions, or to reflect the potential market impact
which could result from the sale of the securities, if the Fund and FCPP
combined own a material percentage of the outstanding securities. The amount of
the discount varies based upon the type of restriction, the time remaining on
the restriction and the size of the holding.
Fair value for securities that are not fully traded in any liquid public
markets or that are privately held are determined pursuant to valuation policies
and procedures which 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"). Debt
securities with attached warrants for the purchase of common stock are initially
recorded at a discount from face value equal to the estimated relative value of
the warrants at date of investment. The discount is amortized to income as an
adjustment to yield from the debt securities. Face value less unamortized
discount represents the "amortized cost" of the debt securities.
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
FOURTEEN
17
FIDUCIARY CAPITAL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
Temporary investments with maturities of less than 60 days are stated at
amortized cost, which approximates market value. Under this method, temporary
investments are valued at cost when purchased and thereafter a constant
proportionate amortization of any discount or premium is recorded until maturity
of the investment.
Cash and Cash Equivalents The Fund considers investments in money market
funds to be cash equivalents.
Interest Receivable on Notes Notes are placed on non-accrual status in the
event of a default (after any applicable grace period expires) or if FCM
determines that there is no reasonable expectation of collecting the interest.
Income Taxes No provision for income taxes has been made in the financial
statements because taxes on Fund income are the responsibility of the individual
partners rather than the Fund.
Investment Transactions The Fund records portfolio investment transactions
on the date on which it obtains an enforceable right to demand the securities or
payment thereof and records temporary investment transactions on the trade date.
Realized gains and losses on investments are determined on the basis of specific
identification for both accounting and tax purposes.
3. ALLOCATIONS OF PROFITS, LOSSES AND CASH DISTRIBUTIONS
Pursuant to the Partnership Agreement, all income derived from temporary
investments will be distributed and allocated 99% to the Limited Partners and 1%
to FCM. Net investment income will, in general, be distributed and allocated:
(i) 99% to the Limited Partners and 1% to FCM until the Limited Partners have
received a cumulative non-compounded preferred return of 9% per annum on their
capital contributions to the Fund, then (ii) 70% to the Limited Partners and 30%
to FCM until FCM has received 10% of all current and prior distributions and
allocations, and thereafter, (iii) 90% to the Limited Partners and 10% to FCM.
Proceeds from capital transactions will, in general, be distributed and
allocated: (i) 99% to the Limited Partners and 1% to FCM until the Limited
Partners have received a cumulative, non-compounded preferred return of 9% per
annum on their capital contributions to the Fund from net investment income,
capital transactions, or both, then (ii) 100% to the Limited Partners until they
have received a return of their capital contributions to the Fund, and
thereafter, (iii) 80% to the Limited Partners and 20% to FCM.
All cash distributions and earnings since the inception of the Fund have
been allocated 99% to the Limited Partners and 1% to FCM.
4. CAPITAL CONTRIBUTIONS
Upon formation of the Fund, FCM contributed $4,000 for its general partner
interest in the Fund. Units of limited partnership interest ("Units") were then
sold in a public offering. The Fund held three closings between August 14, 1990
and October 18, 1990, receiving gross offering proceeds of $36,102,000.
Commissions and other offering costs were charged against proceeds resulting in
net capital contributions from Limited Partners of $31,860,015.
5. PERIODIC UNIT REPURCHASE PLAN
The Fund's Limited Partners adopted a periodic unit repurchase plan during
1993. Pursuant to the terms of the repurchase policy, the Fund annually offers
to repurchase 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.
Repurchases of Units since the adoption of the plan are summarized as
follows:
Units Repurchased Net Asset Value per Unit
--------------------- ------------------------
Percentage
Date of of Outstanding Net of the
Repurchase Offer Number Units Gross 2% Fee
---------------- ------ -------------- ------ ----------
November 1993 117,979 6.54% $18.35 $17.98
November 1994 160,172 9.49% 18.41 18.04
November 1995 119,705 7.84% 19.67 19.28
November 1996 108,068 7.68% 15.91 15.59
November 1997 97,612 7.51% 13.97 13.69
FIFTEEN
18
FIDUCIARY CAPITAL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. 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, net of certain fees received
directly by FCM from the Fund's portfolio companies. Investment advisory fees of
$141,646, $160,179 and $228,980 were incurred by the Fund for 1997, 1996 and
1995, respectively.
7. 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 $143,370
were incurred each year by the Fund during 1997, 1996 and 1995. 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 $81,105, $81,105 and $80,147 for 1997, 1996
and 1995, respectively.
8. 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 FCPP, 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 of $55,219, $55,990 and $58,015 were
incurred by the Fund for 1997, 1996 and 1995, respectively.
9. OTHER RELATED PARTY TRANSACTIONS
FCM and its affiliates are entitled to reimbursement of direct expenses
paid on behalf of the Fund. Such reimbursements amounted to $311,347, $226,061
and $172,443 during 1997, 1996 and 1995, respectively.
10. PORTFOLIO INVESTMENTS
The Fund's portfolio investments consist primarily of high-yield private
placement securities issued as the mezzanine financing of privately structured,
friendly leveraged buyouts, leveraged acquisitions and leveraged
recapitalizations, and are generally linked with an equity participation. The
risk of loss upon default by an issuer is greater than with investment grade
securities because high-yield securities are generally unsecured and are usually
subordinated to other creditors of the issuer. Also, these issuers usually have
higher levels of indebtedness and are more sensitive to adverse economic
conditions than investment grade issuers. Most of these securities are subject
to resale restrictions and generally there is no quoted market for such
securities.
Although the Fund cannot eliminate the risks associated with its
investments in these high-yield securities, it has established risk management
procedures. The Fund subjects each prospective investment to rigorous analysis,
and makes only those investments that are recommended by FCM and that meet the
Fund's investment guidelines or that have otherwise been approved by the
Independent General Partners. The Fund also has procedures in place to
continually monitor its portfolio companies.
As of December 31, 1997, the Fund held portfolio investments in six Managed
Companies, with an aggregate cost of approximately $11.1 million. During the
year ended December 31, 1997, the Fund advanced the balance of its 1996
commitment for a follow-on investment in LMC Operating Corp. ("LMC") at a cost
of approximately $1.0 million.
The Fund's subordinated debt investment in Elgin National Industries, Inc.
was prepaid during 1997. In addition, the Fund sold all of its Neodata
Corporation and ENI Holding Corp. stock and received a distribution from the
escrow account that was established during 1996 in connection with the sale of
the Fund's Huntington Holdings, Inc. stock. The Fund received $10,721,487 in
proceeds, including applicable prepayment premiums, from these transactions,
resulting in aggregate realized gains of $3,571,020.
During 1997, the Fund accrued $25,762 of additional reserves for possible
legal costs and other payments that may be required in connection with the
Canadian's Holdings, Inc. ("Canadian's") bankruptcy proceedings (see Note 13).
This amount was recorded as an additional realized loss in the Fund's Statement
of Operations.
The Fund has pledged the common stock and warrants it owns in AR
Accessories Group, Inc. and LMC Credit Corp. as collateral for the corporations'
debt. None of the Fund's other portfolio investments have been pledged or
otherwise encumbered.
11. UNREALIZED GAIN (LOSS) ON INVESTMENTS
As of December 31, 1996, the Fund had recorded net unrealized loss on
investments of $684,118. During 1997, the Fund recorded $11,869 of unrealized
gain and $3,976,376 of unrealized
SIXTEEN
19
FIDUCIARY CAPITAL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
loss on investments. In addition, the Fund disposed of investments during 1997
with respect to which the Fund had recorded $105,369 of net unrealized loss
during prior years. Therefore, at December 31, 1997, the Fund had net unrealized
loss on investments of $4,543,257.
