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FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
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--------------------------------
THIRD QUARTER REPORT
1998
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FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
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MESSAGE TO INVESTORS
Dear Investor:
In recent months, there have been a number of significant developments with
respect to the Fund and several of its remaining portfolio investments. We will
highlight the most significant of these developments in this letter. In
addition, we will briefly summarize the results of the 1998 repurchase offer and
the status of your distributions.
INVESTMENT UPDATE
LMC Corporation ("LMC") During 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.
In order to raise this capital, LMC offered to its three existing shareholders
the right to purchase 12 million additional common shares at a price of $.50 per
share. The Fund was offered 4,022,100 shares and purchased all of such shares
for a total consideration of $2,011,050. As a result of purchasing these
additional shares, the Fund now owns approximately 41% of LMC's common stock.
Fiduciary Capital Partners, L.P., an affiliated Fund ("FCP"), also purchased the
shares it was offered. The two funds now control approximately 91% of LMC's
common stock.
LMC's third shareholder, ▇▇▇▇ ▇▇▇▇▇▇▇, had until November 1, 1998 to exercise
the right to purchase 3,000,000 shares for $1.5 million. He did not exercise
this right and the Fund and FCP are currently deciding whether to exercise the
right they now have to purchase these additional shares. In order to complete
the original capitalization plan, the two funds intend to invest an additional
$1.5 million either through the purchase of the available shares or other
combinations of debt and equity.
In September 1998, LMC purchased a 158,000 square foot office and manufacturing
facility in Brigham City, Utah from Thiokol Chemical for an aggregate purchase
price of $1,760,000. The company is currently in the process of moving its
operations to this facility. (Please see a copy of LMC's announcement regarding
this move that is included along with this Quarterly Report.) LMC's previous
facility, which consisted of eleven separate buildings in Logan, Utah, was
outdated and inefficient. This new facility allows LMC to house its operations
in one building and is expected to significantly reduce manufacturing costs. As
part of the new facility, the company has installed a state
------------------------
ONE
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FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
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of the art paint facility, which is expected to improve product quality and to
generate additional revenues from contract painting for other manufacturers. As
part of the move, LMC acquired other new capital equipment, which is also
expected to create significant operating efficiencies. The monthly costs
associated with buying this building are less than the amounts LMC was
previously expending on lease payments and we expect further economies through
subleasing of excess office and manufacturing space.
During October 1998, Caterpillar Inc. ("Caterpillar") acquired a major stake in
A.S.V., Inc. ("ASV"), the leader in the skid loader market, and has the option
to ultimately take control of ASV for a purchase price based on a valuation in
excess of $200 million. LMC introduced its skid loader, the TrackMaster, earlier
this year. While Caterpillar will be a strong competitor, we believe that its
acquisition of ASV validates LMC's strategy and concept that there is a very
large market for this new product. We believe that LMC has a superior machine
and that LMC will be successful in capturing a significant share of this market.
R.B.M. Precision Metal Products, Inc. ("RBM") Preliminary year end financial
results indicate that RBM had a record year for fiscal 1998, with sales of
approximately $30 million and EBITDA of approximately $3 million. However, these
sales were achieved primarily through one contract with Digital Equipment
Corporation ("DEC"). During August 1998, RBM notified the Fund that anticipated
sales to DEC and other large customers were expected to decline significantly in
the upcoming year. Of particular concern, were sales to DEC, which has been
acquired by Compaq Computer Corp. As a result of the expected decline in sales,
RBM is in the process of restructuring its debt, including the subordinated debt
held by the Fund. The Fund received the quarterly interest payment that was due
from RBM on August 24, 1998. The interest payment that was due during November
1998 was deferred and became part of the restructuring amounts. Cash receipts
from interest income to the Fund are expected to decrease as a result of the
restructuring.
In early December, RBM and its lenders completed a restructuring under which a
new senior lender, Norwest Business Credit, replaced Bank of America. As part of
this transaction, 13I, RBM's equity sponsor, contributed additional equity to
the company and the subordinated lenders, including the Fund, agreed to accept
shares of RBM's common stock as payment for the next three quarterly interest
payments beginning with the payment that was due during November 1998. As a
consequence, the Fund's ownership of RBM, on a fully-diluted basis, increased
from 5.9% to 7.3%, assuming exercise of its warrants. The restructuring was
designed to provide RBM with a period of time in which to secure additional
customers and return to a more stable financial position under which RBM could
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FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
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meet its interest obligations to its creditors, including the Fund. We are
closely monitoring this situation and will keep you informed as developments
occur.
