Item 1. Business
General
Fiduciary Capital Pension Partners, L.P. (the "Fund" or the "Registrant") is a limited partnership organized under the laws of the State of Delaware on October 20, 1988. The managing general partner of the Fund is FCM Fiduciary Capital Management Company, a Delaware general partnership (the "Managing General Partner" or "FCM"). The independent general partners of the Fund are E. Bruce Fredrikson, Mark A. Sargent and Phillip Siegel (the "Independent General Partners"). (The Managing Partner and the Independent General Partners are collectively referred to herein as the "General Partners.")
The general partners of the Managing General Partner are FCM Fiduciary Capital Corporation, a Delaware corporation, Mezzanine Capital Corporation, a Delaware corporation and an affiliate of PaineWebber Incorporated ("PaineWebber"), and Paul Bagley. Paul Bagley owns 100% of the stock of FCM Fiduciary Capital Corporation.
The Managing General Partner serves as investment adviser ("Investment Adviser") to the Fund and is responsible for the identification of all investments made by the Fund and all other investment advisory services necessary for the operation of the Fund in carrying out its investment objectives and policies. The Independent General Partners oversee the investment activities of the Investment Adviser.
The Fund has elected to operate as a business development company under the Investment Company Act of 1940, as amended. The investment objective of the Fund is to provide current income and capital appreciation by investing primarily in subordinated debt and related equity securities issued as the mezzanine financing of privately structured, friendly leveraged buyouts, leveraged acquisitions and leveraged recapitalizations. A separate fund, Fiduciary Capital Partners, L.P., a Delaware limited partnership ("FCP") was also formed on October 20, 1988 for taxable investors with investment objectives, policies and restrictions similar to those of the Fund. The Fund and FCP co-invest in the investments; however, each fund is accounted for separately.
On January 26, 1990, the Fund and its affiliate, FCP (collectively, the "Funds"), began a public offering of their units of limited partnership interests (the "Units"). The Units were registered pursuant to a Registration Statement on Form N-2 under the Securities Act of 1933, as amended.
The Funds collectively held three closings for the sale of the Units during the period from August 14, 1990 through October 18, 1990. As a result of the closings, the Funds sold 65,898 Units representing an aggregate purchase price of $65,898,000. Of these amounts, 29,796 Units representing an aggregate purchase price of $29,796,000 and 36,102 Units representing an aggregate purchase price of $36,102,000 were received by the Fund and FCP, respectively.
A special meeting of the Fund's Limited Partners was held on October 1, 1993. At the meeting, the Limited Partners approved the extension of the Fund's investment period until December 31, 1995 and the adoption of a fundamental policy of periodic unit repurchases. In connection with the adoption of the repurchase policy, each $1,000 Unit was redenominated into fifty $20 Units. After giving effect to this redenomination, the Fund had 1,489,800 Units outstanding as of October 1, 1993.
Pursuant to the terms of the repurchase policy, the Fund will annually offer to repurchase from its Limited Partners up to 7.5% of its outstanding Units for an amount equal to the current net asset value per Unit, net of a fee (not to exceed 2%) to be retained by the Fund to offset expenses incurred in connection with the repurchase offer. If the number of tendered Units in any year exceeds 7.5% of the outstanding Units, the Fund's General Partners may vote to repurchase up to an additional 2% of the outstanding Units.
Repurchases of Units since the adoption of the plan are summarized as follows:
Each Fund's participation in the following portfolio investments is in proportion to the amount of capital that each Fund had available for investment at the time each investment was acquired. All amounts shown in this report with respect to investments represent only the Fund's proportionate share of the amounts involved.
Portfolio Investments
As of December 31, 1997, the Fund held portfolio investments in six Managed Companies, with an aggregate cost of approximately $9.6 million. As of December 31, 1997, the Fund had no investments in Non-Managed Companies. Managed Companies are those to which significant managerial assistance is offered.
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.
During November 1996, the Fund agreed to provide up to $1,632,960 of additional subordinated debt to LMC Operating Corp. ("LMC"), of which $816,480 was advanced at that time. The Fund advanced the remaining $816,480 during 1997. This follow-on investment consists of 12% Senior Subordinated Revolving Notes due October 31, 2000.
The Fund's subordinated debt investment in Elgin National Industries, Inc. ("Elgin") was prepaid during 1997. In addition, the Fund sold all of its Neodata Corporation ("Neodata") and ENI Holding Corp. ("ENI") stock and received a distribution from the escrow account that was established during 1996 in connection with the sale of the Fund's Huntington Holdings, Inc. ("Huntington") stock. The Fund received $8,848,738 in proceeds, including applicable prepayment premiums from these transactions, resulting in aggregate realized gains of $2,947,254. As discussed in Item 3 of this Report, "Legal Proceedings", the Fund also accrued an additional $22,237 during 1997 for legal costs and other possible payments that may be required in connection with the Canadian's Holdings, Inc. ("Canadian's Holdings") bankruptcy proceedings.
Follow-On Investments in 1997
LMC Operating Corp. On June 10, 1994, the Fund invested $2,348,080 in LMC. The investment consisted of $2,396,000 of 13.00% Senior Subordinated Notes due May 31, 1999 with warrants to acquire common stock.
On February 9, 1996, the Fund participated in a financial restructuring of its LMC investment. The Fund converted its existing LMC subordinated debt and warrants into preferred stock and purchased $454,400 of new common stock. As a result of the restructuring, the Fund increased its ownership of LMC from approximately 12% to approximately 23%.
On November 1, 1996, the Fund agreed to provide up to $1,632,960 of additional subordinated
debt to LMC, of which $816,480 was advanced on that date. The Fund advanced the remaining $816,480 during 1997. This follow-on investment consists of 12% Senior Subordinated Revolving Notes due October 31, 2000.
On February 18, 1998, the Fund agreed to provide up to $449,000 of additional subordinated debt to LMC, of which $314,300 was advanced on that date. The remaining $134,700 was advanced during March 1998. This additional follow-on investment consists of 12% Senior Subordinated Revolving Notes due August 20, 1998.
LMC, headquartered in Logan, Utah, is the leading U.S. manufacturer of low ground pressure track vehicles. These vehicles are used for construction, landscaping, infrastructure development and maintenance in remote locations, right-of-way cleanup, search and rescue, military troop deployment and snow grooming. Primary purchasers of the vehicles include construction and landscaping contractors, ski resorts, utility companies and various governmental agencies.
Dispositions of Portfolio Investments in 1997
Huntington Holdings, Inc. During 1992, the Fund purchased subordinated notes and warrants to purchase common stock in Huntington. During February 1994, Huntington prepaid the subordinated notes that the Fund held.
The Fund continued to hold the warrants to purchase common stock until 1996. During December 1995, Huntington entered into a letter of intent, under the terms of which all Huntington stock would be sold for cash. The sale was consummated during February 1996. The Fund's share of the actual sales proceeds totaled $1,247,229, of which $1,089,896 was received during February 1996, with the balance held by the buyer in escrow. A portion of the escrowed funds was used to pay various transaction expenses and the Fund received additional distributions of $16,439 and $67,198 during September 1996 and May 1997, respectively. The Fund's share of the remaining escrow balance is approximately $70,000. The remaining balance of the escrow was required to be held until February 1998 to be available to fund any contingent purchase price adjustments, and as collateral for potential claims of the buyer with respect to representations made by the selling shareholders, including the Fund. During February 1998, the purchaser notified the sellers, including the Fund, of claims against the escrow account that totaled approximately 31% of the balance remaining in the escrow account. The sellers intend to object to these claims and the balance of the escrow account will not be released until these claims are resolved. Certain of the sellers' representations will survive for periods of time after the escrow account is released, which could result in the Fund being required to subsequently reimburse the buyer for certain costs and expenses.
Huntington, headquartered in Huntington, Indiana, is one of the largest manufacturers and marketers of maintenance and cleaning chemicals in North America. Huntington produces a wide range of intermediate and final-stage cleansers, sterilants and disinfectants for use by hospitals, schools, nursing homes and various industries.
Neodata Corporation During 1991, the Fund purchased subordinated notes in Neodata Services, Inc. ("Neodata Services") and warrants to purchase common stock of Neodata, the parent company of Neodata Services.
During 1992, Neodata raised additional equity via a rights offering to existing shareholders. The Fund elected to purchase additional common stock in the rights offering in order to maintain its existing ownership position in Neodata.
During May 1993, Neodata Services prepaid the subordinated notes that the Fund held following a successful refinancing of the Company's debt at a lower interest rate.
During November 1994, Neodata's stockholders approved a recapitalization of the company. Pursuant to the terms of the recapitalization plan, the Fund received a combination of 10.00% Class A convertible preferred stock and new common stock in exchange for its old common stock and warrants.
During August 1997, Electronic Data Systems Corporation ("EDS") offered to purchase all of Neodata's stock that it did not already own. Hicks Muse, the owner of a controlling portion of Neodata's common stock, accepted the offer and the purchase by EDS closed on September 2, 1997. The Fund received $1,178,150 of cash proceeds from the sale of its Neodata stock.
Neodata, headquartered in Louisville, Colorado, is the largest contract fulfillment company in the world and a leader in providing fulfillment and marketing services to the magazine publishing industry.
Elgin National Industries, Inc. During 1993, the Fund invested $5,651,917 in Elgin and its parent company, ENI. The investment consisted of (a) $5,023,926 of Elgin's 13.00% Senior Subordinated Notes due September 1, 2001 with warrants to purchase common stock in ENI and (b) $587,610 of ENI 10.00% preferred stock and (c) $40,381 of ENI common stock.
During June 1997, the Fund received a written offer from ENI management to prepay the Fund's subordinated debt, redeem the Fund's preferred stock and purchase the Fund's Class B common stock and warrants. The offer was reviewed by all of the subordinated debt holders, including the Fund, and rejected as inadequate.
During August 1997, ENI management made an improved offer, which was revised and accepted by all of the subordinated debt holders, following a series of negotiations. The sale closed on November 5, 1997, with the Fund receiving $7,603,390 of sales proceeds, along with $361,543 of accrued interest and accumulated preferred stock dividends.
Elgin, headquartered in Chicago, Illinois, is a diversified industrial company that is organized into three distinct segments. The Industrial Products Group manufactures specialty industrial threaded fasteners. The Manufacturing Group manufactures machinery and equipment for niches in coal and other mineral processing markets. The Engineering and Construction Group provides a full range of engineering, design and construction management services, including serving as a general contractor under turn-key design and build contracts.
