SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended
Or
[X] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from March 1, 1996 to
February 24, 1997 Commission file number 0-29120
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
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(Exact Name of Registrant as Specified in its Charter)
New York 13-7110611
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
c/o Raymond S. Troubh
Ten Rockefeller Plaza, Suite 712
New York, New York 10020
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (800) 888-6534
Not applicable
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Former name, former address and former fiscal year, if changed since last report
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Units of Beneficial Interest
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
(Cover page continues on next page)
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of May 9, 1997, there were 2,427,281 units of beneficial interest of the
MicroCap Liquidating Trust outstanding.
Documents Incorporated By Reference
None
<PAGE>
PART I
Item 1. Business.
General
The MicroCap Fund, Inc., formerly Commonwealth Associates Growth Fund, Inc. (the
"Fund") terminated its operations on February 24, 1997 (Date of Termination)
pursuant to its Plan of Liquidation, which was approved at a special meeting of
shareholders on July 23, 1996. In accordance with the Plan of Liquidation, all
of the Fund's remaining assets and liabilities as of the Date of Termination
were transferred to the MicroCap Liquidating Trust (the "Trust").
The Fund, which was a Maryland corporation formed on January 26, 1993, was a
non-diversified, closed-end management investment company and operated as a
business development company under the Investment Company Act of 1940. The
Fund's investment objective was to achieve long-term capital appreciation of
assets, rather than current income, by investing in debt and equity securities
of emerging and established companies that management believes offer significant
growth potential.
On March 19, 1993, the Fund's Registration Statement on Form N-2 (File No.
33-57696) was declared effective. On March 29, 1993, the Fund completed its
initial public offering of 2,100,000 shares of common stock at $10.00 per share.
The sole underwriter of the Fund's initial public offering was Commonwealth
Associates, a broker-dealer and investment banking firm. In April 1993, the Fund
sold an additional 94,000 shares of common stock at $10.00 per share as part of
an over-allotment option granted to the underwriter. As a result, the Fund sold
a total of 2,194,000 shares of common stock in its initial public offering,
realizing gross proceeds totaling $21,940,000. In connection with the initial
public offering of its common stock the Fund paid to Commonwealth Associates,
selling commissions totaling $1,535,800 and an unaccountable expense allowance
totaling $548,500. Additionally, the Fund incurred other offering and
organizational costs associated with its public offering totaling $589,332. Net
proceeds to the Fund from the initial public offering, after payment of the
selling commissions, offering and organizational costs and unaccountable expense
allowance totaled $19,266,368, or $8.78 per common share.
On March 2, 1993, prior to the Fund's initial public offering, Commonwealth
Associates Asset Management, Inc. purchased 10,000 shares of the Fund's common
stock for $100,000, or $10.00 per share. As a result, total net proceeds to the
Fund from the sale of its common stock during 1993 totaled $19,366,368, or $8.79
per common share.
On May 9, 1996, the Board of Directors of the Fund adopted the Plan of
Liquidation. On July 23, 1996, the Plan of Liquidation was approved by the
Fund's stockholders. From and after such date, the Fund limited its activities
to liquidating its assets and winding up its affairs pursuant to its Plan of
Liquidation, and since February 24, 1997 (Date of Termination), the Trust has
continued the Fund's liquidation.
On August 30, 1996, the Fund made an initial liquidating cash distribution
totaling $8,495,486 to shareholders of record on August 15, 1996. Common
shareholders received $3.50 per share and preferred shareholders received $4.375
per share. The amount paid to common shareholders was comprised of $0.274 of
long-term capital gain and $3.226 of return of capital. The amount paid to
preferred shareholders was comprised of $0.343 of long-term capital gain and
$4.032 of return of capital.
In May 1997, the Trust declared a second interim liquidating distribution
of $1.00 per Unit, to be paid on July 15, 1997 to unit holders of record on
June 30, 1997.
<PAGE>
Portfolio Investments
On February 24, 1997, the Fund had investments in 5 portfolio companies with an
aggregate cost of $2,224,750 and a fair value of $2,696,593. Pursuant to the
Plan of Liquidation, these investments were transferred to the Trust at the
close of business on February 24, 1997.
For the period from February 29, 1996 to February 24, 1997 ("fiscal 1997"), the
Fund made only one follow-on investment, acquiring 12,500 common shares of
Accumed International, Inc. for $51,411. During fiscal 1997, the Fund liquidated
its investments in Accumed International, Inc., Shells Seafood Restaurants,
Inc., International Communications Technologies, Inc. and Optiva Corp. for
$6,477,189, resulting in a net realized gain of $3,972,372. Each of these
liquidations is discussed in more detail below:
During fiscal 1997, the Fund sold 12,500 common shares of Accumed
International, Inc. and warrants to purchase 250,000 shares of Accumed
common stock for $517,189, realizing a gain of $444,872.
On April 23, 1996, Shells Seafood Restaurants, Inc. completed its initial
public offering of common stock at $5.00 per share. In connection with the
offering, the Fund received $1.61 million, representing repayment of its
$1.31 million senior note and accrued interest thereon. Additionally, in
July 1996, the Fund sold its remaining investment in Shells for $2.7
million, realizing a gain of $2.1 million.
In July 1996, the Fund received $163,205 from International Communication
Technologies, Inc., representing repayment of the $150,000 note due to the
Fund along with accrued interest thereon.
In January 1997, the Fund sold its 150,000 common shares of Optiva
Corp. in a private transaction for $1.8 million, realizing a gain of
$1.3 million.
Competition
During its operation, the Fund encountered competition from other entities and
individuals having similar investment objectives. Neither the Fund nor the Trust
will invest in any new portfolio companies.
Employees
In July 1996, Raymond S. Troubh was appointed President, Chief Executive
Officer, Treasurer, Secretary and Director of the Fund. All of the Fund's
previous officers and all of its employees had resigned by the end of July 1996.
Mr. Troubh held these offices through the Fund's date of termination and became
the independent liquidating trustee of the Trust, with primary responsibility
for the liquidation of its remaining assets.
Item 2. Properties.
None
Item 3. Legal Proceedings.
On April 19, 1996, the Fund filed a complaint against Commonwealth Associates, a
registered broker-dealer and the underwriter of the Fund's initial public
offering, Michael S. Falk, the chief executive officer of Commonwealth
Associates, a minority shareholder and director of the Fund, and Stephen J.
Warner, a former executive officer of Commonwealth Associates and the former
president of the Fund. The civil action, which was filed in federal court in the
Southern District of New York, alleged fraud, breach of fiduciary duties and
violations of the Investment Company Act of 1940. On December 24, 1996, the Fund
and the defendants agreed to a settlement of the complaint, whereby Commonwealth
Associates will make settlement payments to the Fund and the Trust totaling
$1,150,000. In connection therewith, the Fund received $500,000 in December
1996. The remaining balance of the settlement payments will be paid in
installments through December 15, 1997 and will earn interest at an annual rate
of 4.50%. Commonwealth Associates has delivered securities to the Trust as
collateral for the remaining payments. Such securities, which are held in escrow
by the Trust, had a fair value as of February 24, 1997 that exceeded the
$650,000 balance due from the settlement agreement. Through May 1, 1997, the
Trust had received additional payments totaling $100,000. Additionally, as part
of the settlement, the Fund and the defendants agreed to pursue claims against
former counsel to the Fund. The Fund would be entitled to receive 50% of any
recovery from such claims, after the reimbursement to Commonwealth Associates of
all costs and expenses associated with pursuing the claims.
The Fund was a respondent in an arbitration claim Warner v. Commonwealth
Associates Growth Fund, Inc. before the American Arbitration Association
commenced in December 1995 by Stephen J. Warner, the former president, chief
executive officer and portfolio manager of the Fund. The claim alleged breach of
contract and fraud in connection with the termination of employment and
consulting agreements between him and the Fund. In connection with the
settlement agreement discussed above, Mr. Warner has agreed to dismiss all
claims associated with this action. As a result, the Fund reversed its
previously recorded liability of $50,000 in connection with this action.
The Fund was a defendant in an action brought by Michael S. Falk, a former
director of the Fund, in the Supreme Court of New York on June 19, 1996. The
complaint alleged that Kamal Mustafa, the former president and a former director
of the Fund, and president of Bluestone Capital Partners L.P., an investment
banking firm controlled by Mr. Mustafa, caused the Fund to defame Mr. Falk. In
connection with the settlement agreement discussed above, Mr. Falk has agreed to
dismiss all claims associated with this action.
The Fund is a creditor of PSSS, Inc. f/k/a Oh-La-La! Inc. ("PSSS"), which is the
subject of proceedings under chapter 11 of the United States Bankruptcy Code
pending in San Francisco, California (the "Bankruptcy Case"). In connection with
the Bankruptcy Case, Oh-La-La! International, S.A. ("International"), one of
PSSS's largest shareholders, has filed a precautionary proof of claim (the
"Precautionary Proof of Claim"), on behalf of International and other similarly
situated shareholders of PSSS, against, among others, the Fund, certain other
creditors of PSSS, and parties involved in the intended underwriting for, and
conduct of, an initial public offering which PSSS had anticipated would have
occurred in or about 1994. The Precautionary Proof of Claim alleges a claim for
damages as a result of, among other things, (a) the failure to effectuate the
intended initial public offering, and (b) the Bankruptcy Court-approved sale of
PSSS's assets, which was allegedly prejudicial to PSSS's shareholders. PSSS and
International have taken no other action regarding this claim. The Fund has
denied liability for the claims set forth in the Precautionary Proof of Claim.
Resolution efforts are ongoing.
Regency Holdings (Cayman) Inc. ("Holdings") and Regency Maritime Corp.
("Maritime"), Plaintiffs v. The MicroCap Fund, Inc. f/k/a Commonwealth
Associates Growth Fund, Inc., et al. Regency Holdings (Cayman) Inc. and Regency
Maritime Corp. (collectively "Regency") along with other related entities are
debtors in a bankruptcy case pending in the United States Bankruptcy Court for
the Southern District of New York, 95 B 45197 (TLB). In that bankruptcy case,
Regency initiated an adversary proceeding against the Fund and certain other
persons and entities to recover monies that it paid them on the ground that such
payments constituted voidable preferences under the Bankruptcy Code. Regency
maintains that a payment Regency made to the Fund between 90 days and one year
prior to the filing of Regency's bankruptcy petition in the amount of $1,940,000
to satisfy a bridge loan the Fund made to Regency, is a voidable preference
because Kamal Mustafa, the former president of the Fund, was a director of
Regency (and therefore an insider) for a portion of the time that such amounts
were due and owing. Regency also maintains that such relationship had an impact
on Regency's decision to pay these amounts. Additionally, Regency maintains that
a payment of $145,728 made by Regency to the Fund to redeem certain warrants
issued with respect to the loan transaction was made within 90 days of the
filing of the bankruptcy petition and is therefore a voidable preference without
regard to whether Mustafa was an insider. In an amended complaint, Regency also
asserted that the payments to the Fund constitute a fraudulent transfer, as the
payments were in fact made by Maritime and not Holdings. Regency asserts that
Maritime had no obligation to make such payments and received no value for them.
The Fund has served an answer denying the allegations of the amended complaint
and is vigorously contesting Regency's claims. Pursuant to an order filed with
the Bankruptcy Court, the Fund has set aside approximately $2.4 million in an
interest-bearing cash account pending resolution by the Bankruptcy Court of the
adversary proceeding. At the present time, discovery is underway to determine
the validity of the allegations asserted by Regency.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of shareholders during the fourth quarter of
the fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
In accordance with the Plan of Liquidation, each of the 2,188,085 common shares
and 191,357 preferred shares of the Fund, outstanding on February 24, 1997, were
deemed to represent 2,427,281 units of beneficial interest of the MicroCap
Liquidating Trust (the "Units").
In connection with its termination, trading of the Fund's common stock ceased at
the close of business on February 24, 1997, and the shares were delisted from
the NASDAQ Small-Cap Market. Units of the Trust (CUSIP# 59501M) have not been
listed on an exchange as of May 9, 1997 and, therefore, there is currently no
public trading market in the Units. The Trust will seek to have its Units quoted
on the OTC Bulletin Board for over-the counter securities, however, no assurance
can be given that a market will develop or be sustained.
The following table sets forth, for each of the periods indicated, the high and
low closing bid prices for the common stock of the Fund as reported by NASDAQ.
These per share quotations represent inter-dealer prices on the over-the-counter
market, do not include retail markups, markdowns or commissions and may not
represent actual transactions.
<TABLE>
Price Per Share
High Low
Fiscal year ended February 28, 1995:
<S> <C> <C>
First quarter $ 8.25 $ 7.00
Second quarter 8.00 7.50
Third quarter 8.00 6.25
Fourth quarter 6.75 6.00
Fiscal year ended February 29, 1996:
First quarter 6.50 4.00
Second quarter 5.25 4.00
Third quarter 5.38 4.38
Fourth quarter 6.00 4.50
Fiscal year ended February 28, 1997:
First quarter 6.38 4.25
Second Quarter 6.38 4.25
Third Quarter 2.88 1.50
Fourth quarter (through February 24, 1997,
Date of Termination) 2.63 1.50
</TABLE>
As of May 9, 1997, there were 8 holders of record of units of the Trust. Certain
holders of record hold units for approximately 800 beneficial owners.
<PAGE>
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Item 6. Selected Financial Data.
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<TABLE>
Period From
Period From March 19, 1993
March 1, 1996 to Fiscal Fiscal (Commencement
February 24, 1997 Year Ended Year Ended of Operations) to
(Date of Termination) February 29, 1996 February 28, 1995 February 28, 1994
--------------------- ----------------- ----------------- -----------------
Operating Data:
Net investment income (loss) (interest and
<S> <C> <C> <C> <C>
dividend income less operating expenses) $ (1,243,927) $ (313,174) $ 220,352 $ 55,079
Net realized gain (loss) from portfolio investments 3,972,372 (1,061,009) (161,149) (1,557,030)
Net change in unrealized appreciation or
depreciation of investments (1,684,806) 2,121,261 548,448 (513,060)
Net realized and unrealized gain from
portfolio investments 2,287,566 1,060,252 387,299 (2,070,090)
Net increase in net assets resulting
from operations 1,043,639 747,078 607,651 (2,015,011)
Return of capital distributions 7,829,952 - - -
Distributions from net realized gains 665,534 - 70,150 -
Distributions from net investment income - - 275,431 -
Distributions in excess of net investment income - - 95,219 -
Total cash distributions 8,495,486 - 440,800 -
Amounts Per Common Share*:
Net investment income (loss) $ (.51) $ (.13) $ .10 $ .03
Net realized and unrealized gain (loss) from
portfolio investments .94 .44 .18 (.94)
Net increase (decrease) in net assets resulting
from operations .43 .31 .28 (.91)
Cash distributions 3.50 - .20 -
Amounts Per Preferred Share*:
Net investment loss (.64) (.14) n/a -
Net realized and unrealized gain from portfolio
investments 1.18 .46 n/a -
Net increase in net assets resulting from operations .54 .32 n/a -
Cash distributions 4.375 - n/a -
As of As of As of As of
February 24, 1997 February 29, 1996 February 28, 1995 February 28, 1994
----------------- ----------------- ----------------- -----------------
Balance Sheet Data:
Total assets $ 10,968,644 $ 17,568,711 $ 18,054,440 $ 17,739,168
Net assets 9,783,311 17,235,158 17,715,073 17,548,222
Cash and cash equivalents 7,571,246 9,878,280 9,033,750 4,475,544
Portfolio investments at fair value 2,696,593 6,939,805 8,371,350 11,645,538
Per Share Amount:
Net assets per share of common stock $ 4.03 $ 7.25 $ 8.04 $ 7.96
Net assets per share of preferred stock 5.04 7.61 n/a -
</TABLE>
* Based on weighted average number of shares outstanding for each respective
period.
<PAGE>
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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Liquidity and Capital Resources
On July 23, 1996, the Fund's shareholders approved a Plan of Liquidation
pursuant to which the Fund will convert its remaining assets into cash, provide
for all of its liabilities and distribute the net cash to shareholders. On
August 30, 1996, in connection with the Plan of Liquidation, the Fund made an
initial liquidating distribution of $8,495,486 to shareholders of record on
August 15, 1996.
Pursuant to its Plan of Liquidation, the Fund terminated its operations on
February 24, 1997 (Date of Termination), at which time the Fund transferred all
of its remaining assets and liabilities to the MicroCap Liquidating Trust (the
"Trust"). Additional cash distributions will be made to beneficiaries of the
Trust as the remaining assets are liquidated and after the payment of and
reserve for all current and contingent liabilities.
During its final fiscal period from March 1, 1996 to February 24, 1997 ("fiscal
1997"), the Fund had a net cash return from its portfolio investments of
$6,625,153. This includes net cash proceeds of $4,676,564 from the sale of
certain portfolio investments and $2,000,000 from the repayment of promissory
notes due to the Fund. These returns were offset by a $51,411 follow-on
investment made during fiscal 1997.