As a result of these developments, the Fund stopped accruing interest on its RBM
subordinated debt effective August 24, 1998. In addition, the Fund recorded
aggregate writedowns of $665,881 relating to RBM for the 1998 year.
Atlas Environmental, Inc. ("Atlas") On June 3, 1998, the Fund exchanged its
Atlas subordinated notes (which were in default) and warrants for 821,376 shares
of common stock in WasteMasters, Inc. ("WMI"), an Atlanta, Georgia based waste
management company.
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. The call price is $11.25 per share.
The WMI common stock, which trades on the NASDAQ Small Cap Market System
("WAST"), closed at $1.78 and $.97 (an average of the closing bid and ask
prices) on June 3, 1998 (the date of the exchange) and September 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 ($1) that the Atlas securities had previously been carried by the
Fund. The 52 week low for the WMI common stock is $.25 per share and the current
price (December 14, 1998) is $.42.
The Fund recorded a realized loss of $2,125,574 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 $1,097,306 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.
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 LMC, RBM and WMI, are not included.
As reflected in the following graph and the schedules on pages seven and eight
of
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FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
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this Quarterly Report, the Fund invested a total of $41.9 million in
subordinated debt investments and received total realized proceeds of $47.6
million, including interest income, fees and prepayment penalties. In the
aggregate, these debt investments yielded a return on investment of 1.1 to 1 and
an annualized internal rate of return of 7.40%. The Fund also invested $3.1
million in equity securities, from which it realized total proceeds of $10.9
million. In the aggregate, these equity investments yielded a return on
investment of 3.6 to 1 and an internal rate of return of 33.09%. Please note
that prior performance is not necessarily indicative of future results.
[CHART]
We are actively attempting to realize the greatest possible returns from the
Fund's remaining investments.
NET ASSET VALUE
The Fund's net asset value per Unit was $9.76 at September 30, 1998 and $9.43 at
November 13, 1998. The November 13th net asset value was used to establish the
repurchase price for the 1998 repurchase offer. These net asset values compare
to net asset values of $12.66 at December 31, 1997 and $10.40 at June 30, 1998.
The decline in the net asset value from December 31, 1997 to September 30, 1998
resulted primarily from the fact that a significant portion of the cash
distributions for the nine months ended September 30, 1998 represented a return
of capital. In addition, during this nine month period the Fund recorded net
losses (including
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FOUR
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FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
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both realized and unrealized components) on investments, primarily with respect
to its RBM, AR Accessories Group, Inc. and KEMET Corporation ("KEMET")
investments.
The decrease in the net asset value from September 30, 1998 to November 13, 1998
was primarily the result of the recording of an additional unrealized loss with
respect to the RBM investment.
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 has annually offered 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.
The 1998 repurchase offer was mailed to investors during October 1998. Investors
tendered 137,315 Units, or approximately 13.46% of the Fund's outstanding Units,
for repurchase. The Fund repurchased 79,806 Units, or approximately 7.82% of the
Fund's outstanding Units, during November 1998 at a net asset value per Unit of
$9.43 ($9.24, net of the 2% fee).
In the letter that accompanied the repurchase offer, we indicated that we
believe that the 1998 repurchase offer will be the Fund's last repurchase offer.
We intend to present a plan of dissolution to the Fund's Independent General
Partners at their January meeting. As part of this plan, the Fund would cease to
be a Registered Investment Company during 1999. We will provide more detail when
a final plan has been approved.
CASH DISTRIBUTIONS AND STATUS OF FUND
The distribution for the third quarter of 1998 was paid on November 13, 1998 in
an amount equal to $.30 per Unit. Cumulative cash distributions paid to
investors since the Fund's inception during 1990 total between $15.11 and $14.79
on a per Unit ($20.00 cost) basis, depending upon the closing in which the
particular Units were issued.
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FIVE
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FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
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The distribution for the fourth quarter of 1998, which will be paid on February
12, 1999, will also be equal to $.30 per Unit. A significant portion of the 1998
distributions constitute a return of capital.
