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 March 31, 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 May 9, 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 March 31, 1997 (Unaudited) and
February 24, 1997
Schedule of Portfolio Investments as of March 31, 1997 (Unaudited)
Statements of Operations for the Period from February 25, 1997 to March 31,
1997 and for the Three Months ended May 31, 1996
(Unaudited)
Statements of Changes in Net Assets for the Period from February 25, 1997 to
March 31, 1997 and for the Three Months ended May
31, 1996 (Unaudited)
Statements of Cash Flows for the Period from February 25, 1997 to March 31,
1997 and for the Three Months ended May 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
As of March 31, 1997 and February 24, 1997
<TABLE>
March 31, 1997 February 24, 1997
(Unaudited) (Predecessor)
ASSETS
Portfolio investments at fair value (cost $2,224,750 at
<S> <C> <C> <C> <C> <C> <C>
March 31, 1997 and February 24, 1997) $ 2,344,286 $ 2,696,593
Cash and cash equivalents - unrestricted 4,798,985 4,781,028
Cash and cash equivalents - restricted 2,790,218 2,790,218
Accrued interest receivable 38,056 25,959
Receivable from settlement agreement 600,000 650,000
Other assets 44,461 24,846
---------------- -----------------
Total assets 10,616,006 10,968,644
---------------- -----------------
LIABILITIES
Accounts payable - legal 1,168,771 1,076,982
Accounts payable - other 136,075 108,351
---------------- -----------------
Total liabilities 1,304,846 1,185,333
---------------- -----------------
NET ASSETS IN LIQUIDATION $ 9,311,160 $ 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 March 31, 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 $ 85,536 .92%
------------- -------------- --------
Unigene Laboratories, Inc.
Warrant to purchase 615,000 shares of Common Stock
at $1.375, expiring 7/7/00 0 1,230,000 13.21%
------------- -------------- ------
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(2) 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 10.40%
------------- -------------- ------
Oh-La-La! Inc.
9% Convertible Senior Note(2) 140,000 34,800
9% Convertible Senior Note(2) 100,000 25,200
------------- --------------
240,000 60,000 .65%
------------- -------------- --------
Total Portfolio Investments $ 2,224,750 $ 2,344,286 25.18%
============= ============== ======
</TABLE>
(1) Represents fair value as a percentage of net assets.
(2) Non-income producing securities.
See notes to financial statements.
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
Three Months
Period From Ended
February 25, 1997 May 31, 1996
to March 31, 1997 (Predecessor)
INVESTMENT INCOME AND EXPENSES
Income:
<S> <C> <C>
Interest from short-term investments $ 36,303 $ 128,473
Interest and dividends from portfolio investments - 56,498
Other interest income 2,844 -
-------------- ----------------
Total investment income 39,147 184,971
-------------- ----------------
Expenses:
Legal fees 121,063 580,544
Accounting fees 14,000 24,178
Trustee fees 8,500 -
General and administrative expenses 14,362 52,964
Transfer agent and custodian fees 1,066 3,457
Mailing and printing - 24,844
Salary expense - 85,903
Consulting fees - 125,040
Amortization of deferred organizational costs - 9,843
Directors' fees and expenses - 20,678
Insurance expense - 11,366
Other operating expenses - 37,825
-------------- ----------------
Total expenses 158,991 976,642
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NET INVESTMENT LOSS (119,844) (791,671)
-------------- ----------------
NET REALIZED AND UNREALIZED GAIN (LOSS) FROM PORTFOLIO
INVESTMENTS
Net realized gain from portfolio investments - 295,242
Change in net unrealized appreciation of investments (352,307) 2,280,534
-------------- ----------------
Net realized and unrealized gain (loss) from portfolio investments (352,307) 2,575,776
-------------- ----------------
NET (DECREASE) INCREASE IN NET ASSETS
IN LIQUIDATION $ (472,151) $ 1,784,105
============== ================
</TABLE>
See notes to financial statements.
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
<TABLE>
Three Months
Period From Ended
February 25, 1997 May 31, 1996
to March 31,1997 (Predecessor)
<S> <C> <C>
Net investment loss $ (119,844) $(791,671)
Net realized gain from portfolio investments - 295,242
Change in net unrealized appreciation of portfolio
investments (352,307) 2,280,534
---------------- ------------------
(Decrease) increase in net assets in liquidation (472,151) 1,784,105
Net assets in liquidation at beginning of period 9,783,311 17,235,158
---------------- ------------------
N ET ASSETS IN LIQUIDATION AT END OF PERIOD $ 9,311,160 $ 19,019,263
================ ==================
Net asset per unit $ 3.84 $ 7.84
========= ==========
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>
Three Months
Period From Ended
February 25, 1997 May 31, 1996
to March 31, 1997 (Predecessor)
CASH FLOWS PROVIDED FROM (USED FOR)
OPERATING ACTIVITIES
<S> <C> <C>
Net investment loss $ (119,844) $ (791,671)
Adjustments to reconcile net investment loss to cash
provided from (used for) operating activities:
Amortization of deferred organizational costs - 9,843
Depreciation expense 498 1,148
Increase in payables and other liabilities 119,513 468,703
Decrease in receivables and other assets 17,790 219,482
----------------- ------------------
Cash flows provided from (used for) operating activities 17,957 (92,495)
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CASH FLOWS PROVIDED FROM INVESTING ACTIVITIES
Cost of portfolio investments purchased - (44,040)
Repayment of note - 1,310,000
----------------- ------------------
Cash flows provided from investing activities - 1,265,960
----------------- ------------------
Increase in cash and cash equivalents 17,957 1,173,465
Cash and cash equivalents at beginning of period 7,571,246 9,878,280
----------------- ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,589,203 $ 11,051,745
================= ==================
</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 ("Unit"). As a result, each shareholder of the Fund on February 24,
1997, became the holder of one Unit for each share of the Fund's common stock
held on such date and 1.25 Units 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 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.