Other Portfolio Investments
KEMET Corporation ("KEMET") The Fund acquired various subordinated debt and equity investments in KEMET and its subsidiary, KEMET Electronics Corporation ("KEMET Electronics"), during 1991 and 1993.
During October 1992, KEMET completed an initial public offering ("IPO") of its common stock. The stock trades on the NASDAQ National Market System under the symbol "KMET". During June 1993, KEMET Electronics prepaid its subordinated notes which the Fund held following the successful completion of a secondary stock offering. As of December 31, 1993, the Fund continued to hold the common stock and warrants of KEMET.
During 1994, the Fund exercised its warrants and sold a portion of the common stock, realizing total sales proceeds of $1,261,685. During 1995, the Fund sold additional shares of stock, realizing total additional sales proceeds of $3,221,392. KEMET also declared a two-for-one stock split during 1995. The Fund did not sell any additional shares during 1996 or 1997.
The Fund has 23,056 shares of KEMET stock remaining as of December 31, 1997. The Fund's cost basis in its KEMET stock is approximately $.35 per share. At December 31, 1997, the stock closed at $19.3125 (an average of the closing bid and ask prices).
KEMET, headquartered in Greenville, South Carolina, is a leading manufacturer and distributor of both solid tantalum and monolithic ceramic capacitors used as components in circuit boards.
AR Accessories Group, Inc. ("ARA") During 1992, the Fund purchased subordinated notes, warrants to purchase Class B common stock and Class A common stock in Amity Leather Products, Co.
(Amity Leather Products, Co. changed its name to AR Accessories Group, Inc. during 1996.) During August 1994, ARA prepaid the subordinated notes that the Fund held. The Fund continues to hold the Class A common stock and the warrants to purchase Class B common stock.
During February 1998, ARA hired a crisis manager to assist in addressing significant declines in the company's sales and profits, which have occurred in recent years. The hiring of the crisis manager was precipitated by ARA's lenders, who have notified ARA of defaults under its credit lines and have demanded that ARA repay overadvances that were made during 1997.
The Fund has been notified that ARA is considering a number of options for solving these problems, including a possible bankruptcy filing and the sale of the company, or certain of its operations.
ARA manufactures men's and ladies' fine personal leather goods and distributes these products to department stores, mass merchandisers and company-owned Wallet Works stores. AAG markets its products under the brand names of Rolfs, Amity and LaGarde. Headquartered in West Bend, Wisconsin, the Company was founded in 1915 and was family-controlled prior to a management buyout in 1992.
Mobile Technology, Inc. ("MTI") During 1991, the Fund purchased subordinated notes in MTI and various equity securities in MTI's parent company.
The Fund stopped accruing interest on the MTI notes that it held, effective October 1, 1992. In January 1993, MTI commenced restructuring negotiations with its various lenders outside of bankruptcy proceedings. These restructuring negotiations were successfully completed and the restructuring was consummated during July 1994. Pursuant to the terms of the restructuring, the Fund and MTI's other subordinated lenders exchanged their subordinated notes for common stock.
The Fund recognized a realized loss of $3,291,003 during 1994 as a result of the restructuring. The Fund also recorded an unrealized loss of $206,131 in the value of the stock as of December 31, 1994.
During August 1996, MTI consummated a second financial restructuring pursuant to which a substantial amount of its remaining corporate debt was converted to equity. In this restructuring, the existing shareholders, including the Fund, received a reduced number of shares of common stock, along with warrants to purchase additional common stock.
During January 1998, MTI entered into an agreement pursuant to which the company will be sold. If this proposed sale, which is scheduled to close during March 1998, is consummated at the expected price, the Fund will receive approximately $140,000 for its MTI common stock and warrants.
MTI, headquartered in Los Angeles, California, is a provider of magnetic resonance imaging and computed tomography mobile shared-services.
R.B.M. Precision Metal Products, Inc. ("RBM") On May 24, 1995, the Fund invested $1,264,200 in RBM. The investment consisted of $1,290,000 of 13.00% Senior Subordinated Secured Notes due May 24, 2002, with warrants to acquire common stock.
RBM, headquartered in Colorado Springs, Colorado, is a manufacturer of precision sheet metal enclosures, chassis and assemblies for business machines.
Atlas Environmental, Inc. ("Atlas") On January 25, 1996, the Fund invested $3,200,601 in Atlas. The investment consists of $3,265,920 of 13.5% Senior Subordinated Secured Notes due January 19, 2003, with warrants to acquire common stock. The warrants have an exercise price of $8.00 per share. The Atlas common stock is currently traded over the counter on a limited basis with quotations provided via the OTC Bulletin Board under the symbol "ATEV".
The companies that Atlas acquired during 1996 with the proceeds of the Fund's subordinated debt investment have not performed as well as expected. As a result, Atlas defaulted on certain financial
covenants in its agreements with its senior lender and with the Fund. The senior lender, the Bank of New York, reacted to the covenant defaults by limiting Atlas' availability under its revolving credit facility and by instructing Atlas not to pay the quarterly interest payments that were due on the Fund's subordinated debt, beginning in July 1996.
During August 1996, 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 the subordinated notes and wrote the carrying value of its Atlas investment down to a nominal amount.
Atlas has filed a plan of reorganization with the bankruptcy court, in an effort to restructure and emerge from bankruptcy. The plan anticipates that many of the interested parties, including the Fund, will contribute additional capital to the company. While the Find is generally supportive of the plan, there are a number of significant business issues which must be addressed before the Fund will agree to the plan or agree to make a follow-on investment in Atlas.
Atlas, headquartered on Plantation, Florida, is a holding company that owns and manages companies in certain segments of the environmental services industry.
Competition
During the Fund's investment period, which ended on December 31, 1995, the Fund competed with other entities having similar investment objectives for new investments. In addition, because all investments were selected and managed exclusively by the Investment Adviser on behalf of the Fund, any other entities that competed with the Investment Adviser for mezzanine investments, therefore, indirectly competed with the Fund. These competitors included other leveraged acquisition partnerships, other business development companies, investment partnerships and corporations, small business investment companies, and large industrial and financial companies investing directly or through affiliates and individuals. Some of these competitors have more experience with investments similar to those sought by the Funds, greater financial resources and more personnel than the Funds and/or the Investment Adviser. To the extent that there was more competition for investments, the yield available to mezzanine investors may have decreased.
Employees
The Fund has no employees. As discussed above, the Managing General Partner manages the Fund's investments, subject to the supervisory oversight of the Independent General Partners, and performs services on behalf of the Fund. The General Partners are entitled to certain fees and reimbursements of certain out-of-pocket expenses incurred in connection with the performance of these management services. See Item 10 of this Report, "Directors and Executive Officers of the Registrant" and Item 13 of this Report, "Certain Relationships and Related Transactions".
Item 2.
Item 2. Properties
The Fund does not own or lease any physical properties.
Item 3.
Item 3. Legal Proceedings
As previously reported, FCM, the Managing General Partner of the Fund, was named as a defendant in a class action lawsuit against PaineWebber and a number of its affiliates concerning its sale
of 70 different limited partnerships and other direct investment programs, including the offering of the Units. Plaintiffs in the lawsuit alleged, among other things, that the defendants violated federal securities laws and committed common law fraud in the marketing of direct investments.
On May 30, 1995, the United States District Court for the Southern District of New York entered an order certifying the class and dismissing the class action against FCM without prejudice. PaineWebber and Mezzanine Capital Corporation, a minority general partner in FCM and an affiliate of PaineWebber, remained as defendants.
During January 1996, PaineWebber signed a memorandum of understanding with the plaintiffs in the class action outlining the terms under which the parties agreed to settle the case. Pursuant to that memorandum of understanding, PaineWebber irrevocably deposited $125 million into an escrow fund under the supervision of the United States District Court for the Southern District of New York (the "Court") to be used to resolve the litigation in accordance with a definitive settlement agreement and plan of allocation, which the parties subsequently submitted to the Court for its consideration and approval.
On July 17, 1996, a Stipulation of Settlement was preliminarily approved by the Court and notice was mailed to class members. One objection was asserted to the proposed settlement. The Court issued a decision approving the settlement and dismissing the action on March 31, 1997. The sole objector filed an appeal to the Second Circuit. On July 30, 1997, the Second Circuit affirmed the judgment approving the settlement and dismissing the action. The Court must still determine the extent of attorneys fees to be awarded to plaintiffs' counsel, which will be paid from the settlement fund, so that the remainder of the monies can be distributed to class members.
During February 1996, approximately 150 plaintiffs filed an action in Sacramento, California Superior Court against PaineWebber and various affiliated entities (not including FCM) concerning the plaintiffs' purchase of various limited partnership interests. The complaint alleged, among other things, that PaineWebber and its related entities committed fraud and misrepresentations and breached fiduciary duties allegedly owed to the plaintiffs by selling or promoting limited partnership investments that were unsuitable for the plaintiffs and by overstating the benefits, understating the risks and failing to state material facts concerning the investments. This action was settled during March 1997.
On October 3, 1996, Fiduciary commenced an adversary proceeding in the Canadian's Holdings, Inc. and affiliates ("Canadian's") Chapter 11 bankruptcy cases in the United States Bankruptcy Court for the Southern District of New York, Case Nos. 96 B 40891 through 40907, against Finova Capital Corporation ("Finova"), Benson Selzer and Joseph Eiger. The Complaint in the proceeding sought relief on behalf of Canadian's, including, among other things, a declaratory judgment that sales taxes collected by Canadian's and turned over to Finova in the amount of approximately $1.85 million during the period January 1, 1995 through February 21, 1996 were "trust funds" collected by Canadian's on behalf of various state tax authorities.
Through the complaint, the Fund also objected to Finova's secured claim against Canadian's, which was guaranteed by Messrs. Selzer and Eiger, and sought to recover the sales taxes and certain other amounts for the benefit of Canadian's bankruptcy estate based upon various legal theories, including preferential transfers prohibited by the Bankruptcy Code, unjust enrichment, lender liability, breach of fiduciary duty, equitable subordination, and the like.
Pursuant to a directive of the Bankruptcy Court, the Fund filed a motion seeking permission to prosecute the complaint on behalf of Canadian's, and to amend its complaint accordingly. Finova, Selzer and Eiger, Canadian's and the official creditors committee in the bankruptcy case opposed the motion. A hearing on the motion was held on March 11, 1997, and the Court issued a ruling on March 19, 1997, which denied the Fund's motion. As a result of the Court's decision, the Fund dropped this litigation, while preserving its rights to pursue litigation against Finova at a later date.