On February 24, 1997, the Fund had cash and cash equivalents totaling
$7,571,246, of which $2,790,218 is restricted as discussed below. Such cash is
invested in U.S. Treasury Bills or overnight repurchase agreements
collateralized by securities issued by the U.S. Government or its agencies.
Interest earned from such investments for fiscal 1997 and for the fiscal years
ended February 29, 1996 ("fiscal 1996") and February 28, 1995 ("fiscal 1995"),
totaled $450,528, $444,621 and $367,122, respectively. The $7,571,246 of cash
and cash equivalents was transferred to the Trust along with the Fund's other
assets and liabilities on February 24, 1997. Interest earned from available cash
balances in future periods by the Trust is subject to fluctuations in short-term
interest rates and changes in such available cash balances.
The restricted cash and cash equivalents balance of $2,790,218 transferred to
the Trust includes approximately $2.4 million, which has been set aside in an
interest bearing cash account pursuant to an order filed with a Bankruptcy Court
in connection with the ongoing legal proceedings involving the Fund and Regency
Holdings (Cayman) Inc. Additionally, the Fund entered into indemnification
agreements with Mr. Troubh, the trustee of the Trust, and certain of the Fund's
former directors and officers. Pursuant to such agreements, the Fund has
established an escrow account that contains approximately $250,000 in cash and
cash equivalents to provide for potential legal fees and settlement payments
relating to certain actions that may arise against such individuals relating to
activity involving the Fund. Finally, the Fund may be required to reimburse
certain reasonable out-of-pocket expenses of up to $120,000 in connection with
the settlement agreement between the Fund and a shareholder group that had
solicited proxies in opposition to the Fund's Plan of Liquidation. See Notes 5
and 7 of the Notes to Financial Statements.
On February 24, 1997 (Date of Termination), the Fund transferred to the Trust
its accounts payable and accrued liabilities totaling $1,185,333, of which
$1,076,982 related to legal fees and litigation expenses. The Fund has submitted
claims against its directors and officers liability insurance policy, for the
possible recovery of approximately $250,000 of certain legal fees relating to
former officers and directors of the Fund. The recovery of these amounts or any
portion thereof remains uncertain.
In May 1997, the Trust declared an interim liquidating distribution
of $1.00 per Unit, to be paid on July 15, 1997 to unit holders of
record on June 30, 1997.
<PAGE>
Results of Operations
Realized and Unrealized Gains and Losses from Portfolio Investments - For fiscal
1997, fiscal 1996 and fiscal 1995, the Fund had a net realized and unrealized
gain from its portfolio investments of $2,287,566, $1,060,252 and $387,299,
respectively.
Fiscal 1997:
The $2,287,566 net realized and unrealized gain for fiscal 1997 was comprised of
a $3,972,372 net realized gain from the sale of certain portfolio investments
during the period, partially offset by a $1,684,806 decrease to net unrealized
appreciation of portfolio investments during fiscal 1997.
The $3,972,372 net realized gain incurred during fiscal 1997 was comprised of
the following transactions:
During fiscal 1997, the Fund sold 12,500 common shares of Accumed
International, Inc. and warrants to purchase 250,000 shares of
Accumed common stock for $517,189, realizing a gain of $444,872.
On April 23, 1996, Shells Seafood Restaurants, Inc. completed its
initial public offering of common stock at $5.00 per share. In
connection with the offering, the Fund received $1.61 million, representing
repayment of its $1.31 million senior note and accrued interest thereon.
Additionally, in July 1996, the Fund sold its remaining investment in Shells
for $2.7 million, realizing a gain of $2.1 million.
In July 1996, the Fund received $163,205 from International Communication
Technologies, Inc., representing repayment of the $150,000 note due to the
Fund along with accrued interest thereon.
In January 1997, the Fund sold its 150,000 common shares of Optiva Corp.
in a private transaction for $1.8 million, realizing a gain of
$1.3 million.
The Fund's $1,684,806 net decrease in net unrealized appreciation of portfolio
investments for fiscal 1997 includes a $158,439 net unrealized gain due to the
net upward revaluation of certain portfolio investments during the period,
primarily Unigene Laboratories, Inc. This increase to net unrealized
appreciation of portfolio investments was more than offset by the net transfer
of $1,526,367 from unrealized gain to realized gain relating to the portfolio
investments sold during fiscal 1997, as discussed above.
Fiscal 1996:
The $1,060,252 net realized and unrealized gain for fiscal 1996 was comprised of
a $1,061,009 net realized loss from the sale and write-off of certain portfolio
investments during fiscal 1996, which was more than offset by a $2,121,261
increase to net unrealized appreciation of portfolio investments during the
period.
The $1,061,009 net realized loss incurred during fiscal 1996 was comprised of
the following transactions:
In March 1995, the Fund sold its $250,000 investment in SR Communications
Corp. for $200,000 and a $40,000 non-interest bearing promissory note. The
Fund realized a $14,000 loss and recorded $4,000 of interest income from
this transaction.
In May 1995, the Fund sold its 337,500 common shares of Silverado Foods,
Inc. in a private transaction for $822,656, realizing a gain
of $672,656.
In June 1995, the Fund wrote-off its investments in Radiator King
International, Inc. and Weir-Jones Marketing, Inc. due to continued
business and financial difficulties at these companies. The Fund
realized a loss of $1,010,000 in fiscal 1996 from the write-off of
these two investments.
In September 1995, the Fund sold its 55,555 common shares of YES!
Entertainment Corporation for $305,538, realizing a loss of $393,662.
In October 1995, the Fund sold 150,000 common shares of Accumed
International, Inc. (formerly Alamar Biosciences, Inc.) for $159,375,
realizing a loss of $128,081.
In November 1995, the Fund received $145,728 for the redemption of its
291,456 common stock warrants of Regency Holdings (Cayman) Inc., resulting
in a realized gain of $145,728.
<PAGE>
In December 1995, the Fund sold its $1.2 million promissory note and
warrant to purchase 900,000 common shares of Bennett Environmental U.S.,
Inc. in a private transaction for $820,000 and 450,000 common shares of
Bennett Environmental. This transaction resulted in a realized loss of
$333,650 for fiscal 1996.
The Fund's $2,121,261 net increase in net unrealized appreciation of portfolio
investments for fiscal 1996 includes a $1,850,261 net unrealized gain due to the
net upward revaluation of certain portfolio investments during the year,
primarily Shells Seafood Restaurants, Inc., which completed its initial public
offering in April 1996. Net unrealized appreciation of portfolio investments
also increased due to the net transfer of $271,000 from unrealized loss to
realized loss relating to the portfolio investments sold or written-off during
fiscal 1996, as discussed above.
Fiscal 1995:
For fiscal 1995, the Fund's $387,299 net realized and unrealized gain from
portfolio investments was comprised of a $161,149 net realized loss from the
sale of certain portfolio investments during fiscal 1995, which was more than
offset by a $548,448 increase in unrealized appreciation of portfolio
investments for fiscal 1995.
The $161,149 net realized loss for fiscal 1995 resulted from the sale of certain
portfolio investments. During fiscal 1995, the Fund sold 47,852 common shares of
Loronix Information Systems, Inc. in the public market for $258,400, realizing a
gain of $258,400. Such shares were received by the Fund in September 1994 as a
result of a non-cash exercise of a net issuance provision in the Fund's warrant
agreement to purchase common stock of Loronix. In May and June 1994, the Fund
sold 100,000 common shares of Accumed International in the public market for
$210,625, realizing a gain of $18,987. These gains were offset by a $438,536 net
realized loss from the liquidation of the Fund's portfolio of small-cap
marketable securities during the first half of fiscal 1995.
The $548,448 increase in net unrealized appreciation for fiscal 1995 includes a
$710,397 net unrealized gain primarily reflecting the upward revaluation of the
Fund's investment in Silverado Foods, Inc. due to that company's initial public
offering, which was completed in August 1994. The $710,397 unrealized gain was
offset by the transfer of $161,949 from net unrealized gain to realized gain
related to the portfolio investments sold during fiscal 1995, as discussed
above.
Investment Income and Expenses
For fiscal 1997 and fiscal 1996, the Fund had a net investment loss (interest
and dividend income less operating expenses) of $1,243,927 and $313,174,
respectively. For fiscal 1995, the Fund had net investment income of $220,352.
The increase in net investment loss for fiscal 1997 compared to fiscal 1996 was
due to a $1,772,508 increase in operating expenses, exceeding an $841,755
increase in investment income. The increase in operating expenses primarily is
attributable to the significant increase in legal fees during fiscal 1997, which
totaled $1,995,372, as compared to $384,993 for fiscal 1996. The rise in legal
fees primarily is due to (i) litigation costs relating to several legal
proceedings involving the Fund (see Note 5 of Notes to Financial Statements),
(ii) legal fees incurred in connection with the continued restructuring of
certain of the Fund's portfolio investments during fiscal 1997, (iii) matters
relating to the Fund's July 23, 1996 special meeting of shareholders and Plan of
Liquidation and (iv) preparation and issuance of the Information Statement
relating to the establishment of the Trust. The $841,755 increase in investment
income for fiscal 1997 compared to fiscal 1996 primarily is due to the
recognition of $1,150,000 of other income relating to a litigation settlement,
as discussed in Note 5 to Notes to Financial Statements. This income was
partially offset by a decline in interest and dividend income from portfolio
investments of approximately $369,000 due to the reduced amount of interest
earning portfolio securities held by the Fund during fiscal 1997 as compared to
fiscal 1996. The $533,526 decrease in net investment income for fiscal 1996
compared to fiscal 1995 reflects a $203,497 decrease in investment income and a
$330,029 increase in operating expenses for the respective periods. Investment
income was $850,470 and $1,053,967 for fiscal 1996 and fiscal 1995,
respectively. The $203,497 decline in investment income reflects a $280,996
decline in interest and dividends from portfolio investments partially offset by
a $77,499 increase in interest from short-term investments. The decline in
interest and dividends from portfolio investments primarily is the result of the
reversal during fiscal 1996 of approximately $205,000 of accrued interest
relating to promissory notes due from Bennett Environmental and Weir-Jones that
were sold or written-off during fiscal 1996. The increase in interest earned
from short-term investments resulted from an increase in the amount of funds
invested in short-term investments during fiscal 1996 compared to fiscal 1995
and increased interest rates during the 1996 period. The $330,029 increase in
operating expenses for fiscal 1996 compared to fiscal 1995 primarily is due to
an increase in salary expense and legal fees during fiscal 1996. Salary expense
was $328,901 for fiscal 1996, up from $177,273 for fiscal 1995. This reflects
increases in officers' salaries and the addition of full time staff from two in
fiscal 1995 to four in fiscal 1996. Legal fees were $384,993 for fiscal 1996, up
from $180,826 for fiscal 1995. This increase primarily is due to increased
litigation proceedings involving the Fund and the continued restructuring of
certain of the Fund's portfolio investments. See Note 5 of Notes to Financial
Statements.
Net Assets
For fiscal 1997, the Fund had a $1,043,639 increase in net assets resulting from
operations, comprised of the $2,287,566 net realized and unrealized gain from
portfolio investments, partially offset by the $1,243,927 net investment loss
for fiscal 1997. The Fund's net assets also were reduced by the $8,495,486 cash
distribution made to shareholders on August 30, 1996. As a result, the Fund's
net assets were $9,783,311 at February 24, 1997 (Date of Termination),
representing a decrease of $7,451,847 from net assets of $17,235,158 at February
29, 1996. At February 24, 1997 (Date of Termination), the net asset value per
share of common stock and preferred stock was $4.03 and $5.04 per share,
respectively, compared to $7.25 and $7.61 per share, respectively, at February
29, 1996. Upon the transfer of the net assets of the Fund to the Trust as of the
close of business on February 24, 1997, the net asset value of each unit of
beneficial interest in the Trust was $4.03.
Summary of Portfolio Transaction and Change in Net Assets during Fiscal 1997
Portfolio transactions completed during fiscal 1997, resulted in a realized gain
of $3,972,372. As shown below, these transactions returned $6,582,189 (including
cash proceeds of $6,477,189) to the Fund and increased its net asset value for
the period by $2,129,127. The Fund's net assets increased by an additional
$158,439 resulting from a net upward revaluation of the remaining portfolio
investments during fiscal 1997, primarily due to the increase in the fair value
of the Fund's investment in Unigene Laboratories, Inc. as shown below. The
completed portfolio transactions and revaluations increased the Fund's net asset
value on a net basis by $2,287,566 for fiscal 1997.
<PAGE>
<TABLE>
Effect to
Fiscal 1997 Fair Value Net Assets
Investment Proceeds at 2/29/96 for Fiscal 1997
- ----------------------------------------------------------------------------------------------------------------------------
Sales during Fiscal 1997:
- ------------------------
<S> <C> <C> <C>
Shell's Seafood Restaurants, Inc. $ 4,010,000 $ 3,058,750 $ 951,250
Accumed International, Inc. warrants 467,976 224,825 243,151
Accumed International, Inc. stock (1) 49,213 51,411 (2,198)
Unigene Laboratories, Inc. warrants (2) 105,000 30,576 74,424
Optiva Corporation 1,800,000 937,500 862,500
International Communications Technologies 150,000 150,000 0
--------------- -------------- ---------------
Sub-total from sales $ 6,582,189 $ 4,453,062 2,129,127
=============== ============== ---------------
Revaluations during Fiscal 1997:
Unigene Laboratories, Inc. (warrants) 1,262,534
First Colony Acquisition Corp. (968,750)
Bennett Environmental, Inc. 44,655
Oh-La-La! Inc. (180,000)
----------------
Sub-total from revaluations 158,439
---------------
Sub-total from portfolio transactions 2,287,566
Net investment loss for fiscal 1997 (1,243,927)
---------------
Net Change to Net Assets for Fiscal 1997 $ 1,043,639
===============
</TABLE>
(1) The 12,500 shares of Accumed common stock sold during the period were
acquired by the Fund during the same period for $51,411. (2) The return shown
from the Unigene warrants is a non-cash item resulting from the transfer of
60,000 warrants to cover previously accrued consulting costs.
On March 1, 1996, the conversion ratio of the Fund's preferred stock into common
stock increased from 1.05 per share to 1.25 per share. The change in such
conversion ratio resulted in an additional allocation of net assets to preferred
shareholders of approximately $319,525, or $1.26 per share of preferred stock
and the dilution to common shareholders of $319,525, or $.15 per share of common
stock. Additionally, the results of operations for fiscal 1997 increased the
Fund's net assets by $.43 and $.54 per share of common and preferred stock,
respectively. The distribution paid to shareholders on August 30, 1996 also
reduced the Fund's net assets by $3.50 per share of common stock and $4.375 per
share of preferred stock.
For fiscal 1996, the Fund had a net increase in net assets resulting from
operations of $747,078, comprised of the net realized and unrealized gain from
portfolio investments of $1,060,252 offset by the net investment loss of
$313,174. This increase was more than offset by a $1,226,993 decrease in net
assets resulting from the repurchase by the Fund of 290,227 shares of its own
common stock in the public market during fiscal 1996. As a result, the Fund's
net assets decreased $479,915 to $17,235,158 at February 29, 1996, or $7.25 per
share of common stock and $7.61 per share of preferred stock. At February 28,
1995, the net asset value per share of common stock was $8.04.
There was no preferred stock outstanding on February 28, 1995.
For fiscal 1995, the Fund had a net increase in net assets resulting from
operations of $607,651, or $.28 per share of common stock, comprised of net
investment income totaling $220,352 and net realized and unrealized gain from
portfolio investments of $387,299. Additionally, the Fund's net assets declined
$440,800 as a result of the cash distribution of $.20 per share of common stock
paid to shareholders on December 12, 1994. As a result, the Fund's net assets
increased $166,851 to $17,715,073 at February 28, 1995, or $8.04 per share of
common stock, an increase of $.08 per share from $17,548,222, or $7.96 per share
of common stock, at February 28, 1994.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
THE MICROCAP FUND, INC.
INDEX
Independent Auditors' Report
Statements of Assets and Liabilities as of February 24, 1997 (Date of
Termination) and February 29, 1996
Schedules of Portfolio Investments as of February 24, 1997 (Date of Termination)
and February 29, 1996
Statements of Operations for the period from March 1, 1996 to February 24,
1997 (Date of Termination) and for the years ended February 29,
1996 and February 28, 1995
Statements of Changes in Net Assets for the period from March 1, 1996 to
February 24, 1997 (Date of Termination) and for the years ended
February 29, 1996 and February 28, 1995
Statements of Cash Flows for the period from March 1, 1996 to February 24, 1997
(Date of Termination) and for the years ended February 29,
1996 and February 28, 1995
Notes to Financial Statements
Note - All schedules are omitted because of the absence of conditions under
which they are required or because the required information is included
in the financial statements or notes thereto.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The MicroCap Fund, Inc.
We have audited the accompanying statements of assets and liabilities of The
MicroCap Fund, Inc. (the "Fund"), including the schedules of portfolio
investments, as of February 24, 1997 (Date of Termination) and February 29,
1996, and the related statements of operations, changes in net assets and cash
flows for the period from March 1, 1996 to February 24, 1997 (Date of
Termination) and for the years ended February 29, 1996 and February 28, 1995.
