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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-17737
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Fiduciary Capital Partners, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 86-0653600
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(State of organization) (I.R.S. Employer
Identification No.)
410 17th Street
Suite 400
Denver, Colorado 80202
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (800) 866-7607
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
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Fiduciary Capital Partners, L. P.
Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 1998
Table of Contents
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Page
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) 3
Schedule of Investments -
September 30, 1998 3
Balance Sheets - September 30, 1998 and
December 31, 1997 5
Statements of Operations for the three months
ended September 30, 1998 and 1997 6
Statements of Operations for the nine months
ended September 30, 1998 and 1997 7
Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997 8
Statements of Changes in Net Assets for
the nine months ended September 30, 1998
and for the year ended December 31, 1997 9
Selected Per Unit Data and Ratios 10
Notes to Financial Statements 11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 13
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
</TABLE>
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
FIDUCIARY CAPITAL PARTNERS, L.P.
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1998
(unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Principal
Amount/ Investment Amortized % of Total
Shares Investment Date Cost Value Investments
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MANAGED COMPANIES:
27,944 sh. KEMET Corporation,
Common Stock(1)* 07/11/91 $ 9,905 $ 314,370
- --------------------------------------------------------------------------------------------------------------------------
9,905 314,370 2.5%
- --------------------------------------------------------------------------------------------------------------------------
$1,611,880 LMC Corporation, 12.00%
Senior Subordinated 11/01/96
Revolving Notes through
due 10/31/00 (Note 5) 09/23/98 1,611,880 1,611,880
260,400 sh. LMC Corporation, 7.00%
Cumulative Redeemable
Preferred Stock* 06/10/94 2,596,621 2,596,621
5,523,500 sh. LMC Corporation, 02/09/96
Common Stock* through
08/05/98 3,034,549 2,176,469
52.08 sh. LMC Credit Corp.,
Common Stock* 02/09/96 1 1
- --------------------------------------------------------------------------------------------------------------------------
7,243,051 6,384,971 50.7
- --------------------------------------------------------------------------------------------------------------------------
$1,460,000 R.B.M. Precision Metal
Products, Inc., 13.00%
Senior Subordinated
Secured Notes due
5/24/02(2) 05/24/95 1,402,387 1,121,910
11,060.6 sh. R.B.M. Precision Metal
Products, Inc., Warrants to
Purchase Common Stock* 05/24/95 82,955 1
- --------------------------------------------------------------------------------------------------------------------------
1,485,342 1,121,911 8.9
- --------------------------------------------------------------------------------------------------------------------------
Total Investments in Managed Companies (65.2% of net assets) 8,738,298 7,821,252 62.1
- --------------------------------------------------------------------------------------------------------------------------
NON-MANAGED COMPANY:
989,414 sh. WasteMasters, Inc.,
Common Stock(3)* 06/03/98 1,321,795 1
- --------------------------------------------------------------------------------------------------------------------------
Total Investment in Non-Managed Company (0.0% of net assets) 1,321,795 1 0.0
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to financial statements are an
integral part of this schedule.
3
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FIDUCIARY CAPITAL PARTNERS, L.P.
SCHEDULE OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 1998
(unaudited)
<TABLE>
<CAPTION>
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Principal
Amount/ Investment Amortized % of Total
Shares Investment Date Cost Value Investments
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TEMPORARY INVESTMENTS:
$4,775,000 American Express Credit Corp.,
5.26% Notes due 10/2/98 09/15/98 4,774,304 4,774,304
- --------------------------------------------------------------------------------------------------------------------------
Total Temporary Investments (39.8% of net assets) 4,774,304 4,774,304 37.9
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (105.0% of net assets) $14,834,397 $12,595,557 100.0%
==========================================================================================================================
</TABLE>
(1) The KEMET Corporation common stock trades on the NASDAQ National Market
System.
(2) The notes will amortize in three equal annual installments of $486,667
commencing on May 24, 2000.
(3) The WasteMasters, Inc. common stock, which trades on the NASDAQ Small
Cap Market System, is subject to a 24 month lock up period, a call option
and a right of first refusal.
* Non-income producing security.
The accompanying notes to financial statements are an integral
part of this schedule.
4
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FIDUCIARY CAPITAL PARTNERS, L.P.
BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
ASSETS:
Investments:
Portfolio investments, at value:
Managed companies (amortized cost -
$8,738,298 and $11,138,061
respectively) $ 7,821,252 $ 6,594,804
Non-managed company (amortized cost -
$1,321,795) 1 --
Temporary investments, at amortized cost 4,774,304 10,193,557
--------------- ---------------
Total investments 12,595,557 16,788,361
Cash and cash equivalents 230,711 263,694
Accrued interest receivable 68,434 76,821
Other assets 31,519 66,060
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Total assets $ 12,926,221 $ 17,194,936
=============== ===============
LIABILITIES:
Payable to affiliates (Notes 2, 3 and 4) $ 40,108 $ 39,123
Accounts payable and accrued liabilities 525,927 484,837
Distributions payable to partners 364,110 1,213,701
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Total liabilities 930,145 1,737,661
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COMMITMENTS AND CONTINGENCIES (Note 5)
NET ASSETS:
Managing General Partner (81,593) (54,555)
Limited Partners (equivalent to $10.05
and $12.91, respectively, per limited
partnership unit based on 1,201,564
units outstanding) 12,077,669 15,511,830
--------------- ---------------
Net assets 11,996,076 15,457,275
--------------- ---------------
Total liabilities and net assets $ 12,926,221 $ 17,194,936
=============== ===============
</TABLE>
The accompanying notes to financial statements
are an integral part of these financial statements.
5
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FIDUCIARY CAPITAL PARTNERS, L.P.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
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INVESTMENT INCOME:
Income:
Interest $ 181,301 $ 357,418
--------------- ---------------
Total investment income 181,301 357,418
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Expenses:
Professional fees 25,100 72,453
Investment advisory fees (Note 2) 26,285 38,671
Fund administration fees (Note 3) 35,843 35,843
Administrative expenses (Note 3) 20,275 20,275
Independent General Partner fees
and expenses (Note 4) 12,610 21,098
Other expenses 16,443 9,335
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Total expenses 136,556 197,675
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NET INVESTMENT INCOME 44,745 159,743
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REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized (loss) gain on investments (11,704) 1,076,669
Net change in unrealized loss
on investments (416,699) (421,760)
--------------- ---------------
Net (loss) gain on investments (428,403) 654,909
--------------- ---------------
NET (DECREASE) INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ (383,658) $ 814,652
=============== ===============
</TABLE>
The accompanying notes to financial statements are an integral part of
these financial statements.
6
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FIDUCIARY CAPITAL PARTNERS, L.P.
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
INVESTMENT INCOME:
Income:
Interest $ 642,188 $ 1,027,725
--------------- ---------------
Total investment income 642,188 1,027,725
--------------- ---------------
Expenses:
Professional fees 150,548 148,417
Investment advisory fees (Note 2) 95,036 105,085
Fund administration fees (Note 3) 107,528 107,528
Administrative expenses (Note 3) 60,828 60,828
Independent General Partner fees
and expenses (Note 4) 48,766 43,086
Other expenses 50,481 24,873
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Total expenses 513,187 489,817
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NET INVESTMENT INCOME 129,001 537,908
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REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized (loss) gain on investments (2,996,048) 1,158,098
Net change in unrealized loss
on investments 2,304,417 (1,765,014)
--------------- ---------------
Net loss on investments (691,631) (606,916)
--------------- ---------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ (562,630) $ (69,008)
=============== ===============
</TABLE>
The accompanying notes to financial statements are an integral part of
these financial statements.
7
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FIDUCIARY CAPITAL PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets resulting from operations $ (562,630) $ (69,008)
Adjustments to reconcile net decrease in net assets
resulting from operations to net cash provided
by operating activities:
Accreted discount on portfolio investments (14,636) (31,857)
Change in assets and liabilities:
Accrued interest receivable 8,387 (32,593)
Other assets 34,542 (25,121)
Payable to affiliates 985 32,253
Accounts payable and accrued liabilities 2,446 (3,500)
Net realized loss (gain) on investments 2,996,048 (1,158,098)
Net change in unrealized loss
on investments (2,304,417) 1,765,014
--------------- ---------------
Net cash provided by operating activities 160,725 477,090
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of portfolio investments (3,231,190) (948,004)
Proceeds from dispositions of portfolio investments 1,366,389 1,508,925
Sale of temporary investments, net 5,419,253 197,256
--------------- ---------------
Net cash provided by investing activities 3,554,452 758,177
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions paid to partners (3,748,160) (1,181,069)
--------------- ---------------
Net cash used in financing activities (3,748,160) (1,181,069)
--------------- ---------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (32,983) 54,198
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 263,694 272,543
--------------- ---------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 230,711 $ 326,741
=============== ===============
NONCASH INVESTING AND
FINANCING ACTIVITIES:
Investments exchanged for other investments $ 1,639,201 $ --
=============== ===============
</TABLE>
The accompanying notes to financial statements are an integral part of
these financial statements.
