SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended June 30, 1997
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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
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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date. As of August 1, 1997 there were
2,427,281 units of beneficial interest outstanding.
<PAGE>
MICROCAP LIQUIDATING TRUST
(SUCCESSOR TO THE MICROCAP FUND, INC.)
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Statements of Net Assets in Liquidation as of June 30, 1997 (Unaudited) and
February 24, 1997
Schedule of Portfolio Investments as of June 30, 1997 (Unaudited)
Statements of Operations for the three months ended June 30, 1997 and for the
three months ended August 31, 1996 (Unaudited)
Statements of Operations for the period from February 25, 1997 to June 30,
1997 and for the six months ended August 31, 1996 (Unaudited)
Statements of Changes in Net Assets for the period from February 25, 1997 to
June 30, 1997 and for the six months ended August 31, 1996 (Unaudited)
Statements of Cash Flows for period from February 25, 1997 to June 30,
1997 and for the six months ended August 31, 1996 (Unaudited)
Notes to Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities.
Item 3. Defaults upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
STATEMENTS OF NET ASSETS IN LIQUIDATION
<TABLE>
June 30, 1997 February 24, 1997
(Unaudited) (Predecessor)
ASSETS
Portfolio investments at fair value (cost $2,224,750 at
<S> <C> <C> <C> <C> <C> <C>
June 30, 1997 and February 24, 1997) $ 3,048,380 $ 2,696,593
Cash and cash equivalents - unrestricted 4,843,526 4,781,028
Cash and cash equivalents - restricted 2,790,218 2,790,218
Accrued interest receivable 20,790 25,959
Receivable from settlement agreement 450,000 650,000
Other assets 11,995 24,846
---------------- -----------------
Total assets 11,164,909 10,968,644
---------------- -----------------
LIABILITIES
Cash distribution payable 2,427,281 -
Accounts payable - legal 1,006,060 1,076,982
Accounts payable - other 68,357 108,351
Covered call options written 37,500 -
---------------- -----------------
Total liabilities 3,539,198 1,185,333
---------------- -----------------
NET ASSETS IN LIQUIDATION $ 7,625,711 $ 9,783,311
================ =================
</TABLE>
See notes to financial statements.
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
As of June 30, 1997
<TABLE>
% of
Issuer / Position Cost Fair Value Net Assets(1)
Publicly-Held Securities:
Bennett Environmental Inc.
<C> <C> <C> <C>
112,500 shares of Common Stock $ 47,250 $ 97,755 1.28%
------------- -------------- --------
Unigene Laboratories, Inc. (A)
Warrant to purchase 615,000 shares of Common Stock
at $1.375, expiring 7/7/00 0 1,921,875 25.20%
------------- -------------- --------
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 12.70%
------------- -------------- --------
Oh-La-La! Inc.
9% Convertible Senior Note 140,000 34,800
9% Convertible Senior Note 100,000 25,200
------------- --------------
240,000 60,000 .80%
------------- -----------------------
Total Portfolio Investments(B) $ 2,224,750 $ 3,048,380 39.98%
============= ============== ========
</TABLE>
(1) Represents fair value as a percentage of net assets.
(A) In June 1997, the Trust sold a covered call option for $37,500, allowing
for the purchase of up to 307,500 common stock warrants of Unigene
Laboratories, Inc. at a purchase price of $2.875 per warrant. The option
expired on July 30, 1997, with 140,000 warrants called in July 1997 at
$2.875 per warrant, or $402,500.
(B) All portfolio securities held at June 30, 1997 were non-income producing.
See notes to financial statements.