These financial statements are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements 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 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 at February 24, 1997 (Date of Termination) 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, such financial statements present fairly, in all material
respects, the financial position of the Fund at February 24, 1997 (Date of
Termination) and February 29, 1996 and the results of its operations, changes in
its net assets and its cash flows for the period from March 1, 1996 to February
24, 1997 (Date of Termination) and for the years ended February 29, 1996 and
February 28, 1995 in conformity with generally accepted accounting principles.
As explained in Note 2, the financial statements include securities valued at
$2,696,593 and $6,939,805 at February 24, 1997 (Date of Termination) and
February 29, 1996, respectively, representing 28% and 40% of net assets,
respectively, whose values have been estimated by the Board of Directors in the
absence of readily ascertainable market values. We have reviewed the procedures
used by the Board of Directors in arriving at its estimate of value of such
securities and have inspected underlying documentation, and, in the
circumstances, we believe the procedures are reasonable and the documentation
appropriate. However, because of the inherent uncertainty of valuation, those
estimated values may differ significantly from the values that would have been
used had a ready market for the securities existed, and the differences could be
material.
Deloitte & Touche LLP
New York, New York
May 6, 1997, except for Note 10, as to which the
date is May 14, 1997
<PAGE>
THE MICROCAP FUND, INC.
STATEMENTS OF ASSETS AND LIABILITIES
As of February 24, 1997 (Date of Termination)
and February 29, 1996
<TABLE>
February 24, February 29,
1997 1996
--------------- ----------
ASSETS
Portfolio investments at fair value (cost $2,224,750 at February 24, 1997
<S> <C> <C> <C> <C> <C>
and cost $4,783,156 at February 29, 1996) $ 2,696,593 $ 6,939,805
Cash and cash equivalents - unrestricted 4,781,028 9,878,280
Cash and cash equivalents - restricted 2,790,218 -
Receivable from securities sold - 199,375
Accrued interest receivable 25,959 349,781
Deferred organizational costs (net of accumulated amortization of $196,865
at February 24, 1997 and $116,257 at February 29, 1996) 0 80,608
Receivable from settlement agreement 650,000 -
Other assets 24,846 120,862
--------------- ----------------
Total assets 10,968,644 17,568,711
--------------- ----------------
LIABILITIES
Accounts payable - legal 1,076,982 163,263
Accounts payable - other 108,351 170,290
--------------- ----------------
Total liabilities 1,185,333 333,553
--------------- ----------------
NET ASSETS
Preferred Stock, par value $.01; 1,000,000 shares authorized; 440,800 shares
issued and 191,357 shares outstanding at February 24, 1997 and 440,800 shares
issued and 265,317
shares outstanding at February 29, 1996 1,914 2,653
Common Stock, par value $.01; 10,000,000 shares authorized; 2,478,312 shares
issued and 2,188,085 outstanding at February 29, 1997 and 2,388,253 shares
issued and 2,098,026
outstanding at February 29, 1996 24,783 23,883
Additional paid-in-capital 11,611,365 19,441,478
Net unrealized appreciation of portfolio investments 471,843 2,156,649
Accumulated net investment loss (1,281,670) (37,743)
Distribution in excess of net investment loss and realized loss (345,581) (345,581)
Accumulated net realized gain (loss) from portfolio investments 527,650 (2,779,188)
--------------- ----------------
Sub-total 11,010,304 18,462,151
Less: Treasury stock at cost (290,227 shares of common stock) (1,226,993) (1,226,993)
--------------- ----------------
Net Assets $ 9,783,311 $ 17,235,158
=============== ================
Net assets per share of common stock $ 4.03 $ 7.25
======== =======
Net assets per share of preferred stock $ 5.04 $ 7.61
======== =======
</TABLE>
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
SCHEDULE OF PORTFOLIO INVESTMENTS
As of February 24, 1997 (Date of Termination)
<TABLE>
% of
Issuer / Position Cost Fair Value Net Assets(1)
Publicly-Held Securities:
Bennett Environmental Inc.(B)
<C> <C> <C> <C>
112,500 shares of Common Stock $ 47,250 $ 91,905 .94%
------------- --------------
Unigene Laboratories, Inc.(A)
Warrant to purchase 615,000 shares of Common Stock
at $1.38, expiring 7/7/00 0 1,575,938 16.11%
------------- --------------
YES! Entertainment Corporation
Warrant to purchase 11,437 shares of Common Stock
at $15.30 per share, expiring 7/16/98 0 0 0%
------------- --------------
Privately-Held Securities:
First Colony Acquisition Corp.*
106,562 shares of Preferred Stock 594,174 297,087
6% Convertible Promissory Note due 11/1/97 1,343,326 671,663
Warrant to purchase 7,560 shares of Common Stock
at $5.00, expiring 1/24/00 0 0
------------- --------------
1,937,500 968,750 9.90%
------------- --------------
Oh-La-La! Inc.
9% Convertible Senior Note 140,000 34,800
9% Convertible Senior Note 100,000 25,200
------------- --------------
240,000 60,000 .61%
------------- -------------- --------
Total Portfolio Investments(C) $ 2,224,750 $ 2,696,593 27.56%
============= ============== ======
</TABLE>
* May be deemed an "affiliated person" of the Fund as defined in the Investment
Company Act of 1940.
(1) Represents fair value as a percentage of net assets.
(A) On July 1, 1996, the Fund transferred warrants to purchase 60,000 shares of
Unigene Laboratories, Inc. common stock to certain individuals for payment
of consulting and portfolio transaction costs incurred in connection with
the Fund's investment in Unigene.
(B) In September 1996, Bennett Environmental Inc. became a listed public
company on the Montreal Stock Exchange. In connection with the listing, the
company effected a four-for-one reverse split of its outstanding common
stock. As a result, the Fund exchanged its 450,000 common shares of Bennett
for 112,500 shares of the company's common stock.
(C) For the period from March 1, 1996 to February 24, 1997 (Date of
Termination), the Fund liquidated the following investments:
During the first fiscal quarter of the period, the Fund sold warrants to
purchase 190,000 shares of Accumed International, Inc. common stock for
$313,329, realizing a gain of $297,440. Also during the first quarter, the
Fund purchased an additional 12,500 shares of Accumed common stock, which
it later sold for $49,213, realizing a loss of $2,198. In June 1996, the
Fund sold its remaining warrants to purchase 60,000 shares of Accumed
common stock for $154,647, realizing a gain of $149,630.
On April 23, 1996, Shells Seafood Restaurants, Inc. completed an initial
public offering of its common stock at $5.00 per share. In connection with
the offering, the Fund received $1.61 million, representing repayment of
its $1.31 million senior note and accrued interest thereon. Additionally,
in July 1996, the Fund sold its remaining investment in Shells for $2.7
million, realizing a gain of $2.1 million.
In July 1996, the Fund received $163,205 from International Communication
Technologies, Inc., representing repayment of its $150,000 note due to the
Fund along with accrued interest thereon.
In January 1997, the Fund sold its 150,000 shares of common stock of Optiva
Corp. for $1.8 million, realizing a gain of $1.3 million.
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
SCHEDULE OF PORTFOLIO INVESTMENTS
As of February 29, 1996
<TABLE>
% of
Issuer / Position Cost Fair Value Net Assets(1)
Publicly-Held Securities:
Accumed International, Inc.
Warrant to purchase 250,000 shares of Common Stock
<S> <C> <C> <C> <C> <C> <C>
at $5.00 per share, expiring 10/14/97 $ 20,906 $ 224,825 1.30%
------------- --------------
Unigene Laboratories, Inc.
Warrant to purchase 675,000 shares of Common Stock
at $1.38, expiring 7/7/00 0 343,980 2.00%
------------- --------------
YES! Entertainment Corporation
Warrant to purchase 11,437
shares of Common Stock
at $15.30 per share, expiring 7/16/98 0 0 0%
------------- --------------
Privately-Held Securities:
Bennett Environmental Inc.
450,000 shares of Common Stock 47,250 47,250 .27%
------------- --------------
First Colony Acquisition Corp.*
106,562 shares of Preferred Stock 594,174 594,174
6% Convertible Promissory Note due 11/1/97 1,343,326 1,343,326
Warrant to purchase 7,560 shares of Common Stock
at $5.00, expiring 1/24/00 0 0
------------- --------------
1,937,500 1,937,500 11.25%
------------- --------------
International Communication Technologies, Inc.
9% Convertible Promissory Note due 6/30/96 150,000 150,000 .87%
------------- --------------
Oh-La-La! Inc.
9% Convertible Senior Note 140,000 140,000
9% Convertible Senior Note 100,000 100,000
------------- --------------
240,000 240,000 1.39%
------------- --------------
Optiva Corporation
150,000 shares of Common Stock 487,500 937,500 5.44%
------------- --------------
Shells Seafood Restaurants, Inc.*
9% Senior Secured Note 1,310,000 1,310,000
Secured note at prime plus 2% due 10/23/97 500,000 500,000
300,000 shares of Common Stock 90,000 1,125,000
Warrant to purchase 175,000 shares of Common Stock
at $3.15 per share, expiring 12/31/99 0 105,000
Warrant to purchase 75,000 shares of Common Stock
at $3.50 per share, expiring 12/31/99 0 18,750
Warrant to purchase 75,000 shares of Common Stock
at $3.75 per share, expiring 12/31/97 0 0
------------- --------------
1,900,000 3,058,750 17.75%
------------- -------------- -----
Total Portfolio Investments $ 4,783,156 $ 6,939,805 40.27%
============= ============== =====
</TABLE>
* May be deemed an "affiliated person" of the Fund as defined in the Investment
Company Act of 1940.
(1) Represents fair value as a percentage of net assets.
See notes to financial statements.
THE MICROCAP FUND, INC.
STATEMENTS OF OPERATIONS
For the Period from March 1, 1996 to February 24, 1997 (Date of Termination) and
for the Fiscal Years Ended February 29, 1996 and February 28, 1995
<TABLE>
1997 1996 1995
--------------- ------------- ----------
INVESTMENT INCOME AND EXPENSES
Income:
<S> <C> <C> <C>
Interest from short-term investments $ 450,528 $ 444,621 $ 367,122
Interest and dividends from portfolio investments 36,578 405,849 686,845
Other income 1,205,119 - -
--------------- ------------- -------------
Total income 1,692,225 850,470 1,053,967
--------------- ------------- -------------
Expenses:
Administrative expense 125,741 167,113 181,052
Legal fees 1,991,383 384,993 180,826
Accounting fees 96,805 61,169 71,000
Salary expense 178,919 328,901 177,273
Amortization of deferred organizational costs 80,608 39,372 39,372
Transfer agent and custodian fees 22,392 23,332 13,927
Directors' fees and expenses 47,879 13,665 26,032
Consulting fees 201,719 56,103 28,000
Insurance expense 34,722 26,525 37,319
Mailing and printing 66,972 16,308 52,653
Other operating expenses 89,012 46,163 26,161
--------------- ------------- -------------
Total expenses 2,936,152 1,163,644 833,615
--------------- ------------- -------------
NET INVESTMENT INCOME (LOSS) (1,243,927) (313,174) 220,352
--------------- ------------- -------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) FROM PORTFOLIO INVESTMENTS
Net realized gain (loss) from portfolio investments 3,972,372 (1,061,009) (161,149)
Change in net unrealized appreciation or depreciation
of investments (1,684,806) 2,121,261 548,448
--------------- ------------- -------------
Net realized and unrealized gain from
portfolio investments 2,287,566 1,060,252 387,299
--------------- ------------- -------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 1,043,639 $ 747,078 $ 607,651
=============== ============= =============
</TABLE>
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
For the Period from March 1, 1996 to February 24, 1997 (Date of Termination) and
for the Fiscal Years Ended February 29, 1996 and February 28, 1995
<TABLE>
1997 1996 1995
---------------- -------------- ----------
Change in net assets resulting from operations:
<S> <C> <C> <C>
Net investment income (loss) $ (1,243,927) $ (313,174) $ 220,352
Net realized gain (loss) from portfolio investments 3,972,372 (1,061,009) (161,149)
Change in net unrealized appreciation or depreciation
of portfolio investments (1,684,806) 2,121,261 548,448
---------------- ---------------- ---------------
Net increase in net assets resulting from
operations 1,043,639 747,078 607,651
---------------- ---------------- ---------------
Change in net assets from distributions:
Return of capital distribution (7,829,952) - -
Distribution from net realized gains (665,534) - (70,150)
Distribution from net investment income - - (275,431)
Distribution in excess of net investment income - - (95,219)
---------------- ---------------- ---------------
Decrease in net assets from distributions (8,495,486) - (440,800)
---------------- ---------------- ---------------
Change in net assets from capital stock transactions:
Common stock repurchased - (1,226,993) -
---------------- ---------------- ---------------
Total increase (decrease) in net assets for the period (7,451,847) (479,915) 166,851
Net assets at beginning of period 17,235,158 17,715,073 17,548,222
---------------- ---------------- ---------------
NET ASSETS AT END OF PERIOD $ 9,783,331 $ 17,235,158 $ 17,715,073
================ ================ ===============
</TABLE>
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
STATEMENTS OF CASH FLOWS
For the Period from March 1, 1996 to February 24, 1997 (Date of Termination) and
for the Fiscal Years Ended February 29, 1996 and February 28, 1995
<TABLE>
1997 1996 1995
--------------- -------------- ----------
CASH FLOWS PROVIDED FROM (USED FOR)
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net investment income (loss) $ (1,243,927) $ (313,174) $ 220,352
Adjustments to reconcile net investment income (loss)
to cash provided from (used for) operating activities:
Amortization of discount on accounts receivable - (4,000) -
Amortization of deferred organizational costs 80,608 39,372 39,372
Depreciation expense 5,103 480 -
Increase (decrease) in payables and other liabilities 851,780 (5,814) 197,171
Increase in receivables and other assets (130,265) (41,763) (180,538)
--------------- -------------- --------------
Cash flows provided from (used for) operating activities (436,701) (324,899) 276,357
--------------- -------------- --------------
CASH FLOWS PROVIDED FROM (USED FOR)
INVESTING ACTIVITIES
Purchase of portfolio investments (51,411) (3,937,500) (4,283,773)
Net proceeds from the sale of portfolio investments 4,676,564 2,393,922 5,131,422
Repayment of notes 2,000,000 3,940,000 3,620,000
Deposit released from (placed in) escrow - - 255,000
--------------- -------------- --------------
Cash flows provided from (used for) investing activities 6,625,153 2,396,422 4,722,649
--------------- -------------- --------------
CASH FLOWS USED FOR FINANCING
ACTIVITIES
Cash distribution to shareholders (8,495,486) - (440,800)
Common stock repurchased - (1,226,993) -
--------------- -------------- --------------
Cash flows used for financing activities (8,495,486) (1,226,993) (440,800)
--------------- --------------- --------------
Increase (decrease) in cash and cash equivalents (2,307,034) 844,530 4,558,206
Cash and cash equivalents at beginning of period 9,878,280 9,033,750 4,475,544
--------------- -------------- --------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 7,571,246 $ 9,878,280 $ 9,033,750
=============== ============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Purpose
The MicroCap Fund, Inc., formerly Commonwealth Associates Growth Fund, Inc. (the
"Fund"), terminated on February 24, 1997 ("Date of Termination") pursuant to its
Plan of Liquidation, which was approved at a special meeting of shareholders on
July 23, 1996. In accordance with the Plan of Liquidation, the Fund transferred
all of its remaining assets and liabilities as of the Date of Termination to the
MicroCap Liquidating Trust (the "Trust").
The Fund, which was a Maryland corporation formed on January 26, 1993, was a
non-diversified, closed-end management investment company and operated as a
business development company under the Investment Company Act of 1940. The
Fund's investment objective was to achieve long-term capital appreciation of
assets, rather than current income, by investing in debt and equity securities
of emerging and established companies that management believed offer significant
growth potential.
2. Significant Accounting Policies
Valuation of Investments - Portfolio investments were carried at fair value as
determined quarterly by the Fund's Board of Directors. The fair value of the
Fund's publicly-held portfolio securities was adjusted to the closing public
market price on the last day of each fiscal quarter discounted by a factor of 0%
to 40% for sales restrictions. Factors considered in the determination of an
appropriate discount included: underwriter lock-up, affiliate status either by
having a representative on the Board of Directors or by owning greater than 10%
of the outstanding shares of a portfolio security, and other liquidity factors
such as the size of the Fund's position in a given portfolio company compared to
the trading history of the public security. Privately-held portfolio securities
were carried at cost until significant developments affecting the portfolio
company provided a basis for change in valuation, including adjustments to
reflect meaningful third-party transactions in the private market.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles required management to make estimates
and assumptions that affected 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.
Investment Transactions - Investment transactions were recorded on the trade
date, which is the date the Fund obtained an enforceable right to demand the
securities or payment thereof. Realized gains and losses on investments sold
were computed on a specific identification basis. The Fund recorded all other
transactions on the accrual method.
Income Taxes - The Fund qualified as a regulated investment company under the
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and
was not subjected to federal income tax on taxable income which was distributed
in accordance with the provisions of the Code. Therefore, no provision for
federal income taxes was required.