12. NON-ACCRUAL STATUS OF INVESTMENTS
In accordance with the Fund's accounting policies, the Fund stopped
accruing interest on (i) the Canadian's Holdings, Inc. Exchangeable Redeemable
Debentures effective April 1, 1995, (ii) the Canadian's Promissory Notes
effective October 1, 1995, (iii) the Canadian's Subordinated Notes effective
December 1, 1995, (iv) the LMC Senior Subordinated Notes effective December 1,
1995, and (v) the Atlas Environmental, Inc. ("Atlas") Senior Subordinated
Secured Notes effective April 20, 1996.
During 1996, all of the Canadian's debt was written off as a realized loss
and the LMC Senior Subordinated Notes were converted into preferred stock. Thus,
as of December 31, 1997, the Fund's only debt investment on non-accrual status
was the Atlas Senior Subordinated Secured Notes.
13. COMMITMENTS AND CONTINGENCIES
LMC Commitment On February 18, 1998, the Fund agreed to provide up to
$551,000 of additional subordinated debt to LMC, of which $385,700 was advanced
on that date. The remaining $165,300 was advanced during March 1998.
Canadian's Litigation On October 3, 1996, the Fund commenced an adversary
proceeding in the Canadian's Chapter 11 bankruptcy case against Finova Capital
Corporation ("Finova"), ▇▇▇▇▇▇ ▇▇▇▇▇▇ and ▇▇▇▇▇▇ ▇▇▇▇▇. The complaint sought 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 objected to ▇▇▇▇▇▇'s secured claim
against Canadian's, which was guaranteed by ▇▇▇▇▇▇ ▇▇▇▇▇▇ and ▇▇▇▇▇▇ ▇▇▇▇▇, and
sought 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 during 1996 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. On March 19, 1997 the Bankruptcy
Court denied the Fund's claim. As a result of the Court's decision, the Fund
dropped this litigation, while preserving its rights to pursue litigation
against ▇▇▇▇▇▇ at a later date. Beginning July 1, 1997, the Fund began accruing
additional reserves at a 12% annualized rate or $25,762 for the six months ended
December 31, 1997.
LMC Litigation On January 27, 1998, LMC Holding Co. ("LMC Holding"), which
holds 49.75% of the issued and outstanding common stock of LMC, commenced an
action against the Fund, FCPP and each of ▇▇▇▇ ▇▇▇▇▇▇, the Chairman of the Board
and Chief Executive Officer of FCM, ▇. ▇▇▇▇ ▇▇▇▇▇▇▇▇, the President of FCM, and
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, the Senior Vice President, Treasurer, Chief Financial Officer
and Compliance Officer of FCM (collectively, the "Individual Defendants"), in
their capacities as officers of FCM, in the First Judicial District Court in and
for Cache County, State of Utah, entitled LMC Holding Co. v. Fiduciary Capital
Partners, L.P., et al., Civil No. ▇▇-▇▇▇▇▇▇▇ (the "LMC Action"). In the LMC
Action, LMC Holding has asserted claims against the Fund alleging breach of a
shareholders' agreement among the Fund, FCPP and LMC Holding relating to the
management of LMC, against the Fund and the Individual Defendants alleging
breach of fiduciary duties and ultra ▇▇▇▇▇ actions taken on behalf of LMC, and
against the Individual Defendants alleging civil conspiracy/aiding and abetting
and unjust enrichment. LMC Holding is seeking various forms of injunctive relief
and monetary damages in an unspecified amount, including punitive damages and
the return of all management fees paid by LMC to the Fund since November 19,
1997. Discovery in the LMC Action has commenced, and the Fund intends to contest
LMC Holding's claims vigorously. The Fund expects to prevail in the LMC Action,
although there can be no assurance that this will be the case.
LMC Holding is controlled by ▇▇▇▇ ▇▇▇▇▇▇▇, a director of LMC and the
trustee of its pension plan. FCM believes that the LMC Action was commenced in
response to an action filed by LMC against ▇▇. ▇▇▇▇▇▇▇ to recover for a
significant underfunding of LMC's pension plan.
FCM believes that none of the above discussed litigation will have any
material adverse effect on the business, financial condition and results of
operations of the Fund, taken as a whole, beyond the reserve that has been
established with respect to the Canadian's litigation.
SEVENTEEN
20
FIDUCIARY CAPITAL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. RECONCILIATION TO INCOME TAX METHOD OF ACCOUNTING
The following is a reconciliation of the net increase in net assets
resulting from operations in the accompanying financial statements to the
taxable income reported for federal income tax purposes:
1997 1996 1995
----------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets resulting
from operations per
financial statements ................ $ 702,813 $ (405,751) $ (554,403)
Increase (decrease)
resulting from:
Unrealized loss (gain)
on investments .................. 3,859,139 (2,591,211) 7,180,010
Realized gains and
losses on investments ........... (90,867) 590,620 --
Fee income, net of
amortization .................... (57,426) (22,781) (78,385)
Interest income ................... -- -- 43,604
Amortization of
organization and
start-up costs .................. -- -- (14,367)
Other ............................. (26,214) (23,708) (45,884)
----------------------------------------------------------------------------------------------
Taxable income (loss) per
federal income tax
return .............................. $ 4,387,445 $ (2,452,831) $ 6,530,575
---------------------------------------------------------------------------------------------
The following is a reconciliation of the amount of the Fund's net assets as
shown in the accompanying financial statements and the tax bases of the Fund's
net assets:
1997 1996 1995
-------------------------------------------------------------------------------------------
Net assets per
financial statements ................ $ 15,457,275 $ 19,825,171 $ 23,623,286
Realized gains and
losses on investments ............. 4,047,128 4,137,995 3,547,375
Syndication, organization
and start-up costs, net ........... 3,352,335 3,363,008 3,360,886
Unrealized loss on
investments ....................... 4,543,257 684,118 3,275,329
Distributions payable ............... 1,213,701 393,690 426,438
Fee income, net of
amortization ...................... -- 57,426 80,207
Accrued expenses .................... 23,000 25,950 20,176
-------------------------------------------------------------------------------------------
Tax bases of net assets ............. $ 28,636,696 $ 28,487,358 $ 34,333,697
-------------------------------------------------------------------------------------------
EIGHTEEN
21
FIDUCIARY CAPITAL PARTNERS, L.P.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Fiduciary Capital Partners, L.P.:
We have audited the accompanying balance sheets of Fiduciary Capital
Partners, L.P. (a Delaware limited partnership) as of December 31, 1997 and
1996, including the schedule of investments as of December 31, 1997, and the
related statements of operations, cash flows and changes in net assets for each
of the three years in the period ended December 31, 1997 and the selected per
unit data and ratios for the five years then ended. These financial statements
and per unit data and ratios are the responsibility of the partnership's
managing general partner. Our responsibility is to express an opinion on these
financial statements and per unit data and ratios 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 and per unit data
and ratios are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997 and 1996, by correspondence with the custodian. 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 and selected per unit data and
ratios referred to above present fairly, in all material respects, the financial
position of Fiduciary Capital Partners, L.P. as of December 31, 1997 and 1996,
and the results of its operations, its cash flows and the changes in its net
assets for each of the three years in the period ended December 31, 1997, and
the selected per unit data and ratios for the five years then ended, in
conformity with generally accepted accounting principles.
As discussed in Note 2, the financial statements include investment
securities valued at $6,055,136 at December 31, 1997 (39.2% of net assets) and
$15,915,546 at December 31, 1996 (80.3% of net assets) whose values have been
estimated by the managing general partner in the absence of readily
ascertainable market values. However, because of the inherent uncertainty of
valuation, the managing general partner's estimate of values may differ
significantly from the values that would have been used had a ready market
existed for the securities and the differences could be material.