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
Three Months
Three Months Ended
Ended August 31, 1996
June 30, 1997 (Predecessor)
INVESTMENT INCOME AND EXPENSES
Income:
<S> <C> <C>
Interest from short-term investments $ 95,851 $ 142,057
Interest and dividends from portfolio investments - 27,543
Other interest income 6,021 -
Other income 1,196 -
--------------- ----------------
Total 103,068 169,600
--------------- ----------------
Expenses:
Administrative fee 11,616 29,033
Legal fees 3,024 189,061
Accounting fees 17,425 7,955
Trustee fees 25,500 -
Transfer agent and custodian fees 5,672 5,822
Mailing and printing 1,463 19,516
Other operating expenses 630 28,334
Salary expense - 93,016
Amortization of deferred organizational costs - 9,843
Directors' fees and expenses - 24,010
Consulting fees - (39,946)
Insurance expense - 8,680
--------------- ----------------
Total expenses 65,330 375,324
--------------- ----------------
Net investment income (loss) 37,738 (205,724)
--------------- ----------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
FROM PORTFOLIO INVESTMENTS
Net realized gain from portfolio investments - 2,364,630
Change in net unrealized appreciation or depreciation of
portfolio investments 704,094 (3,449,058)
--------------- ----------------
Net realized and unrealized gain (loss) from portfolio investments 704,094 (1,084,428)
--------------- ----------------
NET INCREASE (DECREASE) IN NET ASSETS
IN LIQUIDATION $ 741,832 $ (1,290,152)
=============== ================
</TABLE>
See notes to financial statements.
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
Period From Six Months
February 25, Ended
1997 to August 31, 1996
June 30, 1997 (Predecessor)
INVESTMENT INCOME AND EXPENSES
Income:
<S> <C> <C>
Interest from short-term investments $ 132,154 $ 270,530
Interest and dividends from portfolio investments - 84,041
Other interest income 8,865 -
Other income 1,196 -
-------------- ---------------
Total investment income 142,215 354,571
-------------- ---------------
Expenses:
Administrative fee 25,978 81,997
Legal fees 124,087 769,605
Accounting fees 31,425 32,133
Trustee fees 34,000 -
Transfer agent and custodian fees 6,738 9,279
Mailing and printing 1,463 44,360
Other operating expenses 630 66,159
Salary expense - 178,919
Amortization of deferred organizational costs - 19,686
Directors' fees and expenses - 44,688
Consulting fees - 85,094
Insurance expense - 20,046
-------------- ---------------
Total expenses 224,321 1,351,966
-------------- ---------------
Net investment income (loss) (82,106) (997,395)
-------------- ---------------
NET REALIZED AND UNREALIZED GAIN FROM
PORTFOLIO INVESTMENTS
Net realized gain (loss) from portfolio investments - 2,659,872
Change in net unrealized appreciation or depreciation of
portfolio investments 351,787 (1,168,524)
-------------- ---------------
Net realized and unrealized gain from portfolio investments 351,787 1,491,348
-------------- ---------------
NET INCREASE IN NET ASSETS IN LIQUIDATION $ 269,681 $ 493,953
============== ===============
</TABLE>
See notes to financial statements.
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
<TABLE>
Period From Six Months
February 25, Ended
1997 to August 31, 1996
June 30, 1997 (Predecessor)
Change in net assets resulting from operations:
<S> <C> <C>
Net investment income (loss) $ (82,106) $ (997,395)
Net realized gain (loss) from portfolio investments - 2,659,872
Change in net unrealized appreciation or depreciation of
portfolio investments 351,787 (1,168,524)
--------------- ----------------
Net increase in net assets resulting from operations 269,681 493,953
--------------- ----------------
Cash distributions paid or accrued (2,427,281) (8,495,486)
--------------- ----------------
Net decrease in net assets for the period (2,157,600) (8,001,533)
Net assets in liquidation at beginning of period 9,783,311 17,235,158
--------------- ----------------
NET ASSETS IN LIQUIDATION AT END OF PERIOD $ 7,625,711 $ 9,233,625
=============== ================
Net assets per unit $ 3.14 $ 3.80
======== ========
Number of units of beneficial interest or
common equivalent shares 2,427,281 2,427,281
============= ==============
</TABLE>
See notes to financial statements.
