SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended
Or
[X] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from February 25, 1997 to
December 31, 1997 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Units of Beneficial Interest
================================================================================
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
(Cover page continues on next page)
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of March 16, 1998, there were 2,427,281 units of beneficial interest of the
MicroCap Liquidating Trust outstanding.
Documents Incorporated By Reference
None
<PAGE>
PART I
Item 1. Business.
General
The MicroCap 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 existing and
contingent assets and 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 (the "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.
The Trust was organized for the sole purpose of liquidating the Fund's assets
and winding up the Fund's affairs. The Trust will terminate upon the final
liquidation of its remaining assets, payment of all liabilities and satisfaction
of all outstanding claims and contingencies.
Cash Distributions
On August 30, 1996, the Fund made an initial liquidating cash distribution
totaling $8,495,486 to shareholders of record on August 15, 1996. Common
shareholders received $3.50 per share and preferred shareholders received $4.375
per share. The amount paid to common shareholders was comprised of $0.274 of
long-term capital gain and $3.226 of return of capital. The amount paid to
preferred shareholders was comprised of $0.343 of long-term capital gain and
$4.032 of return of capital.
On 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.
Portfolio Investments
On December 31, 1997, the Trust held four portfolio investments with an
aggregate cost of $2,177,500 and a fair value of $1,622,500. During the period
from February 25, 1997 to December 31, 1997 (the "1997 Period"), the Trust
liquidated its investment in Bennett Environmental, Inc. and sold a portion of
its investment in Unigene Laboratories, Inc. These transactions, discussed in
more detail below, resulted in a net realized gain of $775,250 for the 1997
Period.
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. In July 1997, a portion of the option
was exercised for 140,000 warrants at $2.875 per warrant, or $402,500. The
remaining portion of the option expired on July 30, 1997. The Trust realized a
net gain of $440,000 as a result of these transactions.
In November 1997, the Trust sold its remaining 112,500 common shares of Bennett
Environmental, Inc. for net proceeds of $382,500, or $3.40 per share. The Trust
realized a net gain of $335,250 as a result of this sale.
Competition
The Trust is operating solely to liquidate its remaining assets and will not
invest in any new portfolio companies, therefore, the Trust is not competing for
new investment opportunities.
Employees
The Trust has no employees. In July 1996, Raymond S. Troubh was appointed
President, Chief Executive Officer, Treasurer, Secretary and Director of the
Fund. All of the Fund's previous officers and all of its employees had resigned
by the end of July 1996. Mr. Troubh held these offices through the Fund's date
of termination and became the independent liquidating trustee of the Trust, with
primary responsibility for the liquidation of its remaining assets.
Item 2. Properties.
None
Item 3. Legal Proceedings.
On April 19, 1996, the Fund filed a complaint against Commonwealth Associates, a
registered broker-dealer and the underwriter of the Fund's initial public
offering, Michael S. Falk, the chief executive officer of Commonwealth
Associates, a minority shareholder and former 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 made settlement payments to the Fund and the Trust totaling
$1,150,000. In connection therewith, the Fund received $500,000 in December 1996
and an additional $650,000 in installments during 1997. Interest of $20,415 was
also paid to the Trust with the final installment payment in December 1997.
Additionally, as part of the settlement, the Fund and the defendants agreed to
pursue claims against former counsel to the Fund. The Trust is entitled to
receive 50% of any recovery from such claims after reimbursement to Commonwealth
Associates of all costs and expenses associated with pursuing the claims.
The Trust is a creditor of PSSS, Inc., formerly 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 for PSSS.
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 based upon written submissions to
address the validity of Regency's preference claims was held in December 1997
and resulted in a judgment in favor of the Trust, dismissing the preference
claims with prejudice. It is expected that a trial on the fraudulent conveyance
claims will be held during 1998.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of Unit holders during the last quarter of the
period covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
There were 2,427,281 units of beneficial interest of the MicroCap Liquidating
Trust (the "Units") outstanding as of March 16, 1998. Units of the Trust (CUSIP#
59501M) became listed securities on the OTC Bulletin Board for over-the counter
securities as of April 30, 1997.
The following table sets forth, for each of the periods indicated, the high and
low closing bid prices for the Units as reported by NASDAQ since April 30, 1997.
These per Unit quotations represent inter-dealer prices on the over-the-counter
market, do not include retail markups, markdowns, or commissions and may not
represent actual transactions.