Distributions are expected to continue at the $.30 per Unit rate during 1999,
subject to discontinuance pursuant to the plan of liquidation, if it is
approved.
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. The follow-on investment in LMC discussed above is expected to be the
last such investment by the Fund. 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 Mobile Technology, Inc.
In this same period, the Fund has distributed to investors approximately $4.73
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, RBM, KEMET and WMI. LMC is by far the largest of these investments and we
believe that significant values may be realized if the current management plan
is successfully implemented. Our liquidation plan will attempt to preserve these
values for the Fund's investors, probably by making LMC a publicly traded
company.
* * * * * * * *
If you have any questions concerning your investment in the Fund, please call us
at ▇▇▇-▇▇▇-▇▇▇▇.
Sincerely,
/s/ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇▇, Chairman
FCM Fiduciary Capital Management Company
/s/ ▇. ▇▇▇▇ DeGrassi
▇. ▇▇▇▇ ▇▇▇▇▇▇▇▇, President
FCM Fiduciary Capital Management Company
December 14, 1998
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SIX
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FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
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DEBT INVESTMENTS
REALIZED GAINS AND LOSSES (1)
(UNAUDITED)
INTERNAL
YEAR OF INVESTMENT / YEAR OF GAIN(1) RATE OF
PORTFOLIO COMPANY(2) REPAYMENT COST PROCEEDS(1) (LOSS) RETURN
-------------------- --------- ---- ----------- ------ ------
1990
----
▇▇▇▇-▇▇▇▇▇▇▇▇▇ Foods Co. 1993 $2,426,680 $4,125,587 $1,698,907 23.56%
Midwest Dental Products
Corporation 1992 4,521,533 6,558,107 2,036,574 22.63
Neodata Corporation 1993 2,215,553 3,200,305 984,752 17.11
1991
----
KEMET Corporation 1993 3,313,477 4,534,392 1,220,915 17.63
Mobile Technology, Inc. 1998 3,117,525 850,225 (2,267,300) N/A
1992
----
Huntington Holdings, Inc. 1994 4,368,034 6,173,665 1,805,631 20.07
AR Accessories Group, Inc. 1994 4,521,533 5,518,907 997,374 11.74
1993
----
ENI Holding Corp. 1997 4,881,293 7,822,395 2,941,102 13.91
KB Alloys, Inc. 1995 2,880,217 4,279,396 1,399,179 18.32
KEMET Corporation 1993 1,695,575 1,804,351 108,776 26.41
Protection One, Inc. 1995 834,580 1,133,054 298,474 22.11
1994
----
Canadian's Holdings, Inc. 1996 2,516,176 319,782 (2,196,394) N/A
1995
----
Canadian's Holdings, Inc. 1996 1,473,895 51,908 (1,421,987) N/A
1996
----
Atlas Environmental, Inc. 1998 3,166,759 1,208,756 (1,958,003) N/A
------------ ------------ ------------ ----
Totals $41,932,830 $47,580,830 $5,648,000 7.40%
============ ============ ============ ====
(1) Includes interest income, fees and prepayment penalties. Note that prior
performance is not necessarily indicative of future results.
(2) Includes investment in subsidiaries, if applicable.
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SEVEN
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FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
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EQUITY INVESTMENTS
REALIZED GAINS AND LOSSES
(UNAUDITED)
INTERNAL
YEAR OF INVESTMENT / YEAR OF GAIN RATE OF
PORTFOLIO COMPANY(2) REPAYMENT COST PROCEEDS (LOSS) RETURN
-------------------- --------- ----------- ----------- ----------- --------
1990
----
▇▇▇▇-▇▇▇▇▇▇▇▇▇ Foods Co. 1995 $738,394 $1,197,018 $458,624 9.78%
Neodata Corporation 1997 33,912 923,039 889,127 52.07
1991
----
KEMET Corporation 1994/1995 58,283 3,753,147 3,694,864 112.37
Mobile Technology, Inc. 1992 363,630 -- (363,630) N/A
1992
----
Huntington Holdings, Inc. 1996/1998 85,677 1,220,088 1,134,411 70.09
Neodata Corporation 1997 245,006 255,112 10,106 0.81
AR Accessories Group, Inc. 1998 226,080 -- (226,080) N/A
1993
----
ENI Holding Corp. 1997 670,147 2,745,910 2,075,763 34.60
KEMET Corporation 1994 495,554 729,233 233,679 41.10
Protection One, Inc. 1995 82,420 124,163 41,743 21.02
1994
----
Canadian's Holdings, Inc. 1996 34,821 -- (34,821) N/A
1996
-----
Atlas Environmental, Inc. 1998 33,842 -- (33,842) N/A
----------- ----------- ----------- -----
Totals $3,067,766 $10,947,710 $7,879,944 33.09%
=========== =========== =========== =====
(1) Note that prior performance is not necessarily indicative of future
results.