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
Period From Six Months
February 25, Ended
1997 to August 31, 1996
June 30, 1997 (Predecessor)
CASH FLOWS PROVIDED FROM (USED FOR)
OPERATING ACTIVITIES
<S> <C> <C>
Net investment income (loss) $ (82,106) $ (997,395)
Adjustments to reconcile net investment income (loss) to cash
provided from (used for) operating activities:
Decrease in receivables and other assets 216,185 253,192
(Decrease) increase in payables (110,916) 285,828
Depreciation expense 1,835 2,485
Consulting fees paid in-kind - 105,000
Amortization of deferred organizational costs - 19,686
--------------- ---------------
Cash flows provided from (used for) operating activities 24,998 (331,204)
--------------- ---------------
CASH FLOWS PROVIDED FROM INVESTING ACTIVITIES
Covered call options written 37,500 -
Purchase of portfolio investments - (51,411)
Net proceeds from the sale of portfolio investments - 2,605,932
Repayment of notes - 2,000,000
--------------- ---------------
Cash flows provided from investing activities 37,500 4,554,521
--------------- ---------------
CASH FLOWS USED FOR FINANCING ACTIVITIES
Cash distributions paid - (8,495,486)
--------------- ---------------
Cash flows used for financing activities - (8,495,486)
--------------- ---------------
Increase (decrease) in cash and cash equivalents 62,498 (4,272,169)
Cash and cash equivalents at beginning of period 7,571,246 9,878,280
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,633,744 $ 5,606,111
=============== ===============
</TABLE>
See notes to financial statements.
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. Organization and Purpose
The MicroCap Liquidating Trust ("the Trust"), is the successor to the MicroCap
Fund, Inc., formerly Commonwealth Associates Growth Fund, Inc. (the "Fund"). 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 offered
significant growth potential.
Pursuant to its Plan of Liquidation, which was approved at a special meeting of
shareholders on July 23, 1996, the Fund transferred all of its remaining assets
and its remaining fixed and contingent liabilities to the Trust, effective as of
the close of business on February 24, 1997.
Also effective as of the close of business on February 24, 1997, the 2,188,085
common shares and 191,357 preferred shares of the Fund, outstanding on such
date, were automatically deemed to represent 2,427,281 units of beneficial
interest in the Trust ("Units"). As a result, on February 24, 1997, each
shareholder of the Fund received one Unit of the Trust for each share of the
Fund's common stock held on such date and 1.25 Units of the Trust for each share
of the Fund's preferred stock held on such date.
2. Significant Accounting Policies
Valuation of Investments - Portfolio investments are carried at fair value as
determined quarterly by the Trustee. The fair value of the Trust's publicly-held
portfolio securities is adjusted to the closing public market price on the last
day of the fiscal quarter discounted by a factor of 0% to 20% for sales
restrictions. Factors considered in the determination of an appropriate discount
include: underwriter lock-up, affiliate status by owning greater than 10% of the
outstanding shares of a portfolio security, and other liquidity factors such as
the size of the Trust's position in a given portfolio company compared to the
trading history of the public security. Privately-held portfolio securities are
carried at cost until significant developments affecting the portfolio company
provide 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 requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Transactions - Realized gains and losses on investments sold are
computed on a specific identification basis. The Trust records its transactions
on the accrual method.
Income Taxes - The Trust is 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, such beneficiary's pro rata share of
the Trust's income, gain, loss, deduction or expense, regardless of the amount
or timing of distributions to beneficiaries.
<PAGE>
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MICROCAP LIQUIDATING TRUST
===============================================================================
(Successor to The MicroCap Fund, Inc.)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - continued
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 must 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 were held for more than
one year as of February 24, 1997, the date the liquidating distribution was
deemed to have been made.
Cash and Cash Equivalents - The Trust invests 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 are considered to be cash equivalents
for the statement of cash flows.