As a result of this litigation and the issues involved, the Fund accrued $370,627 during 1996 for legal costs and other possible payments that may be required to settle the litigation or to fund the payment
of Canadian's outstanding sales tax liabilities. Beginning July 1, 1997, the Fund began accruing additional reserves at a 12% annualized rate, or $22,237 for the six months ended December 31, 1997.
On January 27, 1998, LMC Holding Co. ("LMC Holding"), which holds 49.75% of the issued and outstanding common stock of LMC, commenced an action against the Fund, FCP 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"). In the LMC Action, LMC Holding has asserted claims against the Fund alleging breach of a shareholders' agreement among the Fund, FCP and LMC Holding relating to the management of LMC, against the Fund and the Individual Defendants alleging breach of fiduciary duties and ultra vires actions taken on behalf of LMC, and against the Individual Defendants alleging civil conspiracy/aiding and abetting and unjust enrichment. LMC Holding is seeking various forms of injunctive relief and monetary damages in an unspecified amount, including punitive damages and the return of all management fees paid by LMC to the Fund since November 19, 1997. Discovery in the LMC Action has commenced, and the Fund intends to contest LMC Holding's claims vigorously. The Fund expects to prevail in the LMC Action, although there can be no assurance that this will be the case.
LMC Holding is controlled by Paul Wallace, a director of LMC and the trustee of its pension plan. FCM believes that the LMC Action was commenced in response to an action filed by LMC against Mr. Wallace to recover for a significant underfunding of LMC's pension plan.
FCM believes that none of the above discussed litigation will have any material adverse effect on the business, financial condition and results of operations of the Fund, taken as a whole, beyond the reserve that has been established with respect to the Canadian's litigation.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Limited Partners of the Fund, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year ended December 31, 1997.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no organized trading market for the purchase and sale of the Units and certain measures have been adopted and implemented to assure that no such organized trading market will develop.
The Fund's Limited Partners adopted a periodic unit repurchase plan during 1993. Pursuant to the terms of the repurchase policy, the Fund will annually offer to purchase from its Limited Partners, up to 7.5% of its outstanding Units for an amount equal to the current net asset value per Unit, net of a fee (not to exceed 2%) to be retained by the Fund to offset expenses incurred in connection with the repurchase offer. If the number of tendered Units in any year exceeds 7.5% of the outstanding Units, the Fund's General Partners may vote to repurchase up to an additional 2% of the outstanding Units.
Repurchases of Units since the adoption of the plan are summarized as follows:
As of March 1, 1998 the number of Limited Partners of record was approximately 2,629.
The Fund made the following distributions to its partners with respect to 1996 and 1997:
*Includes distributions to the Managing General Partner in an amount equal to 1.0% of the total distribution.
Cash distributions for 1996 were paid out of current and accumulated net investment income (67.3%) and realized gains on investments (32.7%). Cash distributions for 1997 were paid out of current net investment income (26.4%), realized gains on investments (51.1%) and a return of capital (22.5%).
The cash distribution for the first quarter of 1998 will be paid on May 15, 1998. The per Unit distribution rate will vary between $1.00 and $1.13 depending upon the closing in which the particular Units were issued. This disproportionate cash distribution results from the Units being issued on different dates during 1990, and thus being entitled to differing Preferred Return amounts, as defined in the Fund's Partnership Agreement. These disproportionate distribution rates will eliminate the remaining Preferred Return amounts, leaving all Units on an equal basis going forward.
The Fund currently expects the remaining 1998 distributions, beginning with the distribution payable during August 1998, to be made at a rate of $1.00 per Unit per quarter for all Limited Partners. The Fund's investment period ended on December 31, 1995. Although the Fund is permitted to make additional investments in existing portfolio companies after 1995, the Fund is no longer permitted to acquire investments in new portfolio companies, except to fund commitments made prior to December 31, 1995. This will impact the amount of the Fund's quarterly distributions for 1998 and subsequent years because all proceeds from dispositions or maturities of investments will be distributed to investors, except to the extent the cash is needed to fund the annual repurchase offer or to fund any follow-on investments that the Fund may make in existing portfolio companies. The increase in the quarterly distribution rate during 1997 and 1998 represents a distribution of the Neodata, Elgin and ENI sales proceeds.
Item 6.
Item 6. Selected Financial Data
The following selected financial data of the Fund has been derived from the financial statements for the indicated periods. The information set forth below should be read in conjunction with the Fund's financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Items 8 and 7, respectively, of this Report.
- --------------- (1) Effective October 1, 1993, each $1,000 Unit was redenominated into fifty $20 Units. All amounts shown for prior years have been restated to give effect to this redenomination. (2) Calculated using the weighted average number of Units outstanding during the years ended December 31, 1997, 1996, 1995, 1994 and 1993 of 1,095,362, 1,186,294, 1,285,717, 1,413,240 and 1,482,514, respectively. (3) Distribution amounts are reflected during the period in which the cash for the distribution was generated. A portion of the actual cash distributions are paid subsequent to such year.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
During 1990, the Fund completed a public offering of its Units. Net offering proceeds available to the Fund, after deducting commissions and other offering costs, totaled $26,298,970.
The Fund is prohibited by the terms of its Partnership Agreement from borrowing funds for operational purposes.
The Fund's Limited Partners adopted a periodic unit repurchase plan during 1993. Pursuant to the terms of the repurchase policy, the Fund will annually offer to purchase from its Limited Partners, up to 7.5% of its outstanding Units for an amount equal to the current net asset value per Unit, net of a fee (not to exceed 2%) to be retained by the Fund to offset expenses incurred in connection with the repurchase offer. If the number of tendered Units in any year exceeds 7.5% of the outstanding Units, the Fund's General Partners may vote to purchase up to an additional 2% of the outstanding Units.
Repurchases of Units since the adoption of the plan are summarized as follows:
As of December 31, 1997, the Fund held portfolio investments in six Managed Companies, with an aggregate cost of approximately $9.6 million. These portfolio investments, which were made from net offering proceeds and the reinvestment of proceeds from the sale of other portfolio investments, represent approximately 44.7% of the Fund's net assets. When acquired, these portfolio investments generally consisted of high-yield subordinated debt, linked with an equity participation or a comparable participation feature. These securities were typically issued in private placement transactions and were subject to certain restrictions on transfer or sale, thereby limiting their liquidity. A number of the portfolio companies have prepaid their subordinated debt that the Fund held. In addition, three of the portfolio companies have successfully completed IPOs of their stock. The Fund has sold the stock it held in these three compainies, except for a portion of its KEMET stock.
As of December 31, 1997, the Fund's remaining assets were invested in short-term commercial paper. These funds are available to fund follow-on investments, for distribution to the partners or to fund the annual repurchase offer.
The Fund's subordinated debt investment in Elgin was prepaid during 1997. In addition, the Fund sold all of its Neodata and ENI stock and received a distribution from the escrow account that was established during 1996 in connection with the sale of the Fund's Huntington stock. In total, the Fund received $8,848,738 in proceeds, including applicable prepayment premiums, from these transactions.
During November 1996, the Fund agreed to provide up to $1,632,960 of subordinated debt to LMC, of which $816,480 was advanced at that time. The Fund advanced the remaining $816,480 during 1997.
During February 1998, the Fund agreed to provide up to $449,000 of additional subordinated debt to LMC, of which $314,300 was advanced at that time. The remaining $134,700 was advanced during March 1998.
Accrued interest receivable decreased $27,243 from $95,207 at December 31, 1996 to $67,964 at December 31, 1997. This decrease resulted primarily from the sale of the Fund's subordinated debt investment in ENI during 1997. The impact of the ENI sale was partially offset by the accrued interest related to the additional LMC subordinated debt advanced during 1997, which is discussed above.
Other assets increased $52,280 from $6,646 at December 31, 1996 to $58,926 at December 31, 1997. This increase resulted primarily from an increase in prepaid insurance associated with a new liability insurance policy for the Fund's general partners and a receivable from LMC for legal fees that the Fund advanced on behalf of LMC.
Distributions payable to partners increased $695,634, from $334,812 at December 31, 1996 to $1,030,446 at December 31, 1997, resulting from a distribution rate increase from $.30 per Unit for the fourth quarter of 1996 to $1.00 per Unit for the fourth quarter of 1997. The effect of this increase in the quarterly distribuion rate was partially offset by a 7.67% decrease in the number of outstanding Units as a result of the repurchase of Units by the Fund during November 1997.
During 1997, the Fund declared cash distributions to its partners in the aggregate amount of $3,150,925. The distributions were paid in four quarterly payments of $.30, $.30, $1.30 and $1.00 per Unit during the months of May, August and November 1997 and February 1998. In the aggregate, the distributions were paid out of current net investment income (26.4%), realized gains on investments (51.1%) and a return of capital (22.5%).
The Fund currently expects the remaining 1998 distributions, beginning with the distribution payable during August 1998, to be made at a rate of $1.00 per Unit per quarter for all Limited Partners. The Fund's investment period ended on December 31, 1995. Although the Fund is permitted to make additional investments in existing portfolio companies after 1995, the Fund is no longer permitted to acquire investments in new portfolio companies. This will impact the amount of the Fund's quarterly distributions for 1998 and subsequent years because all proceeds from dispositions or maturities of investments will be distributed to investors, except to the extent the cash is needed to fund the annual repurchase offer or to fund any follow-on investments that the Fund may make in existing portfolio companies. The increase in the quarterly distribution rate during 1997 and 1998 represents a distribution of the Neodata, Elgin and ENI sales proceeds.
See "Legal Proceedings" and the Fund's financial statements and notes thereto included in Items 3 and 8, respectively, of this Report, for a discussion of litigation. FCM believes that this litigation will be resolved without any material adverse effect on the Fund's business, financial condition or results of operations, taken as a whole, beyond the reserve that has been established with respect to the Canadian's litigation.
Results of Operations
Investment Income and Expenses
The Fund's investment income consists primarily of interest income earned from the various debt investments held by the Fund and dividend income from the ENI preferred stock that was sold during 1997. Major expenses include professional fees, investment advisory fees, fund administration fees and administrative expenses.
