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 September 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.)
===============================================================================
(Exact Name of Registrant as Specified in its Charter)
New York 13-7110611
===============================================================================
(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
===============================================================================
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (800) 888-6534
Not applicable
===============================================================================
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 October 31, 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 September 30, 1997 (Unaudited)
and February 24, 1997
Schedule of Portfolio Investments as of September 30, 1997 (Unaudited)
Statements of Operations for the three months ended September 30, 1997
and for the three months ended November 30, 1996 (Unaudited)
Statements of Operations for the period from February 25, 1997 to September 30,
1997 and for the nine months ended November 30, 1996 (Unaudited)
Statements of Changes in Net Assets for the period from February 25, 1997 to
September 30, 1997 and for the nine months ended November 30, 1996 (Unaudited)
Statements of Cash Flows for period from February 25, 1997 to September 30,
1997 and for the nine months ended November 30, 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>
September 30, February 24,
1997 1997
(Unaudited) (Predecessor)
ASSETS
Portfolio investments at fair value (cost $2,224,750 at
<S> <C> <C> <C> <C> <C> <C>
September 30, 1997 and February 24, 1997) $ 2,433,996 $ 2,696,593
Cash and cash equivalents - unrestricted 1,969,556 4,781,028
Cash and cash equivalents - restricted 2,790,218 2,790,218
Accrued interest receivable 39,633 25,959
Receivable from settlement agreement 300,000 650,000
Other assets 10,962 24,846
--------------- ---------------
Total assets 7,544,365 10,968,644
--------------- ---------------
LIABILITIES
Accounts payable - legal 87,239 1,076,982
Accounts payable - other 78,006 108,351
--------------- ---------------
Total liabilities 165,245 1,185,333
--------------- ---------------
NET ASSETS IN LIQUIDATION $ 7,379,120 $ 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 September 30, 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
% 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 $ 247,433 3.35%
------------- -------------- --------
Unigene Laboratories, Inc. (B)
Warrant to purchase 475,000 shares of Common Stock
at $1.375, expiring 7/7/00 0 1,157,813 15.69%
------------- -------------- --------
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. (C)
106,562 shares of Series A1 Preferred Stock 594,174 297,087
240,179 shares of Series B1 Preferred Stock 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 13.13%
------------- -------------- --------
Oh-La-La! Inc.
9% Convertible Senior Note 140,000 34,800
9% Convertible Senior Note 100,000 25,200
------------- --------------
240,000 60,000 .81%
------------- -----------------------
Total Portfolio Investments(D) $ 2,224,750 $ 2,433,996 32.98%
============= ============== ========
</TABLE>
(1) Represents fair value as a percentage of net assets.
(A) In November 1997, the Trust sold its remaining investment in Bennett
Environmental, Inc. for net proceeds of $382,500, or $3.40 per share.
(B) 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. The Trust realized a net gain of $440,000
as a result of these transactions.
(C) On July 31, 1997, due to a financial restructuring of the First Colony
Acquisition Corp., the Trust's convertible 6% promissory note was converted
into 240,179 shares of the company's series B1 preferred stock.
(D) All portfolio securities held at September 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 November 30,
September 30, 1996
1997 (Predecessor)
INVESTMENT INCOME AND EXPENSES
Income:
<S> <C> <C>
Interest from U.S. Treasury Bills and repurchase agreements $ 70,378 $ 94,868
Interest and dividends from portfolio investments - (47,463)
Other interest income 4,301 -
-------------- -----------------
Total investment income 74,679 47,405
-------------- -----------------
Expenses:
Administrative expense 20,045 17,289
Legal fees 32,862 890,897
Accounting fees 14,600 40,372
Trustee fees 71,772 -
Transfer agent and custodian fees 5,835 6,094
Mailing and printing 14 5,255
Other operating expenses 1,758 12,702
Amortization of deferred organizational costs - 9,843
Directors' fees and expenses - 3,191
Consulting fees - 25,500
Insurance expense - 7,634
-------------- -----------------
Total expenses 146,886 1,018,777
-------------- -----------------
Net investment loss (72,207) (971,372)
-------------- -----------------
NET REALIZED AND UNREALIZED LOSS
FROM PORTFOLIO INVESTMENTS
Net realized gain from portfolio investments 440,000 -
Change in net unrealized appreciation or depreciation of
portfolio investments (614,384) (269,778)
-------------- -----------------
Net realized and unrealized loss from portfolio investments (174,384) (269,778)
-------------- -----------------
NET DECREASE IN NET ASSETS FROM OPERATIONS $ (246,591) $ (1,241,150)
============== =================
</TABLE>
See notes to financial statements.