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FIDUCIARY CAPITAL PARTNERS, L.P.
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AND FOR THE YEAR ENDED DECEMBER 31, 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Increase in net assets resulting from operations:
Net investment income $ 129,001 $ 1,016,693
Net realized (loss) gain on investments (2,996,048) 3,545,258
Net change in unrealized loss on
investments 2,304,417 (3,859,138)
--------------- ---------------
Net (decrease) increase in net assets
resulting from operations (562,630) 702,813
Repurchase of limited partnership units -- (1,363,640)
Distributions to partners from -
Net investment income (129,001) (1,016,693)
Realized gain on investments (1,742,647) (1,905,894)
Return of capital (1,026,921) (784,482)
--------------- ---------------
Total decrease in net assets (3,461,199) (4,367,896)
Net assets:
Beginning of period 15,457,275 19,825,171
--------------- ---------------
End of period (including no undistributed
net investment income) $ 11,996,076 $ 15,457,275
=============== ===============
</TABLE>
The accompanying notes to financial statements are an integral part of
these financial statements.
9
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FIDUCIARY CAPITAL PARTNERS, L.P.
SELECTED PER UNIT DATA AND RATIOS
(unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------------------- ----------------------------------
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Per Unit Data:
Investment income $ .15 $ .27 $ .53 $ .78
Expenses (.11) (.15) (.42) (.37)
--------------- --------------- --------------- ---------------
Net investment income .04 .12 .11 .41
Net realized (loss) gain on investments (.01) .82 (2.47) .88
Net change in unrealized loss on
investments (.34) (.32) 1.90 (1.34)
Distributions declared to partners (.30) (1.30) (2.40) (1.90)
--------------- --------------- --------------- ---------------
Net decrease in net asset value (.61) (.68) (2.86) (1.95)
Net asset value:
Beginning of period 10.66 14.01 12.91 15.28
--------------- --------------- --------------- ---------------
End of period $ 10.05 $ 13.33 $ 10.05 $ 13.33
=============== =============== =============== ===============
Ratios (annualized):
Ratio of expenses to average net assets 4.42% 4.47% 5.05% 3.53%
Ratio of net investment income to
average net assets 1.45% 3.61% 1.27% 3.88%
Number of limited partnership units at end of period 1,201,564 1,299,176 1,201,564 1,299,176
</TABLE>
The accompanying notes to financial statements are an integral part of these
selected per unit data and ratios.
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FIDUCIARY CAPITAL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 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 September 30, 1998 and the results of
its operations, changes in net assets and its cash flows for the periods then
ended.
These financial statements should be read in conjunction with the Significant
Accounting Policies and other Notes to Financial Statements included in the
Fund's annual audited financial statements for the year ended December 31, 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
$95,036 were paid by the Fund for the nine months ended September 30, 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 $107,528 were
paid by the Fund for the nine months ended September 30, 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 $60,828 for the nine months ended September
30, 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, ("FCPP") (collectively, the "Funds") an annual fee of
$30,000, payable monthly in arrears, together with all out-of-pocket expenses.
Each Fund's allocation of these fees and expenses is based on the relative
number of outstanding Units. Fees and expenses paid by the Fund for the nine
months ended September 30, 1998 totaled $48,766.
5. COMMITMENTS AND CONTINGENCIES
LMC Commitment LMC Corporation (formerly, LMC Operating Corp.) ("LMC") is
entitled to draw down a total of $1,967,040 pursuant to the terms of the Senior
Subordinated Revolving Notes held by the Fund. At September 30, 1998, LMC had
drawn down $1,611,880.
11
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FIDUCIARY CAPITAL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(unaudited)
LMC Litigation On December 23, 1997, LMC commenced an action against Paul
Wallace, a director of LMC and the trustee of its discontinued pension plan, in
an effort to recover for a significant underfunding of LMC's discontinued
pension plan. On January 27, 1998, LMC Holding Co. ("LMC Holding"), which held
approximately 50% of the issued and outstanding common stock of LMC on that
date, commenced an action against the Fund, FCPP and each of Paul Bagley, the
Chairman of the Board and Chief Executive Officer of FCM, W. Duke DeGrassi, the
President of FCM, and Donald R. Jackson, 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. 98-0100077
(the "LMC Action"). LMC Holding is controlled by Paul Wallace. FCM believes that
the LMC Action was commenced in response to the action previously filed by LMC
against Mr. Wallace. The Fund, FCPP and the Individual Defendants entered into a
settlement agreement with LMC Holding, effective April 20, 1998. As part of the
settlement, the Fund and FCPP have been able to increase their percentage
ownership of LMC in exchange for the additional capital contributions. The LMC
Action was subsequently dismissed with prejudice. FCM believes that the
additional investment by the Fund and FCPP will allow LMC to implement a
business plan designed to restore it to profitability within the next few years.
LMC continues to pursue its legal action against Mr. Wallace with respect to the
underfunding of its discontinued pension plan.
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Item 2. 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 September 30, 1998, the Fund held portfolio investments in three Managed
Companies and one Non-Managed Company, with an aggregate cost of approximately
$10.1 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 65.2% of the Fund's net assets.
When acquired, these portfolio investments generally consisted of high-yield
subordinated debt, linked with an equity participation or a comparable
participation feature in middle market companies. These securities were
typically issued in private placement transactions and were subject to certain
restrictions on transfer or sale, thereby limiting their liquidity.
A number of the portfolio companies have prepaid their subordinated debt that
the Fund held. In addition, three of the portfolio companies have successfully
completed initial public offerings ("IPOs") of their stock. The Fund has sold
the stock it held in these three companies, except for a portion of its KEMET
Corporation ("KEMET") stock.
As of September 30, 1998, the Fund's remaining assets were invested in
short-term commercial paper. These funds are available to fund the annual
repurchase offer, to fund follow-on investments in existing portfolio companies,
to pay Fund expenses and for distribution to the partners.
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 was mailed to the Limited Partners during October
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 were converted into additional
LMC common stock. This left LMC with the ability to reborrow the $1,639,200. As
of September 30, 1998, LMC has drawn down $1,284,040 of the $1,639,200 under the
terms of the Revolving Note agreement to fund working
13
<PAGE> 14
capital requirements and to retire the $551,000 of LMC Senior Subordinated
Revolving Notes due August 20, 1998, as described in the preceding paragraph. As
a result of the restructuring, the Fund's percentage ownership of LMC's common
stock increased from approximately 27% to approximately 48%.
During August 1998, the Fund purchased an additional 1,699,500 shares of LMC
common stock for $849,750. As a result of this stock purchase, the Fund's
percentage ownership of LMC's common stock increased from approximately 48% to
approximately 50%.
During the nine months ended September 30, 1998, the Fund sold all of its Mobile
Technology, Inc. ("MTI") stock and warrants and received two distributions from
the escrow account that was established during 1996 in connection with the sale
of the Fund's Huntington Holdings, Inc. ("Huntington") stock. In total, the Fund
received $268,989 in proceeds from these transactions.
Other assets decreased $34,541 from $66,060 at December 31, 1997 to $31,519 at
September 30, 1998. This decrease resulted primarily from the collection of a
receivable from LMC for legal fees that the Fund advanced on behalf of LMC.
Distributions payable to partners decreased $849,591, from $1,213,701 at
December 31, 1997 to $364,110 at September 30, 1998. This decrease resulted from
a decrease in the quarterly distribution rate from $1.00 per Unit for the fourth
quarter of 1997 to $.30 per Unit for the third quarter of 1998.
During the nine months ended September 30, 1998, the Fund paid cash
distributions pertaining to the fourth quarter of 1997 and the first and second
quarters of 1998, in the amounts of $1,213,701, $1,327,455 and $1,207,004,
respectively. The distribution for the fourth quarter of 1997 and the second
quarter of 1998 was equal to $1.00 per Unit for all Limited Partners. The per
Unit distribution rate for the first quarter of 1998 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 distribution for the third quarter of 1998 will be paid on November 13, 1998
at a rate of $.30 per Unit for all Limited Partners. The Fund currently expects
the distribution for the fourth quarter of 1998, which is payable during
February 1999, to also be made at a rate of $.30 per Unit for all Limited
Partners. A significant portion of the 1998 distributions constitute a return of
capital.
The Fund's investment period ended on December 31, 1995. Although the Fund is
permitted to make additional investments in existing portfolio companies after
1995, the Fund is no longer permitted to acquire investments in new portfolio
companies. Consequently, the Fund is now in a liquidation mode. Since the middle
of 1997, the Fund has liquidated its investments in Neodata Corporation, Elgin
National Industries, Inc. and MTI. In this same period, the Fund has distributed
to Limited Partners approximately $4.43 per Unit, with the cash coming in large
part from the liquidation of these investments. At the present time, the Fund
has only four remaining investments: LMC, R.B.M. Precision Metal Products, Inc.