1997 Compared to 1996
The Fund's net investment income was $831,359 for the year ended December 31, 1997 on total investment income of $1,370,252 as compared to net investment income of $772,453 on total investment
income of $1,329,491 for the prior year. Net investment income per limited partnership unit increased from $.64 to $.75, and the ratio of net investment income to average net assets increased from 4.05% to 5.55% for the year ended December 31, 1997 in comparison to the prior year.
Net investment income for the year ended December 31, 1997 increased 7.6% as a result of a small increase in investment income and a small decrease in total expenses. Net investment income per limited partnership unit increased 17.2%. The percentage increase in net investment income per limited partnership unit exceeded the percentage increase in net investment income because of a decrease in the weighted average number of limited partnership units outstanding, which resulted from the repurchase of Units by the Fund during both November 1996 and 1997.
Investment income increased $40,761, or 3.1%, for the year ended December 31, 1997 in comparison to the prior year. This increase resulted primarily from the receipt of the accumulated preferred stock dividends that were paid on the ENI preferred stock at the time of its disposition. The positive impact of the ENI dividend income was significantly offset by a decrease in interest income. A number of factors contributed to the decline in interest income, including (i) the decision to stop accruing interest in the Fund's Atlas subordinated debt investment effective April 1996, (ii) the prepayment of the Fund's Elgin subordinated debt investment during November 1997, and (iii) reduced amounts of temporary investments as a result of the Fund utilizing a portion of its cash reserves to fund the LMC follow-on investment and to repurchase Units during both November 1996 and 1997. The negative effect of these items was partially offset by the increase in interest income earned on the LMC follow-on investment.
Total expenses decreased $18,145, or 3.3%, for the year ended December 31, 1997 in comparison to the prior year. This decrease resulted primarily from decreases in investment advisory fees and other expenses. These decreases were partially offset by an increase in professional fees.
The investment advisory fees paid to FCM decreased during 1997, primarily as a result of the direct receipt by FCM of consulting fees from LMC, one of the Fund's portfolio companies during the first quarter of 1997 and as a result of the repurchase of Units during November 1996 and 1997. Pursuant to the terms of the Fund's investment advisory agreement with FCM, the investment advisory fees payable to FCM by the Fund are reduced by the amount of any fees that FCM receives directly from any of the Fund's portfolio companies. The repurchase of Units decreased the amount of the Fund's available capital (as defined in the Partnership Agreement) which is the base with respect to which the investment advisory fees are calculated.
Other expenses decreased during 1997 primarily as a result of consulting fees and expenses paid during 1996 in connection with the Canadian's bankruptcy proceedings.
Professional fees increased during 1997 primarily because of fees incurred in connection with the Fund's analysis of a proposal pursuant to which its Units would have been exchanged for shares in a newly formed Delaware Business Trust. FCM has decided not to pursue this proposal at this time.
1996 Compared to 1995
The Fund's net investment income was $772,453 for the year ended December 31, 1996 on total investment income of $1,329,491 as compared to net investment income of $1,725,971 on total investment income of $2,268,159 for the prior year. Net investment income per limited partnership unit decreased from $1.33 to $.64, and the ratio of net investment income to average net assets decreased from 7.22% to 4.05% for the year ended December 31, 1996 in comparison to the prior year.
Net investment income for the year ended December 31, 1996 decreased primarily as a result of a decrease in investment income. Total expenses also increased by a small amount.
Investment income decreased $938,668, or 41.4%, for the year ended December 31, 1996 in comparison to the prior year. This decrease resulted primarily from the conversion of the Fund's LMC debt securities into non-dividend paying equity securities, the Canadian's bankruptcy and the decision by
the Fund to stop accruing interest on its subordinated debt investment in Atlas. Other factors that contributed to the decrease in investment income include the utilization of a portion of the Fund's cash reserves to repurchase Units during both November 1995 and 1996 and lower interest rates on the Fund's temporary investments.
Total expenses increased $14,850, or 2.7%, for the year ended December 31, 1996 in comparison to the prior year. This increase resulted primarily from increases in professional fees and other expenses. These increases were partially offset by decreases in investment advisory fees and amortization expense.
The increases in professional fees and other expenses were primarily the result of legal fees and other costs incurred in connection with the Canadian's bankruptcy proceedings and the default by Atlas with respect to the payment of interest due to the Fund. The investment advisory fees decreased primarily as a result of the repurchase of Units by the Fund during both November 1995 and 1996 and the realization during February 1996 of the loss on the Fund's Canadian's investment. Both the repurchase of the Units and the realization of the Canadian's loss decreased the amount of the Fund's available capital (as defined in the Partnership Agreement), which is the base with respect to which the investment advisory fees are calculated. The Fund amortized its organization cost over a five year period beginning with the inception of the Fund in 1990. Therefore, these costs became fully amortized during 1995.
Net Realized Gain (Loss) on Investments
The Fund realized gains of $3,790,988 during the year ended December 31, 1995, net losses of $3,453,919 during the year ended December 31, 1996 and net gains of $2,925,017 during the year ended December 31, 1997.
The realized gains for 1995 consisted of gain, including a prepayment premium, from the prepayment by Protection One of subordinated notes that were held by the Fund and gains from the sale of all of the Carr-Gottstein common stock and KB Alloys notes and a portion of the KEMET common stock that were held by the Fund. During 1996, the Fund realized a gain from the sale of the Fund's Huntington investment and realized a loss on the Fund's Canadian's investment.
The net realized gain for 1997 resulted from gains on the Fund's Neodata, Elgin, ENI and Huntington investments, including a prepayment premium, and an additional realized loss on the Fund's Canadian's investment.
The Fund owned an equity position in Neodata since 1990, which it acquired at a cost of $278,917. In addition, the Fund previously owned Neodata subordinated notes, which were prepaid during May 1993.
During August 1997, Electronic Data Systems Corporation ("EDS") offered to purchase all of Neodata's stock that it did not already own. Hicks Muse, the owner of a controlling portion of Neodata's common stock, accepted the offer. The purchase by EDS closed on September 2, 1997. The Fund received $1,178,150 of cash proceeds from the sale of its Neodata stock, resulting in a realized gain of $899,233.
During 1993, the Fund invested $5,651,917 in Elgin and its parent company, ENI. The investment consisted of (a) $5,023,926 of Elgin's 13.00% Senior Subordinated Notes due September 1, 2001 with warrants to purchase common stock in ENI and (b) $587,610 of ENI 10.00% preferred stock and (c) $40,381 of ENI common stock.
During June 1997, the Fund received a written offer from ENI management to prepay the Fund's subordinated debt, redeem the Fund's preferred stock and purchase the Fund's Class B common stock and warrants. The offer was reviewed by all of the subordinated debt holders, including the Fund, and rejected as inadequate.
During August 1997, ENI management made an improved offer, which was revised and accepted by all of the subordinated debt holders, following a series of negotiations. The sale closed on November 5, 1997, with the Fund receiving $7,603,390 of sales proceeds, along with $361,543 of accrued interest and accumulated preferred stock dividends, resulting in a realized gain of $1,980,823.
During December 1995, Huntington entered into a letter of intent, under the terms of which all Huntington stock would be sold for cash. The sale was consummated during February 1996. The Fund's share of the actual sales proceeds totaled $1,247,229, of which $1,089,896 was received during February 1996, with the balance being held by the buyer in escrow. A portion of the escrowed funds was used to pay various transaction expenses and the Fund received additional distributions of $16,439 and $67,198 during September 1996 and May 1997, respectively. The Fund's share of the remaining escrow balance is approximately $70,000. The remaining balance of the escrow was required to be held until February 1998 to be available to fund contingent purchase price adjustments, and as collateral for potential claims of the buyer with respect to representations made by the selling shareholders, including the Fund. During February 1998, the purchaser notified the sellers, including the Fund, of claims against the escrow account that totaled approximately 31% of the balance remaining in the escrow account. The sellers intend to object to these claims and the balance of the escrow account will not be released until these claims are resolved. The Fund recognized realized gains of $1,020,657 and $67,198 from this transaction during 1996 and 1997, respectively. Additional gain will be recognized if, and when, the Fund actually receives a distribution of any of the remaining escrowed funds.
Beginning July 1, 1997, the Fund began accruing additional Canadian's sales tax related reserves at a 12% annualized rate, or $22,237 for the six months ended December 31, 1997. This additional accrued amount was recorded as an additional realized loss in the Fund's 1997 Statement of Operations.
Net Unrealized Gain (Loss) on Investments
FCM values the Fund's portfolio investments on a weekly basis utilizing a variety of methods. For securities that are publicly traded and for which market quotations are available, valuations are set by the closing sales, or an average of the closing bid and ask prices, as of the valuation date.
Fair value for securities that are not traded in any liquid public markets or that are privately held are determined pursuant to valuation policies and procedures that have been approved by the Independent General Partners and subject to their supervision. There is a range of values that are reasonable for such investments at any particular time. Each such investment is valued initially based upon its original cost to the Fund ("cost method"). The cost method is used until significant developments affecting the portfolio company provide a basis for use of an appraisal valuation. Appraisal valuations are based upon such factors as the portfolio company's earnings, cash flow and net worth, the market prices for similar securities of comparable companies and an assessment of the portfolio company's future financial prospects. In a case of unsuccessful operations, the appraisal may be based upon liquidation value. Appraisal valuations are necessarily subjective. The Fund also may use, when available, third-party transactions in a portfolio company's securities as the basis of valuation ("private market method"). The private market method will be used only with respect to completed transactions or firm offers made by sophisticated, independent investors.
Prior to 1995, the Fund had recorded cumulative net unrealized gain on investments of $3,221,972. During 1995, the Fund recorded $642,173 of unrealized gain and $4,831,540 of unrealized loss on investments. In addition, the Fund disposed of investments during 1995 with respect to which the Fund had recorded $1,927,280 of net unrealized gain during prior years. Therefore, at December 31, 1995, the Fund had net unrealized loss on investments of $2,894,675.
During 1996, the Fund recorded $77,771 of unrealized gain and $1,115,021 of unrealized loss on investments. In addition, the Fund disposed of investments during 1996 with respect to which the Fund had recorded $3,348,623 of net unrealized loss during prior years. Therefore, at December 31, 1996, the Fund had net unrealized loss on investments of $583,302.