<TABLE>
Price Per Unit
High Low
Period from April 30, 1997 to December 31, 1997:
<S> <C> <C> <C> <C> <C> <C>
April 30, 1997 to June 30, 1997 $ 2.25 $ 0.38
Third quarter 2.13 0.69
Fourth quarter 1.19 0.75
Period from January 1, 1998 to March 16, 1998 1.00 0.81
</TABLE>
As of March 16, 1998, there were 9 Unit holders of record of the Trust.
Certain holders of record held Units for approximately 255 beneficial owners.
<PAGE>
Item 6. Selected Financial Data.
<TABLE>
Period From Period From
Mar. 1, 1996 to Fiscal Year Fiscal Year Mar. 19, 1993
Period From Feb. 24, 1997 Ended Ended (Commencement
Feb. 25, 1997 (Date of Feb. 29, Feb. 28, of Operations) to
to Dec. 31, Termination) 1996 1995 Feb. 28, 1994
1997 (Predecessor) (Predecessor) (Predecessor) (Predecessor)
--------------- ------------ ------------ ------------ ----------------
Operating Data:
Net ivestment income (loss) (interest and
<S> <C> <C> <C> <C> <C>
dividend income less operating expenses) $ (173,067) $ (1,243,927) $ (313,174) $ 220,352 $ 55,079
Net realized gain (loss) from portfolio investments775,250 3,972,372 (1,061,009) (161,149) (1,557,030)
Change in net unrealized appreciation or
(depreciation) of investments (1,026,843) (1,684,806) 2,121,261 548,448 (513,060)
Net realized and unrealized gain (loss) from
portfolio investments (251,593) 2,287,566 1,060,252 387,299 (2,070,090)
Net increase (decrease) in net assets resulting
from operations (424,660) 1,043,639 747,078 607,651 (2,015,011)
Cash distributions 2,427,281 8,495,486 - 440,800 -
Per Unit or Common Equivalent Share*:
Net investment income (loss) $ (.07) $ (.51) $ (.13) $ .10 $ .03
Net realized and unrealized gain (loss) from
portfolio investments (.10) .94 .44 .18 (.94)
Net increase (decrease) in net assets resulting
from operations (.17) .43 .31 .28 (.91)
Cash distributions 1.00 3.50 - .20 -
Feb. 24, 1997
(Date of
Termination) Feb. 29, 1996 Feb. 28, 1995 Feb. 28, 1994
Dec. 31, 1997 (Predecessor) (Predecessor) (Predecessor) (Predecessor)
Balance Sheet Data:
Total assets $ 7,084,047 $ 10,968,644 $ 17,568,711 $ 18,054,440 $ 17,739,168
Net assets 6,931,370 9,783,311 17,235,158 17,715,073 17,548,222
Cash and cash equivalents 5,442,020 7,571,246 9,878,280 9,033,750 4,475,544
Portfolio investments at fair value 1,622,500 2,696,593 6,939,805 8,371,350 11,645,538
Per Unit or Common Equivalent Share**:
Net assets $ 2.86 $ 4.03 $ 7.25 $ 8.04 $ 7.96
</TABLE>
* Based on weighted average number of Units or common equivalent shares
outstanding for each respective period. ** Based on number of Units or common
equivalent shares outstanding as of the period end date.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Liquidity and Capital Resources
On December 31, 1997, the MicroCap Liquidating Trust (the "Trust") had cash and
cash equivalents totaling $5,442,020, 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
December 31, 1997 (the "1997 Period") totaled $270,147. Interest earned from
such investments held by The MicroCap Fund, Inc. (the "Fund"), the predecessor
entity to the Trust, for the period from March 1, 1996 to February 24, 1997, the
Fund's termination date, ("Fiscal 1997") and for the period from March 1, 1995
to February 28, 1996 ("Fiscal 1996"), totaled $450,528 and $444,621,
respectively . Interest earned from such cash equivalent balances in future
periods is subject to fluctuations in short-term interest rates and changes in
cash equivalent balances held by the Trust.
The restricted cash and cash equivalents balance of approximately $2.8 million
at December 31, 1997 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, subject to maintaining an adequate reserve for
all current and contingent liabilities.