The cash and cash equivalents of the Trust 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. Raymond S. Troubh, the Trustee of the Trust, 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 4
and 5 below.
3. Related Party Transactions
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 and will continue to provide such services to the Trust during
its liquidation. For services rendered under the agreement, Mr. Troubh receives
$8,500 per month, plus 1% of the amount of each distribution (other than the
initial distribution paid by the Fund on August 30, 1996), plus, at the time any
proceeds of sale or other revenues are received by the Fund or the Trust in
excess of the investment in the 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. For
the period from February 25, 1997 to June 30, 1997, the Trustee received fees
totaling $34,000.
4. 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 is being 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 that exceeded the remaining $450,000 balance due
from the settlement agreement as of June 30, 1997. Through August 1, 1997, the
Trust had received additional payments totaling $250,000. Additionally, as part
of the settlement, the Fund and the defendants agreed to pursue claims against
former counsel to the Fund. The Trust would be entitled to receive 50% of any
recovery from such claims,
<PAGE>
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MICROCAP LIQUIDATING TRUST
===============================================================================
(Successor to The MicroCap Fund, Inc.)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - continued
after the reimbursement to Commonwealth Associates of all costs and expenses
associated with pursuing the claims.
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 Trust, 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 denied
liability for the claims set forth in the Precautionary Proof of Claim. A global
settlement has been reached between and among PSSS, International, the Trust and
several other parties, pursuant to which the Trust will have no liability for
the claims set forth in the Precautionary Proof of Claim (the "Settlement"). The
Settlement has been preliminarily approved by the Bankruptcy Court and is
subject to final approval upon confirmation of a plan of liquidation. Recovery
on account of the Trust's claims as a creditor of PSSS will be the subject of a
number of extraneous factors.
Regency Holdings (Cayman) Inc. ("Holdings") and Regency Maritime Corp.
("Maritime") (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 constituted 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 Trust has set aside approximately $2.4 million in an
interest-bearing cash account pending resolution by the Bankruptcy Court of the
adversary proceeding. Substantial discovery has been undertaken. At the present
time, a limited trial, in part based upon written submissions, is scheduled to
address the validity of Regency's preference claims.
5. 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
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - continued
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 Trust 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 Trust 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.
6. Cash Distribution
In May 1997, the Trust declared an interim liquidating distribution totaling
$2,427,281, or $1.00 per Unit. Such distribution was paid on July 15, 1997 to
unit holders of record on June 30, 1997.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
On June 30, 1997, the Trust had cash and cash equivalents totaling $7,633,744,
of which $2,790,218 was restricted due to certain contingencies, as discussed
below. The Trust's cash balances are 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 the three
months ended June 30, 1997 and for the period from February 25, 1997 to June 30,
1997, totaled $95,851 and $132,154, respectively . Interest earned from such
cash balances in future periods is subject to fluctuations in short-term
interest rates and changes in the Trust's cash balances.
The restricted cash and cash equivalents balance of approximately $2.8 million
is comprised of $2.4 million relating to the Regency Holdings (Cayman) Inc.
litigation, $250,000 relating to certain indemnification agreements with Mr.
Raymond S. Troubh, the Trustee of the Trust, 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 4 and 5 of the Notes to
Financial Statements.
In May 1997, the Trust declared an interim liquidating distribution to unit
holders totaling $2,427,281, or $1.00 per Unit. Such distribution was paid on
July 15, 1997 to unit holders of record on June 30, 1997. 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.
Additionally, on June 30, 1997, the Trust had accounts payable and accrued
liabilities totaling $1.1 million, primarily consisting of legal fees and
litigation expenses. The Fund previously submitted claims in connection with 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 Trust. The recovery of these amounts or any portion thereof
remains uncertain.