The net increase in unrealized loss on investments during 1997 and the cumulative net unrealized loss on investments at December 31, 1997, consisted of the following components:
KEMET completed an IPO of its common stock during 1992. The stock, which trades on the NASDAQ National Market System, closed at $19.3125 (an average of the closing bid and ask prices) on December 31, 1997. This price is down slightly from the closing price of $23.0625 on December 31, 1996. Based on the $19.3125 closing trading price of the common stock, the 23,056 shares of common stock that the Fund held at December 31, 1997 had a market value of $445,269.
The ARA warrants and common stock were written up in value at March 31, 1996 to bring ARA's valuation at that time more in line with the valuations of comparable companies in its industry. However, ARA reported significantly reduced earnings and cash flows from operations for its most recent fiscal year. In addition, the price earnings ratios of comparable companies in its industry have declined recently. As a result of these factors, the ARA warrants and common stock were written down in value by $703,412 during 1997. On a net cumulative basis, as of December 31, 1997, the Fund's ARA investment has been written down in value by $97,213.
During February 1998, ARA hired a crisis manager to assist it in addressing significant declines in the company's sales and profits, which have occurred in recent years. The hiring of the crisis manager was precipitated by ARA's lenders, who have notified ARA of defaults under its credit lines and have demanded that ARA repay overadvances that were made during 1997.
The Fund has been notified that ARA is considering a number of options for solving these problems, including a possible bankruptcy filing and the sale of the company, or certain of its operations.
LMC experienced significant operating problems after the Fund acquired its LMC investment during 1994 and the Fund was involved in a restructuring of its LMC investment during 1995. In the restructuring, the Fund's existing LMC subordinated debt and warrants were converted into preferred stock and the Fund purchased $454,400 of new common stock. As a result of LMC's operational difficulties and the fact that the Fund's investment was converted from debt securities to equity securities the Fund wrote its LMC investment down by $459,200 during 1995.
LMC has a defined contribution plan (the "Plan"), which was closed during 1995. The current and previous trustees of the Plan have failed to assure that the Plan was properly funded, in an amount equal to approximately $600,000. Including penalties and interest, this amount could now total as much as $1,800,000. The Internal Revenue Service ("IRS") has notified LMC that an audit of the Plan will be conducted in early 1998. In order to rectify this problem, LMC has made demands on the current and previous trustees of the Plan and the previous controlling shareholders that these parties make the necessary payments to the Plan. LMC has filed suit against the current trustee, who's wholly-owned company currently owns approximately 50% of LMC's common stock, and expects to prevail in this litigation, although there can be no assurance that this will be the case. Regardless, the IRS may insist
that LMC fund the Plan prior to resolution of the litigation. If the IRS requires LMC to fund the underpayments and the related penalties and interest, it will put pressure on LMC's working capital availability.
As a result of this matter and its potential impact on LMC, the Fund recorded an additional $282,720 write down in the value of its LMC investment during 1997. On a cumulative basis, as of December 31, 1997, the Fund's LMC investment has been written down in value by $741,920. (As discussed in Item 1 of this Report, "Business", the Fund made additional follow-on investments in LMC during 1996, 1997 and 1998.)
The MTI common stock was written down in value by $206,131 during 1994 based upon an independent third party valuation of the company that was obtained by MTI's management. During August 1996, MTI consummated a financial restructuring pursuant to which a substantial amount of its corporate debt was converted to equity. In the restructuring, the existing shareholders, including the Fund, received a reduced number of shares of common stock, along with warrants to purchase additional common stock. The Fund's valuation of its MTI investment was increased by $19,010 and $9,765 during 1996 and 1997, respectively, based upon an analysis of MTI's earnings and cash flows. On a net cumulative basis, as of December 31, 1997, the Fund's MTI investment has been written down in value by $177,356, to a carrying value of $60,271.
During January 1998, MTI entered into an agreement pursuant to which the company will be sold. If this proposed sale, which is scheduled to close during March 1998, is consummated at the expected price, the Fund will receive approximately $140,000 for its MTI common stock and warrants.
The companies that Atlas acquired during 1996 with the proceeds of the Fund's subordinated debt investment have not performed as well as expected. As a result, Atlas defaulted on certain financial covenants in its agreements with its senior lender and with the Fund. The senior lender, the Bank of New York, reacted to the covenant defaults by limiting Atlas' availability under its revolving credit facility and by instructing Atlas not to pay the quarterly interest payments that were due on the Fund's subordinated debt, beginning in July 1996.
During August 1996, Atlas entered into a letter of intent, under the terms of which some of company's businesses would be sold for cash. During November 1996, the purchaser notified Atlas that it wanted to renegotiate the terms of the transaction, including a reduction in the purchase price. Atlas management was unable to reach a revised agreement with the purchaser and Atlas remained in default on its debt. On January 17, 1997, Atlas filed for Chapter 11 bankruptcy protection.
Atlas has filed a plan of reorganization with the bankruptcy court in an effort to restructure and emerge from bankruptcy. The plan anticipates that many of the interested parties, including the Fund, will contribute additional capital to the company. While the Fund is generally supportive of the plan, there are a number of significant business issues which must be addressed before the Fund will agree to the plan or agree to make a follow-on investment in Atlas.
As a result of these developments, the Fund stopped accruing interest on its Atlas investment effective April 20, 1996 and recorded writedowns of $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 is $2.
FCM continually monitors both the Fund's portfolio companies and the markets, and continually evaluates the decision to hold or sell its traded securities.
Inflation and Changing Prices
Inflation has had no material impact on the operations or financial condition of the Fund from inception through December 31, 1997. However, inflation and changing prices, in addition to other factors, may effect the value and the eventual selling price of the Fund's investments.
Item 8.
Item 8. Financial Statements and Supplementary Data
FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
List of Financial Statements
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because (1) the information required is disclosed in the financial statements and notes thereto; (2) the schedules are not required under the related instructions; or (3) the schedules are inapplicable.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Fiduciary Capital Pension Partners, L.P.:
We have audited the accompanying balance sheets of Fiduciary Capital Pension Partners, L.P. (a Delaware limited partnership) as of December 31, 1997 and 1996, including the schedule of investments as of December 31, 1997, and the related statements of operations, cash flows and changes in net assets for each of the three years in the period ended December 31, 1997 and the selected per unit data and ratios for the five years then ended. These financial statements and per unit data and ratios are the responsibility of the partnership's managing general partner. Our responsibility is to express an opinion on these financial statements and per unit data and ratios based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and per unit data and ratios are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1996 and 1995 by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and selected per unit data and ratios referred to above present fairly, in all material respects, the financial position of Fiduciary Capital Pension Partners, L.P. as of December 31, 1997 and 1996, and the results of its operations, its cash flows and the changes in its net assets for each of the three years in the period ended December 31, 1997, and the selected per unit data and ratios for the five years then ended, in conformity with generally accepted accounting principles.
As discussed in Note 2, the financial statements include investment securities valued at $5,309,157 at December 31, 1997 (41.3% of net assets) and $13,475,314 at December 31, 1996 (81.0% of net assets) whose values have been estimated by the managing general partner in the absence of readily ascertainable market values. However, because of the inherent uncertainty of valuation, the managing general partner's estimate of values may differ significantly from the values that would have been used had a ready market existed for the securities and the differences could be material.
/s/ Arthur Andersen LLP
Denver, Colorado February 4, 1998.
FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
The accompanying notes to financial statements are an integral part of this schedule.
FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1997
(1) The KEMET Corporation common stock trades on the NASDAQ National Market System. (2) Amity Leather Products Co. changed its corporate name to AR Accessories Group, Inc. during 1996. (3) The warrants have exercise prices of $19.30 per share (1,062 shares) and $34.30 per share (2,477 shares). (4) The notes will amortize in three equal annual installments of $430,000 commencing on May 24, 2000. (5) The notes will amortize in five equal annual installments of $653,184 commencing on January 19, 1999. The accrual of interest on the notes was discontinued by the Fund effective April 20, 1996. (Note 12) (6) The Atlas Environmental, Inc. common stock trades over the counter on a limited basis with quotations provided via the OTC Bulletin Board. The warrants have an exercise price of $8.00 per share. * Non-income producing security.
The accompanying notes to financial statements are an integral part of this schedule.
FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
BALANCE SHEETS - DECEMBER 31, 1997 AND 1996
The accompanying notes to financial statements are an integral part of these financial statements.
FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
STATEMENTS OF OPERATIONS
FOR EACH OF THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The accompanying notes to financial statements are an integral part of these financial statements.
FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR EACH OF THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The accompanying notes to financial statements are an integral part of these financial statements.
FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
STATEMENTS OF CHANGES IN NET ASSETS
FOR EACH OF THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The accompanying notes to financial statements are an integral part of these financial statements.
FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
SELECTED PER UNIT DATA AND RATIOS (1)
FOR EACH OF THE YEARS ENDED DECEMBER 31, 1997, 1996, 1995, 1994 AND 1993
(1) Effective October 1, 1993, each $1,000 limited partnership unit was redenominated into fifty $20 limited partnership units. All amounts shown for 1993 have been restated to give effect to this redenomination. (2) Calculated using the weighted average number of limited partnership units outstanding during the years ended December 31, 1997, 1996, 1995, 1994 and 1993 of 1,095,362, 1,186,294, 1,285,717, 1,413,240 and 1,482,514, respectively.
The accompanying notes to financial statements are an integral part of these selected per unit data and ratios.
FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. ORGANIZATION AND PURPOSE
Fiduciary Capital Pension Partners, L.P. (the "Fund"), a Delaware limited partnership, was formed on October 20, 1988 to operate as a business development company under the Investment Company Act of 1940. The Fund's operations commenced on August 14, 1990.
FCM Fiduciary Capital Management Company ("FCM"), the Managing General Partner of, and the investment adviser to, the Fund, is responsible, subject to the supervision of the Independent General Partners, for overseeing and monitoring the Fund's investments.
The investment objective of the Fund is to provide current income and capital appreciation by investing primarily in subordinated debt and related equity securities issued as the mezzanine financing of privately structured, friendly leveraged buyouts, leveraged acquisitions and leveraged recapitalizations. These investments are referred to herein as "portfolio investments". Managed companies are those to which significant managerial assistance is offered.
As set forth in the Partnership Agreement, the Fund's investment period ended on December 31, 1995. Although the Fund is permitted to make additional investments in existing portfolio companies, the Fund is no longer permitted to acquire investments in new portfolio companies.