("RBM"), KEMET and WasteMasters, Inc. ("WMI"). By far the Fund's largest
remaining investment is in LMC, of which a large portion consists of that
company's common stock and only a small amount is subordinated debt which
generates current income. KEMET and WMI are publicly-traded companies and the
Fund's investment in these companies consists solely of common stock.
FCM believes it is unlikely that the investments in LMC and RBM will be
liquidated in the next year and therefore the Fund will likely not have
sufficient cash to make regular quarterly distributions throughout 1999.
Considering this situation, FCM recognizes the need to expedite the liquidation
of the Fund and has been investigating a number of alternative measures which
14
<PAGE> 15
would allow the Fund to be liquidated even before the LMC and RBM investments
can be liquidated. We expect to have a plan formulated within the next few
months and would then distribute a proxy to the Limited Partners which would
describe the plan and solicit Limited Partner approval.
RESULTS OF OPERATIONS
Investment Income and Expenses
The Fund's net investment income was $44,745 for the three months ended
September 30, 1998 as compared to net investment income of $159,743 for the
corresponding period of the prior year. Net investment income per limited
partnership unit decreased from $.12 to $.04 and the ratio of net investment
income to average net assets decreased from 3.61% to 1.45% for the three months
ended September 30, 1998 as compared to the corresponding period of the prior
year.
The Fund's net investment income was $129,001 for the nine months ended
September 30, 1998 as compared to net investment income of $537,908 for the
corresponding period of the prior year. Net investment income per limited
partnership unit decreased from $.41 to $.11 and the ratio of net investment
income to average net assets decreased from 3.88% to 1.27% for the nine months
ended September 30, 1998 as compared to the corresponding period of the prior
year.
Net investment income for both the three and nine month periods ended September
30, 1998 decreased primarily as a result of a decrease in investment income as
compared to the corresponding periods of the prior year.
Investment income decreased $176,117 and $385,537, or 49.3% and 37.5%, for the
three and nine month periods ended September 30, 1998, as compared to the
corresponding periods of the prior year. These decreases 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 decreased $61,119, or 30.9%, for the three months ended September
30, 1998, as compared to the corresponding period of the prior year. This
decrease resulted primarily from decreases in professional fees, investment
advisory fees and Independent General Partner fees and expenses. These decreases
were partially offset by an increase in other expenses.
Total expenses increased $23,370, or 4.8%, for the nine months ended September
30, 1998, as compared to the corresponding period of the prior year. This
increase resulted primarily from increases in other expenses, professional fees
and Independent General Partner fees and expenses. The negative effect of these
items was partially offset by a decrease in investment advisory fees.
Professional fees decreased during the three months ended September 30, 1998 as
compared to the corresponding period of the prior year, primarily because of
fees incurred during the prior year in connection with the Fund's analysis of an
abandoned proposal, pursuant to which the Fund's Units would have been exchanged
for shares in a newly-formed Delaware Business Trust. Professional fees
increased slightly for the nine months ended September 30, 1998 as compared to
the corresponding period of the prior year. The decrease discussed above with
respect the three months ended September 30, 1998, was more than offset by legal
fees incurred during the first six months of 1998 in connection with the LMC
litigation.
The investment advisory fees decreased during the three and nine month periods
ended
15
<PAGE> 16
September 30, 1998 as compared to the corresponding periods of the prior year.
These decreases resulted primarily from the effect of the repurchase of Units
during the fourth quarter of 1997 and losses realized by the Fund during the
second quarter of 1998 with respect to the MTI, Atlas Environmental, Inc.
("Atlas") and AR Accessories Group, Inc. ("ARA") portfolio investments. Both the
repurchase of the Units and the realization of the losses 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 decreased during the three months
ended September 30, 1998 because during the corresponding period of the prior
year the Fund paid fees and expenses to two incoming and one outgoing
Independent General partners during a transition period during which new
Independent General partners were being elected. The fees and expenses increased
during the nine months ended September 30, 1998 because one of the Fund's three
Independent General Partners resigned during the fourth quarter of 1996 and was
not replaced until the third quarter of 1997.
Other expenses increased during the three and nine month periods ended September
30, 1998 as compared to the corresponding periods of the prior year, 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 Gain (Loss) on Investments
The Fund owned an equity position in ARA (formerly known as Amity Leather
Products Co.) since 1992. This equity position was acquired in connection with a
subordinated debt investment, which ARA prepaid during 1994.
ARA reported significantly reduced earnings and cash flows from operations
during 1997. During February 1998, ARA hired a crisis manager to assist it in
addressing continuing significant declines in the company's sales and profits.
The hiring of this crisis manager was precipitated by ARA'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.
ARA filed for bankruptcy protection during March 1998. ARA's assets were
liquidated at auction during May 1998, with the proceeds from the sale
satisfying only a portion of ARA's debt. The $378,011 cost of the Fund's equity
investment in ARA was written off as a realized loss during May 1998.
On June 1, 1998, the Fund received $191,469 from the sale of its MTI common
stock and warrants. This amount represents approximately 95% of the sales
proceeds that the Company expected the sellers to receive from the sale. The
remaining 5%, or approximately $10,000, is being held in escrow pending the
resolution of a dispute over whether the sellers or the buyer should receive the
benefit of warrant exercise proceeds. The Fund recorded a realized loss of
$96,461 from this sale. The Fund will record a reduction of the realized loss
if, and when, it actually receives a distribution of any of the escrowed funds.
The Fund's Huntington stock was sold for cash during February 1996. The Fund's
share of the sales proceeds totaled $1,511,364, of which $1,320,711 was received
during February 1996. The balance of the sales proceeds were held in escrow to
pay various transaction expenses, 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. An
agreement was reached with the buyer with regard to purchase price adjustments
and other claims and the escrow accounts have been liquidated. The Fund received
additional distributions of $19,920, $81,429, $76,343 and $1,177 during
September 1996, May 1997, June 1998 and August 1998,
16
<PAGE> 17
respectively. The Fund recognized realized gains of $1,236,821, $81,429 and
$77,520 from this transaction during 1996, 1997 and 1998, respectively.
The companies that Atlas acquired during 1996 with the proceeds of the Fund's
subordinated debt investment did not perform 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, Atlas entered into a letter of intent, under the terms of
which some of the company's businesses would be sold for cash. On November 5,
1996, the purchaser notified Atlas that it wanted to renegotiate the terms of
the transaction, including a reduction in the purchase price. Atlas management
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.
As a result of these developments, the Fund stopped accruing interest on its
Atlas investment during April 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 was $2.
On June 3, 1998, the Fund exchanged its Atlas subordinated notes and warrants
for 989,414 shares of WMI common sock. WMI is an Atlanta, Georgia based waste
management company that has recently announced an aggressive acquisition
program.
Pursuant to the terms of the exchange agreement, the Fund is prohibited from
selling its WMI common stock for 24 months. In addition, the Fund granted the
entity acquiring the Fund's Atlas securities a call on the Fund's WMI common
stock during the 24 month lock up period and a right of first refusal
thereafter, both of which are priced at $11.25 per share.
The WMI common stock, which trades on the NASDAQ Small Cap Market System
("WAST"), closed at $1.78 and $0.97 (an average of the closing bid and ask
prices) on June 3, 1998 and September 30, 1998, respectively. Based on these
prices, the Fund's WMI had trading values of $1,761,157 on the date of the
exchange (June 3, 1998) and $959,732 on September 30, 1998. However, due to a
number of factors, including the speculative nature of the WMI stock, the two
year lock up period and the relative size of the Fund's stock position, FCM has
decided to carry the WMI stock at the same nominal value that the Atlas
securities were previously carried by the Fund. The 52 week low for the WMI
common stock is $0.25 per share.
The Fund recorded a realized loss of $2,560,453 on the exchange, which is equal
to the amount of the loss which the Fund expects to claim for income tax
purposes from the disposition of the Atlas securities. The balance of the
unrealized loss previously recorded by the Fund with respect to the Atlas
securities continues to be carried by the Fund as an unrealized loss.
The Fund is continuing to accrue an interest reserve with respect to the
potential Canadian's sales tax at a 12% annualized rate, or $12,881 and $38,643,
respectively, for the three and nine month periods ended September 30, 1998.
These amounts are recorded as realized losses in the Fund's Statements 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.
17
<PAGE> 18
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.