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to the MicroCap Fund, Inc.)
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
Period From Nine Months
February 25, Ended
1997 to November 30,
September 30, 1996
1997 (Predecessor)
INVESTMENT INCOME AND EXPENSES
Income:
<S> <C> <C>
Interest from U.S. Treasury Bills and repurchase agreements $ 202,532 $ 365,398
Interest and dividends from portfolio investments - 36,578
Other interest income 13,166 -
Other income 1,196 -
-------------- ---------------
Total investment income 216,894 401,976
-------------- ---------------
Expenses:
Administrative expense 46,023 99,286
Legal fees 156,949 1,660,502
Accounting fees 46,025 72,505
Trustee fees 105,772 -
Transfer agent and custodian fees 12,573 15,373
Mailing and printing 1,477 49,615
Other operating expenses 2,388 78,861
Salary expense - 178,919
Amortization of deferred organizational costs - 29,529
Directors' fees and expenses - 47,879
Consulting fees - 110,594
Insurance expense - 27,680
-------------- ---------------
Total expenses 371,207 2,370,743
-------------- ---------------
Net investment loss (154,313) (1,968,767)
-------------- ---------------
NET REALIZED AND UNREALIZED GAIN
FROM PORTFOLIO INVESTMENTS
Net realized gain from portfolio investments 440,000 2,659,872
Change in net unrealized appreciation or depreciation of
portfolio investments (262,597) (1,438,302)
-------------- ---------------
Net realized and unrealized gain from portfolio investments 177,403 1,221,570
-------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS $ 23,090 $ (747,197)
============== ===============
</TABLE>
See notes to financial statements.
MICROCAP LIQUIDATING TRUST (Successor to the
MicroCap Fund, Inc.)
STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION (UNAUDITED)
<TABLE>
Period From Nine Months
February 25, Ended
1997 to November 30,
September 30, 1996
1997 (Predecessor)
Change in net assets resulting from operations:
<S> <C> <C>
Net investment loss $ (154,313) $ (1,968,767)
Net realized gain from portfolio investments 440,000 2,659,872
Change in net unrealized appreciation or depreciation of
portfolio investments (262,597) (1,438,302)
---------------- ----------------
Net increase (decrease) in net assets resulting from operations 23,090 (747,197)
--------------- ----------------
Change in net assets from distributions:
Distributions paid (2,427,281) (8,495,486)
--------------- ----------------
Net decrease in net assets for the period (2,404,191) (9,242,683)
Net assets in liquidation at beginning of period 9,783,311 17,235,158
--------------- ----------------
NET ASSETS IN LIQUIDATION AT END OF PERIOD $ 7,379,120 $ 7,992,475
=============== ================
Net assets per unit $ 3.04 $ 3.29
======== ========
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 Nine Months
February 25, Ended
1997 to November 30,
September 30, 1996
1997 (Predecessor)
CASH FLOWS USED FOR OPERATING ACTIVITIES
<S> <C> <C>
Net investment loss $ (154,313) $ (1,968,767)
Adjustments to reconcile net investment loss to cash
used for operating activities:
Decrease in receivables and other assets 347,038 345,475
(Decrease) increase in payables (1,020,088) 688,656
Depreciation expense 3,172 -
Consulting payment made in-kind - 105,000
Amortization of deferred organizational costs - 29,529
---------------- ----------------
Cash flows used for operating activities (824,191) (800,107)
---------------- ----------------
CASH FLOWS PROVIDED FROM INVESTING ACTIVITIES
Net proceeds from the sale of portfolio investments 440,000 2,876,564
Purchase of portfolio investments - (51,411)
Deposits placed in escrow - (250,197)
Repayment of notes - 2,000,000
---------------- ----------------
Cash flows provided from investing activities 440,000 4,574,956
---------------- ----------------
CASH FLOWS USED FOR FINANCING ACTIVITIES
Cash distributions paid (2,427,281) (8,495,486)
---------------- ----------------
Cash flows used for financing activities (2,427,281) (8,495,486)
---------------- ----------------
Decrease in cash and cash equivalents (2,811,472) (4,720,637)
Cash and cash equivalents at beginning of period 7,571,246 9,878,280
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,759,774 $ 5,157,643
================ ================
</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"), a liquidating trust established
under the laws of the State of New York, 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>
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 and overnight repurchase agreements collateralized by securities
issued by the U.S. Government or its agencies. Such investments 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.