A separate fund, Fiduciary Capital Partners, L.P. ("FCP"), was also formed on October 20, 1988 for taxable investors with investment objectives, policies and restrictions similar to those of the Fund. While the Fund and FCP have co-invested in each of the portfolio investments, each fund is accounted for separately. Each fund's participation in the portfolio investments is in proportion to the amount of capital that each fund had available for investment at the time each investment was acquired. Certain expenses are allocated between the funds based on the amount of each fund's total capital. The accompanying financial statements include only the activities of the Fund.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Accounting Method The Fund maintains its accounting records, prepares financial statements and files its tax returns using the accrual method of accounting.
Realized and Unrealized Gain or Loss on Investments Realized gains and losses are recorded upon disposition of investments and are calculated based upon the difference between the proceeds and the cost basis determined using the specific identification method. All other changes in the valuation of investments, as determined by FCM, are included as changes in the unrealized appreciation or depreciation of investments in the Fund's Statements of Operations.
Valuation of Investments FCM values the Fund's investments on a weekly basis utilizing a variety of methods. For securities that are publicly traded and for which market quotations are available, valuations are set by the closing sales, or an average of the closing bid and asked prices, as of the valuation date. The Fund discounts these closing market prices between 5% and 20% to reflect lack of liquidity, if the Fund's securities are subject to legal or contractual trading restrictions, or to
FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
reflect the potential market impact which could result from the sale of the securities, if the Fund and FCP combined own a material percentage of the outstanding securities. The amount of the discount varies based upon the type of restriction, the time remaining on the restriction and the size of the holding.
Fair value for securities that are not traded in any liquid public markets or that are privately held are determined pursuant to valuation policies and procedures which have been approved by the Independent General Partners and subject to their supervision. There is a range of values that are reasonable for such investments at any particular time. Each such investment is valued initially based upon its original cost to the Fund ("cost method"). Debt securities with attached warrants for the purchase of common stock are initially recorded at a discount from face value equal to the estimated relative value of the warrants at date of investment. The discount is amortized to income as an adjustment to yield from the debt securities. Face value less unamortized discount represents the "amortized cost" of the debt securities.
The cost method is used until significant developments affecting the portfolio company provide a basis for use of an appraisal valuation. Appraisal valuations are based upon such factors as the portfolio company's earnings, cash flow and net worth, the market prices for similar securities of comparable companies and an assessment of the portfolio company's future financial prospects. In a case of unsuccessful operations, the appraisal may be based upon liquidation value. Appraisal valuations are necessarily subjective. The Fund also may use, when available, third-party transactions in a portfolio company's securities as the basis of valuation ("private market method"). The private market method is used only with respect to completed transactions or firm offers made by sophisticated, independent investors.
Temporary investments with maturities of less than 60 days are stated at amortized cost, which approximates market value. Under this method, temporary investments are valued at cost when purchased and thereafter a constant proportionate amortization of any discount or premium is recorded until maturity of the investment.
Cash and Cash Equivalents The Fund considers investments in money market funds to be cash equivalents.
Interest Receivable on Notes Notes are placed on non-accrual status in the event of a default (after any applicable grace period expires) or if FCM determines that there is no reasonable expectation of collecting the interest.
Income Taxes No provision for income taxes has been made in the financial statements because taxes on Fund income are the responsibility of the individual partners rather than the Fund.
Investment Transactions The Fund records portfolio investment transactions on the date on which it obtains an enforceable right to demand the securities or payment thereof and records temporary investment transactions on the trade date. Realized gains and losses on investments are determined on the basis of specific identification for both accounting and tax purposes.
3. ALLOCATIONS OF PROFITS, LOSSES AND CASH DISTRIBUTIONS
Pursuant to the Partnership Agreement, all income derived from temporary investments will be distributed and allocated 99% to the Limited Partners and 1% to FCM. Net investment income will, in general, be distributed and allocated: (i) 99% to the Limited Partners and 1% to FCM until the Limited
FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
Partners have received a cumulative non-compounded preferred return of 9% per annum on their capital contributions to the Fund, then (ii) 70% to the Limited Partners and 30% to FCM until FCM has received 10% of all current and prior distributions and allocations, and thereafter, (iii) 90% to the Limited Partners and 10% to FCM.
Proceeds from capital transactions will, in general, be distributed and allocated: (i) 99% to the Limited Partners and 1% to FCM until the Limited Partners have received a cumulative, non-compounded preferred return of 9% per annum on their capital contribution to the Fund from net investment income, capital transactions, or both, then (ii) 100% to the Limited Partners until they have received a return of their capital contributions to the Fund, and thereafter, (iii) 80% to the Limited Partners and 20% to FCM.
All cash distributions and earnings since the inception of the Fund have been allocated 99% to the Limited Partners and 1% to FCM.
4. CAPITAL CONTRIBUTIONS
Upon formation of the Fund, FCM contributed $4,000 for its general partner interest in the Fund. Units of limited partnership interest ("Units") were then sold in a public offering. The Fund held three closings between August 14, 1990 and October 18, 1990, receiving gross offering proceeds of $29,796,000. Commissions and other offering costs were charged against proceeds resulting in net capital contributions from Limited Partners of $26,294,970.
5. PERIODIC UNIT REPURCHASE PLAN
The Fund's Limited Partners adopted a periodic unit repurchase plan during 1993. Pursuant to the terms of the repurchase policy, the Fund will annually offer to repurchase from its Limited Partners, up to 7.5% of its outstanding Units for an amount equal to the current net asset value per Unit, net of a fee (not to exceed 2%) to be retained by the Fund to offset expenses incurred in connection with the repurchase offer. If the number of tendered Units in any year exceeds 7.5% of the outstanding Units, the Fund's General Partners may vote to repurchase up to an additional 2% of the outstanding Units.
Repurchases of Units since the adoption of the plan are summarized as follows:
6. INVESTMENT ADVISORY FEES
As compensation for its services as investment adviser, FCM receives a subordinated monthly fee at the annual rate of 1% of the Fund's available capital, as defined in the Partnership Agreement, net of certain fees received directly by FCM from the Fund's portfolio companies. Investment advisory
FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
fees of $120,800, $136,714 and $195,279 were incurred by the Fund for 1997, 1996 and 1995, respectively.
7. FUND ADMINISTRATION FEES
As compensation for its services as fund administrator, FCM receives a monthly fee at the annual rate of .45% of net proceeds available for investment, as defined in the Partnership Agreement. Fund administration fees of $118,327 were incurred each year by the Fund during 1997, 1996 and 1995. FCM is also reimbursed, subject to various limitations, for administrative expenses incurred in providing accounting and investor services to the Fund. The Fund reimbursed FCM for administrative expenses of $68,895, $68,895 and $68,105 for 1997, 1996 and 1995, respectively.
8. INDEPENDENT GENERAL PARTNER FEES AND EXPENSES
As compensation for services rendered to the Fund, each of the Independent General Partners receives from the Fund and FCP an annual fee of $30,000, payable monthly in arrears, together with all out-of-pocket expenses. Each fund's allocation of these fees and expenses is based on the relative number of outstanding Units. Fees and expenses of $46,966, $47,563 and $49,283 were incurred by the Fund for 1997, 1996 and 1995, respectively.
9. OTHER RELATED PARTY TRANSACTIONS
FCM and its affiliates are entitled to reimbursement of direct expenses paid on behalf of the Fund. Such reimbursements amounted to $256,851, $200,848 and $154,260 during 1997, 1996 and 1995, respectively.
10. PORTFOLIO INVESTMENTS
The Fund's portfolio investments consist primarily of high-yield private placement securities issued as the mezzanine financing of privately structured, friendly leveraged buyouts, leveraged acquisitions and leveraged recapitalizations, and are generally linked with an equity participation. The risk of loss upon default by an issuer is greater than with investment grade securities because high-yield securities are generally unsecured and are usually subordinated to other creditors of the issuer. Also, these issuers usually have higher levels of indebtedness and are more sensitive to adverse economic conditions than investment grade issuers. Most of these securities are subject to resale restrictions and generally there is no quoted market for such securities.
Although the Fund cannot eliminate the risks associated with its investments in these high-yield securities, it has established risk management procedures. The Fund subjects each prospective investment to rigorous analysis, and makes only those investments that are recommended by FCM and that meet the Fund's investment guidelines or that have otherwise been approved by the Independent General Partners. The Fund also has procedures in place to continually monitor its portfolio companies.
As of December 31, 1997, the Fund held portfolio investments in six Managed Companies, with an aggregate cost of approximately $9.6 million. During the year ended December 31, 1997, the Fund acquired a follow-on investment in LMC Operating Corp. ("LMC") at a cost of approximately $0.8 million.
FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
The Fund's subordinated debt investment in Elgin National Industries, Inc. was prepaid during 1997. In addition, the Fund sold all of its Neodata Corporation and ENI Holding Corp. stock and received a distribution from the escrow account that was established during 1996 in connection with the sale of the Fund's Huntington Holdings, Inc. stock. The Fund received $8,848,738 in proceeds, including applicable prepayment premiums, resulting in aggregate realized gains of $2,947,255.
During 1997, the Fund accrued $22,238 of additional reserves for possible legal costs and other payments that may be required in connection with the Canadian's Holdings, Inc. ("Canadian's") bankruptcy proceedings (see Note 13). This amount was recorded as an additional realized loss in the Fund's Statement of Operations.
The Fund has pledged the common stock and warrants it owns in AR Accessories Group, Inc. and LMC Credit Corp. as collateral for the corporations' debt. None of the Fund's other portfolio investments have been pledged or otherwise encumbered.
11. UNREALIZED GAIN (LOSS) ON INVESTMENTS
As of December 31, 1996, the Fund had recorded net unrealized loss on investments of $583,302. During 1997, the Fund recorded $9,765 of unrealized gain and $3,315,695 of unrealized loss on investments. In addition, the Fund disposed of investments during 1997 with respect to which the Fund had recorded $86,963 of net unrealized loss during prior years. Therefore, at December 31, 1997, the Fund had net unrealized loss on investments of $3,802,269.
12. NON-ACCRUAL STATUS OF INVESTMENTS
In accordance with the Fund's accounting policies, the Fund stopped accruing interest on (i) the Canadian's Holdings, Inc. Exchangeable Redeemable Debentures effective April 1, 1995, (ii) the Canadian's Promissory Notes effective October 1, 1995, (iii) the Canadian's Subordinated Notes effective December 1, 1995, (iv) the LMC Senior Subordinated Notes effective December 1, 1995, and (v) the Atlas Environmental, Inc. ("Atlas") Senior Subordinated Secured Notes effective April 20, 1996.