(2) Includes investment in subsidiaries, if applicable.
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EIGHT
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FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
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SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
------------------------------
PRINCIPAL
AMOUNT/ INVESTMENT AMORTIZED % OF TOTAL
SHARES INVESTMENT DATE COST VALUE INVESTMENTS
--------- ---------- ---------- --------- ----- -----------
MANAGED COMPANIES:
23,056 sh. KEMET Corporation,
Common Stock(1)* 07/11/91 $8,170 $259,380
--------- ----------
8,170 259,380 2.5%
--------- ---------- -----
$1,338,120 LMC Corporation, 12.00%
Senior Subordinated 11/01/96
Revolving Notes through
due 10/31/00 (Note 5) 09/23/98 1,338,120 1,338,120
239,600 sh. LMCCorporation, 7.00%
Cumulative Redeemable
Preferred Stock* 06/10/94 2,389,210 2,389,210
4,476,500 sh. LMCCorporation, 02/09/96
Common Stock* through
08/05/98 2,465,449 1,723,529
49.72 sh. LMCCredit Corp.,
Common Stock* 02/09/96 1 1
--------- ----------
6,192,780 5,450,860 52.4
--------- ---------- -----
$1,290,000 R.B.M. Precision Metal
Products, Inc., 13.00%
Senior Subordinated
Secured Notes due
5/24/02(2) 05/24/95 1,239,095 991,276
9,772.7 sh. R.B.M. Precision Metal
Products, Inc., Warrants to
Purchase Common Stock* 05/24/95 73,295 1
--------- ----------
1,312,390 991,277 9.5
--------- ---------- -----
Total Investments in Managed
Companies (67.8% of net assets) 7,513,340 6,701,517 64.4
--------- ---------- -----
NON-MANAGED COMPANY:
821,376 sh. WasteMasters, Inc.,
Common Stock(3)* 06/03/98 1,097,307 1
--------- ----------
Total Investment in Non-Managed
Company (0.0% of net assets) 1,097,307 1 0.0
--------- ---------- -----
The accompanying notes to financial statements
are an integral part of this schedule.
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NINE
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FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
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SCHEDULE OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 1998 (UNAUDITED)
------------------------------
PRINCIPAL
AMOUNT/ INVESTMENT AMORTIZED % OF TOTAL
SHARES INVESTMENT DATE COST VALUE INVESTMENTS
--------- ---------- ---------- --------- ----- -----------
TEMPORARY INVESTMENTS:
$3,700,000 American Express
Credit Corp., 5.26%
Notes due 10/2/98 09/15/98 3,699,461 3,699,461
Total Temporary Investments
(39.8% of net assets) 3,699,461 3,699,461 35.6
----------- ----------- -----
Total Investments (105.0% of net assets) $12,310,108 $10,400,979 100.0%
=========== =========== =====
(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.
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TEN
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FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
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BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 (UNAUDITED)
----------------------------------------------------
1998 1997
------------ ------------
ASSETS:
Investments:
Portfolio investments, at value:
Managed companies (amortized cost -
$7,513,340 and $9,556,695,
respectively) $6,701,517 $5,754,426
Non-managed company (amortized cost -
$1,097,307) 1 --
Temporary investments, at amortized cost 3,699,461 8,194,820
------------ ------------
Total investments 10,400,979 13,949,246
Cash and cash equivalents 193,653 276,108
Accrued interest receivable 60,926 67,964
Other assets 31,099 58,926
------------ ------------
Total assets $10,686,657 $14,352,244
============ ============
LIABILITIES:
Payable to affiliates (Notes 2, 3 and 4) $35,576 $33,796
Accounts payable and accrued liabilities 458,926 424,137
Distributions payable to partners 309,134 1,030,446
------------ ------------
Total liabilities 803,636 1,488,379
============ ============
COMMITMENTS AND CONTINGENCIES (NOTE 5)
NET ASSETS:
Managing General Partner (72,790) (49,360)
Limited Partners (equivalent to $9.76
and $12.66, respectively, per limited
partnership unit based on 1,020,142
units outstanding) 9,955,811 12,913,225
------------ ------------
Net assets 9,883,021 12,863,865
------------ ------------
Total liabilities and net assets $10,686,657 $14,352,244
============ ============
The accompanying notes to financial statements
are an integral part of these financial statements.