Results of Operations
Realized and Unrealized Gains and Losses from Portfolio Investments - For the
1997 Period, the Trust had a net realized and unrealized loss from its portfolio
investments of $251,593. For Fiscal 1997 and Fiscal 1996, the Fund had a net
realized and unrealized gain from its portfolio investments of $2,287,566 and
$1,060,252, respectively.
1997 Period:
The $251,593 net realized and unrealized loss for the 1997 Period was comprised
of a $775,250 net realized gain from the sale of certain portfolio investments
during the 1997 Period, as discussed below. These realized gains were more than
offset by a $1,026,843 decrease to net unrealized appreciation of portfolio
investments during the 1997 Period, as discussed below.
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. In July 1997, a portion of the option
was exercised for 140,000 warrants at $2.875 per warrant, or $402,500. The
remaining portion of the option expired on July 30, 1997. The Trust realized a
net gain of $440,000 as a result of these transactions. In November 1997, the
Trust sold its remaining 112,500 common shares of Bennett Environmental, Inc.
for $382,500, or $3.40 per share, resulting in a realized gain of $335,250.
During the 1997 Period, the Trust had a $1,026,843 net decrease in the net
unrealized appreciation of its remaining portfolio investments. Such decrease
included a $623,438 net downward revaluation of the Trust's holdings of Unigene
Laboratories, Inc., and a net transfer of $403,405 from unrealized gain to
realized gain relating to the portfolio investments sold during the 1997 Period,
as discussed above.
<PAGE>
Fiscal 1997:
The Fund's $2,287,566 net realized and unrealized gain for Fiscal 1997 was
comprised of a $3,972,372 net realized gain from the sale of certain portfolio
investments during the period, as discussed below. This gain was partially
offset by a $1,684,806 decrease to net unrealized appreciation of portfolio
investments during Fiscal 1997, as discussed below.
The $3,972,372 net gain realized during Fiscal 1997 was comprised of the
following transactions:
The Fund sold 12,500 common shares of Accumed International, Inc. and
warrants to purchase 250,000 shares of Accumed common stock for $517,189,
realizing a gain of $444,872. On April 23, 1996, Shells Seafood Restaurants,
Inc. completed its initial public offering of common stock at $5.00 per share.
In connection with the offering, the Fund received $1,617,195, representing
repayment of its $1,310,000 senior note and accrued interest thereon.
Additionally, in July 1996, the Fund sold its remaining investment in Shells for
$2,700,000, realizing a gain of $2,110,000. On July 1, 1996, the Fund
transferred warrants to purchase 60,000 shares of
Unigene Laboratories, Inc. common stock to certain individuals for payment
of consulting and portfolio transaction costs incurred in connection with
the Fund's investment in Unigene. This transaction resulted in a $105,000
gain, which was equally offset by $105,000 of consulting fee expense
recorded by the Fund over several prior fiscal quarters.
In July 1996, the Fund received $163,205 from International Communication
Technologies, Inc., representing repayment of the $150,000 note due to the
Fund along with accrued interest thereon.
In January 1997, the Fund sold its 150,000 common shares of Optiva Corp. in
a private transaction for $1,800,000, realizing a gain of $1,312,500.
The Fund's $1,684,806 net decrease in net unrealized appreciation of portfolio
investments for Fiscal 1997 includes a $158,439 net unrealized gain due to the
net upward revaluation of certain portfolio investments during the period,
primarily Unigene Laboratories, Inc. This increase to net unrealized
appreciation of investments was more than offset by the net transfer of
$1,526,367 from unrealized gain to realized gain relating to the portfolio
investments sold during Fiscal 1997, as discussed above.
Fiscal 1996:
The $1,060,252 net realized and unrealized gain for Fiscal 1996 was comprised of
a $1,061,009 net realized loss from the sale and write-off of certain portfolio
investments during the period, as discussed below. This loss was more than
offset by a $2,121,261 increase to net unrealized appreciation of portfolio
investments for Fiscal 1996, as discussed below.
The $1,061,009 net loss realized during Fiscal 1996 was comprised of the
following transactions:
In March 1995, the Fund sold its $250,000 investment in SR Communications
Corp. for $200,000 and a $40,000 non-interest bearing promissory note. The Fund
realized a $14,000 loss and recorded $4,000 of interest income from this
transaction. In May 1995, the Fund sold its 337,500 common shares of Silverado
Foods, Inc. in a private transaction for $822,656, realizing a gain of $672,656.