/s/ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ LLP
Denver, Colorado
February 4, 1998.
NINETEEN
22
FIDUCIARY CAPITAL PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Fund's
audited Financial Statements and the Notes thereto. This report contains, in
addition to historical information, forward-looking statements that include
risks and other uncertainties. The Fund's actual results may differ materially
from those anticipated in these forward-looking statements. While the Fund can
not always predict what factors would cause actual results to differ materially
from those indicated by the forward-looking statements, factors that might cause
such a difference include general economic and business conditions, competition
and other factors discussed elsewhere in this report. Readers are urged to
consider statements that include the terms "believes", "expects", "plans",
"anticipates", "intends" or the like to be uncertain and forward-looking. The
Fund undertakes no obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of anticipated or unanticipated events.
LIQUIDITY AND CAPITAL RESOURCES
During 1990, the Fund completed a public offering of its Units. Net
offering proceeds available to the Fund, after deducting commissions and other
offering costs, totaled $31,860,015.
The Fund has authority to borrow funds for operational purposes. To date,
however, the Fund has not borrowed any funds and it has no established credit
arrangements.
The Fund's Limited Partners adopted a periodic unit repurchase plan during
1993. Pursuant to the terms of the repurchase policy, the Fund will annually
offer 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 purchase up to an additional 2% of the outstanding Units.
Repurchases of Units since the adoption of the plan are summarized as
follows:
Units Repurchased Net Asset Value per Unit
------------------------ ------------------------
Percentage
Date of of Outstanding Net of the
Repurchase Offer Number Units Gross 2% Fee
----------------- ------- -------------- ------- ----------
November 1993 117,979 6.54% $ 18.35 $ 17.98
November 1994 160,172 9.49% 18.41 18.04
November 1995 119,705 7.84% 19.67 19.28
November 1996 108,068 7.68% 15.91 15.59
November 1997 97,612 7.51% 13.97 13.69
As of December 31, 1997, the Fund held portfolio investments in six Managed
Companies, with an aggregate cost of approximately $11.1 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 42.7% 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. 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 IPOs of their stock. The Fund has sold the stock it held in these
three companies, except for a portion of its KEMET stock.
As of December 31, 1997, 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.
The Fund's subordinated debt investment in Elgin was prepaid during 1997.
In addition, the Fund sold all of its Neodata and ENI stock and received a
distribution from the escrow account that was established during 1996 in
connection with the sale of the Fund's Huntington stock. In total, the Fund
received $10,721,487 in proceeds, including applicable prepayment premiums, from
these transactions.
During November 1996, the Fund agreed to provide up to $1,967,040 of
subordinated debt to LMC, of which $983,520 was advanced at that time. The Fund
advanced the remaining $983,520 during 1997.
During February 1998, the Fund agreed to provide up to $551,000 of
additional subordinated debt to LMC, of which $385,700 was advanced at that
time. The remaining $165,300 was advanced during March 1998.
Accrued interest receivable decreased $37,069 from $113,890 at December 31,
1996 to $76,821 at December 31, 1997. This decrease resulted primarily from the
sale of the Fund's subordinated debt investment in ENI during 1997. The impact
of the ENI sale was partially offset by the accrued interest related to the
additional LMC subordinated debt advanced during 1997, which is discussed above.
Other assets increased $58,412 from $7,648 at December 31, 1996 to $66,060
at December 31, 1997. This increase resulted primarily from an increase in
prepaid insurance associated with a
TWENTY
23
FIDUCIARY CAPITAL PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
new liability insurance policy for the Fund's general partners and a receivable
from LMC for legal fees that the Fund advanced on behalf of LMC.
Distributions payable to partners increased $820,011, from $393,690 at
December 31, 1996 to $1,213,701 at December 31, 1997, resulting from a
distribution rate increase from $.30 per Unit for the fourth quarter of 1996 to
$1.00 per Unit for the fourth quarter of 1997. The effect of this increase in
the quarterly distribution rate was partially offset by a 7.51% decrease in the
number of outstanding Units as a result of the repurchase of Units by the Fund
during November 1997.
During 1997, the Fund declared cash distributions to its partners in the
aggregate amount of $3,707,069. The distributions were paid in four quarterly
payments of $.30, $.30, $1.30 and $1.00 per Unit during the months of May,
August and November 1997 and February 1998. In the aggregate, the distributions
were paid out of current net investment income (27.4%), realized gains on
investments (51.4%) and a return of capital (21.2%).
The Fund currently expects the remaining 1998 distributions, beginning with
the distribution payable during August 1998, to be made at a rate of $1.00 per
Unit per quarter for all Limited Partners. 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 1998 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. The increase in the quarterly distribution rate during 1997
and 1998 represents a distribution of the Neodata, Elgin and ENI sales proceeds.
See Note 13 to the Fund's financial statements for a discussion of
litigation. FCM believes that this litigation will be resolved without any
material adverse effect on the Fund's business, financial condition or results
of operations, taken as a whole, beyond the reserve that has been established
with respect to the Canadian's litigation.
RESULTS OF OPERATIONS
INVESTMENT INCOME AND EXPENSES
The Fund's investment income consists primarily of interest income earned
from the various debt investments held by the Fund and dividend income from the
ENI preferred stock that was sold during 1997. Major expenses include
professional fees, investment advisory fees, fund administration fees and
administrative expenses.
1997 Compared to 1996
The Fund's net investment income was $1,016,693 for the year ended December
31, 1997 on total investment income of $1,646,796 as compared to net investment
income of $951,907 on total investment income of $1,600,487 for the prior year.
Net investment income per limited partnership unit increased from $.68 to $.78,
and the ratio of net investment income to average net assets increased from
4.19% to 5.69% for the year ended December 31, 1997 in comparison to the prior
year.
Net investment income for the year ended December 31, 1997 increased 6.8%
as a result of a small increase in investment income and a small decrease in
total expenses. Net investment income per limited partnership unit increased
14.7%. The percentage increase in net investment income per limited partnership
unit exceeded the percentage increase in net investment income because of a
decrease in the weighted average number of limited partnership units
outstanding, which resulted from the repurchase of Units by the Fund during both
November 1996 and 1997.
Investment income increased $46,309, or 2.9%, for the year ended December
31, 1997 in comparison to the prior year. This increase resulted primarily from
the receipt of the accumulated preferred stock dividends that were paid on the
ENI preferred stock at the time of its disposition. The positive impact of the
ENI dividend income was significantly offset by a decrease in interest income. A
number of factors contributed to the decline in interest income, including (i)
the decision to stop accruing interest in the Fund's Atlas subordinated debt
investment effective April 1996, (ii) the prepayment of the Fund's Elgin
subordinated debt investment during November 1997, and (iii) reduced amounts of
temporary investments as a result of the Fund utilizing a portion of its cash
reserves to fund the LMC follow-on investment and to repurchase Units during
both November 1996 and 1997. The negative effect of these items was partially
offset by the increase in interest income earned on the LMC follow-on
investment.
Total expenses decreased $18,477, or 2.8%, for the year ended December 31,
1997 in comparison to the prior year. This decrease resulted primarily from
decreases in investment advisory fees and other expenses. These decreases were
partially offset by an increase in professional fees.