The transfer of net assets from the Fund to the Trust is considered to be a
liquidating distribution of the Fund for federal income tax purposes. Therefore,
each holder of the common or preferred stock of the Fund will recognize gain or
loss equal to the difference between the net fair value of the liquidating
distribution, of $4.03 per common equivalent share, deemed received in respect
of such shares and the holder's adjusted tax basis in such shares. Such gain or
loss is a capital gain or loss if such shares were held as a capital asset, and
such capital gain or loss is long-term if such shares are held for more than one
year as of February 24, 1997, the date the liquidating distribution was deemed
to have been made.
THE MICROCAP FUND, INC.
NOTES TO FINANCIAL STATEMENTS
The Trust will be a complete pass-through entity for federal income tax purposes
and, accordingly, is not subject to income tax. Instead, each beneficiary of the
Trust is required to take into account, in accordance with such beneficiary's
method of accounting, his pro rata share of the Trust's income, gain, loss,
deduction or expense, regardless of the amount or timing of distributions to
beneficiaries.
Cash and Cash Equivalents - The Fund invested its available cash in U.S.
Treasury Bills or overnight repurchase agreements collateralized by securities
issued by the U.S. Government or its agencies. Investments in U.S. Treasury
Bills and overnight repurchase agreements were considered to be cash equivalents
for the statement of cash flows.
The cash and cash equivalents of the Fund include restricted cash of
approximately $2.8 million, comprised of $2.4 million relating to the Regency
Holdings (Cayman) Inc. litigation, $250,000 relating to certain indemnification
agreements with Mr. Troubh and certain of the Fund's former directors and
officers and $120,000 relating to the potential reimbursement of out-of-pocket
expenses of a shareholder group that had solicited proxies in opposition to the
Fund's Plan of Liquidation. See Notes 5 and 7 below.
Organizational Costs - Organizational costs of $196,865 were amortized over the
period beginning March 19, 1993 (Commencement of Operations) to February 24,
1997 (Date of Termination).
Reclassifications - Certain reclassifications were made to the prior period
financial statements in order to conform to the current period
- -----------------
presentation.
3. Related Party Transactions
Commonwealth Associates Asset Management Inc. ("CAAM"), an affiliate of
Commonwealth Associates, the underwriter of the Fund's initial public offering,
was the Fund's administrator from its inception to December 10, 1995. During
such time, CAAM was responsible for the management and administrative services
necessary for the operation of the Fund and received an administrative fee at an
annual rate of 1% of the Fund's net assets. Such fee was determined and paid
quarterly. On October 11, 1995, CAAM terminated the administrative agreement
with the Fund effective December 10, 1995. From such date to present, the Fund
has been self administered.
In July 1996, the Fund entered into an agreement with Raymond S. Troubh, whereby
Mr. Troubh provided management services to the Fund in connection with its Plan
of Liquidation. For services to be rendered under the agreement, Mr. Troubh
received $8,500 per month, plus 1% of the amount of each distribution (other
than the initial distribution paid on August 30, 1996), plus, at the time any
proceeds of sale or other revenues are received by the Fund in excess of the
Fund's investment in a particular asset, Mr. Troubh will receive 5% of such
excess for amounts received in 1996 or 1997, 4% of such excess for amounts
received in 1998, 2% in 1999 and 0% thereafter; provided, however, that in no
event shall the total compensation paid to Mr. Troubh be less than $250,000.
Through February 24, 1997 (Date of Termination), the Fund had paid consulting
fees to Mr. Troubh totaling $127,319. Mr. Troubh will continue to be paid under
the same compensation arrangement as the trustee of the Trust.
4. Director's Fees and Expenses
During the periods reported, each non-affiliated director of the Fund's Board of
Directors received an annual fee of $2,500 and $250 for each meeting of the
Board of Director's and each committee meeting of the Board attended. Each
non-affiliated director also received reimbursement for all out-of-pocket costs
incurred to attend such meetings.
<PAGE>
THE MICROCAP FUND, INC.
NOTES TO FINANCIAL STATEMENTS
5. Litigation
On April 19, 1996, the Fund filed a complaint against Commonwealth Associates, a
registered broker-dealer and the underwriter of the Fund's initial public
offering, Michael S. Falk, the chief executive officer of Commonwealth
Associates, a minority shareholder and director of the Fund, and Stephen J.
Warner, a former executive officer of Commonwealth Associates and the former
president of the Fund. The civil action, which was filed in federal court in the
Southern District of New York, alleged fraud, breach of fiduciary duties and
violations of the Investment Company Act of 1940. On December 24, 1996, the Fund
and the defendants agreed to a settlement of the complaint, whereby Commonwealth
Associates will make settlement payments to the Fund and the Trust totaling
$1,150,000. In connection therewith, the Fund received $500,000 in December
1996. The remaining balance of the settlement payments will be paid in
installments through December 15, 1997 and will earn interest at an annual rate
of 4.50%. Commonwealth Associates has delivered securities to the Trust as
collateral for the remaining payments. Such securities, which are held in escrow
by the Trust, had a fair value as of February 24, 1997 that exceeded the
$650,000 balance due from the settlement agreement. Through May 1, 1997, the
Trust had received additional payments totaling $100,000. Additionally, as part
of the settlement, the Fund and the defendants agreed to pursue claims against
former counsel to the Fund. The Fund would be entitled to receive 50% of any
recovery from such claims, after the reimbursement to Commonwealth Associates of
all costs and expenses associated with pursuing the claims.
The Fund was a respondent in an arbitration claim Warner v. Commonwealth
Associates Growth Fund, Inc. before the American Arbitration Association
commenced in December 1995 by Stephen J. Warner, the former president, chief
executive officer and portfolio manager of the Fund. The claim alleged breach of
contract and fraud in connection with the termination of employment and
consulting agreements between him and the Fund. In connection with the
settlement agreement discussed above, Mr. Warner has agreed to dismiss all
claims associated with this action. As a result, the Fund reversed its
previously recorded liability of $50,000 in connection with this action.
The Fund was a defendant in an action brought by Michael S. Falk, a former
director of the Fund, in the Supreme Court of New York on June 19, 1996. The
complaint alleged that Kamal Mustafa, the former president and a former director
of the Fund, and president of Bluestone Capital Partners L.P., an investment
banking firm controlled by Mr. Mustafa, caused the Fund to defame Mr. Falk. In
connection with the settlement agreement discussed above, Mr. Falk has agreed to
dismiss all claims associated with this action.
The Fund is a creditor of PSSS, Inc. f/k/a Oh-La-La! Inc. ("PSSS"), which is the
subject of proceedings under chapter 11 of the United States Bankruptcy Code
pending in San Francisco, California (the "Bankruptcy Case"). In connection with
the Bankruptcy Case, Oh-La-La! International, S.A. ("International"), one of
PSSS's largest shareholders, has filed a precautionary proof of claim (the
"Precautionary Proof of Claim"), on behalf of International and other similarly
situated shareholders of PSSS, against, among others, the Fund, certain other
creditors of PSSS, and parties involved in the intended underwriting for, and
conduct of, an initial public offering which PSSS had anticipated would have
occurred in or about 1994. The Precautionary Proof of Claim alleges a claim for
damages as a result of, among other things, (a) the failure to effectuate the
intended initial public offering, and (b) the Bankruptcy Court-approved sale of
PSSS's assets, which was allegedly prejudicial to PSSS's shareholders. PSSS and
International have taken no other action regarding this claim. The Fund has
denied liability for the claims set forth in the Precautionary Proof of Claim.
Resolution efforts are ongoing.
Regency Holdings (Cayman) Inc. ("Holdings") and Regency Maritime Corp.
("Maritime"), Plaintiffs v. The MicroCap Fund, Inc. f/k/a
Commonwealth Associates Growth Fund, Inc., et al. Regency Holdings (Cayman)
<PAGE>
THE MICROCAP FUND, INC.
NOTES TO FINANCIAL STATEMENTS
Inc. and Regency Maritime Corp. (collectively "Regency") along with other
related entities are debtors in a bankruptcy case pending in the United States
Bankruptcy Court for the Southern District of New York, 95 B 45197 (TLB). In
that bankruptcy case, Regency initiated an adversary proceeding against the Fund
and certain other persons and entities to recover monies that it paid them on
the ground that such payments constituted voidable preferences under the
Bankruptcy Code. Regency maintains that a payment Regency made to the Fund
between 90 days and one year prior to the filing of Regency's bankruptcy
petition in the amount of $1,940,000 to satisfy a bridge loan the Fund made to
Regency, is a voidable preference because Kamal Mustafa, the former president of
the Fund, was a director of Regency (and therefore an insider) for a portion of
the time that such amounts were due and owing. Regency also maintains that such
relationship had an impact on Regency's decision to pay these amounts.
Additionally, Regency maintains that a payment of $145,728 made by Regency to
the Fund to redeem certain warrants issued with respect to the loan transaction
was made within 90 days of the filing of the bankruptcy petition and is
therefore a voidable preference without regard to whether Mustafa was an
insider. In an amended complaint, Regency also asserted that the payments to the
Fund constitute a fraudulent transfer, as the payments were in fact made by
Maritime and not Holdings. Regency asserts that Maritime had no obligation to
make such payments and received no value for them. The Fund has served an answer
denying the allegations of the amended complaint and is vigorously contesting
Regency's claims. Pursuant to an order filed with the Bankruptcy Court, the Fund
has set aside approximately $2.4 million in an interest-bearing cash account
pending resolution by the Bankruptcy Court of the adversary proceeding. At the
present time, discovery is underway to determine the validity of the allegations
asserted by Regency.
6. Distributions
On August 30, 1996, the Fund made an initial liquidating cash distribution
totaling $8,495,486 to shareholders of record on August 15, 1996. Common
shareholders received $3.50 per share and preferred shareholders received $4.375
per share. The amount paid to common shareholders was comprised of $0.274 of
long-term capital gain and $3.226 of return of capital. The amount paid to
preferred shareholders was comprised of $0.343 of long-term capital gain and
$4.032 of return of capital.
On November 7, 1994, the Fund's Board of Directors declared a cash distribution
to shareholders totaling $440,800, or $0.20 per share of common stock. The
distribution was paid on December 12, 1994 to shareholders of record on November
30, 1994.
7. Other Information
On July 15, 1996, the Fund entered into a settlement agreement with a group of
shareholders of the Fund's common stock that had solicited proxies in opposition
to the Fund's Plan of Liquidation (the "13D Group"). Under the settlement
agreement, the Fund and the 13D Group agreed that, (i) certain members of the
13D Group and affiliated persons would cease to have business dealings with or
receive compensation from the Fund, (ii) a 13D Group member would have the right
to receive notice of and attend all meetings of the Board of Directors and any
committee meeting thereof, and (iii) subject to the approval of the Securities
and Exchange Commission (the "SEC"), the Fund would reimburse the 13D Group for
its reasonable out of pocket expenses up to $120,000 in connection with the 13D
Group's efforts. An application relating to such reimbursement by the Fund to
the 13D Group was filed with the SEC on September 27, 1996.
Effective on August 1, 1996, the Fund entered into indemnification agreements
with Mr. Raymond Troubh and certain of the Fund's former directors and officers.
Pursuant to such agreements, the Fund established an escrow account that
contains approximately $250,000 in cash or cash equivalents to provide for
potential legal fees and settlement payments relating to certain actions that
may arise against such individuals relating to activity involving the Fund.
<PAGE>
THE MICROCAP FUND, INC.
NOTES TO FINANCIAL STATEMENTS
<TABLE>
8. Capital Stock Transactions
Number of Additional Number of Number of
Common Paid-in Preferred Treasury
Shares Amount Capital Shares Amount Shares Amount
Balance at February 28, 1994 and
<S> <C> <C> <C> <C> <C>
February 28, 1995 2,204,000 $ 22,040 $ 19,541,193
Issuance of preferred stock
dividend (4,408) 440,800 $ 4,408
Conversion of preferred stock
into common stock 184,253 1,843 (88) (175,483) (1,755)
Purchase of treasury shares 290,227$ 1,226,993
Reclassification of distribution in
excess of net investment income (95,219)
Balance at February 28, 1996 2,388,253 $ 23,883 $ 19,441,478 265,317 $ 2,653 290,227$ 1,226,993
Conversion of preferred stock
into common stock 90,059 900 (161) (73,960) (739)
Return of capital distribution (7,829,952)
Balance at February 24, 1997 2,478,312 $ 24,783 $ 11,611,365 191,357 $ 1,914 290,227$ 1,226,993
=========================================================================================
</TABLE>
In accordance with the Plan of Liquidation, each of the 2,188,085 common shares
and 191,357 preferred shares of the Fund, outstanding on February 24, 1997,
became convertible into 2,427,281 units of beneficial interest of the MicroCap
Liquidating Trust.
9. Classification of Portfolio Investments
As of February 24, 1997 (Date of Termination), the Fund's investments in
portfolio companies were categorized as follows:
<TABLE>
% of
Type of Investments Cost Fair Value Net Assets*
- ------------------- ---------------- --------------- -----------
<S> <C> <C> <C>
Preferred Stock $ 594,174 $ 297,087 3.04%
Common Stock 47,250 1,667,843 17.04%
Debt Securities 1,583,326 731,663 7.48%
---------------- --------------- ----------
Total $ 2,224,750 $ 2,696,593 27.56%
================ =============== ======
Country/Geographic Region
Eastern United States $ 1,937,500 $ 2,544,688 26.01%
Western United States 240,000 60,000 .61%
Canada 47,250 91,905 .94%
---------------- --------------- ----------
Total $ 2,224,750 $ 2,696,593 27.56%
================ =============== ======
Industry
Biotechnology $ 0 $ 1,575,938 16.11%
Consumer Products 1,937,500 968,750 9.90%
Environmental Services 47,250 91,905 .94%
Food Services 240,000 60,000 .61%
---------------- --------------- ----------
Total $ 2,224,750 $ 2,696,593 27.56%
================ =============== ======
</TABLE>
* Percentage of net assets is based on fair value.
10. Subsequent Event
In May 1997, the Trust declared an interim liquidating distribution of
$1.00 per Unit, to be paid on July 15, 1997 to unit holders of
record on June 30, 1997.
<PAGE>
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers.
The following table sets forth certain information with respect to the Fund's
sole executive officer and director, who will serve as the initial Trustee of
the Trust.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year First
Elected a
Director Position with
Name Age or Officer the Fund
Raymond S. Troubh 70 1996 President, Chief Executive Officer,
Treasurer, Secretary and Director
</TABLE>
Raymond S. Troubh has served as President, Chief Executive Officer, Treasurer,
Secretary and Director of the Fund since July 1996. Mr. Troubh is a financial
consultant, a former governor of the American Stock Exchange and a former
general partner of Lazard Freres & Co., an investment banking firm. Mr. Troubh
is a director of ADT Limited, a security systems company; America West Airlines,
Inc., an airline; ARIAD Pharmaceuticals, Inc., a pharmaceutical company; Becton,
Dickinson and Company, a healthcare products manufacturer; Diamond Offshore
Drilling, Inc., an offshore drilling company; Foundation Health Corporation, a
healthcare company; General American Investors Company, an investment advisory
company; Olsten Corporation, a temporary personnel and healthcare services
company; Petrie Stores Liquidating Trust, a liquidating trust holding the assets
of a former women's apparel retailer; Time Warner Inc., a media and
entertainment company; WHX Corporation, a holding company; and Triarc Companies,
Inc., a diversified holding company.
Item 11. Executive Compensation.
During the period from March 1, 1996 to February 24, 1997 ("fiscal 1997"), Kamal
Mustafa, the former president and chief executive officer of the Fund, received
compensation of $33,930 and Joseph Luchese, the former Treasurer of the Fund,
received $102,000. No other individual officer or employee of the Fund received
compensation in excess of $100,000 during fiscal 1997.
On July 24, 1996, following approval by the Board of Directors of the Fund, Mr.
Troubh entered into a consulting agreement with the Fund pursuant to which he is
compensated for his management services to the Fund and to the Trust in the
amount of $8,500 per month, plus 1% of the amount of each distribution (other
than the initial distribution paid on August 30, 1996), plus, at the time any
proceeds of sale or other revenues are received by the Fund in excess of the
Fund's investment in a particular asset, Mr. Troubh will receive 5% of such
excess for amounts received in 1996 or 1997, 4% of such excess for amounts
received in 1998, 2% of such excess for amounts received in 1999, and 0% of such
excess for amounts received thereafter; provided, however, that in no event
shall the total compensation paid to Mr. Troubh be less than $250,000. For
fiscal 1997, the Fund paid consulting fees to Mr. Troubh totaling $127,319.
Pursuant to the Trust Agreement, Trustees are to receive (i) $500 per month or
portion thereof during which such person serves as Trustee plus $200 per hour
for time spent on trust matters or (ii) such greater compensation as shall be
determined by the Board of Directors of the Fund at their final meeting or as
may subsequently be approved by Beneficiaries holding a aggregate number of
Units representing greater than 50% of the total number of Units outstanding.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Security Ownership
The following table sets forth information as of May 9, 1997 with respect to the
beneficial ownership of Units of Beneficial Interest, based on their ownership
of shares of the Fund's common and preferred stock as of the Fund's Date of
Termination, by (i) each person known by the Trust to be the owner of more than
5% of the outstanding Units of Beneficial Interest, (ii) the Chief Executive
Officer and sole trustee of the Trust and (iii) all officers and directors of
the Trust as a group.