In June 1995, the Fund wrote-off its investments in Radiator King International,
Inc. and Weir-Jones Marketing, Inc. due to continued business and financial
difficulties at these companies. The Fund realized a loss of $1,010,000 in
Fiscal 1996 from the write-off of these two investments. In September 1995, the
Fund sold its 55,555 common shares of YES! Entertainment Corporation for
$305,538, realizing a loss of $393,662. In October 1995, the Fund sold 150,000
common shares of Accumed International, Inc. (formerly Alamar Biosciences, Inc.)
for $159,375, realizing a loss of $128,081. In November 1995, the Fund received
$145,728 for the redemption of its 291,456 common stock warrants of Regency
Holdings (Cayman) Inc., resulting in a realized gain of $145,728. In December
1995, the Fund sold its $1,200,000 promissory note and warrant to purchase
900,000 common shares of Bennett Environmental U.S., Inc. in a private
transaction for $820,000 and 450,000 common shares of Bennett Environmental.
This transaction resulted in a realized loss of $333,650 for Fiscal 1996.
The Fund's $2,121,261 net increase in net unrealized appreciation of portfolio
investments for Fiscal 1996 includes a $1,850,261 net unrealized gain due to the
net upward revaluation of certain portfolio investments during the year,
primarily Shells Seafood Restaurants, Inc., which completed its initial public
offering in April 1996. Net unrealized appreciation of portfolio investments
also increased due to the net transfer of $271,000 from unrealized loss to
realized loss relating to the portfolio investments sold or written-off during
Fiscal 1996, as discussed above.
Investment Income and Expenses
For the 1997 Period, the Trust had a net investment loss (interest and dividend
income less operating expenses) of $173,067. For Fiscal 1997 and Fiscal 1996,
the Fund had a net investment loss of $1,243,927 and $313,174, respectively.
The significantly reduced net investment loss of $173,067 for the 1997 Period as
compared to $1,243,927 for Fiscal 1997 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 $304,556 as compared to
$1,692,225 for Fiscal 1997. The decrease in investment income primarily was due
to the recognition of $1,150,000 of other income during Fiscal 1997 relating to
a litigation settlement, as discussed in detail in Note 4 of Notes to Financial
Statements. Additionally, interest income from short-term investments was
reduced by $180,381, reflecting the shorter 1997 Period of approximately 10
months compared to the almost complete full year period for Fiscal 1997, and
reduced cash equivalent balances held during the 1997 Period as compared to the
amount for Fiscal 1997. Interest income is expected to continue to decline as
the Trust continues with the liquidation of its remaining assets and subsequent
distribution of such proceeds to Unit holders. The Trust had no interest or
dividend income from portfolio investments for the 1997 Period, since it held no
interest earning portfolio securities during the 1997 Period.
The operating expenses of the Trust for the 1997 Period were $477,623 as
compared to $2,936,152 for Fiscal 1997. The decrease in operating expenses
primarily is attributable to two major factors. First, a significant decrease in
legal fees was incurred during the 1997 Period compared to Fiscal 1997. Legal
fees incurred during Fiscal 1997 totaled $1,991,383, as compared to $167,602 for
the 1997 Period. The Fund incurred significant legal fees during Fiscal 1997
from (i) several legal proceedings involving the Fund (see Notes 4 and 5 of
Notes to Financial Statements), (ii) continued restructuring of certain of the
Fund's portfolio investments during Fiscal 1997, (iii) matters relating to the
Fund's July 23, 1996 special meeting of shareholders and Plan of Liquidation and
(iv) preparation and issuance of the Information Statement relating to the
establishment of the Trust. Secondly, certain operating expenses of the Fund,
other than legal fees, are no longer incurred by the Trust. These expenses
include salary expense, amortization expense, directors fees, insurance,
consulting fees and certain other expenses. Expenses, other than legal fees,
incurred for the 1997 Period totaled $310,021, as compared to $944,769 for
Fiscal 1997.
The increase in net investment loss for Fiscal 1997 compared to Fiscal 1996 was
due to a $1,772,508 increase in operating expenses, which exceeded an $841,755
increase in investment income. The increase in operating expenses primarily is
attributable to the significant increase in legal fees during Fiscal 1997, as
discussed above. The $841,755 increase in investment income for Fiscal 1997
compared to Fiscal 1996 primarily is due to the recognition of $1,150,000 of
other income relating to a litigation settlement, as discussed above. This
income was partially offset by a decline in interest and dividend income from
portfolio investments of $369,271 due to the reduced amount of interest earning
portfolio securities held by the Fund during Fiscal 1997 as compared to Fiscal
1996.