The net increase in unrealized loss on investments during the three and nine
month periods ended September 30, 1998 and the cumulative net unrealized loss on
investments as of September 30, 1998 consisted of the following components:
<TABLE>
<CAPTION>
Unrealized Gain (Loss) Recorded
-------------------------------
During the Three During the Nine
Months Ended Months Ended As of
Portfolio Company September 30, 1998 September 30, 1998 September 30, 1998
- ------------------------------------ -------------------- -------------------- --------------------
<S> <C> <C> <C>
Unrealized net loss recorded during
prior periods with respect to
investments disposed of during
the period $ -- $ 4,214,940 $ --
KEMET (53,268) (225,298) 304,465
LMC -- -- (858,080)
RBM (363,431) (363,431) (363,431)
WMI -- (1,321,794) (1,321,794)
-------------------- -------------------- --------------------
$ (416,699) $ 2,304,417 $ (2,238,840)
==================== ==================== ====================
</TABLE>
KEMET completed an IPO of its common stock during 1992. The stock, which trades
on the NASDAQ National Market System, closed at $11.25 (an average of the
closing bid and ask prices) on September 30, 1998. This price is down from the
closing prices of $13.15625 and $19.3125 on June 30, 1998 and December 31, 1997,
respectively. Based on the $11.25 closing trading price of the common stock, the
27,944 shares of common stock that the Fund held at September 30, 1998 had a
market value of $314,370.
During August 1998, RBM notified the Fund that anticipated sales to certain
large customers were expected to decline significantly in the upcoming year. Of
particular concern, were sales to Digital Equipment Corporation, which has been
acquired by Compaq Computer Corp. As a result of the anticipated decline in
sales, RBM is attempting to restructure its debt, including the subordinated
notes held by the Fund. The Fund received the quarterly interest payment that
was due from RBM on August 24, 1998. As part of the proposed restructuring, RBM
has asked the Fund to defer the quarterly interest payments due in November
1998, February 1999 and May 1999. The Fund is presently working with RBM and its
other lenders to arrive at a satisfactory restructuring. As a result of these
developments, the Fund recorded a $363,431 writedown at September 30, 1998 in
the carrying value of its RBM investment.
See "Net Realized Gain (Loss) on Investments" for a discussion of the unrealized
loss on the Fund's WMI stock investment.
18
<PAGE> 19
FCM continually monitors both the Fund's portfolio companies and the markets,
and continually evaluates the decision to hold or sell its traded securities.
Readiness for Year 2000
FCM has completed a review of the accounting and other information systems that
are currently being utilized by FCM and the Fund with regard to Year 2000
issues. This review involved both actual tests of parts of the information
systems that were conducted by third party consultants and representations
received from various software vendors. FCM believes that all of these systems
are Year 2000 compliant. All of the costs associated with this review were paid
by FCM.
FCM also corresponded with appropriate third parties, such as the Fund's
custodian and transfer agent, concerning whether their information systems are
Year 2000 compliant. These third parties have represented that their information
systems are either currently Year 2000 compliant or that they have identified
the scope of required upgrades or changes to their information systems that are
needed and that they have a plan in place to complete these upgrades on a timely
basis.
As a result of the above discussed review, Year 2000 issues are not expected to
have any material adverse effects on the Fund's results of operations or
financial condition.
19
<PAGE> 20
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
On December 23, 1997, LMC commenced an action against Paul Wallace, a director
of LMC and the trustee of its discontinued pension plan, in an effort to recover
for a significant underfunding of LMC's discontinued pension plan. On January
27, 1998, LMC Holding Co. ("LMC Holding"), which held approximately 50% of the
issued and outstanding common stock of LMC on that date, commenced an action
against the Fund, FCPP and each of Paul Bagley, the Chairman of the Board and
Chief Executive Officer of FCM, W. Duke DeGrassi, the President of FCM, and
Donald R. Jackson, 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. 98-0100077 (the "LMC Action"). LMC Holding is
controlled by Paul Wallace. FCM believes that the LMC Action was commenced in
response to the action previously filed by LMC against Mr. Wallace. The Fund,
FCPP and the Individual Defendants entered into a settlement agreement with LMC
Holding, effective April 20, 1998. As part of the settlement, the Fund and FCPP
have been able to increase their percentage ownership of LMC in exchange for
additional capital contributions. The LMC Action was subsequently dismissed with
prejudice. FCM believes that the additional investment by the Fund and FCPP will
allow LMC to implement a business plan designed to restore it to profitability
within the next few years. LMC continues to pursue its legal action against Mr.
Wallace with respect to the underfunding of its discontinued pension plan.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits and Reports to be filed:
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
11.1 Statement of Computation of Net Investment Income Per Limited
Partnership Unit.
19.1 Reports Furnished to Securities Holders.
27.1 Financial Data Schedule.
</TABLE>
(b) The Registrant did not file any reports on Form 8-K during the third
quarter of the fiscal year ending December 31, 1998.
20
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Fiduciary Capital Partners, L. P.
(Registrant)
By: FCM Fiduciary Capital Management Company
Managing General Partner
Date: November 9, 1998 By: /s/ Donald R. Jackson
---------------------
Donald R. Jackson
Chief Financial Officer
21
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C>
11.1 Statement of Computation of Net Investment
Income Per Limited Partnership Unit.
19.1 Reports Furnished to Securities Holders.
27.1 Financial Data Schedule.
</TABLE>
E-1
<PAGE> 1
FIDUCIARY CAPITAL PARTNERS, L.P.
--------------------------------
STATEMENT OF COMPUTATION OF NET
INVESTMENT INCOME PER LIMITED
PARTNERSHIP UNIT
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Investment Income $ 44,745 $ 159,743 $ 129,001 $ 537,908
Percentage Allocable to Limited Partners 99% 99% 99% 99%
---------- ---------- ---------- ----------
Net Investment Income Allocable
to Limited Partners $ 44,298 $ 158,146 $ 127,711 $ 532,529
========== ========== ========== ==========
Weighted Average Number of Limited
Partnership Units Outstanding 1,201,564 1,299,176 1,201,564 1,299,176
========== ========== ========== ==========
Net Investment Income Per Limited
Partnership Unit $ .04 $ .12 $ .11 $ .41
========== ========== ========== ==========
</TABLE>
<PAGE> 1
FIDUCIARY CAPITAL PARTNERS, L.P.
--------------------------------
--------------------------------
SECOND QUARTER REPORT
1998
<PAGE> 2
FIDUCIARY CAPITAL PARTNERS, L.P.
- --------------------------------------------------------------------------------
MESSAGE TO INVESTORS
Dear Investor:
The Fund's net asset value per Unit was $10.66 at June 30, 1998. The Fund held
portfolio investments in four companies, which represented approximately 59.1%
of the Fund's net assets. The Fund's remaining assets were invested in
short-term commercial paper. These funds are available to fund the annual
repurchase offer, to fund follow-on investments in existing portfolio companies,
to pay Fund expenses and for distribution to the investors.
CASH DISTRIBUTIONS
The distribution for the second quarter of 1998 was paid on August 14, 1998 in
an amount equal to $1.00 per Unit. Cumulative cash distributions paid to
investors since the Fund's inception during 1990 total between $14.82 and $14.50
on a per Unit ($20.00 cost) basis, depending upon the closing in which the
particular Units were issued.
The distribution for the third quarter of 1998 will be paid on November 13, 1998
in the amount of $.30 per Unit. All investors will receive this distribution if
they are record holders as of September 30, 1998, whether or not Units are
tendered for repurchase in the 1998 Periodic Repurchase Offer (see below).
A significant portion of the Fund's 1998 distributions will constitute a return
of capital.
INVESTMENT UPDATE
LMC Corporation ("LMC") In early 1998, LMC determined that it needed $6 million
to fund the development of its new product (the TrackMaster), finance the
downpayment on and move to a new facility, purchase capital equipment needed to
modernize the Company's production operations and to provide working capital.
Accordingly, the Company offered to its existing shareholders the right to
purchase 12 million addi-
--------------------------------
ONE
<PAGE> 3
FIDUCIARY CAPITAL PARTNERS, L.P.
tional common shares at a price of $.50 per share. The Fund was offered
4,977,900 shares and has purchased all of such shares for a total consideration
of $2,488,950. As a result of purchasing these additional shares, the Fund now
owns approximately 50% of the Company's common stock and in conjunction with
Fiduciary Capital Pension Partners, L.P., an affiliated fund ("FCPP"), owns
approximately 91% of the Company. The other LMC shareholder has until November
1, 1998 to exercise the right to purchase 3,000,000 shares for $1.5 million. If
this shareholder does not exercise this right, the Fund and FCPP will then have
the right to purchase these additional shares.
In early September, the Company will purchase a building in Brigham City, Utah
and will move its operations to this facility over the next two months. The
existing facility, which consists of eleven separate buildings in Logan, Utah,
is outdated and inefficient. The new facility will allow the Company to house
its operations in one building and is expected to significantly reduce the
Company's manufacturing costs. Additionally, the monthly costs associated with
buying this building will be less than the Company is currently expending on
lease payments. As part of the move, the Company is acquiring new capital
equipment which will also provide significant operating efficiencies.