The investment advisory fees paid to FCM decreased during 1997, primarily
as a result of the direct receipt by FCM of
TWENTY-ONE
24
FIDUCIARY CAPITAL PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
consulting fees from LMC, one of the Fund's portfolio companies during the first
quarter of 1997 and as a result of the repurchase of Units during November 1996
and 1997. Pursuant to the terms of the Fund's investment advisory agreement with
FCM, the investment advisory fees payable to FCM by the Fund are reduced by the
amount of any fees that FCM receives directly from any of the Fund's portfolio
companies. The repurchase of Units 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.
Other expenses decreased during 1997 primarily as a result of consulting
fees and expenses paid during 1996 in connection with the Canadian's bankruptcy
proceedings.
Professional fees increased during 1997 primarily because of fees incurred
in connection with the Fund's analysis of a proposal pursuant to which its Units
would have been exchanged for shares in a newly formed Delaware Business Trust.
FCM has decided not to pursue this proposal at this time.
1996 Compared to 1995
The Fund's net investment income was $951,907 for the year ended December
31, 1996 on total investment income of $1,600,487 as compared to net investment
income of $2,037,186 on total investment income of $2,668,846 for the prior
year. Net investment income per limited partnership unit decreased from $1.33 to
$.68, and the ratio of net investment income to average net assets decreased
from 7.19% to 4.19% for the year ended December 31, 1996 in comparison to the
prior year.
Net investment income for the year ended December 31, 1996 decreased
primarily as a result of a decrease in investment income. Total expenses also
increased by a small amount.
Investment income decreased $1,068,359, or 40.0%, for the year ended
December 31, 1996 in comparison to the prior year. This decrease resulted
primarily from the conversion of the Fund's LMC debt securities into
non-dividend paying equity securities, the Canadian's bankruptcy and the
decision by the Fund to stop accruing interest on its subordinated debt
investment in Atlas. Other factors that contributed to the decrease in
investment income include the utilization of a portion of the Fund's cash
reserves to repurchase Units during both November 1995 and 1996 and lower
interest rates on the Fund's temporary investments.
Total expenses increased $16,920, or 2.7%, for the year ended December 31,
1996 in comparison to 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.
The increases in professional fees and other expenses were primarily the
result of legal fees and other costs incurred in connection with the Canadian's
bankruptcy proceedings and the default by Atlas with respect to the payment of
interest due to the Fund. The investment advisory fees decreased primarily as a
result of the repurchase of Units by the Fund during both November 1995 and 1996
and the realization during February 1996 of the loss on the Fund's Canadian's
investment. Both the repurchase of the 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
cost 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
The Fund realized gains of $4,588,421 during the year ended December 31,
1995, net losses of $3,948,869 during the year ended December 31, 1996 and net
gains of $3,545,258 during the year ended December 31, 1997.
The realized gains for 1995 consisted of gain, including a prepayment
premium, from the prepayment by Protection One of subordinated notes that were
held by the Fund and gains from the sale of all of the ▇▇▇▇-▇▇▇▇▇▇▇▇▇ common
stock and KB Alloys notes and a portion of the KEMET common stock that were held
by the Fund. During 1996, the Fund realized a gain from the sale of the Fund's
Huntington investment and realized a loss on the Fund's Canadian's investment.
The net realized gain for 1997 resulted from gains on the Fund's Neodata,
Elgin, ENI and Huntington investments, including a prepayment premium, and an
additional realized loss on the Fund's Canadian's investment.
The Fund owned an equity position in Neodata since 1990, which it acquired
at a cost of $337,946. In addition, the Fund previously owned Neodata
subordinated notes, which were prepaid during May 1993.
During August 1997, Electronic Data Systems Corporation ("EDS") offered to
purchase all of Neodata's stock that it did not already own. ▇▇▇▇▇ Muse, the
owner of a controlling portion of Neodata's common stock, accepted the offer.
The purchase by EDS closed on September 2, 1997. The Fund received $1,427,496 of
cash proceeds from the sale of its Neodata stock,
TWENTY-TWO
25
FIDUCIARY CAPITAL PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
resulting in a realized gain of $1,089,550.
During 1993, the Fund invested $6,726,339 in Elgin and its parent company,
ENI. The investment consisted of (a) $6,087,185 of Elgin's 13.00% Senior
Subordinated Notes due September 1, 2001 with warrants to purchase common stock
in ENI, (b) $711,971 of ENI 10.00% preferred stock, and (c) $48,927 of ENI
common stock.
During June 1997, the Fund received a written offer from ENI management to
prepay the Fund's subordinated debt, redeem the Fund's preferred stock and
purchase the Fund's Class B common stock and warrants. The offer was reviewed by
all of the subordinated debt holders, including the Fund, and rejected as
inadequate.
During August 1997, ENI management made an improved offer, which was
revised and accepted by all of the subordinated debt holders, following a series
of negotiations. The sale closed on November 5, 1997, with the Fund receiving
$9,212,562 of sales proceeds, along with $438,070 of accrued interest and
accumulated preferred stock dividends, resulting in a realized gain of
$2,400,041.
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, with
the balance being held by the buyer in escrow. A portion of the escrowed funds
was used to pay various transaction expenses and the Fund received additional
distributions of $19,920 and $81,429 during September 1996 and May 1997,
respectively. The Fund's share of the remaining escrow balance is approximately
$85,000. The remaining balance of the escrow was required to be held until
February 1998 to be available to fund 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. During February 1998, the
purchaser notified the sellers, including the Fund, of claims against the escrow
account that totaled approximately 31% of the balance remaining in the escrow
account. The sellers intend to object to these claims and the balance of the
escrow account will not be released until these claims are resolved. The Fund
recognized realized gains of $1,236,821 and $81,429 from this transaction during
1996 and 1997, respectively. Additional gain will be recognized if, and when,
the Fund actually receives a distribution of any of the remaining escrowed
funds.
Beginning July 1, 1997, the Fund began accruing additional Canadian's sales
tax related reserves at a 12% annualized rate, or $25,762 for the six months
ended December 31, 1997. This additional accrued amount was recorded as an
additional realized loss in the Fund's 1997 Statement of Operations.
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 will be
used only with respect to completed transactions or firm offers made by
sophisticated, independent investors.
Prior to 1995, the Fund had recorded cumulative net unrealized gain on
investments of $3,904,681. During 1995, the Fund recorded $777,782 of unrealized
gain and $5,622,311 of unrealized loss on investments. In addition, the Fund
disposed of investments during 1995 with respect to which the Fund had recorded
$2,335,481 of net unrealized gain during prior years. Therefore, at December 31,
1995, the Fund had net unrealized loss on investments of $3,275,329.
During 1996, the Fund recorded $94,187 of unrealized gain and $1,344,097 of
unrealized loss on investments. In addition, the Fund disposed of investments
during 1996 with respect to which the Fund had recorded $3,841,121 of net
unrealized loss during prior years. Therefore, at December 31, 1996, the Fund
had net unrealized loss on investments of $684,118.
TWENTY-THREE
26
FIDUCIARY CAPITAL PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The net increase in unrealized loss on investments during 1997 and the
cumulative net unrealized loss on investments at December 31, 1997, consisted of
the following components:
Unrealized Gain (Loss) Recorded
-------------------------------
As of
Portfolio Investment During 1997 December 31, 1997
-------------------- ----------- -----------------
Unrealized net loss recorded
during prior years with
respect to investments
disposed of during 1997 $ 105,369 $ --
KEMET (104,791) 529,763
ARA (852,283) (117,787)
LMC (317,280) (858,080)
MTI 11,869 (214,907)
Atlas (2,702,022) (3,882,246)
------------------------------------------------------------------
$(3,859,138) $(4,543,257)
==================================================================
KEMET completed an IPO of its common stock during 1992. The stock, which
trades on the NASDAQ National Market System, closed at $19.3125 (an average of
the closing bid and ask prices) on December 31, 1997. This price is down
slightly from the closing price of $23.0625 on December 31, 1996. Based on the
$19.3125 closing trading price of the common stock, the 27,944 shares of common
stock that the Fund held at December 31, 1997 had a market value of $539,668.