Results of Operations
The Trust is pursuing the orderly liquidation of its assets and subsequent
distribution to unit holders of the proceeds from such liquidation, including
the Trust's existing cash balances after payment of all current, future and
contingent liabilities. Prior to the creation of the Trust, the Fund had begun
to pursue this objective with the approval of its Plan of Liquidation in July
1996. For the three months ended June 30, 1997 and for the period from February
25, 1997 to June 30, 1997 (the "1997 Period"), the Trust had an increase in net
assets in liquidation of $741,832 and $269,681, respectively.
Realized and Unrealized Gains and Losses from Portfolio Investments
For the three months ended June 30, 1997 and for the 1997 Period, the Trust had
unrealized gains from its remaining portfolio investments of $704,094 and
$351,787, respectively. The Trust had no realized gains or losses from its
portfolio investments during the 1997 Period.
The $351,787 unrealized gain for the 1997 Period resulted from the net upward
revaluation of the Trust's publicly-held portfolio investments, primarily due to
the increased public market price of Unigene Laboratories, Inc. common stock at
the end of the period.
For the three months ended August 31, 1996 (the equivalent prior year period),
the Fund had a net realized and unrealized loss from its portfolio investments
of $1,084,428, comprised of a $2,364,630 net realized gain from portfolio
investments and a $3,449,058 decrease in net unrealized appreciation of
investments for the three month period. For the six months ended August 31, 1996
(the "1996 Period"), the Fund had a net realized and unrealized gain from its
portfolio investments of $1,491,348, comprised of a $2,659,872 net realized gain
from portfolio investments and a $1,168,524 decrease in net unrealized
appreciation of investments.
The $2,364,630 net realized gain for the three months ended August 31, 1996,
included the sale of the Fund's investment in Shells Seafood Restaurants, Inc.
for $2,700,000, which resulted in a realized gain of $2,110,000. Also during the
quarter, the Fund sold its remaining 60,000 Accumed International, Inc. common
stock warrants for $154,647, realizing a gain of $149,630. Additionally, during
the period, the Fund completed the transfer of 60,000 Unigene Laboratories, Inc.
common stock warrants to certain individuals representing the payment of
consulting fees incurred in connection with the Fund's investment in Unigene.
The transaction resulted in the recognition of a $105,000 realized gain, which
has been equally offset by $105,000 of consulting fee expense recorded by the
Fund over several fiscal quarters. During its fiscal quarter ended May 31, 1996,
the Fund had a net realized gain of $295,242, resulting from the sale of 190,000
Accumed common stock warrants and 12,500 shares of Accumed common stock.
For the three and six months ended August 31, 1996, the Fund had a decrease in
net unrealized appreciation of investments of $3,449,058 and $1,168,524,
respectively. The $1,168,524 decrease in net unrealized appreciation for the six
months ended August 31, 1996, was comprised of a $1,381,261 net unrealized gain
due to the upward revaluation of certain portfolio investments for the period,
primarily Shell's Seafood Restaurants, Inc., offset by a $2,549,785 reduction in
net unrealized appreciation due to the transfer from unrealized gain to realized
gain relating to the portfolio sales completed during the period, as discussed
above.
Investment Income and Expenses
For the three months ended June 30, 1997 and August 31, 1996, the Trust had net
investment income of $37,738 and a net investment loss of $205,724,
respectively. For the period from February 25, 1997 to June 30, 1997 and for the
six months ended August 31, 1996, the Trust had a net investment loss of $82,106
and $997,395, respectively.
The decrease in net investment loss from $997,395 for the 1996 Period as
compared to $82,106 for the 1997 Period primarily reflects the termination of
the ongoing operations of the Fund, the adoption of its Plan of Liquidation and
transfer of its remaining assets to the Trust, as discussed above.