LMC's new product, the TrackMaster, was introduced into the market in the Spring
of 1998 and has received very favorable market acceptance. The TrackMaster is a
low ground pressure tracked vehicle that appears to have significant utility in
a wide variety of applications. Through July, the Company had been successful in
signing eight dealers with 27 sales locations to sell the TrackMaster.
Approximately 25 of the new machines have been sold. Sales of this machine have
been somewhat slowed by certain design and performance problems, a situation
which is normal for the introduction of a new product. LMC's management has been
very proactive in addressing the problems, all of which have been corrected or
are presently being corrected. The Company expects to sell 120 of these machines
in the fiscal year starting October 1, 1998.
FCM believes that with the new product, the new plant and new capital equipment,
LMC will achieve profitability within the next year or so.
--------------------------------
TWO
<PAGE> 4
FIDUCIARY CAPITAL PARTNERS, L.P.
- --------------------------------------------------------------------------------
Atlas Environmental, Inc. ("Atlas") On June 3, 1998, the Fund exchanged its
Atlas subordinated notes (which were in default) and warrants for 989,414 shares
of WasteMasters, Inc. ("WMI") common stock. WMI is an Atlanta, Georgia based
waste management company that has recently announced an aggressive acquisition
program.
Pursuant to the terms of the exchange agreement, the Fund is prohibited from
selling its WMI common stock for 24 months. In addition, the Fund granted the
entity acquiring the Fund's Atlas securities a call on the Fund's WMI common
stock during the 24 month lock up period and a right of first refusal
thereafter, both of which are priced at $11.25 per share.
The WMI common stock, which trades on the NASDAQ Small Cap Market System
("WAST"), closed at $1.78 and $2.01 (an average of the closing bid and ask
prices) on June 3, 1998 (the date of the exchange) and June 30, 1998,
respectively. However, due to a number of factors, including the speculative
nature of the WMI stock, the two year lock up period and the relative size of
the Fund's stock position, the Fund is carrying the WMI stock at the same
nominal value that the Atlas securities had previously been carried by the Fund,
which was a total of $2. The 52 week low for the WMI common stock is $0.25 per
share and the current price (August 31, 1998) is $0.875.
The Fund recorded a realized loss of $2,560,453 on the exchange, which is equal
to the amount of the loss that the Fund expects to claim for income tax purposes
from the disposition of the Atlas securities. The $1,321,794 balance of the
unrealized loss previously recorded by the Fund with respect to the Atlas
securities continues to be carried by the Fund as an unrealized loss.
AR Accessories Group, Inc. ("ARA") The Fund owned an equity position in ARA
(formerly known as Amity Leather Products Co.) since 1992. This equity position
was acquired in connection with a subordinated debt investment, which ARA
prepaid during 1994.
ARA filed for bankruptcy protection during March 1998. ARA's assets were
liquidated at auction during May 1998, with the proceeds from the
--------------------------------
THREE
<PAGE> 5
FIDUCIARY CAPITAL PARTNERS, L.P.
- --------------------------------------------------------------------------------
sale satisfying only a portion of ARA's debt. As a result, the $378,011 cost of
the Fund's equity investment in ARA was written off as a realized loss during
May 1998.
Mobile Technology, Inc. ("MTI") On June 1, 1998, the Fund received $191,469 from
the sale of its MTI common equity. This amount represents approximately 95% of
the sales proceeds that MTI expected the selling shareholders to receive from
the sale. The remaining 5%, or approximately $10,000, is being held in escrow
pending the resolution of a dispute over whether the sellers or the buyer should
receive the benefit of warrant exercise proceeds. The Fund recorded a realized
loss of $96,461 as a result of this sale.
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, LMC and WMI, are not included.
As reflected in the following graph and the schedules on pages seven and eight
of this Quarterly Report, the Fund invested a total of $50.6 million in
subordinated debt investments and received total proceeds of $57.6 million,
including interest income, and fees and prepayment penalties, if applicable. In
the aggregate, these debt investments yielded a return on investment of 1.1 to 1
and an annualized internal rate of return of 7.60%. The Fund also invested $3.7
million in equity securities, from which it received total proceeds of $13.3
million. In the aggregate, these equity investments yielded a return on
investment of 3.6 to 1 and an annualized internal rate of return of 33.19%. Note
that prior performance is not necessarily indicative of future results.
--------------------------------
FOUR
<PAGE> 6
FIDUCIARY CAPITAL PARTNERS, L.P.
- --------------------------------------------------------------------------------
[GRAPH]
The Fund has four remaining investments, which we anticipate will be liquidated
over the next two to three years. We are actively attempting to realize the
greatest possible returns from these remaining investments.
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. If Units in excess of this amount are
tendered, Units are purchased on a pro-rated basis, after giving priority to
investors owning less than 100 Units.
--------------------------------
FIVE
<PAGE> 7
FIDUCIARY CAPITAL PARTNERS, L.P.
- --------------------------------------------------------------------------------
The next opportunity to have the Fund repurchase your 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 800-866-7607.
Sincerely,
Paul Bagley, Chairman
FCM Fiduciary Capital Management Company
W. Duke DeGrassi, President
FCM Fiduciary Capital Management Company
August 31, 1998
--------------------------------
SIX
<PAGE> 8
<TABLE>
<CAPTION>
FIDUCIARY CAPITAL PARTNERS, L.P.
- ----------------------------------------------------------------------------------------
DEBT INVESTMENTS
REALIZED GAINS AND LOSSES (1)
- ----------------------------------------------------------------------------------------
Internal
Year of Investment / Year of Gain(1) Rate of
Portfolio Company(2) Repayment Cost Proceeds(1) (Loss) Return
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1990
Carr-Gottstein Foods Co. 1993 $ 2,940,260 $ 4,998,722 $2,058,462 23.56%
Midwest Dental Products
Corporation 1992 5,478,467 7,946,060 2,467,593 22.63
Neodata Corporation 1993 2,684,449 3,877,613 1,193,164 17.11
1991
KEMET Corporation 1993 4,014,737 5,494,046 1,479,309 17.63
Mobile Technology, Inc. 1998 3,777,475 1,030,215 (2,747,260) N/A
1992
Huntington Holdings, Inc. 1994 5,292,479 7,480,171 2,187,692 20.07
AR Accessories Group, Inc. 1994 5,478,467 6,686,926 1,208,459 11.74
1993
ENI Holding Corp. 1997 5,914,363 9,477,926 3,563,563 13.91
KB Alloys, Inc. 1995 3,489,783 5,185,069 1,695,286 18.32
KEMET Corporation 1993 2,054,425 2,186,222 131,797 26.41
Protection One, Inc. 1995 985,660 1,338,165 352,505 22.11
1994
Canadian's Holdings, Inc. 1996 2,876,392 367,216 (2,509,176) N/A
1995
Canadian's Holdings, Inc. 1996 1,750,113 62,294 (1,687,819) N/A
1996
Atlas Environmental, Inc. 1998 3,814,633 1,456,045 (2,358,588) N/A
- ----------------------------------------------------------------------------------------
Totals $50,551,703 $57,586,690 $7,034,987 7.60%
========================================================================================
</TABLE>
(1) Includes interest income, and fees and prepayment penalties, if applicable.
Note that prior performance is not necessarily indicative of future results.
(2) Includes investment in subsidiaries, if applicable.
--------------------------------
SEVEN
<PAGE> 9
<TABLE>
<CAPTION>
FIDUCIARY CAPITAL PARTNERS, L.P.
- -----------------------------------------------------------------------------------------
EQUITY INVESTMENTS
REALIZED GAINS AND LOSSES(1)
- -----------------------------------------------------------------------------------------
Internal
Year of Investment / Year of Gain Rate of
Portfolio Company(2) Realization Cost Proceeds (Loss) Return
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1990
Carr-Gottstein Foods Co. 1995 $ 894,666 $ 1,450,374 $ 555,708 9.78%
Neodata Corporation 1997 41,089 1,118,393 1,077,304 52.07
1991
KEMET Corporation 1994/1995 70,616 4,547,055 4,476,439 112.37
Mobile Technology, Inc. 1992 440,586 - (440,586) N/A
1992
Huntington Holdings, Inc. 1996/1998 103,811 1,478,483 1,374,672 70.10
Neodata Corporation 1997 296,858 309,103 12,245 0.81
AR Accessories Group, Inc. 1994 273,920 - (273,920) N/A
1993
ENI Holding Corp. 1997 811,976 3,327,051 2,515,075 34.60
KEMET Corporation 1994 600,443 883,564 283,121 41.10
Protection One, Inc. 1995 97,340 146,641 49,301 21.02
1994
Canadian's Holdings, Inc. 1996 39,782 - (39,782) N/A
1996
Atlas Environmental, Inc. 1998 40,765 - (40,765) N/A
- -----------------------------------------------------------------------------------------
Totals $3,711,852 $13,260,664 $9,548,812 33.19%
=========================================================================================
</TABLE>
(1) Note that prior performance is not necessarily indicative of future
results.