The ARA warrants and common stock were written up in value at March 31,
1996 to bring ARA's valuation at that time more in line with the valuations of
comparable companies in its industry. However, ARA reported significantly
reduced earnings and cash flows from operations for its most recent fiscal year.
In addition, the price earnings ratios of comparable companies in its industry
have declined recently. As a result of these factors, the ARA warrants and
common stock were written down in value by $852,283 during 1997. On a net
cumulative basis, as of December 31, 1997, the Fund's ARA investment has been
written down in value by $117,787.
During February 1998, ▇▇▇ hired a crisis manager to assist it in addressing
significant declines in the company's sales and profits, which have occurred in
recent years. The hiring of the crisis manager was precipitated by ▇▇▇'s
lenders, who have notified ARA of defaults under its credit lines and have
demanded that ARA repay overadvances that were made during 1997.
The Fund has been notified that ARA is considering a number of options for
solving these problems, including a possible bankruptcy filing and the sale of
the company, or certain of its operations.
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. As a result of LMC's operational
difficulties and the fact that the Fund's investment was converted from debt
securities to equity securities the Fund wrote its LMC investment down by
$540,800 during 1995.
LMC has a defined contribution plan (the "Plan"), which was closed during
1995. The current and previous trustees of the Plan have failed to assure that
the Plan was properly funded, in an amount equal to approximately $600,000.
Including penalties and interest, this amount could now total as much as
$1,800,000. The Internal Revenue Service ("IRS") has notified LMC that an audit
of the Plan will be conducted in early 1998. In order to rectify this problem,
LMC has made demands on the current and previous trustees of the Plan and the
previous controlling shareholders that these parties make the necessary payments
to the Plan. LMC has filed suit against the current trustee, who's wholly-owned
company currently owns approximately 50% of LMC's common stock, and expects to
prevail in this litigation, although there can be no assurance that this will be
the case. Regardless, the IRS may insist that LMC fund the Plan prior to
resolution of the litigation. If the IRS requires LMC to fund the underpayments
and the related penalties and interest, it will put pressure on LMC's working
capital availability.
As a result of this matter and its potential impact on LMC, the Fund
recorded an additional $317,280 write down in the value of its LMC investment
during 1997. On a cumulative basis, as of December 31, 1997, the Fund's LMC
investment has been written down in value by $858,080. (The Fund made additional
follow-on investments in LMC during 1996, 1997 and 1998.)
The MTI common stock was written down in value by $249,766 during 1994
based upon an independent third party valuation of the company that was obtained
by MTI's management. During August 1996, MTI 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 valuation of its MTI
investment was increased by $22,990 and $11,869 during 1996 and 1997,
respectively, based upon an analysis of MTI's earnings and cash flows. On a net
cumulative basis, as of December 31, 1997, the Fund's MTI investment has been
written down in value by $214,907, to a carrying value of $73,023.
TWENTY-FOUR
27
FIDUCIARY CAPITAL PARTNERS, L.P.
During January 1998, MTI entered into an agreement pursuant to which the
company will be sold. If this proposed sale, which is scheduled to close during
March 1998, is consummated at the expected price, the Fund will receive
approximately $160,000 for its MTI common stock and warrants.
The companies that Atlas acquired during 1996 with the proceeds of the
Fund's subordinated debt investment have not performed as well as expected. As a
result, Atlas defaulted on certain financial covenants in its agreements with
its senior lender and with the Fund. The senior lender, the Bank of New York,
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, beginning in
July 1996.
During August 1996, ▇▇▇▇▇ entered into a letter of intent, under the terms
of which some of company's businesses would be sold for cash. During November
1996, the purchaser notified Atlas that it wanted to renegotiate the terms of
the transaction, including a reduction in the purchase price. Atlas management
was unable to reach a revised agreement with the purchaser and Atlas remained in
default on its debt. On January 17, 1997, Atlas filed for Chapter 11 bankruptcy
protection.
▇▇▇▇▇ has filed a plan of reorganization with the bankruptcy court in an
effort to restructure and emerge from bankruptcy. The plan anticipates that many
of the interested parties, including the Fund, will contribute additional
capital to the company. While the Fund is generally supportive of the plan,
there are a number of significant business issues which must be addressed before
the Fund will agree to the plan or agree to make a follow-on investment in
Atlas.
As a result of these developments, the Fund stopped accruing interest on
its Atlas investment effective April 20, 1996 and recorded writedowns of
$1,180,224 and $2,702,022 during 1996 and 1997, respectively, in the carrying
value of the investment. The remaining carrying value of the Fund's Atlas
investment as of December 31, 1997 is $2.
FCM continually monitors both the Fund's portfolio companies and the
markets, and continually evaluates the decision to hold or sell its traded
securities.
INFLATION AND CHANGING PRICES
Inflation has had no material impact on the operations or financial
condition of the Fund from inception through December 31, 1997. However,
inflation and changing prices, in addition to other factors, may effect the
value and the eventual selling price of the Fund's investments.
TWENTY-FIVE
28
FIDUCIARY CAPITAL PARTNERS, L.P.
FUND INFORMATION
FIDUCIARY CAPITAL PARTNERS, L.P.
▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
(▇▇▇) ▇▇▇-▇▇▇▇
MANAGING GENERAL PARTNER
FCM Fiduciary Capital Management Company
AUDITORS
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ LLP
Denver, Colorado
LEGAL COUNSEL
▇▇▇▇▇▇ & ▇▇▇▇▇▇▇ LLP
Denver, Colorado
TRANSFER AGENT
Service Data Corporation
Omaha, Nebraska
A copy of the Annual Report on Form 10-K, as filed with the Securities and
Exchange Commission, will be furnished without charge to Limited Partners upon
request. A copy can also be obtained from the SEC's ▇▇▇▇▇ Database on the World
Wide Web at: ▇▇▇▇://▇▇▇.▇▇▇.▇▇▇/▇▇▇▇▇▇▇.▇▇▇.
TWENTY-SIX
29
Fiduciary Capital Partners, L.P.
---------------------------------------------------------
----------------------------
FIRST QUARTER REPORT
1998
30
FIDUCIARY CAPITAL PARTNERS, L.P.
SCHEDULE OF INVESTMENTS
MARCH 31, 1998 (UNAUDITED)
--------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT/ INVESTMENT AMORTIZED % OF TOTAL
SHARES INVESTMENT DATE COST VALUE INVESTMENTS
--------------------------------------------------------------------------------------------
MANAGED COMPANIES:
27,944 sh. KEMET Corporation,
Common Stock(1)* 07/11/91 $ 9,905 $ 516,091
--------------------------------------------------------------------------------------------
9,905 516,091 3.3%
--------------------------------------------------------------------------------------------
75,856 sh. AR Accessories Group,
Inc., Warrants to
Purchase Class B
Common Stock* 07/30/92 104,091 1
27,392 sh. AR Accessories Group,
Inc., Class A Common
Stock* 07/30/92 273,920 1
--------------------------------------------------------------------------------------------
378,011 2 0.0
--------------------------------------------------------------------------------------------
$1,967,040 LMC Operating Corp.,
12.00% Senior Subordinated 11/01/96
Revolving Notes through
due 10/31/00 11/04/97 1,967,040 1,967,040
$551,000 LMC Operating Corp.,
12.00% Senior Subordinated
Revolving Notes 02/18/98 &
due 8/20/98 03/18/98 551,000 551,000
260,400 sh. LMC Operating Corp., 7.00%
Cumulative Redeemable
Preferred Stock* 06/10/94 2,596,621 2,284,139
27.28 sh. LMC Operating Corp.,
Common Stock* 02/09/96 545,599 1
52.08 sh. LMC Credit Corp.,
Common Stock* 02/09/96 1 1
--------------------------------------------------------------------------------------------
5,660,261 4,802,181 31.1
--------------------------------------------------------------------------------------------
1,608 sh. Mobile Technology, Inc., 07/06/94 &
Common Stock* 12/28/94 227,438 81,769
4,287 sh. Mobile Technology, Inc.,
Warrants to Purchase 07/06/94 &
Common Stock(2)* 12/28/94 60,492 90,246
--------------------------------------------------------------------------------------------
287,930 172,015 1.1
--------------------------------------------------------------------------------------------
The accompanying notes to financial statements are an
integral part of this schedule.