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ELEVEN
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FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
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STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
------------------------------------------------------------------
1998 1997
---- ----
INVESTMENT INCOME:
Income:
Interest $150,238 $298,669
--------- ---------
Total investment income 150,238 298,669
--------- ---------
Expenses:
Professional fees 22,212 60,746
Investment advisory fees (Note 2) 22,501 32,913
Fund administration fees (Note 3) 29,581 29,581
Administrative expenses (Note 3) 17,223 17,223
Independent General Partner fees
and expenses (Note 4) 10,725 15,586
Other expenses 20,339 8,856
--------- ---------
Total expenses 122,581 164,905
--------- ---------
NET INVESTMENT INCOME 27,657 133,764
--------- ---------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized (loss) gain on investments (10,148) 888,114
Net change in unrealized loss
on investments (365,064) (352,780)
--------- ---------
Net (loss) gain on investments (375,212) 535,334
--------- ---------
NET (DECREASE) INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $(347,555) $669,098
========= =========
The accompanying notes to financial statements
are an integral part of these financial statements.
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TWELVE
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FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
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STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
-----------------------------------------------------------------
1998 1997
----------- -----------
INVESTMENT INCOME:
Income:
Interest $532,023 $860,164
----------- -----------
Total investment income 532,023 860,164
----------- -----------
Expenses:
Professional fees 130,285 125,209
Investment advisory fees (Note 2) 80,981 89,666
Fund administration fees (Note 3) 88,745 88,745
Administrative expenses (Note 3) 51,671 51,671
Independent General Partner fees
and expenses (Note 4) 41,474 36,586
Other expenses 53,282 24,866
----------- -----------
Total expenses 446,438 416,743
----------- -----------
NET INVESTMENT INCOME 85,585 443,421
----------- -----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized (loss) gain on investments (2,486,531) 955,312
Net change in unrealized loss
on investments 1,893,140 (1,469,711)
----------- -----------
Net loss on investments (593,391) (514,399)
----------- -----------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $(507,806) $(70,978)
=========== ===========
The accompanying notes to financial statements
are an integral part of these financial statements.
------------------------
THIRTEEN
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FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
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STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
-----------------------------------------------------------------
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets
resulting from operations $(507,806) $(70,978)
Adjustments to reconcile net decrease
in net assets resulting from operations to net
cash provided by operating activities:
Accreted discount on portfolio investments (12,932) (27,028)
Change in assets and liabilities:
Accrued interest receivable 7,038 (31,392)
Other assets 27,827 (26,579)
Payable to affiliates 1,780 29,808
Accounts payable and accrued liabilities 1,433 (2,556)
Net realized loss (gain) on investments 2,486,531 (955,312)
Net change in unrealized loss
on investments (1,893,140) 1,469,711
----------- -----------
Net cash provided by operating activities 110,731 385,674
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of portfolio investments (2,618,810) (786,996)
Proceeds from dispositions of portfolio investments 1,124,615 1,245,348
Sale of temporary investments, net 4,495,359 197,761
----------- -----------
Net cash provided by investing activities 3,001,164 656,113
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions paid to partners (3,194,350) (1,004,437)
----------- -----------
Net cash used in financing activities (3,194,350) (1,004,437)
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (82,455) 37,350
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 276,108 234,305
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $193,653 $271,655
=========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Investments exchanged for other investments $1,360,801 $--
----------- -----------
The accompanying notes to financial statements
are an integral part of these financial statements.