(2) Includes investment in subsidiaries, if applicable.
--------------------------------
EIGHT
<PAGE> 10
<TABLE>
<CAPTION>
FIDUCIARY CAPITAL PARTNERS, L.P.
- --------------------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT/ INVESTMENT AMORTIZED % OF TOTAL
SHARES INVESTMENT DATE COST VALUE INVESTMENTS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MANAGED COMPANIES:
27,944 sh. KEMET Corporation,
Common Stock(1)* 07/11/91 $ 9,905 $367,638
- --------------------------------------------------------------------------------------------
9,905 367,638 2.7%
- --------------------------------------------------------------------------------------------
$1,762,140 LMC Corporation, 12.00%
Senior Subordinated 11/01/96
Revolving Notes through
due 10/31/00 (Note 5) 06/22/98 1,762,140 1,762,140
260,400 sh. LMC Corporation, 7.00%
Cumulative Redeemable
Preferred Stock* 06/10/94 2,596,621 2,596,621
3,824,000 sh. LMC Corporation, 02/09/96 &
Common Stock* 05/05/98 2,184,799 1,326,719
52.08 sh. LMC Credit Corp.,
Common Stock* 02/09/96 1 1
- --------------------------------------------------------------------------------------------
6,543,561 5,685,481 41.6
- --------------------------------------------------------------------------------------------
$1,460,000 R.B.M. Precision Metal
Products, Inc., 13.00%
Senior Subordinated
Secured Notes due
5/24/02(2) 05/24/95 1,397,328 1,397,328
11,060.6 sh. R.B.M. Precision Metal
Products, Inc., Warrants to
Purchase Common Stock* 05/24/95 82,955 82,955
- --------------------------------------------------------------------------------------------
1,480,283 1,480,283 10.8
- --------------------------------------------------------------------------------------------
Total Investments in Managed
Companies (59.1% of net assets) 8,033,749 7,533,402 55.1
- --------------------------------------------------------------------------------------------
NON-MANAGED COMPANY:
989,414 sh. WasteMasters, Inc.,
Common Stock(3)* 06/03/98 1,321,795 1
- --------------------------------------------------------------------------------------------
Total Investment in Non-Managed
Company (0.0% of net assets) 1,321,795 1 0.0
- --------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to financial statements are an integral part
of this schedule.
--------------------------------
NINE
<PAGE> 11
FIDUCIARY CAPITAL PARTNERS, L.P.
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT/ INVESTMENT AMORTIZED % OF TOTAL
SHARES INVESTMENT DATE COST VALUE INVESTMENTS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TEMPORARY INVESTMENTS
$3,075,000 General Motors Accept.
Corp., 5.39% Notes
due 7/14/98 06/30/98 3,069,026 3,069,026
$3,075,000 General Electric
Capital Corp., 5.38%
Notes due 7/14/98 06/30/98 3,069,037 3,069,037
- --------------------------------------------------------------------------------------------
Total Temporary Investments (48.2% of net assets) 6,138,063 6,138,063 44.9
- --------------------------------------------------------------------------------------------
Total Investments (107.3% of net assets) $15,493,607 $13,671,466 100.0%
============================================================================================
</TABLE>
(1) The KEMET Corporation common stock trades on the NASDAQ National Market
System.
(2) The notes will amortize in three equal annual installments of $486,667
commencing on May 24, 2000.
(3) The WasteMasters, Inc. common stock, which trades on the NASDAQ Small
Cap System, is subject to a 24 month lock up period, a call option and a
right of first refusal.
* Non-income producing security.
The accompanying notes to financial statements are an
integral part of this schedule.
-------------------------------
TEN
<PAGE> 12
<TABLE>
<CAPTION>
FIDUCIARY CAPITAL PARTNERS, L.P.
- ---------------------------------------------------------------------------------------
BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997 (UNAUDITED)
- ---------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investments:
Portfolio investments, at value:
Managed companies (amortized cost -
$8,033,749 and $11,138,061,
respectively) $ 7,533,402 $ 6,594,804
Non-managed company (amortized cost -
$1,321,795) 1 -
Temporary investments, at amortized cost 6,138,063 10,193,557
- ---------------------------------------------------------------------------------------
Total investments 13,671,466 16,788,361
Cash and cash equivalents 740,160 263,694
Accrued interest receivable 72,724 76,821
Other assets 5,536 66,060
- ---------------------------------------------------------------------------------------
Total assets $ 14,489,886 $ 17,194,936
=======================================================================================
LIABILITIES:
Payable to affiliates (Notes 2, 3 and 4) $ 30,103 $ 39,123
Accounts payable and accrued liabilities 508,936 484,837
Distributions payable to partners 1,207,004 1,213,701
- ---------------------------------------------------------------------------------------
Total liabilities 1,746,043 1,737,661
- ---------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
NET ASSETS:
Managing General Partner (74,115) (54,555)
Limited Partners (equivalent to $10.66
and $12.91, respectively, per limited
partnership unit based on 1,201,564
units outstanding) 12,817,958 15,511,830
- ---------------------------------------------------------------------------------------
Net assets 12,743,843 15,457,275
- ---------------------------------------------------------------------------------------
Total liabilities and net assets $ 14,489,886 $ 17,194,936
=======================================================================================
</TABLE>
The accompanying notes to financial statements are an integral part
of these financial statements.
------------------------------
ELEVEN
<PAGE> 13
FIDUCIARY CAPITAL PARTNERS, L.P.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Income:
Interest $ 214,948 $ 336,462
- ------------------------------------------------------------------------------------
Total investment income 214,948 336,462
- ------------------------------------------------------------------------------------
Expenses:
Professional fees 36,969 22,957
Investment advisory fees (Note 2) 32,986 44,135
Fund administration fees (Note 3) 35,842 35,842
Administrative expenses (Note 3) 20,277 20,277
Independent General Partner fees
and expenses (Note 4) 14,879 11,023
Other expenses 18,930 7,099
- ------------------------------------------------------------------------------------
Total expenses 159,883 141,333
- ------------------------------------------------------------------------------------
NET INVESTMENT INCOME 55,065 195,129
- ------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized (loss) gain on investments (2,971,463) 81,429
Net change in unrealized loss
on investments 2,905,923 (388,403)
- ------------------------------------------------------------------------------------
Net loss on investments (65,540) (306,974)
- ------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ (10,475) $(111,845)
=====================================================================================
</TABLE>
The accompanying notes to financial statements are an integral part
of these financial statements.
------------------------------
TWELVE
<PAGE> 14
FIDUCIARY CAPITAL PARTNERS, L.P.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Income:
Interest $ 460,887 $ 670,307
- -------------------------------------------------------------------------------------
Total investment income 460,887 670,307
- -------------------------------------------------------------------------------------
Expenses:
Professional fees 125,448 75,964
Investment advisory fees (Note 2) 68,751 66,414
Fund administration fees (Note 3) 71,685 71,685
Administrative expenses (Note 3) 40,553 40,553
Independent General Partner fees
and expenses (Note 4) 36,156 24,696
Other expenses 34,038 12,831
- -------------------------------------------------------------------------------------
Total expenses 376,631 292,143
- -------------------------------------------------------------------------------------
NET INVESTMENT INCOME 84,256 378,164
- -------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized (loss) gain on investments (2,984,344) 81,429
Net change in unrealized loss
on investments 2,721,116 (1,343,253)
- -------------------------------------------------------------------------------------
Net loss on investments (263,228) (1,261,824)
- -------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ (178,972) $ (883,660)
=====================================================================================
</TABLE>
The accompanying notes to financial statements are an integral part
of these financial statements.
------------------------------
THIRTEEN
<PAGE> 15
FIDUCIARY CAPITAL PARTNERS, L.P.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets
resulting from operations $ (178,972) $ (883,660)
Adjustments to reconcile net decrease in net
assets resulting from operations to net
cash provided by operating activities:
Accreted discount on portfolio investments (9,577) (20,864)
Change in assets and liabilities:
Accrued interest receivable 4,097 (10,916)
Other assets 60,524 (38,014)
Payable to affiliates (9,020) 9,123
Accounts payable and accrued liabilities (1,663) 5,388
Net realized loss (gain) on investments 2,984,344 (81,429)
Net change in unrealized loss
on investments (2,721,116) 1,343,253
- ------------------------------------------------------------------------------------
Net cash provided by operating activities 128,617 322,881
- ------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of portfolio investments (1,985,300) (554,596)
Proceeds from dispositions of portfolio investments 818,812 81,429
Sale of temporary investments, net 4,055,494 897,677
- ------------------------------------------------------------------------------------
Net cash provided by investing activities 2,889,006 424,510
- ------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions paid to partners (2,541,157) (787,379)
- ------------------------------------------------------------------------------------
Net cash used in financing activities (2,541,157) (787,379)
- ------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 476,466 (39,988)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 263,694 272,543
- ------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 740,160 $ 232,555
====================================================================================
NONCASH INVESTING AND FINANCING ACTIVITIES:
Investments exchanged for other investments $1,639,201 $ -
====================================================================================
</TABLE>
The accompanying notes to financial statements are an integral part
of these financial statements.