ONE
31
FIDUCIARY CAPITAL PARTNERS, L.P.
SCHEDULE OF INVESTMENTS (CONTINUED)
MARCH 31, 1998 (UNAUDITED)
-------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT/ INVESTMENT AMORTIZED % OF TOTAL
SHARES INVESTMENT DATE COST VALUE INVESTMENTS
-------------------------------------------------------------------------------------------
$1,460,000 R.B.M. Precision Metal
Products, Inc., 13.00%
Senior Subordinated
Secured Notes due
5/24/02(3) 05/24/95 1,392,451 1,392,451
11,060.6 sh. R.B.M. Precision Metal
Products, Inc., Warrants to
Purchase Common Stock* 05/24/95 82,955 82,955
-------------------------------------------------------------------------------------------
1,475,406 1,475,406 9.6
-------------------------------------------------------------------------------------------
$3,934,080 Atlas Environmental, Inc.,
13.50% Senior Subordinated
Secured Notes
due 1/19/03(4)* 01/25/96 3,841,482 1
407,659 sh. Atlas Environmental, Inc.,
Warrants to Purchase
Common Stock(5)* 01/25/96 40,766 1
-------------------------------------------------------------------------------------------
3,882,248 2 0.0
-------------------------------------------------------------------------------------------
Total Investments in Managed
Companies (49.9% of net assets) 11,693,761 6,965,697 45.1
-------------------------------------------------------------------------------------------
TEMPORARY INVESTMENTS:
$4,250,000 Ford Motor Credit
Corporation, 5.32%
Notes due 4/14/98 03/31/98 4,241,804 4,241,804
$4,250,000 American Express
Credit Corp., 5.35%
Notes due 4/14/98 03/31/98 4,241,851 4,241,851
-------------------------------------------------------------------------------------------
Total Temporary Investments (60.8% of net assets) 8,483,655 8,483,655 54.9
-------------------------------------------------------------------------------------------
Total Investments (110.7% of net assets) $20,177,416 $15,449,352 100.0%
===========================================================================================
The accompanying notes to financial statements are an
integral part of this schedule.
TWO
32
FIDUCIARY CAPITAL PARTNERS, L.P.
SCHEDULE OF INVESTMENTS (CONTINUED)
(1) The KEMET Corporation common stock trades on the NASDAQ National Market
System.
(2) The warrants have exercise prices of $19.30 per share (1,286 shares) and
$34.30 per share (3,001 shares).
(3) The notes will amortize in eight equal annual installments of $486,667
commencing on May 24, 2000.
(4) The notes will amortize in five equal annual installments of $786,816
commencing on January 19, 1999. The accrual of interest on the notes was
discontinued by the Fund effective April 20, 1996.
(5) 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.
THREE
33
FIDUCIARY CAPITAL PARTNERS, L.P.
BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997 (UNAUDITED)
==========================================================================================
1998 1997
------------------------------------------------------------------------------------------
ASSETS:
Investments:
Portfolio investments, at value:
Managed companies (amortized cost -
$11,693,761 and $11,138,061,
respectively) $ 6,965,697 $ 6,594,804
Temporary investments, at amortized cost 8,483,655 10,193,557
------------------------------------------------------------------------------------------
Total investments 15,449,352 16,788,361
Cash and cash equivalents 303,471 263,694
Accrued interest receivable 81,293 76,821
Other assets 61,116 66,060
------------------------------------------------------------------------------------------
Total assets $ 15,895,232 $ 17,194,936
==========================================================================================
LIABILITIES:
Payable to affiliates (Notes 2, 3 and 4) $ 75,888 $ 39,123
Accounts payable and accrued liabilities 530,566 484,837
Distributions payable to partners 1,327,456 1,213,701
------------------------------------------------------------------------------------------
Total liabilities 1,933,910 1,737,661
==========================================================================================
COMMITMENTS AND CONTINGENCIES (NOTE 5)
NET ASSETS:
Managing General Partner (68,571) (54,555)
Limited Partners (equivalent to $11.68
and $12.91, respectively, per limited
partnership unit based on 1,201,564
units outstanding) 14,029,893 15,511,830
------------------------------------------------------------------------------------------
Net assets 13,961,322 15,457,275
------------------------------------------------------------------------------------------
Total liabilities and net assets $ 15,895,232 $ 17,194,936
==========================================================================================
The accompanying notes to financial statements are an integral part
of these financial statements.
FOUR
34
FIDUCIARY CAPITAL PARTNERS, L.P.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
------------------------------------------------------------------------------------
1998 1997
------------------------------------------------------------------------------------
INVESTMENT INCOME:
Income:
Interest $ 245,939 $ 333,845
------------------------------------------------------------------------------------
Total investment income 245,939 333,845
------------------------------------------------------------------------------------
Expenses:
Investment advisory fees (Note 2) 35,765 22,279
Professional fees 88,479 53,007
Fund administration fees (Note 3) 35,843 35,843
Administrative expenses (Note 3) 20,276 20,276
Independent General Partner fees
and expenses (Note 4) 21,277 13,673
Other expenses 15,108 5,732
------------------------------------------------------------------------------------
Total expenses 216,748 150,810
------------------------------------------------------------------------------------
NET INVESTMENT INCOME 29,191 183,035
------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
LOSS ON INVESTMENTS:
Net realized loss on investments (12,881) --
Net change in unrealized loss
on investments (184,807) (954,850)
------------------------------------------------------------------------------------
Net loss on investments (197,688) (954,850)
------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $(168,497) $(771,815)
====================================================================================
The accompanying notes to financial statements are an integral part
of these financial statements.
FIVE
35
FIDUCIARY CAPITAL PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
------------------------------------------------------------------------------------
1998 1997
------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets resulting from operations $ (168,497) $(771,815)
Adjustments to reconcile net decrease in net assets
resulting from operations to net cash provided by
operating activities:
Accreted discount on portfolio investments (4,700) (10,250)
Change in assets and liabilities:
Accrued interest receivable (4,472) (5,839)
Other assets 4,944 5,011
Payable to affiliates 36,765 757
Accounts payable and accrued liabilities 32,848 (18,181)
Net realized loss on investments 12,881 --
Net change in unrealized loss on investments 184,807 954,850
------------------------------------------------------------------------------------
Net cash provided by operating activities 94,576 154,533
------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of portfolio investments (551,000) --
Sale of temporary investments, net 1,709,902 297,256
------------------------------------------------------------------------------------
Net cash provided by investing activities 1,158,902 297,256
------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions paid to partners (1,213,701) (393,690)
------------------------------------------------------------------------------------
Net cash used in financing activities (1,213,701) (393,690)
------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 39,777 58,099
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 263,694 272,543
------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 303,471 $ 330,642
====================================================================================
The accompanying notes to financial statements are an integral part
of these financial statements.