During 1996, all of the Canadian's debt was written off as a realized loss and the LMC Senior Subordinated Notes were converted into preferred stock. Thus, as of December 31, 1997, the Fund's only debt investment on non-accrual status was the Atlas Senior Subordinated Secured Notes.
13. COMMITMENTS AND CONTENGENCIES
LMC Commitment On February 18, 1998, the Fund agreed to provide up to $449,000 of additional subordinated debt to LMC, of which $314,300 was advanced on that date. The remaining $134,700 was advanced during March 1998.
Canadian's Litigation On October 3, 1996, the Fund commenced an adversary proceeding in the Canadian's Chapter 11 bankruptcy case against Finova Capital Corporation ("Finova"), Benson Selzer and Joseph Eiger. The complaint sought a declaratory judgment that sales taxes collected by Canadian's and turned over to Finova were "trust funds" collected by Canadian's on behalf of various state tax authorities. Through the complaint, the Fund objected to Finova's secured claim against Canadian's,
FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
which was guaranteed by Benson Selzer and Joseph Eiger, and sought to recover the sales tax and certain other amounts for the benefit of Canadian's bankruptcy estate. As a result of this litigation and the issues involved, the Fund accrued $370,627 during 1996 for legal costs and possible payments that may be required to settle the litigation or to fund the payment of Canadian's outstanding sales tax liabilities. On March 19, 1997 the Bankruptcy Court denied the Fund's claim. As a result of the Court's decision, the Fund dropped this litigation, while preserving its rights to pursue litigation against Finova at a later date. Beginning July 1, 1997, the Fund began accruing additional reserves at a 12% annualized rate or $22,237 for the six months ended December 31, 1997.
LMC Litigation On January 27, 1998, LMC Holding Co. ("LMC Holding"), which holds 49.75% of the issued and outstanding common stock of LMC, commenced an action against the Fund, FCP 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"). In the LMC Action, LMC Holding has asserted claims against the Fund alleging breach of a shareholders' agreement among the Fund, FCP and LMC Holding relating to the management of LMC, against the Fund and the Individual Defendants alleging breach of fiduciary duties and ultra vires actions taken on behalf of LMC, and against the Individual Defendants alleging civil conspiracy/aiding and abetting and unjust enrichment. LMC Holding is seeking various forms of injunctive relief and monetary damages in an unspecified amount, including punitive damages and the return of all management fees paid by LMC to the Fund since November 19, 1997. Discovery in the LMC Action has commenced, and the Fund intends to contest LMC Holding's claims vigorously. The Fund expects to prevail in the LMC Action, although there can be no assurance that this will be the case.
LMC Holding is controlled by Paul Wallace, a director of LMC and the trustee of its pension plan. FCM believes that the LMC Action was commenced in response to an action filed by LMC against Mr. Wallace to recover for a significant underfunding of LMC's pension plan.
FCM believes that none of the above discussed litigation will have any material adverse effect on the business, financial condition and results of operations of the Fund, taken as a whole, beyond the reserve that has been established with respect to the Canadian's litigation.
FIDUCIARY CAPITAL PENSION PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
14. RECONCILIATION TO INCOME TAX METHOD OF ACCOUNTING
The following is a reconciliation of the net increase in net assets resulting from operations in the accompanying financial statements to the taxable income reported for federal income tax purposes:
The following is a reconciliation of the amount of the Fund's net assets as shown in the accompanying financial statements and the tax bases of the Fund's net assets:
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There were no changes in accountants or disagreements with accountants with respect to accounting or financial disclosure issues during 1997 or 1996.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The Fund has no directors or executive officers. The General Partners of the Fund jointly manage and control the affairs of the Fund and have general responsibility and authority in all matters affecting its business.
FCM serves as Investment Adviser to the Fund and is responsible for the identification of all investments made by the Fund and all other investment advisory services necessary for the operation of the Fund in carrying out its investment objectives and policies. The Investment Committee of FCM is responsible for approval of all investment decisions of FCM with respect to the Fund and consists of seven members. Five of the seven members are appointed by FCM Fiduciary Capital Corporation ("FCC") and two are appointed by Mezzanine Capital Corporation ("MCC"). The current members of the Investment Committee are Paul Bagley, W. Duke DeGrassi and Michael G. Rafferty, appointed by FCC; and Gerald F. Goertz, Jr. and Clifford B. Wattley, appointed by MCC. Election of two additional members to the Investment Committee by FCC remains undetermined as of the date of this Report. The Independent General Partners oversee the investment activities of the Investment Adviser.
Information concerning the directors and executive officers of the Managing General Partner (and of its partners) and the Independent General Partners is as follows:
FCM Fiduciary Capital Management Company (a Delaware general partnership, the partners of which are FCM Fiduciary Capital Corporation, Mezzanine Capital Corporation and Paul Bagley)
Name Positions Held
Paul Bagley Chairman and Chief Executive Officer W. Duke DeGrassi President Donald R. Jackson Senior Vice President, Treasurer, Chief Financial and Accounting Officer and Compliance Officer
Paul Bagley, age 55, is Chairman, Chief Executive Officer and an Investment Committee Member of FCM. Mr. Bagley is a founding principal of Stone Pine Capital, LLC, a group that provides mezzanine capital to fund acquisitions, buyouts, growth and recapitalization and is also associated with Stone Pine Asset Management, LLC and Stone Pine Investment Banking, LLC. Mr. Bagley was Chief Executive Officer of Laidlaw Holdings, Inc., an investment services company, from January 1995 until November 1996, For more than twenty years prior to October 1988, Mr. Bagley was engaged in investment banking activities with Shearson Lehman Hutton Inc. and its predecessor, E.F. Hutton & Company Inc. Mr. Bagley served in various capacities with Shearson and E.F. Hutton, including Executive Vice President and Director, Managing Director, Head of Direct Investment Origination and Manager of Corporate Finance. Mr. Bagley serves as Chairman of the Board of Directors of Silver Screen Management, Inc. and International Film Investors, Inc., which manage film portfolios. Mr. Bagley is also a director of Consolidated Capital of North America, Inc. and Hollis-Eden Pharmaceuticals, Inc., both publicly held companies, LMC Operating Corp., a privately held manufacturer of low ground pressure vehicles, and Hamilton Lane Private Equity Partners, PLC, an Irish Stock Exchange listed investment partnership. Mr. Bagley graduated from the University of California at Berkeley in 1965 with a B.Sc. in Business and Economics and from Harvard Business School in 1968 with an M.B.A. in Finance.
W. Duke DeGrassi, age 51, is the President and an Investment Committee Member of FCM. Mr. DeGrassi is also an owner of The Stone Pine Companies, a group of private entities, that provide asset management and investment banking services to third parties, which are not related to the Funds. From May 1988 to December 1993, Mr. DeGrassi was a Corporate Vice President with PaineWebber
Incorporated. From 1986 and until joining PaineWebber, Mr. DeGrassi was a Vice President in the Direct Investments Group at Shearson Lehman Hutton Inc. Prior to that, Mr. DeGrassi spent seventeen years as a financial executive in the energy business, working both domestically and in foreign operations. Mr. DeGrassi received a Bachelor of Business Administration in accounting from the University of Texas at Austin in 1969. Mr. DeGrassi serves as Chairman of the Board and Chief Executive Officer of LMC Operating Corp.
Donald R. Jackson, age 48, is a Senior Vice President, Treasurer, Chief Financial and Accounting Officer and Compliance Officer of FCM. Mr. Jackson is also an owner of The Stone Pine Companies, a group of private entities, that provide asset management and investment banking services to third parties, which are not related to the Funds. From January 1990 to June 1994, Mr. Jackson was a Corporate Vice President with PaineWebber Incorporated, where he was involved in the financial administration of various publicly and privately offered investment programs. During 1989, Mr. Jackson was self-employed. Immediately prior to that he was a First Vice President in the Direct Investments Group with Shearson Lehman Hutton Inc. From 1972 to 1986, Mr. Jackson was associated with the accounting firm of Arthur Andersen & Co., serving as a partner from 1981 to 1986. He received a Bachelor of Science degree in accounting in 1971 from the University of Denver and is a Certified Public Accountant. Mr. Jackson serves as a director of LMC Operating Corp. and Consolidated Capital of North America, Inc.
FCM Fiduciary Capital Corporation
Name Positions Held
Paul Bagley Chief Executive Officer and Sole Member of the Board of Directors W. Duke DeGrassi President Donald R. Jackson Vice President, Treasurer, Assistant Secretary and Chief Financial and Accounting Officer
For information regarding Paul Bagley, W. Duke DeGrassi and Donald R. Jackson see the above section concerning the management of FCM Fiduciary Capital Management Company.
Mezzanine Capital Corporation
Name Positions Held
Gerald F. Goertz, Jr. President and Director Clifford B. Wattley Vice President, Assistant Secretary and Director Stephen R. Dyer Vice President, Assistant Secretary and Director Joseph P. Ciavarella Vice President, Secretary, Treasurer and Chief Financial and Accounting Officer
Gerald F. Goertz, Jr., age 40, is the President and a Director of Mezzanine Capital Corporation. Mr. Goertz joined PaineWebber Incorporated in December 1990 and holds the position of Senior Vice President and Director of Specialized Investment Services. Prior to joining PaineWebber Incorporated, Mr. Goertz was associated with CG Realty Advisors and The Freeman Company. He received his Bachelor of Arts degree in Business Administration in 1979 from Vanderbilt University and his Juris Doctorate and Masters of Business Administration from Memphis State University in 1982.
Clifford B. Wattley, age 48, is a Vice President, Assistant Secretary and Director of Mezzanine Capital Corporation. Mr. Wattley is a Corporate Vice President with PaineWebber Incorporated, having joined the firm in 1986. He also was employed previously by Paine, Webber, Jackson & Curtis from 1979 to 1980. From 1986 to 1992, Mr. Wattley participated in PaineWebber's Principal Transactions
Group. From 1992, Mr. Wattley has been a member of the Private Investment Department. He holds a Bachelor of Science degree in engineering from Columbia University and a Masters in Business Administration from Harvard University.