Total investment income for the 1997 Period was $142,215 as compared to $354,571
for the 1996 Period. The decrease in investment income primarily resulted from
reduced interest income, which reflects the shorter 1997 Period, which consisted
of 133 days or less than 75% of the full six month period for 1996, and reduced
cash balances held during the 1997 Period as compared to the 1996 Period. The
Trust had no interest or dividend income from portfolio investments for the 1997
Period, due to the reduction in interest earning portfolio securities held
during the 1997 Period. Interest income is expected to continue to decline as
the Trust continues with the liquidation of its remaining assets.
The operating expenses of the Trust during the 1997 Period consist primarily of
legal and accounting fees, Trustee fees, custodial fees and general and
administrative expenses. During the 1997 Period, such expenses were incurred in
connection with ongoing litigation and the continued liquidation of the Trust's
remaining assets. Expenses incurred during the three and six months ended August
31, 1996 included certain ongoing expenses of the Fund, which will not be
incurred by the Trust, including salary expense, amortization expense, directors
fees, insurance and other expenses.
Net Assets in Liquidation
As of June 30, 1997, net assets in liquidation totaled $7,625,711, a decrease of
$2,157,600 from net assets of $9,783,331 at February 24, 1997. This decrease is
the result of the $2,427,281 accrued cash distribution exceeding the $269,681
increase in net assets in liquidation for the 1997 Period. At June 30, 1997, the
net asset value per unit of beneficial interest was $3.14, compared to $4.03 at
February 24, 1997.
<PAGE>
PART II - OTHER INFORMATION
Item 1. 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 is being 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 that exceeded the remaining $450,000 balance due
from the settlement agreement as of June 30, 1997. Through August 1, 1997, the
Trust had received additional payments totaling $250,000. Additionally, as part
of the settlement, the Fund and the defendants agreed to pursue claims against
former counsel to the Fund. The Trust 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 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 Trust, 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 denied
liability for the claims set forth in the Precautionary Proof of Claim. A global
settlement has been reached between and among PSSS, International, the Trust and
several other parties, pursuant to which the Trust will have no liability for
the claims set forth in the Precautionary Proof of Claim (the "Settlement"). The
Settlement has been preliminarily approved by the Bankruptcy Court and is
subject to final approval upon confirmation of a plan of liquidation. Recovery
on account of the Trust's claims as a creditor of PSSS will be the subject of a
number of extraneous factors.
Regency Holdings (Cayman) Inc. ("Holdings") and Regency Maritime Corp.
("Maritime") (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 constituted 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 Trust has set aside approximately $2.4 million in an
interest-bearing cash account pending resolution by the Bankruptcy Court of the
adversary proceeding. Substantial discovery has been undertaken. At the present
time, a limited trial, in part based upon written submissions, is scheduled to
address the validity of Regency's preference claims.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was brought to a vote of security holders during the period covered by
this report.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
None.
<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
Date: August 14, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE MICROCAP LIQUIDATING TRUST'S QUARTERLY
REPORT ON FORM 10-Q FOR THE PERIOD FROM FEBRUARY 25, 1997 TO JUNE 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> FEB-25-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 2,224,750
<INVESTMENTS-AT-VALUE> 3,048,380
<RECEIVABLES> 471,899
<ASSETS-OTHER> 10,886
<OTHER-ITEMS-ASSETS> 7,633,744
<TOTAL-ASSETS> 11,164,909
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,539,198
<TOTAL-LIABILITIES> 3,539,198
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 2,427,281
<SHARES-COMMON-PRIOR> 2,427,281
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 823,630
<NET-ASSETS> 7,625,711
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 141,019
<OTHER-INCOME> 1,196
<EXPENSES-NET> 224,321
<NET-INVESTMENT-INCOME> (82,106)
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 351,787
<NET-CHANGE-FROM-OPS> 269,681
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 2,427,281
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (2,157,600)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 8,704,511
<PER-SHARE-NAV-BEGIN> 4.03
<PER-SHARE-NII> (.03)
<PER-SHARE-GAIN-APPREC> .14
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (1.00)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 3.14
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