SIX
36
FIDUCIARY CAPITAL PARTNERS, L.P.
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND FOR
THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED)
---------------------------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------------------------
Increase in net assets resulting from operations:
Net investment income $ 29,191 $ 1,016,693
Net realized (loss) gain on investments (12,881) 3,545,258
Net change in unrealized (loss) gain on investments (184,807) (3,859,138)
---------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting
from operations (168,497) 702,813
Repurchase of limited partnership units -- (1,363,640)
Distributions to partners from -
Net investment income (29,191) (1,016,693)
Realized gain on investments (1,298,265) (1,905,894)
Return of capital -- (784,482)
---------------------------------------------------------------------------------------
Total decrease in net assets (1,495,953) (4,367,896)
Net assets:
Beginning of period 15,457,275 19,825,171
---------------------------------------------------------------------------------------
End of period (including no undistributed
net investment income) $13,961,322 $15,457,275
=======================================================================================
The accompanying notes to financial statements are an integral part
of these financial statements.
SEVEN
37
FIDUCIARY CAPITAL PARTNERS, L.P.
SELECTED PER UNIT DATA AND RATIOS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
-------------------------------------------------------------------------------
1998 1997
-------------------------------------------------------------------------------
PER UNIT DATA:
Investment income $ .20 $ .25
Expenses (.18) (.11)
-------------------------------------------------------------------------------
Net investment income .02 .14
Net realized loss on investments (.01) --
Net change in unrealized (loss) gain on investments (.15) (.73)
Distributions declared to partners (1.09) (.30)
-------------------------------------------------------------------------------
Net decrease in net asset value (1.23) (.89)
Net asset value:
Beginning of period 12.91 15.28
-------------------------------------------------------------------------------
End of period $11.68 $14.39
-------------------------------------------------------------------------------
RATIOS (ANNUALIZED):
Ratio of expenses to average net assets 5.89% 3.13%
Ratio of net investment income to average net assets 0.79% 3.80%
Number of limited partnership units at end of period 1,201,564 1,299,176
The accompanying notes to financial statements are an integral part
of these selected per unit data and ratios.
EIGHT
38
FIDUCIARY CAPITAL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 (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 Fiduciary Capital Partners, L.P. (the "Fund"), necessary to fairly present
the financial position of the Fund as of March 31, 1998 and the results of its
operations, changes in net assets and its cash flows for the period 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, 1997.
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
$35,765 were paid by the Fund for the three months ended March 31, 1998.
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 $35,843 were
paid by the Fund for the three months ended March 31, 1998. 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 $20,276 for the three months ended March 31,
1998.
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 three months ended
March 31, 1998 totaled $21,277.
NINE
39
FIDUCIARY CAPITAL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES
LMC Commitment During April 1998, the Fund agreed to restructure and increase
its aggregate investment in LMC Operating Corp. ("LMC"). In the restructuring,
$1,639,200 of the Fund's LMC Senior Subordinated Revolving Notes due October 31,
2000 will be converted into additional LMC common stock. LMC will then be
allowed to again draw down the $1,639,200 under the terms of the Revolving Note
agreement to fund working capital requirements and to retire the $551,000 of LMC
Senior Subordinated Revolving Notes due August 20, 1998, which were recently
purchased by the Fund. As a result of the restructuring, the Fund's percentage
ownership of LMC's common stock will increase from approximately 27% to
approximately 48%.
LMC Litigation On January 27, 1998, LMC Holding Co. ("LMC Holding"), which
holds 49.75% of the issued and outstanding common stock of LMC, commenced an
action against the Fund, FCPP and each of ▇▇▇▇ ▇▇▇▇▇▇, the Chairman of the
Board and Chief Executive Officer of FCM, ▇. ▇▇▇▇ ▇▇▇▇▇▇▇▇, the President of
FCM, and ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, the Senior Vice President, Treasurer, Chief
Financial Officer and Compliance Officer of FCM (collectively, the "Individual
Defendants"), in their capacities as officers of FCM, in the First Judicial
District Court in and for Cache County, State of Utah, entitled LMC Holding Co.
v. Fiduciary Capital Partners, L.P., et al., Civil No. ▇▇-▇▇▇▇▇▇▇ (the "LMC
Action"). LMC Holding is controlled by ▇▇▇▇ ▇▇▇▇▇▇▇, a director of LMC and the
trustee of its discontinued pension plan. FCM believes that the LMC Action was
commenced in response to an action filed by LMC against ▇▇. ▇▇▇▇▇▇▇ to recover
for a significant underfunding of LMC's discontinued pension plan. The Fund,
FCPP and the Individual Defendants entered into a settlement agreement with LMC
Holding, effective April 20, 1998. The terms of the settlement call for the
Board of LMC to be increased to six members with the Fund and FCPP selecting
three directors and LMC Holding selecting three, until such time as LMC becomes
a reporting company under the Securities Exchange Act of 1934, as amended. As
part of the settlement, the Fund and FCPP have been able to increase their
percentage ownership of LMC pursuant to the restructuring described above. FCM
believes that the additional investment by the Fund and FCPP will be very
beneficial to LMC and allow it to implement a business plan designed to restore
LMC to profitability within the next few years. LMC continues to pursue its
legal action against ▇▇. ▇▇▇▇▇▇▇ with respect to the underfunding of its
discontinued pension plan.
TEN
40
FIDUCIARY CAPITAL PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the Fund's unaudited
Financial Statements and the Notes thereto. This report contains, in addition to
historical information, forward-looking statements that include risks and other
uncertainties. The Fund's actual results may differ materially from those
anticipated in these forward-looking statements. While the Fund can not always
predict what factors would cause actual results to differ materially from those
indicated by the forward-looking statements, factors that might cause such a
difference include general economic and business conditions, competition and
other factors discussed elsewhere in this report. Readers are urged to consider
statements that include the terms "believes", "expects", "plans", "anticipates",
"intends" or the like to be uncertain and forward-looking. The Fund undertakes
no obligation to release publicly any revisions to these forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of anticipated or unanticipated events.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Fund held portfolio investments in six Managed
Companies, with an aggregate cost of approximately $11.7 million. The value of
these portfolio investments, which were made from net offering proceeds and the
reinvestment of proceeds from the sale of other portfolio investments,
represents approximately 49.9% 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 March 31, 1998, 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.
Pursuant to the terms of the Fund's periodic unit repurchase policy, the Fund
will annually offer 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 1998 repurchase offer will be mailed to the Limited Partners during October
ELEVEN
41
FIDUCIARY CAPITAL PARTNERS, L.P.
1998. The actual redemption of tendered Units will occur on November 20, 1998.
During February 1998, the Fund agreed to purchase $551,000 of LMC's Senior
Subordinated Revolving Notes due August 20, 1998. This investment was funded
during February and March 1998.
During April 1998, the Fund agreed to restructure and increase its aggregate
investment in LMC. In the restructuring, $1,639,200 of the Fund's LMC Senior
Subordinated Revolving Notes due October 31, 2000 will be converted into
additional LMC common stock. LMC will then be allowed to again draw down the
$1,639,200 under the terms of the Revolving Note agreement to fund working
capital requirements and to retire the $551,000 of LMC Senior Subordinated
Revolving Notes due August 20, 1998, which were recently purchased by the Fund.
As a result of the restructuring, the Fund's percentage ownership of LMC's
common stock will increase from approximately 27% to approximately 48%.