<TABLE>
Amount and Nature
Of Beneficial Percentage of
Beneficial Owner (1) Ownership Outstanding Units
- -------------------- ----------------------- ---------------------
<S> <C>
Raymond S. Troubh 0 *
All officers and directors as a group
(one person) 0 *
Cramer Rosenthal McGlynn (2) 146,000 6.9%
Robert L. Priddy (3) 150,100 7.0%
</TABLE>
* Less than 1%
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days upon the exercise of warrants or
options. Each beneficial owner's percentage ownership is determined by
assuming that options or warrants that are held by such person (but not
those held by any other person) and which are exercisable within 60 days
have been exercised.
(2) Based on information contained in Amendment No. 4 to Statement on
Schedule 13D filed with the Securities and Exchange Commission on
December 19, 1996.
(3) Based on information contained in Amendment No. 4 to Statement on Schedule
13D filed with the Securities and Exchange Commission on December 19, 1996.
Includes 17,500 shares of Common Stock issuable upon conversion of shares
of Preferred Stock.
Item 13. Certain Relationships and Related Transactions.
Not applicable.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
(a) 1. Financial Statements
Independent Auditors' Report
Statements of Assets and Liabilities as of February 24, 1997 (Date of
Termination) and February 29, 1996
Schedules of Portfolio Investments as of February 24, 1997 (Date of
Termination) and February 29, 1996
Statements of Operations for the period from March 1, 1996 to
February 24, 1997 (Date of Termination) and for the years ended
February 29, 1996 and February 28, 1995
Statements of Changes in Net Assets for the period from March 1, 1996
to February 24, 1997 (Date of Termination) and for the years
ended February 29, 1996 and February 28, 1995
Statements of Cash Flows for the period from March 1, 1996 to
February 24, 1997 (Date of Termination) and for the years ended
February 29, 1996 and February 28, 1995
Notes to Financial Statements
2. Exhibits.
(2) Agreement and Declaration of Trust, dated as of January 28, 1997,
between the Fund and Raymond S. Troubh as Trustee
(3) (i) Certificate of Incorporation of the Fund (1)
(ii) (a) Bylaws of the Fund (1)
(b) Amendments to Bylaws of the Fund (2)
(10) (a) Administrative Agreement (1)
(b) Profit Sharing Plan (1)
(27) Financial Data Schedule
(b) No reports on Form 8-K have been filed during the last quarter of the
period for which this report is filed.
- -----------------------
(1) Incorporated by reference to the Fund's Form N-2, as amended, filed
on January 29, 1993.
(2) Incorporated by reference to the Fund's Form 10-K for the fiscal year
ended February 29, 1996, filed on June 13, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROCAP LIQUIDATING TRUST
/s/ Raymond S. Troubh
Raymond S. Troubh
Trustee, President, Chief Executive Officer, Treasurer, and Secretary
(Principal Executive and Principal Financial and Accounting Officer)
Date: May 15, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MICROCAP LIQUIDATING TRUST'S TRANSITION REPORT ON FORM 10-K FOR THE
PERIOD FROM MARCH 1, 1996 TO FEBRUARY 24, 1997 (DATE OF TERMINATION) AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-24-1997
<INVESTMENTS-AT-COST> 2,224,750
<INVESTMENTS-AT-VALUE> 2,696,593
<RECEIVABLES> 675,959
<ASSETS-OTHER> 24,846
<OTHER-ITEMS-ASSETS> 7,571,246
<TOTAL-ASSETS> 10,968,644
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,185,333
<TOTAL-LIABILITIES> 1,185,333
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,611,365
<SHARES-COMMON-STOCK> 2,188,085
<SHARES-COMMON-PRIOR> 2,098,026
<ACCUMULATED-NII-CURRENT> (1,281,670)
<OVERDISTRIBUTION-NII> (345,581)
<ACCUMULATED-NET-GAINS> 527,650
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 471,843
<NET-ASSETS> 9,783,311
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,692,225
<OTHER-INCOME> 0
<EXPENSES-NET> 2,936,152
<NET-INVESTMENT-INCOME> (1,243,927)
<REALIZED-GAINS-CURRENT> 3,972,372
<APPREC-INCREASE-CURRENT> (1,684,806)
<NET-CHANGE-FROM-OPS> 1,043,639
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 665,534
<DISTRIBUTIONS-OTHER> 7,829,952
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (7,451,847)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (345,581)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,936,152
<AVERAGE-NET-ASSETS> 13,509,244
<PER-SHARE-NAV-BEGIN> 7.25
<PER-SHARE-NII> (.51)
<PER-SHARE-GAIN-APPREC> .94
<PER-SHARE-DIVIDEND> (.15)
<PER-SHARE-DISTRIBUTIONS> (.27)
<RETURNS-OF-CAPITAL> (3.23)
<PER-SHARE-NAV-END> 4.03
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
LIQUIDATING TRUST
AGREEMENT
By and Between
THE MICROCAP FUND, INC.,
as the Grantor,
and
Raymond S. Troubh,
as Trustee
Dated as of January 28, 1997
iv
===============================================================================
TABLE OF CONTENTS
ARTICLE I
NAME AND DEFINITIONS
1.1. Name................................................................. 2
1.2. Certain Terms Defined................................................. 2
ARTICLE II
NATURE OF TRANSFER
2.1. Purpose of Trust...................................................... 4
2.2. Prohibited ........................................................... 5
2.3. No Reversion to Fund.................................................. 5
2.4. Instruments of Further Assurance...................................... 5
2.5. Payment of Liabilities................................................ 5
2.6. Incidents of Ownership................................................ 6
2.7. Notice to Unlocated Shareholders..................................... 6
ARTICLE III
BENEFICIARIES
3.1. Beneficial Interests.................................................. 6
3.2. Rights of Beneficiaries............................................... 7
3.3. Transfer of Interests of Beneficiaries............................... 8
3.4. Trustees as Beneficiaries............................................. 9
ARTICLE IV
DURATION AND TERMINATION OF TRUST
4.1. Duration.............................................................. 9
4.2. Other Obligations of Trustees upon
Termination....................................................... 9
ARTICLE V
ADMINISTRATION OF TRUST
5.1. Sale of Trust ........................................................ 10
5.2. Transactions with Related Persons.................................... 10
5.3. Restriction on Trust Assets.......................................... 11
5.4. Payment of Claims, Expenses and Liabilities........................... 11
5.5. Interim Distributions....................... ...................... 11
5.6. Final Distribution.................................................... 11
5.7. Reports to Beneficiaries and Others................................... 12
5.8. Federal Income Tax Information....................................... 12
5.9. Employment of Manager ............................................ 13
ARTICLE VI
POWERS OF AND LIMITATIONS ON THE TRUSTEES
6.1. Limitations on Trustees.............................................. 14
6.2. Specific Powers of Trustees.......................................... 15
ARTICLE VII
CONCERNING THE TRUSTEES,
BENEFICIARIES, EMPLOYEES AND AGENTS
7.1. Generally............................................................. 18
7.2. Reliance by Trustees.................................................. 19
7.3. Liability to Third Persons............................................ 20
7.4. Recitals.............................................................. 20
7.5. Indemnification...................................................... 20
7.6. Rights of Trustees, Employees, Independent
Contractors and Agents To Own Units or Other
Property and To Engage in Other Business........................ 22
ARTICLE VIII
PROTECTION OF PERSONS DEALING WITH THE TRUSTEES
8.1. Action by Trustees.................................................... 23
8.2. Delegation...................................................... 23
8.3. Reliance on Statement by Trustees..................................... 24
ARTICLE IX
COMPENSATION OF TRUSTEES
9.1. Amount of Compensation............................................... 24
9.2. Dates of Payment...................................................... 24
9.3. Expenses............................................................ 24
ARTICLE X
TRUSTEES AND SUCCESSOR TRUSTEES
10.1. Number and Qualification of Trustees................................. 25
10.2. Resignation and Removal............................................ 25
10.3. Appointment of Successor............................................ 26
10.4. Acceptance of Appointment by Successor
Trustee.......................................................... 26
10.5. Bonds................................................................ 26
ARTICLE XI
CONCERNING THE BENEFICIARIES
11.1. Evidence of Action by Beneficiaries.................................. 27
11.2. Limitation on Suits by Beneficiaries............................... 27
11.3. Requirement of Undertaking.......................................... 28
ARTICLE XII
MEETING OF BENEFICIARIES
12.1. Purpose of Meetings............................................... 28
12.2. Meeting Called by Trustees.......................................... 28
12.3. Meeting Called on Request of Beneficiaries.......................... 29
12.4. Persons Entitled to Vote at Meeting of
Beneficiaries............................................... 29
12.5. Quorum and Vote Required........................................ 29
12.6. Adjournment of Meeting............................................. 29
12.7. Conduct of Meetings............................................. 29
12.8. Record of Meeting................................................. 30
ARTICLE XIII
AMENDMENTS
13.1. Consent of Trustees and Beneficiaries................................ 30
13.2. Notice and Effect of Amendment....................................... 31
ARTICLE XIV
MISCELLANEOUS PROVISIONS
14.1. Filing Documents..................................................... 32
14.2. Intention of Parties to Establish Trust........................... 32
14.3. Beneficiaries Have No Rights or Privileges
as Shareholders of MicroCap..................................... 32
14.4. Laws as to Construction.............................................. 32
14.5. Severability........................................................ 32
14.6. Notices............................................................ 33
14.7. Counterparts......................................................... 33
14.8. Binding......................................................... 34
===============================================================================
============================================================================
31
LIQUIDATING TRUST AGREEMENT
AGREEMENT AND DECLARATION OF TRUST, dated as of January 28,
1997, by and between The MicroCap Fund, Inc., a Maryland corporation ("Fund"),
and Raymond S. Troubh, as trustee (the "Trustee," and together with any
additional trustees appointed hereunder, the "Trustees").
WHEREAS, Fund's Board of Directors and shareholders have
adopted a Plan of Liquidation and Dissolution (the "Plan");
WHEREAS, Fund's Board of Directors anticipates that Fund may
not be able to fully wind up all of its affairs prior to the date by which Fund
must dissolve, and therefore have made specific arrangements for such
contingency in the Plan;
WHEREAS, the Plan, among other things, (i) provides for the
establishment of a liquidating trust pursuant to the terms and conditions hereof
(the "Trust") and the establishment of one or more escrow, reserve and other
accounts (collectively, the "Reserve Funds"), (ii) provides the methods by which
the Trustee was selected to serve as agent of the Beneficiaries (as defined
below) and trustee of the Trust, (iii) authorizes and directs Fund to grant,
assign and convey the Retained Assets to the Trustee as agent for the
Beneficiaries (as defined below) all assets of Fund not distributed to
shareholders in cancellation of the interest of the Shareholders in Fund and
(iv) authorizes and directs the Trustee to hold and reduce to cash for and on
behalf of, and distribute to, the Beneficiaries the assets of the Trust in
accordance with the terms and conditions hereof.
NOW, THEREFORE, in consideration of the premises, and subject to the
terms and provisions herein, effective as of the close of business on the Record
Date, Fund hereby grants, releases, assigns, conveys and delivers unto the
Trustee for the benefit of the beneficiaries of the Trust (the "Beneficiaries"),
all of Fund's right, title and interest in and to all assets of Fund not
distributed to shareholders as of the Record Date for the uses and purposes
stated herein, and the Trustee hereby accepts such assets and such Trust:
ARTICLE I
NAME AND DEFINITIONS
.1. NameI.1. Name. This trust shall be known as the MicroCap Liquidating
Trust.
I.2. Certain Terms DefinedI.2. Certain Terms Defined. For all purposes of
this instrument, unless the context otherwise requires:
(a) Affiliated Person shall mean a Person (i) who in
his individual capacity is a director, trustee, officer, partner or
employee of the Manager or of a Person who controls, is controlled by
or is under common control with the Manager or (ii) who controls, is
controlled by or is under common control with the Manager.
(b) Affiliated Trustee shall mean a Trustee (i) who
in his individual capacity is a director, trustee, officer, partner or
employee of the Manager or of a Person who controls, is controlled by
or is under common control with the Manager or (ii) who controls, is
controlled by or is under common control with the Manager.
(c) Agreement shall mean this instrument as
originally executed or as it may from time to time be amended pursuant
to the terms hereof.
(d) Beneficial Interest shall mean each Beneficiary's
proportionate share of the Trust Assets initially determined by the
ratio of the number of Shares held by the Initial Beneficiary on the
close of business on the Record Date over the total number of Shares
issued and outstanding on such Record Date and thereafter each
Beneficiaries' proportional beneficial interest in the Trust.
(e) Initial Beneficiary shall mean each of the Shareholders.
(f) Manager shall mean such Person or Persons who
have been employed by, or who have contracted with, the Trustees to
assist in the management of the Trust.
(g) Person shall mean an individual, a corporation, a
partnership, an association, a joint stock company, a limited liability
company, a trust, a joint venture, any unincorporated organization, or
a government or political subdivision thereof.
(h) Record Date shall mean the date selected by the
Board of Directors of Fund for determination of the shareholders of
Fund entitled to become Beneficiaries, which shall also be the date on
which Fund conveys to the Trust all of the assets of Fund not
previously distributed to shareholders of Fund.
(i) Shares shall mean the shares of Common Stock, par
value $.01 per share, of Fund, and the shares of Series A Convertible
Preferred Stock, par value $.01 per share, with each share of such
preferred stock being treated hereunder as being equivalent to 1.25
shares of Common Stock.
(j) Shareholders shall mean the holders of record of the
outstanding Shares of Fund at the close of business on the Record Date.
(k) Trust shall mean the Trust created by this Agreement.
(l) Trust Assets shall mean all the property held
from time to time by the Trustees under this Agreement, which initially
shall consist of the assets granted, assigned and conveyed to the
Trustee by Fund pursuant to the Plan, and, in addition, shall
thereafter include all dividends, rents, royalties, income, proceeds
and other receipts of, from, or attributable to any assets held by the
Trust, less any of the foregoing utilized by the Trustees to pay
expenses of the Trust, satisfy liabilities of Fund or the Trust or make
distributions to the Beneficiaries.
(m) Trustees shall mean the original Trustee, any
Trustees appointed hereunder after the date hereof, and their
successors.
<PAGE>
ARTICLE II ARTICLE II
NATURE OF TRANSFER
II.1. Purpose of TrustII.1. Purpose of Trust.
(a) The Trust is organized for the sole purpose of winding up
Fund's affairs with no objective to continue or engage in the conduct of a trade
or business.
(b) As Fund is required to liquidate and dissolve prior to
fully winding up its affairs, including, but not limited to, its payment of any
unsatisfied debts, claims, liabilities, commitments, suits and other
obligations, whether contingent or fixed, arising from any source whatsoever
(the "Liabilities"), without any established procedure to satisfy such
Liabilities, Fund's Board of Directors and Shareholders each approved the Plan,
which calls for the establishment of the Trust, and sets forth the manner in
which the Trustees are selected, for the purpose of providing a procedure which
will enable Fund to dissolve in a timely manner, and wind up its affairs, by
assigning and conveying to the Trustees pursuant to the terms contained herein
all assets of Fund not previously distributed to Shareholders. The assets
granted, assigned and conveyed to the Trustees will be held in the Trust, and
the Trustees will: (i) further liquidate the Trust Assets if necessary to carry
out the purpose of the Trust and facilitate distribution of the Trust Assets;
(ii) allocate, protect, conserve and manage the Trust Assets in accordance with
the terms and conditions hereof; (iii) complete the winding up of Fund's
affairs; (iv) act on behalf of the Beneficiaries and in the capacity of Fund in
connection with any matters and (v) distribute the Trust Assets in accordance
with the terms and conditions hereof.
(c) It is intended that the granting, assignment and
conveyance of the initial Trust Assets by Fund to the Trustees pursuant hereto
shall be treated for federal and state income tax purposes as if Fund made such
distributions directly to the Shareholders. It is further intended that for
federal, state and local income tax purposes the Trust shall be treated as a
liquidating trust under Treasury Regulation Section 301.7701-4(d) and any
analogous provision of state or local law, and the Beneficiaries shall be
treated as the owners of their respective share of the Trust pursuant to
Sections 671 through 679 of the Internal Revenue Code of 1986, as amended (the
"Code") and any analogous provision of state or local law and shall be taxed on
their respective share of the Trust's taxable income (including both ordinary
income and capital gains) pursuant to Section 671 of the Code and any analogous
provision of state or local law. The Trustees shall file all tax returns
required to be filed with any governmental agency consistent with this position,
including, but not limited to, any returns required of grantor trusts pursuant
to Section 1.671-4(a) of the income tax regulations under the Code (the "Income
Tax Regulations").