------------------------
FOURTEEN
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FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
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STATEMENTS OF CHANGES IN NET ASSETS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND FOR
THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED)
----------------------------------------------------
1998 1997
------------ ------------
Increase in net assets resulting from operations:
Net investment income $85,585 $831,359
Net realized (loss) gain on investments (2,486,531) 2,925,017
Net change in unrealized loss on investments 1,893,140 (3,218,969)
------------ ------------
Net (decrease) increase in net assets
resulting from operations (507,806) 537,407
Repurchase of limited partnership units -- (1,162,618)
Distributions to partners from -
Net investment income (85,585) (831,359)
Realized gain on investments (1,402,287) (1,608,939)
Return of capital (985,166) (710,627)
------------ ------------
Total decrease in net assets (2,980,844) (3,776,136)
Net assets:
Beginning of period 12,863,865 16,640,001
------------ ------------
End of period (including no undistributed
net investment income) $9,883,021 $12,863,865
============ ============
The accompanying notes to financial statements
are an integral part of these financial statements.
------------------------
FIFTEEN
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FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
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SELECTED PER UNIT DATA AND RATIOS
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------ -----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
PER UNIT DATA:
Investment income $.15 $.27 $.51 $.77
Expenses (.12) (.15) (.43) (.37)
----------- ----------- ----------- -----------
Net investment income .03 .12 .08 .40
Net realized (loss) gain
on investments (.01) .80 (2.41) .86
Net change in unrealized
loss on investments (.36) (.32) 1.84 (1.32)
Distributions declared to partners (.30) (1.30) (2.41) (1.90)
----------- ----------- ----------- -----------
Net decrease in net asset value (.64) (.70) (2.90) (1.96)
Net asset value:
Beginning of period 10.40 13.82 12.66 15.08
----------- ----------- ----------- -----------
End of period $9.76 $13.12 $9.76 $13.12
=========== =========== =========== ===========
RATIOS (ANNUALIZED):
Ratio of expenses to average net assets 4.80% 4.45% 5.31% 3.58%
Ratio of net investment income to
average net assets 1.08% 3.61% 1.02% 3.81%
Number of limited partnership units at
end of period 1,020,142 1,104,881 1,020,142 1,104,881
The accompanying notes to financial statements
are an integral part of these selected per unit data and ratios.
------------------------
SIXTEEN
18
FIDUCIARY CAPITAL PENSION 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
$80,981 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 $88,745 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 $51,671 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 (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 $41,474.
------------------------
SEVENTEEN
19
FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
5. COMMITMENTS AND CONTINGENCIES
LMC Commitment LMC Corporation (formerly, LMC Operating Corp.) ("LMC") is
entitled to draw down a total of $1,632,960 pursuant to the terms of the Senior
Subordinated Revolving Notes held by the Fund. At September 30, 1998, LMC had
drawn down $1,338,120.
LMC Litigation On December 23, 1997, LMC commenced an action against ▇▇▇▇
▇▇▇▇▇▇▇, 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, FCP and each of ▇▇▇▇ ▇▇▇▇▇▇, the
Chairman of the Board and Chief Executive Officer of FCM, ▇. ▇▇▇▇ ▇▇▇▇▇▇▇▇, the
President of FCM, and ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, the Senior Vice President, Treasurer,
Chief Financial Officer and Compliance Officer of FCM (collectively, the
"Individual Defendants"), in their capacities as officers of FCM, in the First
Judicial District Court in and for Cache County, State of Utah, entitled LMC
Holding Co. v. Fiduciary Capital Partners, L.P., et al., Civil No. ▇▇-▇▇▇▇▇▇▇
(the "LMC Action"). LMC Holding is controlled by ▇▇▇▇ ▇▇▇▇▇▇▇. FCM believes that
the LMC Action was commenced in response to the action previously filed by LMC
against ▇▇. ▇▇▇▇▇▇▇. The Fund, FCP and the Individual Defendants entered into a
settlement agreement with LMC Holding, effective April 20, 1998. As part of the
settlement, the Fund and FCP 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 FCP 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 ▇▇. ▇▇▇▇▇▇▇ with respect to the
underfunding of its discontinued pension plan.