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%. Through November 1, 1997, the Trust had received additional payments
totaling $400,000. 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 $250,000
balance due from the settlement agreement as of November 1, 1997. Additionally,
as part of the settlement, the Fund and the defendants agreed to pursue claims
against
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - continued
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 Trust 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 Trust 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 is contingent upon a
number of factors beyond the Trust's control.
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 or fraudulent conveyances under the
Bankruptcy Code. Holdings maintains that a payment 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. Holdings also maintains that such relationship
had an impact on the decision to pay these amounts. Additionally, Holdings
maintains that a payment of $145,728 made 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. 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. A limited trial, in part based upon written
submissions, has been 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
On July 15 1997, the Trust paid an interim liquidating distribution totaling
$2,427,281, or $1.00 per Unit, to unit holders of record on June 30, 1997.
7. Subsequent Event
In November 1997, the Trust sold its remaining investment in Bennett
Environmental, Inc. for net proceeds of $382,500, or $3.40 per share.
8. Classification of Portfolio Investments
The Trust's investments were categorized as follows as of September 30, 1997:
<TABLE>
Percentage of
Type of Investments Cost Fair Value Net Assets*
- ------------------- --------------- --------------- -----------
<S> <C> <C> <C>
Preferred Stock $ 1,937,500 $ 968,750 13.13%
Common Stock 47,250 1,405,246 19.04%
Debt Securities 240,000 60,000 .81%
---------------- -------------- ------
Total $ 2,224,750 $ 2,433,996 32.98%
================ ============== ======
Country/Geographic Region
Western U.S. $ 240,000 $ 60,000 .81%
Eastern U.S. 1,937,500 2,126,563 28.82%
Canada 47,250 247,433 3.35%
---------------- -------------- -------
Total $ 2,224,750 $ 2,433,996 32.98%
================ ============== ======
Industry
Biotechnology $ 0 $ 1,157,813 15.69%
Consumer Products 1,937,500 968,750 13.13%
Environmental Services 47,250 247,433 3.35%
Food Services 240,000 60,000 .81%
---------------- -------------- -------
Total $ 2,224,750 $ 2,433,996 32.98%
================ ============== ======
</TABLE>
* Represents fair value as a percentage of net assets.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
On September 30, 1997, the MicroCap Liquidating Trust (the "Trust") had cash and
cash equivalents totaling $4,759,774, 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 September 30,
1997 and for the period from February 25, 1997 to September 30, 1997, totaled
$70,378 and $202,532, 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 for additional information.
On July 15, 1997, the Trust paid an interim liquidating distribution totaling
$2,427,281, or $1.00 per Unit, to unit holders of record on June 30, 1997. The
Trust expects to make additional cash distributions to beneficiaries as its
remaining assets are liquidated and after an adequate reserve for all current
and contingent liabilities.
As of September 30, 1997, the Trust had current liabilities totaling $165,245,
primarily consisting of legal and accounting fees.
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 September 30, 1997, the Trust had a decrease in net
assets in liquidation of $246,591, comprised of a net investment loss of $72,207
and a net realized and unrealized loss from portfolio investments of $174,384.
For the period from February 25, 1997 to September 30, 1997 (the "1997 Period"),
the Trust had an increase in net assets in liquidation of $23,090, comprised of
a net investment loss of $154,313 and a net realized and unrealized gain from
portfolio investments of $177,403. For the three months ended November 30, 1996
(the equivalent prior year period), the Fund had a decrease in net assets of
$1,241,150, comprised of a net investment loss of $971,372 and a net realized
and unrealized loss from portfolio investments of $269,778. For the nine months
ended November 30, 1996, the Fund had a decrease in net assets of $747,197,
comprised of a net investment loss of $1,968,767 and a net realized and
unrealized gain from portfolio investments of $1,221,570.
Realized and Unrealized Gains and Losses from Portfolio Investments
For the three months ended September 30, 1997, the Trust had a net realized and
unrealized loss from its remaining portfolio investments of $174,384, comprised
of a $440,000 net realized gain from portfolio investments and a $614,384
decrease in net unrealized appreciation of investments for the quarter. For the
1997 Period, the Trust had a net realized and unrealized gain from its portfolio
investments of $177,403, comprised of a $440,000 net realized gain from
portfolio investments and a $262,597 decrease in net unrealized appreciation of
investments for the period.