During the three months ended March 31, 1998, the Fund paid a cash distribution
pertaining to the fourth quarter of 1997 in the amount of $1,213,701, or $1.00
per Unit. The distribution for the first quarter of 1998 will be paid on May 15,
1998. The per Unit distribution rate will vary between $1.00 and $1.13 depending
upon the closing in which the particular Units were issued. This
disproportionate cash distribution results from the Units being issued on
different dates during 1990, and thus being entitled to differing Preferred
Return amounts, as defined in the Fund's Partnership Agreement. These
disproportionate distribution rates will eliminate the remaining Preferred
Return amounts, leaving all Units on an equal basis going forward.
The Fund currently expects the distribution for the second quarter of 1998,
which is payable during August 1998, to be made at a rate of $1.00 per Unit for
all Limited Partners and that the remaining 1998 distributions will likely be
reduced to a rate of $.30 per Unit per quarter.
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 impacts the amount of the Fund's quarterly distributions because
all proceeds from dispositions or maturities of investments are distributed to
investors, except to the extent the cash is needed to fund the annual repurchase
offer or to fund any follow-on investments in existing portfolio companies. The
increase in the quarterly distribution rate during 1997 and 1998 represents a
distribution of the proceeds from dispositions or maturities of investments
during 1997.
TWELVE
42
FIDUCIARY CAPITAL PARTNERS, L.P.
RESULTS OF OPERATIONS
INVESTMENT INCOME AND EXPENSES
The Fund's net investment income was $29,191 for the three months ended March
31, 1998 as compared to net investment income of $183,035 for the corresponding
period of the prior year. Net investment income per limited partnership unit
decreased from $.14 to $.02 and the ratio of net investment income to average
net assets decreased from 3.80% to 0.79% for the three months ended March 31,
1998 as compared to the corresponding period of the prior year.
Net investment income for the three months ended March 31, 1998 decreased as a
result of both a decrease in investment income and an increase in total
expenses.
Investment income decreased $87,906, or 26.3%, for the three months ended
March 31, 1998, as compared to the corresponding period of the prior year. This
decrease resulted primarily from the prepayment of the Fund's Elgin National
Industries Inc. subordinated debt investment during November 1997. The Fund's
total investments also decreased as a result of the Fund's repurchase of 7.51%
of its Units during the fourth quarter of 1997. The negative effect of these
items was partially offset by increases in interest income earned on temporary
investments and on the LMC follow-on investments that were acquired during 1997
and 1998.
Total expenses increased $65,938, or 43.7%, for the three months ended March 31,
1998 as compared to the corresponding period of the prior year. This increase
resulted primarily from increases in investment advisory fees, professional
fees, Independent General Partner fees and expenses and other expenses.
The investment advisory fees paid to FCM increased as a result of the direct
receipt by FCM of consulting fees from LMC during the first quarter of 1997.
Pursuant to the terms of the Fund's investment advisory agreement with FCM, the
investment advisory fees payable to FCM by the Fund are reduced by the amount of
any fees that FCM receives directly from any of the Fund's portfolio companies.
The effect of the decrease (to zero) in the amount of LMC consulting fees
received by FCM was partially offset by the effect of the repurchase of Units by
the Fund during the fourth quarter of 1997 and the realization of additional
losses with respect to the Fund's investment in Canadian's Holdings, Inc. and
its subsidiary ("Canadian's"). 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.
Independent General Partner fees and expenses increased because one of the
Fund's three Independent General Partners resigned during the fourth quarter of
1996 and was not replaced until July 1997. The increase in professional fees was
primarily the result of legal fees incurred during the three months ended March
31, 1998 in connection with the
THIRTEEN
43
FIDUCIARY CAPITAL PARTNERS, L.P.
LMC litigation. Other expenses increased primarily as a result of insurance
expense associated with a new liability insurance policy for the Fund's general
partners that was initially purchased during September 1997.
NET REALIZED LOSS ON INVESTMENTS
Beginning July 1, 1997, the Fund began accruing additional Canadian's sales tax
related reserves at a 12% annualized rate, or $12,881 for the three months ended
March 31, 1998. This additional accrued amount was recorded as an additional
realized loss in the Fund's Statement of Operations.
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, 1997, the Fund had recorded $529,763 of unrealized gain and
$5,073,020 of unrealized loss on investments. Therefore, as of December 31,
1997, the Fund had recorded a total net unrealized loss on investments of
$4,543,257.
FOURTEEN
44
FIDUCIARY CAPITAL PARTNERS, L.P.
The net increase in unrealized loss on investments during the three months ended
March 31, 1998 and the cumulative net unrealized loss on investments as of March
31, 1998 consisted of the following components:
Unrealized Gain (Loss) Recorded
----------------------------------------------------------------------------------
During the Three
Months Ended As of
Portfolio Company March 31, 1998 March 31, 1998
----------------------------------------------------------------------------------
KEMET $ (23,577) $ 506,186
ARA (260,222) (378,009)
LMC -- (858,080)
MTI 98,992 (115,915)
Atlas -- (3,882,246)
---------------------------------------------------------------------------------
$ (184,807) $ (4,728,064)
=================================================================================
KEMET completed an IPO of its common stock during 1992. The stock, which trades
on the NASDAQ National Market System, closed at $18.46875 (an average of the
closing bid and ask prices) on March 31, 1998. This price is down slightly from
the closing price of $19.3125 on December 31, 1997. Based on the $18.46875
closing trading price of the common stock, the 27,944 shares of common stock
that the Fund held at March 31, 1998 had a market value of $516,091.
AR Accessories Group, Inc. ("ARA") reported significantly reduced earnings and
cash flows from operations during 1997. In addition, the price earnings ratios
of comparable companies in its industry declined. As a result of these factors,
the ARA warrants and common stock were written down in value during 1997 to a
carrying value of $260,244.
During February 1998, ▇▇▇ hired a crisis manager to assist it in addressing
continuing significant declines in the company's sales and profits. The hiring
of the crisis manager was precipitated by ▇▇▇'s lenders, who notified ARA of
defaults under its credit lines and demanded that ARA repay overadvances that
were made during 1997. The Fund was notified that ARA was considering a number
of options for solving these problems, including a possible bankruptcy filing
and the sale of the company, or certain of its operations.
On March 13, 1998, ▇▇▇ filed for Chapter 11 bankruptcy protection. It is
currently anticipated that ▇▇▇'s assets will be sold at auction during May 1998
and that the proceeds will be less than ARA's total outstanding debt.
The Fund's subordinated debt investment in ARA was prepaid in a prior year. The
Fund's only remaining investment in ARA is a common equity position that was
acquired in connection with the Fund's original subordinated debt investment.
Since it is anticipated that all of the proceeds that will be realized from the
liquidation of ARA `s assets will likely
FIFTEEN
45
FIDUCIARY CAPITAL PARTNERS, L.P.
satisfy only a portion of ARA's debt, the Fund has written the carrying value of
its remaining ARA equity investment down to a nominal amount ($2) as of March
31, 1998.
On a net cumulative basis, as of December 31, 1997, the Fund's investment in
Mobile Technology, Inc. ("MTI") had been written down in value by $214,907, to a
carrying value of $73,023.
MTI was sold on March 12, 1998. The Fund, which owned less that 0.5% of MTI's
common equity, expected to receive approximately $201,000 from the sale.
However, at the closing a dispute arose over the calculation of the sales price.
The dispute, which revolves primarily around whether the sellers or the buyer
should receive the benefit of warrant exercise proceeds, involves approximately
5% of the anticipated sales proceeds. As a result of these developments, the
MTI investment was written up in value by $98,992 at March 31, 1998, to a
carrying value of $172,015.
FCM continually monitors both the Fund's portfolio companies and the markets,
and continually evaluates the decision to hold or sell its traded securities.
SIXTEEN