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 March 31, 1997, the Trust paid fees to the
Trustee totaling $8,500.
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 $600,000 balance due from the
settlement agreement as of March 31, 1997. 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 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.
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 Trust, 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 Trust 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.
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 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
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - continued
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. 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 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
Pursuant to its Plan of Liquidation, the Fund terminated its operations on
February 24, 1997, at which time the Fund transferred all of its remaining
assets and liabilities to the Trust, including $7,571,246 of cash and cash
equivalents.
On March 31, 1997, the Trust had cash and cash equivalents totaling $7,589,203,
of which $2,790,218 is 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 period
from February 25, 1997 to March 31, 1997, totaled $36,303. 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.
Additionally, on March 31, 1997, the Trust had accounts payable and accrued
liabilities totaling $1,304,846, of which $1,168,771 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
Trust. 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.
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.
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 remaining 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 upon the approval of its Plan of Liquidation in July
1996.
Realized and Unrealized Gains and Losses from Portfolio Investments
For the period from February 25, 1997 to March 31, 1997 (the "1997 period"), the
Trust had a $352,307 unrealized loss from its remaining portfolio investments
resulting from the net downward revaluation of its publicly-held portfolio
investments, primarily due to the decreased public market price of Unigene
Laboratories, Inc. common stock at the end of the period. There were no realized
gains or losses from portfolio investments during the 1997 period.
For the three months ended May 31, 1996, the Fund had a $2,575,776 net realized
and unrealized gain from portfolio investments, comprised of a $295,242 net
realized gain from portfolio investments and a $2,280,534 increase in net
unrealized appreciation of investments.
During the three months ended May 31, 1996, the Fund sold warrants to purchase
190,000 shares of Accumed International, Inc. common stock for $313,329,
realizing a gain of $297,440. Additionally during the quarter, the Fund sold
12,500 shares of Accumed common stock for $49,213, realizing a loss of $2,198.
The $2,280,534 increase in net unrealized appreciation of investments for the
quarter included a $2,438,446 net unrealized gain, primarily due to the
increased public market price of Unigene Laboratories, Inc. and Shells Seafood
Restaurants, Inc. common stock at the end of the quarter. This additional
unrealized gain was offset by a $157,912 transfer from unrealized to realized
gain due to the Accumed warrants sold during the quarter, as discussed above.
Investment Income and Expenses
The significant decrease in net investment loss for the 1997 period as compared
to the 1996 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. For the 1997 period and for
the three months ended May 31, 1996, the Trust had a net investment loss of
$119,884 and $791,671, respectively.
Investment income for the 1997 period, a period of slightly over one month, was
$39,147. Investment income for the fiscal quarter ended May 31, 1996 was
$184,971. The Trust had no interest or dividend income for the 1997 period, due
to the reduction in interest earning portfolio securities held during the 1997
period. Such securities will continue to decline as the Trust proceeds with the
liquidation of its remaining assets.
The operating expenses of the Trust during the 1997 period consists of legal and
accounting fees, consulting 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 quarter ended May 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
At March 31, 1997, net assets in liquidation totaled $9,311,160, a decrease of
$472,151 from the net assets of the Fund of $9,783,331 at February 24, 1997.
This decrease was comprised of the $352,307 net unrealized loss from portfolio
investments and the $119,844 net investment loss for the 1997 period. At March
31, 1997, the net asset value per Unit was $3.84, compared to $4.03 per common
equivalent share 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 $600,000 balance due from the
settlement agreement as of March 31, 1997. 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 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.
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 Trust, 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 Trust 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 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.
THE MICROCAP LIQUIDATING TRUST
/s/ Raymond S. Troubh
Raymond S. Troubh
Trustee
Date: May 15, 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 MARCH
31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> FEB-25-1997
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 2,224,750
<INVESTMENTS-AT-VALUE> 2,344,286
<RECEIVABLES> 638,056
<ASSETS-OTHER> 44,461
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10,616,006
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,304,846
<TOTAL-LIABILITIES> 1,304,846
<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> 119,536
<NET-ASSETS> 9,311,160
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 39,147
<OTHER-INCOME> 0
<EXPENSES-NET> 158,991
<NET-INVESTMENT-INCOME> (119,844)
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> (352,307)
<NET-CHANGE-FROM-OPS> (472,151)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (472,151)
<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> 9,547,236
<PER-SHARE-NAV-BEGIN> 4.03
<PER-SHARE-NII> (.05)
<PER-SHARE-GAIN-APPREC> (.14)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 3.84
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