------------------------------
FOURTEEN
<PAGE> 16
FIDUCIARY CAPITAL PARTNERS, L.P.
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND FOR
THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets resulting from operations:
Net investment income $ 84,256 $ 1,016,693
Net realized (loss) gain on investments (2,984,344) 3,545,258
Net change in unrealized loss on investments 2,721,116 (3,859,138)
- ---------------------------------------------------------------------------------------
Net (decrease) increase in net assets
resulting from operations (178,972) 702,813
Repurchase of limited partnership units - (1,363,640)
Distributions to partners from -
Net investment income (84,256) (1,016,693)
Realized gain on investments (1,741,470) (1,905,894)
Return of capital (708,734) (784,482)
- ---------------------------------------------------------------------------------------
Total decrease in net assets (2,713,432) (4,367,896)
Net assets:
Beginning of period 15,457,275 19,825,171
- ---------------------------------------------------------------------------------------
End of period (including no undistributed
net investment income) $ 12,743,843 $15,457,275
=======================================================================================
</TABLE>
The accompanying notes to financial statements are an integral part
of these financial statements.
------------------------------
FIFTEEN
<PAGE> 17
FIDUCIARY CAPITAL PARTNERS, L.P.
- --------------------------------------------------------------------------------
SELECTED PER UNIT DATA AND RATIOS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
- ---------------------------------------------------------------------------------------------
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER UNIT DATA:
Investment income $ .18 $ .26 $ .38 $ .51
Expenses (.13) (.11) (.31) (.22)
- ---------------------------------------------------------------------------------------------
Net investment income .05 .15 .07 .29
Net realized (loss) gain on
investments (2.45) .06 (2.46) .06
Net change in unrealized loss
on investments 2.39 (.29) 2.24 (1.02)
Distributions declared to partners (1.00) (.30) (2.09) (.60)
- ---------------------------------------------------------------------------------------------
Net decrease in net asset value (1.01) (.38) (2.24) (1.27)
Net asset value:
Beginning of period 11.68 14.39 12.91 15.28
- ---------------------------------------------------------------------------------------------
End of period $ 10.67 $ 14.01 $ 10.67 $ 14.01
=============================================================================================
RATIOS (ANNUALIZED):
Ratio of expenses to average
net assets 4.77% 3.07% 5.35% 3.09%
Ratio of net investment income to
average net assets 1.64% 4.24% 1.20% 4.00%
Number of limited partnership units at
end of period 1,201,564 1,299,176 1,201,564 1,299,176
</TABLE>
The accompanying notes to financial statements are an integral part of these
selected per unit data and ratios.
----------------------------------
SIXTEEN
<PAGE> 18
FIDUCIARY CAPITAL PARTNERS, L.P.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 1998 and the results of its
operations, changes in net assets and its cash flows for the periods then ended.
These financial statements should be read in conjunction with the Significant
Accounting Policies and other Notes to Financial Statements included in the
Fund's annual audited financial statements for the year ended December 31, 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
$68,751 were paid by the Fund for the six months ended June 30, 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 $71,685 were
paid by the Fund for the six months ended June 30, 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 $40,553 for the six months ended June 30, 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 six months ended
June 30, 1998 totaled $36,156.
-------------------------------------
SEVENTEEN
<PAGE> 19
FIDUCIARY CAPITAL PARTNERS, L.P.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES
LMC Commitments LMC Corporation (formerly, LMC Operating Corp.) ("LMC") is
entitled to draw down a total of $1,967,040 pursuant to the terms of the Senior
Subordinated Revolving Notes held by the Fund. At June 30, 1998, LMC had only
drawn down $1,762,140. The remaining $204,900 was drawn down on July 14, 1998.
On August 4, 1998, the Fund purchased an additional 1,699,500 shares of LMC
common stock for $849,750.
LMC Litigation On January 27, 1998, LMC Holding Co. ("LMC Holding"), which held
approximately 50% of the issued and outstanding common stock of LMC on that
date, commenced an action against the Fund, FCPP and each of Paul Bagley, the
Chairman of the Board and Chief Executive Officer of FCM, W. Duke DeGrassi, the
President of FCM, and Donald R. Jackson, 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. 98-0100077
(the "LMC Action"). LMC Holding is controlled by Paul Wallace, 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 Mr. Wallace
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. As part of the settlement, the Fund
and FCPP have been able to increase their percentage ownership of LMC in
exchange for the additional capital contributions. The LMC Action was
subsequently dismissed with prejudice. FCM believes that the additional
investment by the Fund and FCPP will allow LMC to implement a business plan
designed to restore it to profitability within the next few years. LMC continues
to pursue its legal action against Mr. Wallace with respect to the underfunding
of its discontinued pension plan.
---------------------------------
EIGHTEEN
<PAGE> 20
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 June 30, 1998, the Fund held portfolio investments in three Managed
Companies and one Non-Managed Company, with an aggregate cost of approximately
$9.4 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 55.1% 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 June 30, 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 addi-
---------------------------------
NINETEEN
<PAGE> 21
FIDUCIARY CAPITAL PARTNERS, L.P.
- --------------------------------------------------------------------------------
tional 2% of the outstanding Units. The 1998 repurchase offer will be mailed to
the Limited Partners during October 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 were converted into additional
LMC common stock. LMC was 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, as described in the preceding paragraph. As a result of the restructuring,
the Fund's percentage ownership of LMC's common stock increased from
approximately 27% to approximately 48%.
During August 1998, the Fund purchased an additional 1,699,500 shares of LMC
common stock for $849,750. As a result of this stock purchase, the Fund's
percentage ownership of LMC's common stock increased from approximately 48% to
approximately 50%.
During June 1998, the Fund sold all of its Mobile Technology, Inc. ("MTI") stock
and warrants 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. ("Huntington") stock. In total, the Fund received $267,812 in
proceeds from these two transactions.
Other assets decreased $60,524 from $66,060 at December 31, 1997 to $5,536 at
June 30, 1998. This decrease resulted primarily from the collection of a
receivable from LMC for legal fees that the Fund advanced on behalf of LMC and a
decrease in prepaid insurance.
During the six months ended June 30, 1998, the Fund paid cash distributions
pertaining to the fourth quarter of 1997 and the first quarter of 1998, in the
amounts of $1,213,701 and $1,327,456, respectively. The distribution for the
fourth quarter of 1997 was equal to $1.00 per Unit for all Limited Partners. The
per Unit distribution rate for the first quarter of 1998 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.
---------------------------------
TWENTY
<PAGE> 22
FIDUCIARY CAPITAL PARTNERS, L.P.
- --------------------------------------------------------------------------------
The distribution for the second quarter of 1998 was paid on August 14, 1998 at a
rate of $1.00 per Unit for all Limited Partners. The Fund currently expects the
distribution for the third and fourth quarters of 1998, which are payable during
November 1998 and February 1999, to be made at a reduced rate of $.30 per Unit
for all Limited Partners. A significant portion of the distributions made in
1998 will constitute a return of capital.
The Fund's investment period ended on December 31, 1995. Although the Fund is
permitted to make additional investments in existing portfolio companies after
1995, the Fund is no longer permitted to acquire investments in new portfolio
companies. 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 and 1998.
RESULTS OF OPERATIONS
INVESTMENT INCOME AND EXPENSES
The Fund's net investment income was $55,065 for the three months ended June 30,
1998 as compared to net investment income of $195,129 for the corresponding
period of the prior year. Net investment income per limited partnership unit
decreased from $.15 to $.05 and the ratio of net investment income to average
net assets decreased from 4.24% to 1.64% for the three months ended June 30,
1998 as compared to the corresponding period of the prior year.
The Fund's net investment income was $84,256 for the six months ended June 30,
1998 as compared to net investment income of $378,164 for the corresponding
period of the prior year. Net investment income per limited partnership unit
decreased from $.29 to $.07 and the ratio of net investment income to average
net assets decreased from 4.00% to 1.20% for the six months ended June 30, 1998
as compared to the corresponding period of the prior year.
Net investment income for both the three and six month periods ended June 30,
1998 decreased as a result of both a decrease in investment income and an
increase in total expenses.
Investment income decreased $121,514 and $209,420, or 36.1% and 31.2%, for the
three and six month periods ended June 30, 1998, as compared to the
corresponding periods of the prior year. These decreases resulted primarily from
the prepayment of the Fund's Elgin National Industries Inc. subordinated debt
investment during
---------------------------------
TWENTY-ONE
<PAGE> 23
FIDUCIARY CAPITAL PARTNERS, L.P.