II.2. Prohibited II.2. Prohibited Activities. The Trust shall
not continue or engage in the conduct of any trade or business, and the Trustees
are expressly prohibited from, and shall have no power or authority to, continue
or engage in the conduct of any trade or business on behalf of the Trust or the
Beneficiaries, and all of the terms and conditions hereof shall be construed
accordingly.
II.3. No Reversion to FundII.3. No Reversion to Fund. In no event shall any
part of the Trust Assets revert to or be distributed to Fund.
II.4. Instruments of Further AssuranceII.4. Instruments of
Further Assurance. After the dissolution of Fund, such Persons as shall have the
right and power to so act, will, upon reasonable request of the Trustees,
execute, acknowledge, and deliver such further instruments and do such further
acts as may be necessary or proper to carry out effectively the purposes of this
Agreement, to confirm or effectuate the transfer to the Trustees of any property
intended to be covered hereby, and to vest in the Trustees, their successors and
assigns, the estate, powers, instruments or funds in trust hereunder.
II.5. Payment of LiabilitiesII.5. Payment of Liabilities. The
Trustees hereby assume all Liabilities. Should any Liability be asserted against
the Trustees as the transferees of the Trust Assets or as a result of the
assumption made in this paragraph, the Trustees may use such part of the Trust
Assets as may be necessary in contesting any such Liability or in payment
thereof, but in no event shall the Trustees, Beneficiaries or employees or
agents of the Trust be personally liable, nor shall resort be had to the private
property of such Persons, in the event the Trust Assets are not sufficient to
satisfy the Liabilities of the Trust.
II.6. Incidents of OwnershipII.6. Incidents of Ownership. The
Shareholders shall be the Initial Beneficiaries of the Trust created by this
Agreement and the Trustees shall retain only such incidents of legal ownership
as are necessary to undertake the actions and transactions authorized herein.
II.7. Notice to Unlocated Shareholders. If the Trust holds
Trust Assets for unlocated Shareholders, due notice shall be given to such
Shareholders in accordance with local law.II.7. Notice to Unlocated
Shareholders. If the Trust holds Trust Assets for unlocated Shareholders, due
notice shall be given to such Shareholders in accordance with local law.
ARTICLE III
BENEFICIARIES
III.1. Beneficial InterestsIII.1. Beneficial Interests.
(a) The Initial Beneficial Interest of each former Shareholder
as a Beneficiary hereof shall be determined by the Trustees in accordance with a
certified copy of Fund's shareholder list as of the Record Date. Fund will
deliver such a certified copy of its shareholder list to the Trustees within a
reasonable time after such date. For ease of administration, the Trustees shall
express the Beneficial Interest of each Beneficiary in terms of units ("Units").
Each record owner of shares of Common Stock of Fund at the Record Date shall be
entitled to receive one Unit in cancellation of each such share and each record
owner of shares of preferred stock of Fund shall be entitled to receive 1.25
Units in cancellation of each such share.
(b) The certificates representing Shares will be deemed to
evidence the number of Units in the Trust owned by each Beneficiary, provided,
however, that upon exchange or transfer of such certificates, the certificates
shall be marked with an appropriate legend, or new certificates in a form
approved by the Trustees shall be issued and shall evidence the number of Units
owned.
(c) If any conflicting claims or demands are made or asserted
with respect to the ownership of any Units, or if there should be any
disagreement between the transferees, assignees, heirs, representatives or
legatees succeeding to all or part of the interest of any Beneficiary resulting
in adverse claims or demands being made in connection with such Units, then, in
any of such events, the Trustees shall be entitled, at their sole election, to
refuse to comply with any such conflicting claims or demands. In so refusing,
the Trustees may elect to make no payment or distribution with respect to such
Units, or to make such payment to a court of competent jurisdiction or an escrow
agent, and in so doing the Trustees shall not be or become liable to any of such
parties for their failure or refusal to comply with any of such conflicting
claims or demands, nor shall the Trustees be liable for interest on any funds
which it may so withhold. The Trustees shall be entitled to refrain and refuse
to act until either (i) the rights of the adverse claimants have been
adjudicated by a final judgment of a court of competent jurisdiction, (ii) all
differences have been adjusted by valid written agreement between all of such
parties, and the Trustees shall have been furnished with an executed counterpart
of such agreement, or (iii) there is furnished to the Trustees a surety bond or
other security satisfactory to the Trustees, as they shall deem appropriate, to
fully indemnify them as between all conflicting claims or demands.
III.2. Rights of BeneficiariesIII.2. Rights of Beneficiaries.
Each Beneficiary shall be entitled to participate in the rights and benefits due
to a Beneficiary hereunder according to his Beneficial Interest. Each
Beneficiary shall take and hold the same subject to all the terms and provisions
of this Agreement. The interest of the Beneficiary hereby is declared and shall
be in all respects personal property and upon the death of an individual
Beneficiary, his Beneficial Interest shall pass as personal property to his
legal representative and such death shall in no way terminate or affect the
validity of this Agreement. A Beneficiary shall have no title to, right to,
possession of, management of, or control of, the Trust Assets except as herein
expressly provided. No widower, widow, heir, or devisee of any person who may be
a Beneficiary shall have any right of dower, homestead, or inheritance, or of
partition, or of any other right, statutory or otherwise, in any property
forming a part of the Trust Assets but the whole title to all the Trust Assets
shall be vested in the Trustees and the sole interest of the Beneficiaries shall
be the rights and benefits given to such Persons under the Agreement.
III.3. Transfer of Interests of BeneficiariesIII.3. Transfer
of Interests of Beneficiaries. The Beneficial Interests will be registered with
the Securities and Exchange Commission on Form 8-B. Once the Trust's
Registration Statement on Form 8-B has been declared effective, the Beneficial
Interest of a Beneficiary may be transferred, in accordance with applicable
securities laws, either by the Beneficiary in person or by a duly authorized
agent or attorney, or by the properly appointed legal representatives of the
Beneficiary; provided, however, that if the Trust receives a ruling from the
Internal Revenue Service to the effect that transferability by Beneficiaries of
their Beneficial Interests will adversely affect the Trust's qualification as a
"liquidating trust" for purposes of the Code and Treasury Regulation Section
301.7701-4(d), the Beneficial Interest of a Beneficiary may not be transferred
either by the Beneficiary in person or by a duly authorized agent or attorney,
or by the properly appointed legal representatives of the Beneficiary, nor may a
Beneficiary have authority or power to sell, assign, transfer, encumber, or in
any other manner dispose of his Beneficial Interest; provided, however, that the
Beneficial Interest shall be assignable or transferable by will, intestate
succession, or operation of law and, provided further, that the executor or
administrator of the estate of a Beneficiary may mortgage, pledge, grant a
security interest in, hypothecate or otherwise encumber, the Beneficial Interest
held by the estate of such Beneficiary if necessary in order to borrow money to
pay estate, succession or inheritance taxes or the expenses of administering the
estate of the Beneficiary, upon written notice to the Trustees.
The Beneficial Interests of the Beneficiaries hereunder shall
not be subject to attachment, execution, sequestration or any order of a court,
nor shall such interests be subject to the contracts, debts, obligations,
engagements or liabilities of any Beneficiary, but the interest of a Beneficiary
shall be paid by the Trustees to the Beneficiary free and clear of all
assignments, attachments, anticipations, levies, executions, decrees and
sequestrations and shall become the property of the Beneficiary only when
actually received by such Beneficiary.
III.4. Trustees as BeneficiariesIII.4. Trustees as
Beneficiaries. Each Trustee, either individually or in a representative or
fiduciary capacity may be a Beneficiary to the same extent as if he were not a
Trustee hereunder and have all the rights of a Beneficiary, including, without
limitation, the right to vote and to receive distributions, to the same extent
as if he were not a Trustee hereunder.
ARTICLE IV ARTICLE IV
DURATION AND TERMINATION OF TRUST
IV.1. DurationIV.1. Duration. The existence of this Trust
shall terminate upon the earliest of (i) a termination required by the
applicable laws of the State of New York, (ii) the termination due to the
distribution of all the Trust Assets as provided in Section 5.6, or (iii) the
expiration of a period of three years from the date of the creation of the
Trust; provided, however, the Trustees, in their discretion, may extend the
existence of this Trust to such later date as they may designate, if they
determine that an extension is reasonably necessary to pay or make provision for
then known liabilities, actual or contingent, and provided further, however,
that the Trust shall not in any event terminate pursuant to this clause (iii)
prior to the date the Trustees are permitted to make a final distribution in
accordance with Section 5.6.
IV.2. IV.2. Other Obligations of Trustees upon Termination.
Upon distribution of all the Trust Assets, the Trustees shall provide for the
retention of the books, records, lists of holders of Units, certificates for
Shares and Units and files which shall have been delivered to or created by the
Trustees. At the Trustees' discretion, all of such records and documents may be
destroyed at any time after seven years from the distribution of all the Trust
Assets. Except as otherwise specifically provided herein, upon the distribution
of all the Trust Assets, the Trustees shall have no further duties or
obligations hereunder.
ARTICLE VARTICLE V
ADMINISTRATION OF TRUST ASSETS
V.1. Disposition of Trust V.1. Disposition of Trust Assets.
The Trustees may, at such times as they may deem appropriate, collect,
liquidate, reduce to cash, transfer, assign, or otherwise dispose of all or any
part of the Trust Assets as they deem appropriate at public auction or at
private sale for cash, securities or other property, or upon credit (either
secured or unsecured as the Trustees shall determine).
V.2. Transactions with Related PersonsV.2. Transactions with
Related Persons. Notwithstanding any other provisions of this Agreement, but
only to the extent that such transactions have not been previously approved by
the Shareholders as part of the Plan, the Trustees shall not knowingly, directly
or indirectly, sell or otherwise transfer all or any part of the Trust Assets
to, or contract with, (i) any Trustee, employee or agent (acting in their
individual capacities) of this Trust or (ii) any Person of which any Trustee,
employee or agent of this Trust is an affiliate by reason of being a trustee,
director, officer, partner or direct or indirect beneficial owner of 5% or more
of the outstanding capital stock, shares or other equity interest of such
Persons; unless, in each such case, after disclosure of such interest or
affiliation, such transaction is approved by a majority of the Trustees who are
not interested in the transaction and such Trustees determine that such
transaction is on its terms fair and reasonable to the Trust and is in the best
interests of the Beneficiaries, and in no event less favorable to this Trust
than terms available for a comparable transaction with unrelated Persons. The
Trustees are entitled to rely in good faith on certificates of the Trustees,
employees and agents of the Trust with respect to their interests in any
transaction.
V.3. V.3. Restriction on Trust Assets. The Trust shall not
receive transfers of any assets prohibited by Revenue Procedure 82-58, as the
same may be amended, supplemented or modified including, but not limited to, any
listed stocks or securities, any readily-marketable assets, any operating assets
of a going business, any unlisted stock of a single issuer that represents 80
percent or more of the stock of such issuer or any general or limited
partnership interests.
V.4. Payment of Claims, Expenses and LiabilitiesV.4. Payment
of Claims, Expenses and Liabilities. The Trustees shall pay from the Trust
Assets all claims, expenses, charges, liabilities, and obligations of the Trust
and all Liabilities and obligations which the Trustees specifically assume and
agree to pay pursuant to this Agreement and such transferee liabilities which
the Trustees may be obligated to pay as transferees of the Trust Assets,
including among the foregoing, and without limiting the generality of the
foregoing, interest, penalties, taxes, assessments, and public charges of every
kind and nature and the costs, charges, and expenses connected with or growing
out of the execution or administration of this Trust and such other payments and
disbursements as are provided in this Agreement or which may be determined to be
a proper charge against the Trust Assets by the Trustees.
V.5. Interim DistributionsV.5. Interim Distributions. At such
times as may be determined by them, the Trustees shall distribute, or cause to
be distributed, to the Beneficiaries, in proportion to the number of Units held
by each Beneficiary, such cash or other property comprising a portion of the
Trust Assets as the Trustees may in their sole discretion determine may be
distributed without detriment to the conservation and protection of the Trust
Assets; provided, however, that the Trustees shall distribute, or cause to be
distributed, at least annually to the Beneficiaries any proceeds from the sale
of Trust Assets in excess of a reasonable amount (as determined by the Trustees)
to satisfy the claims, expenses and liabilities described in Section 5.4.
V.6. Final DistributionV.6. Final Distribution. If the
Trustees determine that the Liabilities and all other claims, expenses, charges,
liabilities and obligations of the Trust have been paid or discharged, or if the
existence of the Trust shall terminate pursuant to Section 4.1, the Trustees
shall, as expeditiously as is consistent with the conservation and protection of
the Trust Assets, distribute the Trust Assets to the Beneficiaries in proportion
to the number of Units held by each Beneficiary. The Trustees shall hold in the
Trust and thereafter make disposition of all liquidating distributions and other
payments due any Beneficiaries who have not been located, in accordance with
Maryland law, subject to applicable state laws regarding escheat and abandoned
property.
V.7. Reports to Beneficiaries and OthersV.7. Reports to
Beneficiaries and Others. As soon as practicable after the end of each taxable
year of the Trust and after termination of the Trust, the Trustees shall submit
a written report and account to the Beneficiaries showing (i) the assets and
liabilities of the Trust at the end of such taxable year or upon termination and
the receipts and disbursements of the Trustees for such taxable year or period,
certified by an independent certified public accountant, (ii) any changes in the
Trust Assets which they have not previously reported, and (iii) any action taken
by the Trustees in the performance of their duties under this Agreement which
they have not previously reported and which, in their opinion, materially
affects the Trust Assets. The Trustees may submit similar reports for such
interim periods during the taxable year as they deem advisable or as may be
required by the Securities and Exchange Commission. The taxable year of the
Trust shall end on December 31 of each year unless the Trustees deem it
advisable to establish some other date as the date on which the taxable year of
the Trust shall end.
V.8. Federal Income Tax InformationV.8. Federal Income Tax
Information. As soon as practicable after the close of each taxable year, the
Trustees shall mail to each Person who was a Beneficiary at the close of the
year, a statement showing on a unit basis the dates and amounts of all
distributions made by the Trustees, the Trust Assets disposed of by the Trust,
if any, income earned on Trust Assets, if any, and such other information as is
reasonably available to the Trustees which may be helpful in determining the
amount of gross income attributable to the Trust that such Beneficiary should
include in such Person's Federal income tax return for the preceding year. In
addition, after receipt of a request in good faith, or in their discretion
without such request or if required by applicable law, the Trustees shall
furnish to any Person who has been a Beneficiary at any time during the
preceding year a statement containing such further information as is reasonably
available to the Trustees which shall be helpful in determining the amount of
taxable income which such Person should include in such Person's Federal income
tax return.
V.9. Employment of Manager V.9.Employment of Manager
(a) The Trustees shall be responsible for the general policies
of the Trust and for the general supervision of the activities of the Trust
conducted by all agents, employees, advisors or managers of the Trust. However,
the Trustees are not and shall not be required personally to conduct the
activities of the Trust, and consistent with their ultimate responsibility as
stated above, the Trustees shall have the power to appoint, employ or contract
with any Person or Persons (including one or more of themselves or any
corporation, partnership, or trust in which one or more of them may be
directors, officers, shareholders, partners or trustees) as the Trustees may
deem necessary or proper for the transaction of the activities of the Trust. The
Trustees may therefore employ or contract with such Person or Persons (herein
referred to as the "Manager") and may grant or delegate such authority to the
Manager as the Trustees may in their sole discretion deem necessary or desirable
to carry out the purpose of the Trust without regard to whether such authority
is normally granted or delegated by trustees.
The Trustees shall have the power to determine the terms and
compensation of the Manager or any other Person whom they may employ or with
whom they may contract, provided, however, that any determination to employ or
contract with any Trustee or other Person such that a Trustee or other Person
would be an Affiliated Trustee or an Affiliated Person shall be valid only if
made, approved or ratified after disclosure of such interests by the affirmative
vote or written consent of a majority of the non-Affiliated Trustees. The
Trustees may exercise broad discretion in allowing the Manager to administer and
regulate the operations of the Trust, to act as agent for the Trust, to execute
documents on behalf of the Trustees, and to make executive decisions which
conform to general policies and general principles previously established by the
Trustees.
(b) The Manager or other Persons shall not be required to
administer the Trust as its sole and exclusive function and may have other
business interests and may engage in other activities similar or in addition to
those relating to the Trust, including the rendering of advice or services of
any kind to investors or any other Persons and the management of other
investments.
ARTICLE VI ARTICLE VI
POWERS OF AND LIMITATIONS ON THE TRUSTEES
VI.1. Limitations on TrusteesVI.1. Limitations on Trustees.
The Trustees shall not at any time, on behalf of the Trust or Beneficiaries,
enter into or engage in any trade or business, and no part of the Trust Assets
shall be used or disposed of by the Trustees in furtherance of any trade or
business. The Trustees shall be restricted to the holding and collection of the
Trust Assets and the payment and distribution thereof for the purposes set forth
in this Agreement and to the conservation and protection of the Trust Assets and
the administration thereof in accordance with the provisions of this Agreement.