The $440,000 net realized gain results from the June 1997 sale of a covered call
option on certain warrants of Unigene Laboratories, Inc. held by the Trust for
$37,500 and the July 1997 sale of 140,000 Unigene warrants for $402,500. The
change in unrealized appreciation of investments for the three months ended
September 30, 1997 and for the 1997 Period included a $211,884 net unrealized
loss and a $139,903 net unrealized gain, respectively, primarily due to the net
revaluation of the remaining Unigene warrants held by the Trust. Unrealized
appreciation of investments was further reduced for the respective periods due
to the transfer of $402,500 from unrealized gain to realized gain resulting from
the sale of certain Unigene warrants during the quarter, as discussed above.
For the three months ended November 30, 1996, the Fund had a $269,778 net
unrealized loss from its portfolio investments resulting from the net downward
revaluation of certain portfolio investments for the three month period. The
Fund had no realized gains or losses from its portfolio investments for the
three months ended November 30, 1996. For the nine months ended November 30,
1996, the Fund had a net realized and unrealized gain from its portfolio
investments of $1,221,570, comprised of a $2,659,872 net realized gain from
portfolio investments and a $1,438,302 decrease in net unrealized appreciation
of investments.
The $2,659,872 net realized gain for the nine months ended November 30, 1996,
included the July 1996 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 nine month period, the Fund sold its remaining
60,000 common stock warrants of Accumed International, Inc. (formerly Alamar
Biosciences, Inc.) for $154,647, realizing a gain of $149,630. Additionally,
during the period, the Fund completed the transfer of 60,000 Unigene 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 was
equally offset by $105,000 of consulting fee expense recorded by the Fund over
several previous fiscal quarters. The Fund also had a net realized gain of
$295,242 during the period, resulting from the sale of 190,000 Accumed common
stock warrants and 12,500 shares of Accumed common stock.
The $1,438,302 decrease in net unrealized appreciation for the nine months ended
November 30, 1996 was comprised of a $1,111,483 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 September 30, 1997 and November 30, 1996, the Trust
had a net investment loss of $72,207 and $971,372, respectively. For the 1997
Period and for the nine months ended November 30, 1996 (the "1996 Period"), the
Trust had a net investment loss of $154,313 and $1,968,767, respectively.
The significantly reduced net investment loss of $1,968,767 for the 1996 Period
as compared to $154,313 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 $216,894 as compared to $401,976
for the 1996 Period. The decrease in investment income primarily resulted from
reduced interest income, reflecting the shorter 1997 Period, which consisted of
219 days, or less than 80% of the full nine 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 of 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 for the three months ended September 30,
1997 and for the 1997 Period were $146,886 and $371,207, respectively. Such
expenses consisted 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 nine months ended November 30, 1996 totaling $1.0 million and $2.4
million, respectively, 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 September 30, 1997, net assets in liquidation totaled $7,379,120, a
decrease of $2,404,191 from net assets in liquidation of $9,783,311 at February
24, 1997. This decrease is the result of the $2,427,281 cash distribution paid
in July 1997 exceeding the $23,090 increase in net assets in liquidation for the
1997 Period. At September 30, 1997, the net asset value per unit of beneficial
interest was $3.04, 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%. Through November 1, 1997, the Trust had received additional payments
totaling $400,000. 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 $250,000
balance due from the settlement agreement as of November 1, 1997. 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 Trust 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 is contingent upon a
number of factors beyond the Trust's control.
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 or fraudulent conveyances under the
Bankruptcy Code. Holdings maintains that a payment 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. Holdings also maintains that such relationship
had an impact on the decision to pay these amounts. Additionally, Holdings
maintains that a payment of $145,728 made 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. 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. A limited trial, in part based upon written
submissions, has been 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: November 14, 1997
<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 SEPTEMBER 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> FEB-25-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 2,224,750
<INVESTMENTS-AT-VALUE> 2,433,996
<RECEIVABLES> 339,633
<ASSETS-OTHER> 10,962
<OTHER-ITEMS-ASSETS> 4,759,774
<TOTAL-ASSETS> 7,544,365
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 165,245
<TOTAL-LIABILITIES> 165,245
<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> 209,246
<NET-ASSETS> 7,379,120
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 215,698
<OTHER-INCOME> 1,196
<EXPENSES-NET> 371,207
<NET-INVESTMENT-INCOME> (154,313)
<REALIZED-GAINS-CURRENT> 440,000
<APPREC-INCREASE-CURRENT> (262,597)
<NET-CHANGE-FROM-OPS> 23,090
<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> (2,404,191)
<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> 8,581,216
<PER-SHARE-NAV-BEGIN> 4.03
<PER-SHARE-NII> (.06)
<PER-SHARE-GAIN-APPREC> .07
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (1.00)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 3.04
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