Stephen R. Dyer, age 38 is a Vice President, Assistant Secretary and Director of Mezzanine Capital Corporation. He joined PaineWebber Incorporated in June 1988 as a Divisional Vice President and is currently a Corporate Vice President and Director of Private Investments. Prior to joining PaineWebber Incorporated, Mr. Dyer had been employed, since June 1987, as an Assistant Vice President in the Retail National Products Group of L.F. Rothschild & Co. Incorporated. Prior to joining L.F. Rothschild he was employed, beginning in January 1985, as an Associate in the Real Estate Department of Thomson McKinnon Securities Inc. From July 1981 to August 1983, Mr. Dyer was on the audit staff of the accounting firm of Arthur Young & Company. He received his Bachelor of Science degree in Accounting in 1981 from Boston College and a Masters of Business Administration from Indiana University in December 1984. Mr. Dyer is a Certified Public Accountant.
Joseph P. Ciavarella, age 42, is a Vice President, Secretary, Treasurer and Chief Financial and Accounting Officer of Mezzanine Capital Corporation. He joined PaineWebber Incorporated in May 1994. Prior to joining PaineWebber Incorporated, he was affiliated with Aviation Capital Group in the area of aircraft finance. Mr. Ciavarella was associated with Integrated Resources, Inc. from 1983 to 1993 as a corporate financial officer as well as a senior financial officer in various subsidiaries in the equipment leasing, aircraft finance and venture capital areas. Mr. Ciavarella has a Bachelor of Business Administration degree in Accounting from Hofstra University and is a Certified Public Accountant.
Independent General Partners
A. E. Bruce Fredrikson
E. Bruce Fredrikson, age 60, has been an Independent General Partner since 1992. Dr. Fredrikson is a Professor of Finance at Syracuse University School of Management where he has taught since 1966 and has previously served as Chairman of the Finance Department. Dr. Fredrikson has a bachelor's degree in economics from Princeton University and a master's degree in business administration and a Ph.D. in finance from Columbia University. Dr. Fredrikson serves as a director of Innodata Corporation, Track Data Corporation and Eagle Finance Corp.
B. Mark A. Sargent
Mark A. Sargent, age 46, is the Dean and a Professor of Law at Villanova University School of Law. From 1989 to 1997, he was a Professor of Law at the University of Maryland School of Law, and served as Associate Dean from 1995 to 1997. Mr. Sargent is also currently a member of the editorial boards for several business law publications, a consultant on corporate and securities law matters, and an arbitrator for disputes in the securities industry. Mr. Sargent has a bachelors degree from Wesleyan University, a masters degree in history from Cornell University and a J.D. degree from Cornell Law School.
C. Phillip Siegel
Phillip Siegel, age 55, is a General Partner and Chief Financial Officer of Endeavor Capital Management, LLC. From May 1996 through February 1998, Mr. Siegel was a Vice President and Chief Financial Officer of Health Management Systems, Inc. From 1993 until May 1996, Mr. Siegel was an independent business consultant. He served as senior executive officer of Presidential Life Insurance Company from December 1989 until February 1993, most recently as Senior Vice President. During 1988, Mr. Siegel served as Chief Operating Officer and Chief Financial Officer of Sherwood Group and Sherwood Securities. From 1972 through 1987, Mr. Siegel served in various senior executive capacities for the American subsidiary of Reuters Limited, PLC, including as Vice President for Acquisitions, as Vice President and General Counsel, and as the senior financial officer. Mr. Siegel is a director of WestPoint Stevens, Inc. (and a member of its audit committee).
Norman J. Peer resigned as an Independent General Partner during July 1997, when he accepted an appointment as a Superior Court Judge for the State of New Jersey. Pursuant to New Jersey State law, Mr. Peer was unable to continue to serve as an Independent General Partner after his term as a judge commenced.
Compliance with Section 16(a) of the Exchange Act
Messrs. Sargent and Siegel became Independent General Partners of the Fund during 1997. While neither of these individuals owns, or has owned, any Units of the Fund, the Forms 3 which are required to be filed by such persons pursuant to the provisions of Section 16(a) of the Securities Exchange Act of 1934 were not filed on a timely basis.
Based solely upon a review of Forms 3 and 4 furnished to the Fund during 1997 and 1998, and written representations by the persons listed above, the Fund has not identified any such person that failed to file on a timely basis the forms required by Section 16(a) of the Exchange Act for fiscal year 1997, other than those discussed in the preceding paragraph.
Item 11.
Item 11. Executive Compensation
No compensation was paid by the Fund to the officers and directors of the General Partners during 1997. See Item 13 of this Report, "Certain Relationships and Related Transactions" for a description of the compensation and fees paid to the General Partners and their affiliates by the Fund during 1997.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) As of the date hereof, no person is known by the Fund to be the beneficial owner of more than 5% of the Units of the Fund. The Fund has no directors or officers, and none of the General Partners of the Fund owns any Units.
The name and address of the Managing General Partner is as follows:
FCM Fiduciary Capital Management Company 410 17th Street, Suite 400 Denver, Colorado 80202
(b) No directors of FCM Fiduciary Capital Corporation, no directors or officers of Mezzanine Capital Corporation and no Independent General Partners owned any Units as of March 1, 1998. One officer of FCM Fiduciary Capital Management Company and FCM Fiduciary Capital Corporation owned 100 Units as of March 1, 1998.
(c) The Fund knows of no arrangements, the operation of the terms of which may at a subsequent date result in a change in control of the Fund.
Item 13.
Item 13. Certain Relationships and Related Transactions
The Fund may co-invest in portfolio investments with FCP, under certain terms and conditions, pursuant to a co-investment order issued by the Securities and Exchange Commission. The Funds have co-invested in the past and are continuing to do so. See Item 1 of this Report, "Business", which is incorporated herein by reference, for a description of these co-investments.
The General Partners and their affiliates have received, or will receive, certain types of compensation, fees or other distributions in connection with the operations of the Fund. The fees and compensation were determined in accordance with the applicable provisions of the Partnership Agreement.
Following is a summary of the amounts paid, or payable, to the General Partners and their affiliates for 1997.
Investment Advisory Fees As compensation for its services as investment adviser, FCM receives a subordinated monthly fee at the annual rate of 1% of the Fund's available capital, as defined in the Partnership Agreement, net of certain fees received directly by FCM from the Fund's portfolio companies. During 1997, FCM earned investment advisory fees of $120,800.
Fund Administration Fees As compensation for its services as fund administrator, FCM receives a monthly fee at an annual rate of .45% of net proceeds available for investment, as defined in the Partnership Agreement. During 1997, FCM earned fund administration fees of $118,327. The Fund also reimbursed FCM for $68,895 of administrative expenses incurred in providing accounting and investor services to the Fund during 1997.
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 FCP an annual fee of $30,000, payable monthly in arrears, together with all out-of-pocket expenses. Each fund's allocation of these fees and expenses is based on the relative number of outstanding Units. Fees and expenses of $46,966 were incurred by the Fund during 1997.
Accountable Expenses FCM and its affiliates are entitled to reimbursement of direct expenses paid on behalf of the Fund. During 1997, such reimbursements amounted to $256,851.
Partnership Interest FCM received cash distributions of $31,509 as their allocable share of distributions for 1997. In addition, $5,374 of the Fund's net investment income and net loss on investments for 1997 was allocated to FCM.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) and (d) The following documents are filed as part of this Report:
1. Financial Statements: See List of Financial Statements in Item 8.
2. Financial Statement Schedules: None.
(b) The Partnership filed one report on Form 8-K during the fourth quarter of the fiscal year ended December 31, 1997. The report was dated November 5, 1997, and was filed with the Securities and Exchange Commission on December 12, 1997, to report the sale of the Fund's ENI investment and the amount and record date of the Fund's cash distribution for the fourth quarter of 1997.
(c) Exhibits required to be filed.
Exhibit No. Description
3.1 (a) Fourth Amended and Restated Certificate of Limited Partnership of Fiduciary Capital Partners, L.P., dated as of January 29, 1990. Filed as Exhibit 3.1(a) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992.*
(b) Second Amended and Restated Agreement of Limited Partnership of Fiduciary Capital Partners, L.P., dated as of October 1, 1993. Filed as Exhibit 3.1(b) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.*
(c) Amendment Number One to the Second Amended and Restated Agreement of Limited Partnership of Fiduciary Capital Partners, L.P., dated as of October 1, 1993. Filed as Exhibit 3.1(c) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.*
10.1 Investment Advisory Contract, dated as of October 1, 1993, between Fiduciary Capital Partners, L.P. and FCM Fiduciary Capital Management Company. Filed as Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.*
10.2 (a) Custody Agreement, dated as of July 19, 1990, between Fiduciary Capital Partners, L.P. and M&I First National Bank. Filed as Exhibit 10-C to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990.*
(b) Amendment to Custody Agreement of Fiduciary Capital Partners, L.P., dated as of October 13, 1992. Filed as Exhibit 10.2(b) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992.*
(c) Second Amendment to Custody Agreement of Fiduciary Capital Partners, L.P., dated as of January 21, 1994. Filed as Exhibit 10.2(c) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.*
------------------- * Not filed herewith. In accordance with Rule 12b-32 of the General Rules and Regulations under the Securities Exchange Act of 1934, reference is made to the document previously filed with the Commission which is incorporated herein by reference.
------------------- * Not filed herewith. In accordance with Rule 12b-32 of the General Rules and Regulations under the Securities Exchange Act of 1934, reference is made to the document previously filed with the Commission which is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 20, 1998
FIDUCIARY CAPITAL PENSION PARTNERS, L.P. (Registrant)
By: FCM FIDUCIARY CAPITAL MANAGEMENT COMPANY its Managing General Partner
By: /s/ W. Duke DeGrassi ------------------------------------------ W. Duke DeGrassi President
By: /s/ Donald R. Jackson ------------------------------------------ Donald R. Jackson Senior Vice President, Treasurer and Chief Financial and Accounting Officer
By: E. BRUCE FREDRIKSON Independent General Partner
/s/ E. Bruce Fredrikson ------------------------------------------
By: MARK A. SARGENT Independent General Partner
/s/ Mark A. Sargent ------------------------------------------
By: PHILLIP SIEGEL Independent General Partner
/s/ Phillip Siegel ------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following person on behalf of the Registrant and in the capacities indicated on March 20, 1998.
SIGNATURE OF THE SOLE DIRECTOR OF THE MANAGING GENERAL PARTNER OF FCM FIDUCIARY CAPITAL MANAGEMENT COMPANY (A DELAWARE GENERAL PARTNERSHIP), MANAGING GENERAL PARTNER OF THE REGISTRANT.
Exhibit Index
- ------------------- * See Item 14(c) for statement of location of exhibits incorporated by reference.
E-1