In no event shall the Trustees take any action which would jeopardize the status
of the Trust as a "liquidating trust" for federal income tax purposes within the
meaning of Treasury Regulation Section 301.7701-4(d). This limitation shall
apply regardless of whether the conduct of any such trade or business is deemed
by the Trustees to be necessary or proper for the conservation and protection of
the Trust Assets. The Trustees shall not invest any of the funds held as Trust
Assets, except that the Trustees may invest any portion of the Trust Assets in
(i) direct obligations of the United States of America or obligations of any
agency or instrumentality thereof which mature not later than one year from the
date of acquisition thereof; (ii) money market deposit accounts, checking
accounts, savings accounts, or certificates of deposit, or other time deposit
accounts which mature not later than one year from the date of acquisition
thereof which are issued by a commercial bank or savings institution organized
under the laws of the United States of America or any state thereof; or (iii)
any other investments which may be determined by the Trustees to be permissible
under Revenue Procedure 82-58, as the same may be amended, supplemented or
modified.
VI.2. Specific Powers of TrusteesVI.2. Specific Powers of
Trustees. Subject to the provisions of Section 6.1, the Trustees shall have the
following specific powers in addition to any powers conferred upon them by any
other Section or provision of this Agreement or any statutory laws of the State
of New York; provided, however, that the enumeration of the following powers
shall not be considered in any way to limit or control the power of the Trustees
to act as specifically authorized by any other Section or provision of this
Agreement and to act in such a manner as the Trustees may deem necessary or
appropriate to conserve and protect the Trust Assets or to confer on the
Beneficiaries the benefits intended to be conferred upon them by this Agreement:
(a) To determine the nature and amount of the consideration to
be received with respect to the sale or other disposition of, or the grant of
interests in, the Trust Assets.
(b) To collect, liquidate or otherwise convert into cash, or
such other property as they deem appropriate, all property, assets and rights in
the Trust Assets, and to pay, discharge and satisfy all other claims, expenses,
charges, Liabilities, and obligations existing with respect to the Trust Assets,
the Trust or the Trustees.
(c) To elect, appoint, engage, retain or employ any Persons as
agents, representatives, employees, or independent contractors (including
without limitation, investment advisors, accountants, transfer agents,
attorneys-at-law, managers, appraisers, brokers, or otherwise) in one or more
capacities, and to pay compensation from the Trust Assets for services in as
many capacities as such Person may be so elected, appointed, engaged, retained
or employed, to prescribe the titles, powers and duties, terms of service and
other terms and conditions of the election, appointment, engagement, retention
or employment of such Persons and, except as prohibited by law, to delegate any
of the powers and duties of the Trustees to any one or more Trustees, agents,
representatives, employers, independent contractors or other Persons.
(d) To retain and set aside such funds out of the Trust Assets
as the Trustees shall deem necessary or expedient to pay, or provide for the
payment of (i) unpaid claims, expenses, charges, Liabilities, and obligations of
the Trust or Fund, (ii) contingencies, and (iii) the expenses of administering
the Trust Assets.
(e) To do and perform any and all acts necessary or
appropriate for the conservation and protection of the Trust Assets, including
acts or things necessary or appropriate to maintain assets held by the Trustees
pending sale or other disposition thereof or distribution thereof to the
Beneficiaries.
(f) To hold legal title to property of the Trust in the name
of the Trust, or in the name of one or more of the Trustees, or of any other
Person, without disclosure of the interest of the Trust therein.
(g) To cause any investments of any part of the Trust Assets
to be registered and held in the name of any one or more of their names or in
the names of a nominee or nominees without increase or decrease of liability
with respect thereto.
(h) To institute or defend actions or declaratory judgments or
other actions, arbitrations or mediations and to take such other action, in the
name of the Trust or Fund or as otherwise required, as the Trustees may deem
necessary or desirable to enforce any instruments, contracts, agreements, causes
of action or rights relating to or forming a part of the Trust Assets.
(i) To determine conclusively from time to time the value of
and to revalue the securities and other property of the Trust, in accordance
with independent appraisals or other information as they deem satisfactory.
(j) To cancel, terminate, or amend any instruments, contracts,
agreements, obligations or causes of action relating to or forming a part of the
Trust Assets, and to execute new instruments, contracts, agreements, obligations
or causes of action notwithstanding that the terms of any such instruments,
contracts, agreements, obligations or causes of action may extend beyond the
terms of this Trust, provided that no such new instrument, contract, agreement,
obligation or cause of action shall permit the Trustees to engage in any
activity prohibited by Section 6.1.
(k) To vote by proxy or otherwise on behalf of the
Beneficiaries and with full power of substitution all shares of stock and all
securities held by the Trustees hereunder and to exercise every power, election,
discretion, option and subscription right and give every notice, make every
demand, and to do every act or thing in respect to any shares of stock or any
securities held by the Trustees which the Trustees might or could do if they
were the absolute owners thereof.
(l) To undertake or join in any merger, plan of
reorganization, consolidation, liquidation, dissolution, readjustment or other
transaction of any corporation, any of whose shares of stock or other
securities, obligations, or properties may at any time constitute a part of the
Trust Assets, and to accept the substituted shares of stock, bonds, securities,
obligations and properties and to hold the same in trust in accordance with the
provisions hereof.
(m) In connection with the sale or other disposition or
distribution of any securities held by the Trustees, to comply with the
applicable Federal and state securities laws, and to enter into agreements
relating to sale or other disposition or distribution thereof.
(n) To authorize transactions between corporations or other
entities whose securities, or other interests therein (either in the nature of
debt or equity) are held by the Trustees as part of the Trust Assets.
(o) To perform any act authorized, permitted, or required
under any instrument, contract, agreement, right, obligation or cause of action
relating to or forming a part of the Trust Assets whether in the nature of an
approval, consent, demand or notice thereunder or otherwise, unless such act
would require the consent of the Beneficiaries in accordance with the express
provisions of this Agreement.
<PAGE>
ARTICLE VII ARTICLE VII
CONCERNING THE TRUSTEES,
BENEFICIARIES, EMPLOYEES AND AGENTS
VII.1. GenerallyVII.1. Generally. The Trustees accept and
undertake to discharge the trust created by this Agreement, upon the terms and
conditions thereof on behalf of the Beneficiaries. The Trustees shall exercise
such of the rights and powers vested in them by this Agreement, and use the same
degree of care and skill in their exercise as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs. No provision of
this Agreement shall be construed to relieve the Trustees from liability for
their own negligent action, their own negligent failure to act, or their own
willful misconduct, except that:
(a) No Trustee shall be responsible for the acts or omissions
of any other Trustee if done or omitted without his knowledge or consent unless
it shall be proved that such Trustee was negligent in ascertaining the pertinent
facts, and no successor Trustee shall be in any way responsible for the acts or
omissions of any Trustees in office prior to the date on which he becomes a
Trustee.
(b) No Trustee shall be liable except for the performance of
such duties and obligations as are specifically set forth in this Agreement, and
no implied covenants or obligations shall be read into this Agreement against
the Trustees.
(c) In the absence of bad faith on the part of the Trustees,
the Trustees may conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon any certificates or opinions
furnished to the Trustees and conforming to the requirements of this Agreement;
but in the case of any such certificates or opinions which are specifically
required to be furnished to the Trustees by any provision hereof, the Trustees
shall be under a duty to examine the same to determine whether or not they
conform to the requirements of this Agreement.
(d) No Trustee shall be liable for any error of judgment made in good faith.
No Trustee shall be liable with respect to any action taken or omitted to be
taken by him in good faith in accordance with the direction of Beneficiaries
having an aggregate Beneficial Interest of more than 50% relating to the time,
method, and place of conducting any proceeding for any remedy available to the
Trustees, or exercising any trust or power conferred upon the Trustees under
this Agreement.
VII.2. Reliance by TrusteesVII.2. Reliance by Trustees.
Except as otherwise provided in Section 7.1:
(a) The Trustees may rely and shall be protected in acting
upon any resolution, certificate, statement, instrument, opinion, report,
notice, request, consent, order, or other paper or document believed by them to
be genuine and to have been signed or presented by the proper party or parties.
(b) The Trustees may consult with legal counsel, auditors or
other experts to be selected by them, including firms of which a Trustee may be
a member, and the advice or opinion of such counsel, auditors or other experts
shall be full and complete personal protection to all Trustees, employees and
agents of the Trust in respect of any action taken or suffered by them in good
faith and in reliance on, or in accordance with, such advice or opinion.
(c) Persons dealing with Trustees shall look only to the Trust
Assets to satisfy any liability incurred by the Trustees to such Person in
carrying out the terms of this Trust, and the Trustees shall have no personal or
individual obligation to satisfy any such liability.
(d) As far as practicable, the Trustees shall cause any
written instrument creating an obligation of the Trust to include a reference to
this Agreement and to provide that neither the Beneficiaries, the Trustees nor
their agents shall be liable thereunder and that the other parties to such
instrument shall look solely to the Trust Assets for the payment of any claim
thereunder or the performance thereof; provided, however, that the omission of
such provision from any such instrument shall not render the Beneficiaries,
Trustees, or their agents liable nor shall the Trustees be liable to anyone for
such omission.
VII.3. Liability to Third PersonsVII.3. Liability to Third
Persons. No Beneficiary shall be subject to any personal liability whatsoever,
in tort, contract or otherwise, to any Person in connection with the Trust
Assets or the affairs of this Trust; and no Trustee, employee or agent of this
Trust shall be subject to any personal liability whatsoever, in tort, contract
or otherwise, to any Person in connection with the Trust Assets or the affairs
of this Trust, except for his own willful misconduct, knowingly and
intentionally committed in bad faith; and all such other Persons shall look
solely to the Trust Assets for satisfaction of claims of any nature arising in
connection with the affairs of this Trust. The Trustees shall, at all times,
maintain insurance for the protection of the Trust Assets, its Beneficiaries,
Trustees, employees and agents in such amount as the Trustees shall deem
adequate to cover all foreseeable liability to the extent available at
reasonable rates.
VII.4. RecitalsVII.4. Recitals. Any written instrument
creating an obligation of this Trust shall be conclusively taken to have been
executed or done by a Trustee, employee or agent of this Trust only in his
capacity as Trustee under this Agreement or in his capacity as employee or agent
of the Trust.
VII.5. IndemnificationVII.5. Indemnification. Each Trustee and
employee of the Trust and each agent of the Trust and the directors, officers,
partners, employees, equity owners and agents of such agent (each an
"Indemnified Person" and collectively, the "Indemnified Persons") shall be
indemnified out of the Trust Assets against all liabilities and expenses,
including amounts paid in satisfaction of judgments, in compromise or as fines
and penalties, and counsel fees, reasonably incurred by the Indemnified Persons
in connection with the defense or disposition of any action, suit or other
proceeding by the Trust or any other Person, whether civil or criminal, in which
the Indemnified Person may be involved or with which the Indemnified Person may
be threatened (i) in the case of any Trustee or any employee or agent of the
Trust, while in office or thereafter, by reason of his being or having been such
a Trustee, employee or agent, and (ii) in the case of any director, officer,
partner, employee, equity owner or agent of any agent of the Trust by reason of
any such Person exercising or failing to exercise any right hereunder; provided,
however, that the Indemnified Person shall not be entitled to such
indemnification in respect of any matter as to which the Indemnified Person
shall have been adjudicated to have acted in bad faith or with willful
misfeasance, negligence, or in reckless disregard of the Indemnified Person's
duties; and provided, further, however, that, as to any matter disposed of by a
compromise payment by such Indemnified Person pursuant to a consent decree or
otherwise, no indemnification either for said payment or for any other expenses
shall be provided unless the Trustees shall have received a written opinion from
independent counsel approved by the Trustees to the effect that if the foregoing
matters had been adjudicated, such Indemnified Person would not have been found
to have acted in bad faith or with willful misfeasance, negligence, or in
reckless disregard of the Indemnified Person's duties. The rights accruing to
any Indemnified Person under these provisions shall not exclude any other right
to which the Indemnified Person may be lawfully entitled; provided, however,
that no Indemnified Person may satisfy any right of indemnity or reimbursement
granted herein or to which the Indemnified Person may be otherwise entitled
except out of the Trust Assets, and no Beneficiary shall be personally liable to
any person with respect to any claim for indemnity or reimbursement or
otherwise. The Trustees may make advance payments in connection with
indemnification under this Section, provided that the Indemnified Person shall
have given a written undertaking to repay any amount advanced to the Indemnified
Person and to reimburse the Trust in the event it is subsequently determined
that the Indemnified Person is not entitled to such indemnification. The
Trustees may purchase such insurance as they feel, in the exercise of their
discretion, adequately insures that each Indemnified Person shall be indemnified
against any such loss, liability or damage pursuant to this Section. The rights
accruing to any Indemnified Person by reason of the foregoing shall not be
deemed to exclude any other right to which he may legally be entitled nor shall
anything else contained herein restrict the right of the Trustees to indemnify
or reimburse such Indemnified Person in any proper case even though not
specifically provided for herein, nor shall anything contained herein restrict
the right of any such Indemnified Person to contribution under applicable law.
Notwithstanding anything to the contrary in this Paragraph 7.5, no
indemnification shall be provided in excess of that permitted by the Investment
Company Act of 1940 (the "1940 Act") if the provisions of Section 17 thereof
apply.
VII.6. Rights of Trustees, Employees, Independent Contractors
and Agents To Own Units or Other Property and To Engage in Other BusinessVII.6.
Rights of Trustees, Employees, Independent Contractors and Agents To Own Units
or Other Property and To Engage in Other Business. Any Trustee, employee,
independent contractor or agent may acquire, own, hold and dispose of Units for
his individual account, and may exercise all rights thereof and thereunder to
the same extent and in the same manner as if he were not a Trustee, employee,
independent contractor or agent. Any Trustee, employee, independent contractor
or agent may, in his personal capacity or in a capacity of trustee, officer,
director, shareholder, partner, member, advisor, employee of any Person or
otherwise, have business interests and holdings similar to or in addition to
those relating to the Trust. Subject to the provisions of Article V hereof, any
Trustee, employee, independent contractor or agent of the Trust may be a
trustee, officer, director, shareholder, partner, member, advisor, employee or
independent contractor of, or otherwise have a direct or indirect interest in,
any Person who may be engaged to render advice or services to the Trust, and may
receive compensation from such Person as well as compensation as Trustee,
employee, independent contractor or agent or otherwise hereunder. None of these
activities shall be deemed to conflict with his duties as Trustee, employee,
independent contractor or agent.
<PAGE>
ARTICLE VIII ARTICLE VIII
PROTECTION OF PERSONS DEALING WITH THE TRUSTEES
VIII.1. Action by TrusteesVIII.1. Action by Trustees. All
action required or permitted to be taken by the Trustees, in their capacity as
Trustees, shall be taken (i) at a meeting at which a quorum is present, having
been duly called by one or more of the Trustees on at least 24 hours prior
written or telephonic notice to all of the Trustees then serving, or (ii)
without a meeting, by a written vote, resolution, or other writing signed by all
the Trustees then serving. Notice of a meeting may be waived in writing by any
Trustee either before or after such meeting and the attendance of a Trustee
shall constitute a waiver of notice of such meeting except where a Trustee
attends a meeting for the express purpose of objecting to the transaction of any
business on the ground that the meeting has not been lawfully called or
convened. All or any one or more Trustees may participate in the meeting of the
Trustees by means of conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other and
participation in a meeting pursuant to which such communications are used by a
Trustee shall constitute presence in person at such meeting. Except where this
Agreement otherwise provides, all action taken at such a meeting shall be by
vote or resolution of a majority of such of the Trustees as are present and
shall have the same force and effect as if taken by all the Trustees. A majority
of the Trustees then serving shall constitute a quorum. Any action taken by the
Trustees pursuant to this Section 8.1 may be implemented by any one Trustee
unless otherwise specified by the Trustees authorizing or approving such action.
Such implementation may include, without limitation, the execution and delivery
of documents. Without limiting any of the foregoing of this Article VIII and
subject to the approval of the Trustees as herein provided, any one Trustee may
hold title to, or an interest in, any and all of the Trust Assets, for and on
behalf of the Trust and the Trustees.
VIII.2. DelegationVIII.2. Delegation. An individual Trustee
may, at any time and from time to time, by an instrument in writing delegate any
or all of his rights, powers, duties, authority and privileges, whether or not
discretionary, to any other Trustee for such period or periods of time as may be
specified in such written instrument; provided, however, that any such
instrument shall be revocable at any time and that any Trustee who is granted
any discretionary power hereunder may not delegate such discretionary power to
any Trustee who is not granted such discretionary power.
VIII.3. Reliance on Statement by TrusteesVIII.3. Reliance on
Statement by Trustees. Any Person dealing with the Trustees shall be fully
protected in relying upon the Trustees' certificate signed by any one or more of
the Trustees that they have authority to take any action under this Trust. Any
Person dealing with the Trustees shall be fully protected in relying upon the
Trustees' certificate setting forth the facts concerning the calling of any
meeting of the Trustees or the Beneficiaries, the giving of notice thereof, and
the action taken at such meeting, including the aggregate number of Units held
by the Beneficiaries taking such action.