- --------------------------------------------------------------------------------
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 $18,550 and $84,488, or 13.1% and 28.9%, for the three
and six month periods ended June 30, 1998 as compared to the corresponding
periods of the prior year. These increases resulted primarily from increases in
professional fees, Independent General Partner fees and expenses and other
expenses.
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 1998 in connection with the
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.
The investment advisory fees paid to FCM increased during the first quarter of
1998 as compared to the corresponding period of the prior year 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 during 1998 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.
The investment advisory fees decreased $11,149, or 25.3%, during the second
quarter as compared to the corresponding period of the prior year. The
comparative reversal from the first quarter resulted primarily from (i) the fact
that FCM received no consulting fees from LMC during the second quarter of 1997,
and (ii) the losses realized by the Fund during the second quarter of 1998 with
respect to the MTI, Atlas Environmental, Inc. ("Atlas") and AR Accessories
Group, Inc. ("ARA") portfolio investments. As noted above, realized losses
decrease 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.
---------------------------------
TWENTY-TWO
<PAGE> 24
FIDUCIARY CAPITAL PARTNERS, L.P.
- --------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS) ON INVESTMENTS
The Fund owned an equity position in ARA (formerly known as Amity Leather
Products Co.) since 1992. This equity position was acquired in connection with a
subordinated debt investment, which ARA prepaid during 1994.
ARA reported significantly reduced earnings and cash flows from operations
during 1997. During February 1998, ARA hired a crisis manager to assist it in
addressing continuing significant declines in the company's sales and profits.
The hiring of this crisis manager was precipitated by ARA'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.
ARA filed for bankruptcy protection during March 1998. ARA's assets were
liquidated at auction during May 1998, with the proceeds from the sale
satisfying only a portion of ARA's debt. The $378,011 cost of the Fund's equity
investment in ARA was written off as a realized loss during May 1998.
On June 1, 1998, the Fund received $191,469 from the sale of its MTI common
stock and warrants. This amount represents approximately 95% of the sales
proceeds that the Company expected the sellers to receive from the sale. The
remaining 5%, or approximately $10,000, is being held in escrow pending the
resolution of a dispute over whether the sellers or the buyer should receive the
benefit of warrant exercise proceeds. The Fund recorded a realized loss of
$96,461 from this sale. The Fund will record a reduction of the realized loss
if, and when, it actually receives a distribution of any of the escrowed funds.
The Fund's Huntington stock was sold for cash during February 1996. The Fund's
share of the sales proceeds totaled $1,511,364, of which $1,320,711 was received
during February 1996. The balance of the sales proceeds were held in escrow to
pay various transaction expenses, 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. An
agreement was recently reached with the buyer with regard to purchase price
adjustments and other claims. The Fund received additional distributions of
$19,920, $81,429 and $76,343 during September 1996, May 1997 and June 1998,
respectively. The Fund's share of the remaining escrow balance is approximately
$1,000. The Fund recognized realized gains of $1,236,821, $81,429 and $76,343
from this transaction during 1996, 1997 and 1998, respectively.
The companies that Atlas acquired during 1996 with the proceeds of the Fund's
subordinated debt investment did not perform 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
---------------------------------
TWENTY-THREE
<PAGE> 25
FIDUCIARY CAPITAL PARTNERS, L.P.
- --------------------------------------------------------------------------------
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, Atlas entered into a letter of intent, under the terms of
which some of the company's businesses would be sold for cash. On November 5,
1996, the purchaser notified Atlas that it wanted to renegotiate the terms of
the transaction, including a reduction in the purchase price. Atlas management
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.
As a result of these developments, the Fund stopped accruing interest on its
Atlas investment during April 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 was $2.
On June 3, 1998, the Fund exchanged its Atlas subordinated notes and warrants
for 989,414 shares of WasteMasters, Inc. ("WMI") common sock. WMI is an Atlanta,
Georgia based waste management company that has recently announced an aggressive
acquisition program.
Pursuant to the terms of the exchange agreement, the Fund is prohibited from
selling its WMI common stock for 24 months. In addition, the Fund granted the
entity acquiring the Fund's Atlas securities a call on the Fund's WMI common
stock during the 24 month lock up period and a right of first refusal
thereafter, both of which are priced at $11.25 per share.
The WMI common stock, which trades on the NASDAQ Small Cap Market System
("WAST"), closed at $1.78 and $2.01 (an average of the closing bid and ask
prices) on June 3, 1998 and June 30, 1998, respectively. Based on these prices,
the Fund's WMI had trading values of $1,761,157 on the date of the exchange
(June 3, 1998) and $1,988,722 on June 30, 1998. However, due to a number of
factors, including the speculative nature of the WMI stock, the two year lock up
period and the relative size of the Fund's stock position, FCM decided to carry
the WMI stock at the same nominal value that the Atlas securities had previously
been carried by the Fund. The 52 week low for the WMI common stock is $0.25 per
share and the current price (August 12, 1998) is $1.125.
The Fund recorded a realized loss of $2,560,453 on the exchange, which is equal
to the amount of the loss which the Fund expects to claim for income tax
purposes from the disposition of the Atlas securities. The balance of the
unrealized loss previously recorded by the Fund with respect to the Atlas
securities continues to be carried by the Fund as an unrealized loss.
---------------------------------
TWENTY-FOUR
<PAGE> 26
FIDUCIARY CAPITAL PARTNERS, L.P.
- --------------------------------------------------------------------------------
The Fund is continuing to accrue an interest reserve with respect to the
potential Canadian's sales tax at a 12% annualized rate, or $12,881 and $25,762,
respectively for the three and six month periods ended June 30, 1998. These
amounts are recorded as realized losses in the Fund's Statements 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.
---------------------------------
TWENTY-FIVE
<PAGE> 27
FIDUCIARY CAPITAL PARTNERS, L.P.
- --------------------------------------------------------------------------------
The net increase in unrealized loss on investments during the three and six
month periods ended June 30, 1998 and the cumulative net unrealized loss on
investments as of June 30, 1998 consisted of the following components:
Unrealized Gain (Loss) Recorded
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
During the Three During the Six
Months Ended Months Ended As of
Portfolio Company June 30, 1998 June 30, 1998 June 30, 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized losses recorded during
prior periods with respect to
investments disposed of during
the period $ 4,376,170 $ 4,214,940 $ --
KEMET (148,453) (172,030) 357,733
LMC -- -- (858,080)
WMI (1,321,794) (1,321,794) (1,321,794)
- -------------------------------------------------------------------------------------
$ 2,905,923 $ 2,721,116 $ (1,822,141)
=====================================================================================
</TABLE>
KEMET completed an IPO of its common stock during 1992. The stock, which trades
on the NASDAQ National Market System, closed at $13.15625 (an average of the
closing bid and ask prices) on June 30, 1998. This price is down from the
closing prices of $18.46875 and $19.3125 on March 31, 1998 and December 31,
1997, respectively. Based on the $13.15625 closing trading price of the common
stock, the 27,944 shares of common stock that the Fund held at June 30, 1998 had
a market value of $367,638.
See "Net Realized Gain (Loss) on Investments" for a discussion of the unrealized
loss on the Fund's WMI stock investment.
FCM continually monitors both the Fund's portfolio companies and the markets,
and continually evaluates the decision to hold or sell its traded securities.
----------------------------
TWENTY-SIX
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 14,834,397
<INVESTMENTS-AT-VALUE> 12,595,557
<RECEIVABLES> 68,434
<ASSETS-OTHER> 31,519
<OTHER-ITEMS-ASSETS> 230,711
<TOTAL-ASSETS> 12,926,221
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 930,145
<TOTAL-LIABILITIES> 930,145
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 1,201,564
<SHARES-COMMON-PRIOR> 1,201,564
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (2,238,840)
<NET-ASSETS> 11,996,076
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 642,188
<OTHER-INCOME> 0
<EXPENSES-NET> 513,187
<NET-INVESTMENT-INCOME> 129,001
<REALIZED-GAINS-CURRENT> (2,996,048)
<APPREC-INCREASE-CURRENT> 2,304,417
<NET-CHANGE-FROM-OPS> (562,630)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 129,001
<DISTRIBUTIONS-OF-GAINS> 1,742,647
<DISTRIBUTIONS-OTHER> 1,026,921
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (3,461,199)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,665,127
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 95,036
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 513,187
<AVERAGE-NET-ASSETS> 13,539,629
<PER-SHARE-NAV-BEGIN> 12.91
<PER-SHARE-NII> .11
<PER-SHARE-GAIN-APPREC> (.57)
<PER-SHARE-DIVIDEND> .11
<PER-SHARE-DISTRIBUTIONS> 1.44
<RETURNS-OF-CAPITAL> .85
<PER-SHARE-NAV-END> 10.05
<EXPENSE-RATIO> 5.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