------------------------
EIGHTEEN
20
FIDUCIARY CAPITAL PENSION 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 September 30, 1998, the Fund held portfolio investments in three Managed
Companies and one Non-Managed Company, with an aggregate cost of approximately
$8.6 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 67.8% 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
------------------------
NINETEEN
21
FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
--------------------------------------------------------------------------------
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 $449,000 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, $1,360,800 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 $1,360,800. As
of September 30, 1998, LMC has drawn down $1,338,120 of the $1,360,800 under the
terms of the Revolving Note agreement to fund working capital requirements and
to retire the $449,000 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 23% to approximately 40%.
During August 1998, the Fund purchased an additional 1,300,500 shares of LMC
common stock for $650,250. As a result of this stock purchase, the Fund's
percentage ownership of LMC's common stock increased from approximately 40% to
approximately 41%.
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 $222,016 in proceeds from these transactions.
Other assets decreased $27,827 from $58,926 at December 31, 1997 to $31,099 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 $721,312, from $1,030,446 at
December 31, 1997 to $309,134 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 $1,030,446, $1,139,142 and $1,024,761,
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
------------------------
TWENTY
22
FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
--------------------------------------------------------------------------------
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"), ▇▇▇▇▇ 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
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 $27,657 for the three months ended
September 30, 1998 as compared to net investment income of $133,764 for the
corresponding period of the prior year. Net investment income per limited
partnership unit decreased from $.12 to $.03 and the ratio of net investment
income to average net assets decreased from 3.61% to 1.08% for the three months
ended September 30, 1998 as compared to the corresponding period of the prior
year.
------------------------
TWENTY-ONE
23
FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
--------------------------------------------------------------------------------
The Fund's net investment income was $85,585 for the nine months ended
September 30, 1998 as compared to net investment income of $443,421 for the
corresponding period of the prior year. Net investment income per limited
partnership unit decreased from $.40 to $.08 and the ratio of net investment
income to average net assets decreased from 3.81% to 1.02% 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 $148,431 and $328,141, or 49.7% and 38.1%, 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 7.67% 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 $42,324, or 25.7%, 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 $29,695, or 7.1%, 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.
------------------------
TWENTY-TWO
24
FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
--------------------------------------------------------------------------------
The investment advisory fees decreased during 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 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, ▇▇▇ 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 ▇▇▇'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. ▇▇▇'s assets were
liquidated at auction during May 1998, with the proceeds from the sale
satisfying only a portion of ARA's debt. The $311,989 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 $158,043 from the sale of its MTI common
stock and warrants. This amount represents approximately 95% of the sales
proceeds that the
------------------------
TWENTY-THREE
25
FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
--------------------------------------------------------------------------------
Company expected the sellers to receive from the sale. The remaining 5%, or
approximately $8,000, 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 $79,584 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 $1,247,229, of which $1,089,896 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 $16,439, $67,198, $63,001 and $971 during
September 1996, May 1997, June 1998 and August 1998, respectively. The Fund
recognized realized gains of $1,020,657, $67,198 and $63,972 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, ▇▇▇▇▇ 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 $979,776 and
$2,243,103 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 821,376 shares of WMI common sock. WMI is an Atlanta, Georgia based waste
management company that has recently announced an aggressive acquisition
program.
------------------------
TWENTY-FOUR
26
FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
--------------------------------------------------------------------------------
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 $1,462,049 on the date of the
exchange (June 3, 1998) and $796,735 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 $2,125,574 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 $11,119 and $33,356,
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.
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
------------------------
TWENTY-FIVE
27
FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
--------------------------------------------------------------------------------
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 $437,099 of unrealized gain and
$4,239,368 of unrealized loss on investments. Therefore, as of December 31,
1997, the Fund had recorded a total net unrealized loss on investments of
$3,802,269.
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:
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
----------------- ------------------ ------------------ ------------------
Unrealized losses recorded
during prior periods with
respect to investments disposed
of during the period $ -- $ 3,497,448 $ --
KEMET (43,951) (185,889) 251,210
LMC -- -- (741,920)
RBM (321,113) (321,113) (321,113)
WMI -- (1,097,306) (1,097,306)
----------- ----------- -----------
$ (365,064) $ 1,893,140 $(1,909,129)
=========== =========== ===========
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
23,056 shares of common stock that the Fund held at September 30, 1998 had a
market value of $259,380.
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
------------------------
TWENTY-SIX
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FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
--------------------------------------------------------------------------------
restructuring. As a result of these developments, the Fund recorded a $321,113
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.
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.
------------------------
TWENTY-SEVEN