IX ARTICLE IX
COMPENSATION OF TRUSTEES
IX.1. Amount of CompensationIX.1. Amount of Compensation. In
lieu of commissions or other compensation fixed by law for trustees, each
Trustee shall receive as compensation for services as Trustee hereunder, (i)
$500 per month or portion thereof during which such Person serves as Trustee
plus $200 per hour spent on Trust matters or (ii) such greater compensation as
shall be determined by the Board of Directors of Fund at their final meeting or
as may subsequently be approved by Beneficiaries having an aggregate Beneficial
Interest of more than 50%.
IX.2. Dates of PaymentIX.2. Dates of Payment. The
compensation payable to each Trustee pursuant to the provisions of Section 9.1
shall be paid monthly or at such other times as
the Trustees may determine.
X.3. ExpensesIX.3. Expenses. Each Trustee shall be reimbursed from the Trust
Assets for all expenses reasonably incurred by him in the performance of his
duties in accordance with this Agreement.
<PAGE>
ARTICLE X ARTICLE X
TRUSTEES AND SUCCESSOR TRUSTEES
X.1. Number and Qualification of TrusteesX.1. Number and
Qualification of Trustees. Subject to the provisions of Section 10.3 relating to
the period pending the appointment of a successor Trustee, there shall be no
fewer than one nor more than five Trustees of this Trust, each of whom shall be
a citizen and resident of or a corporation which is incorporated under the laws
of a state of the United States and, if a corporation, it shall be authorized to
act as a corporate fiduciary under the laws of the State of New York and each of
whom shall not have been at anytime prior to May 8, 1996 an "interested person"
(as such term is used in the 1940 Act) with respect to Fund or Commonwealth
Associates (a partnership which sponsored Fund and acted as underwriter of
Fund's initial public offering) as if each of Fund and Commonwealth Associates
were an investment company registered under the 1940 Act. Within the limits set
forth in this Section 10.1, the number of Trustees may be increased or decreased
from time to time by the Trustees.
If any corporate Trustee shall ever change its name, or shall
reorganize or reincorporate, or shall merge with or into or consolidate with any
other bank or trust company, such corporate Trustee shall be deemed to be a
continuing entity and shall continue to act as a Trustee hereunder with the same
liabilities, duties, powers, titles, discretions and privileges as are herein
specified for a Trustee.
X.2. Resignation and RemovalX.2. Resignation and Removal. Any
Trustee may resign and be discharged from the Trust hereby created by giving
written notice thereof to the remaining Trustee or Trustees and by mailing such
notice to the Beneficiaries at their respective addresses as they appear in the
records of the Trustees. Such resignation shall become effective on the day
specified in such notice or upon the appointment of such Trustee's successor and
such successor's acceptance of such appointment, whichever is earlier. Any
Trustee may be removed at any time, with or without cause, by Beneficiaries
having an aggregate Beneficial Interest of at least 75% of the total Beneficial
Interest.
X.3. Appointment of SuccessorX.3. Appointment of Successor.
Should at any time a Trustee resign or be removed, die, become mentally
incompetent or incapable of action (as determined by a majority of the remaining
Trustees in their sole discretion), or be adjudged a bankrupt or insolvent, a
vacancy shall be deemed to exist and a successor shall be appointed by the
remaining Trustees. If and only if such a vacancy is not filled by the remaining
Trustees within 60 days, the Beneficiaries may, pursuant to Article XII hereof,
call a meeting to appoint a successor Trustee by Beneficiaries holding a
majority of the Beneficial Interest represented at the meeting. Pending the
appointment of a successor Trustee, the remaining Trustees then serving may take
any action in the manner set forth in Section 8.1.
X.4. Acceptance of Appointment by Successor TrusteeX.4.
Acceptance of Appointment by Successor Trustee. Any successor Trustee appointed
hereunder shall execute an instrument accepting such appointment hereunder and
shall deliver one counterpart thereof to each of the other Trustees and, in case
of a resignation, to the retiring Trustee. Thereupon such successor Trustee
shall, without any further act, become vested with all the estates, properties,
rights, powers, trusts and duties of his or its predecessor in the Trust
hereunder with like effect as if originally named therein; but the retiring
Trustee shall nevertheless, when requested in writing by the successor Trustee
or by the remaining Trustees, execute and deliver an instrument or instruments
conveying and transferring to such successor Trustee upon the trust herein
expressed, all the estates, properties, rights, powers and trusts of such
retiring Trustee, and shall duly assign, transfer and deliver to such successor
Trustee all property and money held by him hereunder.
X.5. BondsX.5. Bonds. Unless required by the Board of
Directors of Fund prior to the Record Date, or unless a bond is required by law,
no bond shall be required of any original Trustee hereunder. Unless required by
a majority vote of the Trustees prior to a successor Trustee's acceptance of an
appointment as such pursuant to Section 10.4, or unless a bond is required by
law and such requirement cannot be waived by or with approval of the
Beneficiaries, no bond shall be required of any successor Trustee hereunder. If
a bond is required by law, no surety or security with respect to such bond shall
be required unless required by law and such requirement cannot be waived by or
with approval of the Beneficiaries or unless required by the Board of Directors
of Fund. If a bond is required by the Board of Directors of Fund or by a
majority vote of the Trustees, the Board of Directors of Fund or the Trustees,
as the case may be, shall determine whether, and to what extent, a surety or
security with respect to such bond shall be required.
ARTICLE XI ARTICLE XI
CONCERNING THE BENEFICIARIES
XI.1. Evidence of Action by BeneficiariesXI.1. Evidence of
Action by Beneficiaries. Whenever in this Agreement it is provided that the
Beneficiaries may take any action (including the making of any demand or
request, the giving of any notice, consent, or waiver, the removal of a Trustee,
the appointment of a successor Trustee, or the taking of any other action), the
fact that at the time of taking any such action such Beneficiaries have joined
therein may be evidenced (i) by any instrument or any number of instruments of
similar tenor executed by Beneficiaries in person or by agent or attorney
appointed in writing, or (ii) by the record of the Beneficiaries voting in favor
thereof at any meeting of Beneficiaries duly called and held in accordance with
the provisions of Article XII.
XI.2. Limitation on Suits by BeneficiariesXI.2. Limitation on
Suits by Beneficiaries. No Beneficiary shall have any right by virtue of any
provision of this Agreement to institute any action or proceeding at law or in
equity against any party other than the Trustees upon or under or with respect
to the Trust Assets or the agreements relating to or forming part of the Trust
Assets, and the Beneficiaries do hereby waive any such right, unless
Beneficiaries having an aggregate Beneficial Interest of at least 25% shall have
made written request upon the Trustees to institute such action or proceeding in
their own names as Trustees hereunder and shall have offered to the Trustees
reasonable indemnity against the costs and expenses to be incurred therein or
thereby, and the Trustees for 30 days after their receipt of such notice,
request, and offer of indemnity shall have failed to institute any such action
or proceeding.
XI.3. Requirement of UndertakingXI.3. Requirement of
Undertaking. The Trustees may request any court to require, and any court may in
its discretion require, in any suit for the enforcement of any right or remedy
under this Agreement, or in any suit against the Trustees for any action taken
or omitted by them as Trustees, the filing by any party litigant in such suit of
an undertaking to pay the costs of such suit, and such court may in its
discretion assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in such suit, having due regard to the merits and
good faith of the claims or defenses made by such party litigant; provided,
however, that the provisions of this Section shall not apply to any suit or
other proceeding by the Trustees.
ARTICLE XII ARTICLE XII
MEETING OF BENEFICIARIES
XII.1. Purpose of MeetingsXII.1. Purpose of Meetings. A
meeting of the Beneficiaries may be called at any time and from time to time
pursuant to the provisions of this Article for the purposes of taking any action
which the terms of this Agreement permit a Beneficiary having a specified
aggregate Beneficial Interest to take either acting alone or with the Trustees.
XII.2. Meeting Called by TrusteesXII.2. Meeting Called by
Trustees. The Trustees may at any time call a meeting of the Beneficiaries to be
held at such time and at such place within the State of New York (or elsewhere
if so determined by a majority of the Trustees) as the Trustees shall determine.
Written notice of every meeting of the Beneficiaries shall be given by the
Trustees (except as provided in Section 12.3), which written notice will set
forth the time and place of such meeting and in general terms the action
proposed to be taken at such meeting, and shall be mailed not more than 90 nor
less than 10 days before such meeting is to be held to all of the Beneficiaries
of record not more than 90 days before the date of such meeting. The notice
shall be directed to the Beneficiaries at their respective addresses as they
appear in the records of the Trust.
XII.3. Meeting Called on Request of BeneficiariesXII.3.
Meeting Called on Request of Beneficiaries. Within 30 days after written request
to the Trustees by Beneficiaries having an aggregate Beneficial Interest of at
least 50% to call a meeting of all the Beneficiaries, which written request
shall specify in reasonable detail the action proposed to be taken, the Trustees
shall proceed under the provisions of Section 12.2 to call a meeting of the
Beneficiaries, and if the Trustees fail to call such meeting within such 30-day
period then such meeting may be called by Beneficiaries having an aggregate
Beneficial Interest of at least one-third or their designated representative.
XII.4. Persons Entitled to Vote at Meeting of
BeneficiariesXII.4. Persons Entitled to Vote at Meeting of Beneficiaries. Each
Beneficiary shall be entitled to vote at a meeting of the Beneficiaries either
in person or by his proxy duly authorized in writing. The vote of each
Beneficiary shall be weighted based on the number of Units held by each
Beneficiary in the Trust Assets. The signature of the Beneficiary on such
written authorization need not be witnessed or notarized.
XII.5. Quorum and Vote RequiredXII.5. Quorum and Vote
Required. At any meeting of Beneficiaries, the presence of Beneficiaries having
an aggregate Beneficial Interest sufficient to take action on any matter for the
transaction of which such meeting was called shall be necessary to constitute a
quorum; but if less than a quorum be present, Beneficiaries having an aggregate
Beneficial Interest of more than 50% of the aggregate Beneficial Interest of all
Beneficiaries represented at the meeting may adjourn such meeting with the same
effect and for all intents and purposes as though a quorum had been present.
Except to the extent a higher percentage is specified for a particular matter or
is required by law, the approval of Beneficiaries having an aggregate Beneficial
Interest of more than 50% of the aggregate Beneficial Interest of all
Beneficiaries shall be required for taking action on any matter voted on by the
Beneficiaries.
XII.6. Adjournment of MeetingXII.6. Adjournment of Meeting. Any meeting of
Beneficiaries may be adjourned from time to time and a meeting may be held at
such adjourned time and place without further notice.
XII.7. Conduct of MeetingsXII.7. Conduct of Meetings. The
Trustees shall appoint the Chairman and the Secretary of the meeting. The vote
upon any resolution submitted to any meeting of Beneficiaries shall be by
written ballot. An Inspector of Votes, appointed by the Chairman of the meeting,
shall count all votes cast at the meeting for or against any resolution and
shall make and file with the Secretary of the meeting their verified written
report.
XII.8. Record of MeetingXII.8. Record of Meeting. A record of
the proceedings of each meeting of Beneficiaries shall be prepared by the
Secretary of the meeting. The record shall be signed and verified by the
Secretary of the meeting and shall be delivered to the Trustees to be preserved
by them. Any record so signed and verified shall be conclusive evidence of all
the matters therein stated.
ARTICLE XIII ARTICLE XIII
AMENDMENTS
XIII.1. Consent of Trustees and BeneficiariesXIII.1. Consent
of Trustees and Beneficiaries. At the direction or with the consent of both the
Trustees and Beneficiaries having an aggregate Beneficial Interest of at least a
majority, or such greater percentage as shall be specified in this Agreement for
the taking of an action by the Beneficiaries under the affected provision of
this Agreement, of the total Beneficial Interest, the Trustees shall promptly
make and execute a declaration amending this Agreement for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of this Agreement or amendments thereto; provided, however, that no such
amendment shall permit the Trustees to engage in any activity prohibited by
Section 6.1 hereof or affect the Beneficiaries' rights to receive their pro rata
shares of the Trust Assets at the time of distribution; and provided further,
however, that no consent of the Beneficiaries shall be required with respect to
any amendment made solely for the purpose of facilitating the transferability by
Beneficiaries of Units so long as such amendment has been approved by all the
Trustees or making any other addition, change or deletion to resolve any
ambiguity or inconsistency herein or that does not materially and adversely
affect any Beneficiary's Beneficial Interest.
XIII.2. Notice and Effect of AmendmentXIII.2. Notice and
Effect of Amendment. Promptly after the execution by the Trustees of any such
declaration of amendment, the Trustees shall give notice of the substance of
such amendment to the Beneficiaries or, in lieu thereof, the Trustees may send a
copy of the amendment to each Beneficiary. Upon the execution of any such
declaration of amendment by the Trustees, this Agreement shall be deemed to be
modified and amended in accordance therewith and the respective rights,
limitations of rights, obligations, duties, and immunities of the Trustees and
the Beneficiaries under this Agreement shall thereafter be determined, exercised
and enforced hereunder subject in all respects to such modification and
amendments, and all the terms and conditions of any such amendment shall be
thereby deemed to be part of the terms and conditions of this Agreement for any
and all purposes.
<PAGE>
XIV ARTICLE XIV
MISCELLANEOUS PROVISIONS
XIV.1. Filing DocumentsXIV.1. Filing Documents. This Agreement
shall be filed or recorded in such office or offices as the Trustees may
determine to be necessary or desirable. A copy of this Agreement and all
amendments thereof shall be maintained in the office of each Trustee and shall
be available at all times during regular business hours for inspection by any
Beneficiary or his duly authorized representative. The Trustees shall file or
record any amendment of this Agreement in the same places where the original
Agreement is filed or recorded. The Trustees shall file or record any instrument
which relates to any change in the office of Trustee in the same places where
the original Agreement is filed or recorded.
XIV.2. Intention of Parties to Establish TrustXIV.2. Intention
of Parties to Establish Trust. This Agreement is not intended to create and
shall not be interpreted as creating a corporation, association, partnership, or
joint venture of any kind for purposes of Federal income taxation or for any
other purpose.
XIV.3. Beneficiaries Have No Rights or Privileges as
Shareholders of FundXIV.3. Beneficiaries Have No Rights or Privileges as
Shareholders of Fund. Except as expressly provided in this Agreement or under
applicable law, the Beneficiaries shall have no rights or privileges
attributable to their former status as Shareholders of Fund.
XIV.4. Laws as to ConstructionXIV.4. Laws as to Construction.
This Agreement shall be governed by and construed in accordance with the laws of
the State of New York. The Trustees, and the Beneficiaries (by their vote with
respect to the Liquidation Plan and/or their acceptance of any distributions
made to them pursuant to this Agreement), consent and agree that this Agreement
shall be governed by and construed in accordance with such laws.
XIV.5. SeverabilityXIV.5. Severability. In the event any
provision of this Agreement or the application thereof to any Person or
circumstances shall be finally determined by a court of proper jurisdiction to
be invalid or unenforceable to any extent, the remainder of this Agreement, or
the application of such provision to persons or circumstances other than those
as to which it is held invalid or unenforceable, shall not be affected thereby,
and each provision of this Agreement shall be valid and enforced to the fullest
extent permitted by law.
XIV.6. NoticesXIV.6. Notices. Any notice or other
communication by the Trustees to any Beneficiary shall be deemed to have been
sufficiently given, for all purposes, if deposited, postage prepaid, in a post
office or letter box addressed to such Person at his address as shown in the
records of the Trust.
All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered personally or
sent by cable, telegram, telecopier or telex to the parties at the following
addresses or at such other addresses as shall be specified by the parties by
like notice:
(a) If to the Trustees:
Raymond S. Troubh
Ten Rockefeller Plaza
Suite 712
New York, New York 10020
Facsimile: (212) 489-7484
with a copy to:
Skadden, Arps, Slate, Meagher &
Flom LLP
919 Third Avenue
New York, New York 10022
Attention: Richard T. Prins, Esq.
Facsimile: (212) 735-2000
(b) if to Fund:
The MicroCap Fund, Inc.
575 Fifth Avenue
New York, New York
Attention: Raymond S. Troubh
Facsimile: (212) 489-7484
XIV.7. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
together constitute but one and the same instrument.
XIV.8. Binding. XIV.8. Binding
(a) The obligations of Fund are not personally binding upon,
nor shall resort be had to the private property of, any of the directors,
shareholders, officers, employees or agents of Fund, but only the property of
Fund shall be bound.
(b) The obligations of the Trust are not personally binding
upon, nor shall resort be had to the private property of, any of the Trustees,
Beneficiaries, employees or agents of the Trust, but only the Trust Assets shall
be bound.
IN WITNESS WHEREOF, The MicroCap Fund, Inc. has caused this
Agreement to be executed by its President and Chief Executive Officer, and the
initial Trustee herein has executed this Agreement, as trustee and not as an
individual, this 28th day of January, 1997.
THE MICROCAP FUND, INC.
By:/s/ RAYMOND S. TROUBH
Raymond S. Troubh
President and Chief Executive Officer
/s/ RAYMOND S. TROUBH
Trustee