Net Assets
For the 1997 Period, the Trust had a $424,660 decrease in net assets resulting
from operations, comprised of the $251,593 net realized and unrealized loss from
portfolio investments and the $173,067 net investment loss. The Trust's net
assets also were reduced by the $2,427,281 cash distribution made to unit
holders on July 15, 1997. As a result, the Trust's net assets were $6,931,370 at
December 31, 1997, representing a decrease of $2,851,941 from net assets of
$9,783,311 at February 24, 1997, the Fund's termination date.
On a per Unit basis, the results of operations for the 1997 Period decreased the
Trust's net assets by $.17 per Unit and the cash distribution paid to Unit
holders on July 15, 1997 reduced the Trust's net assets by $1.00 per Unit. As a
result, the Trust's net asset value was $2.86 per Unit as of December 31, 1997,
down $1.17 from $4.03 as of February 24, 1997.
Summary of Portfolio Transaction and Change in Net Assets during the 1997 Period
Portfolio transactions completed during the 1997 Period, resulted in a realized
gain of $775,250. As shown below, these transactions returned $822,500 to the
Trust and increased its net asset value for the period by $371,845. This
increase in the Trust's net assets was more than offset by a $623,438 net
decrease in net assets resulting from the downward revaluation of the Trust's
investment in Unigene Laboratories, Inc., as shown below. The completed
portfolio transactions and revaluations decreased the Trust's net asset value on
a net basis by $251,593 for the 1997 Period.
<TABLE>
Effect on
1997 Period Fair Value Net Assets
Investment Proceeds at 2/24/97 for the 1997 Period
- -------------------------------------------------------------------------------------------------------------------------
Sales during the 1997 period:
- ----------------------------
<S> <C> <C> <C>
Unigene Laboratories, Inc. $ 440,000 $ 358,750 $ 81,250
Bennett Environmental, Inc. 382,500 91,905 290,595
--------------- -------------- ---------------
Sub-total from sales $ 822,500 $ 450,655 371,845
=============== ============== ---------------
Revaluations during the 1997 period:
Unigene Laboratories, Inc. (Warrants) (623,438)
Sub-total from portfolio transactions (251,593)
Net investment loss for the 1997 Period (173,067)
---------------
Change in Net Assets for the 1997 Period $ (424,660)
===============
</TABLE>
For Fiscal 1997, the Fund had a net increase in net assets resulting from
operations of $1,043,639, comprised of the net realized and unrealized gain from
portfolio investments of $2,287,566 offset by the net investment loss of
$1,243,927. Additionally, the cash distribution paid to shareholders on August
30, 1996 also reduced the Fund's net assets by $8,495,486. As a result, the
Fund's net assets were $9,783,311, or $4.03 per common equivalent share, as of
February 24, 1997, down from $17,235,158, or $7.25 per common equivalent share,
as of February 29, 1996.
For Fiscal 1996, the Fund had a net increase in net assets resulting from
operations of $747,078, comprised of the net realized and unrealized gain from
portfolio investments of $1,060,252 offset by the net investment loss of
$313,174. This increase was more than offset by a $1,226,993 decrease in net
assets resulting from the repurchase by the Fund of 290,227 shares of its own
common stock in the public market during Fiscal 1996. As a result, the Fund's
net assets decreased $479,915 to $17,235,158 at February 29, 1996, or $7.25 per
common equivalent share.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
INDEX
Independent Auditors' Report
Statements of Assets and Liabilities as of December 31, 1997 and February 24,
1997 (Date of Termination) (Predecessor)
Schedules of Portfolio Investments as of December 31, 1997 and February 24, 1997
(Date of Termination) (Predecessor)
Statements of Operations for the period from February 25, 1997 to December 31,
1997, for the period from March 1, 1996 to February 24, 1997 (Date of
Termination) (Predecessor) and for the fiscal year ended February 29, 1996
(Predecessor)
Statements of Changes in Net Assets for the period from February 25, 1997 to
December 31, 1997, for the period from March 1, 1996 to February 24, 1997 (Date
of Termination) (Predecessor) and for the fiscal year ended February 29, 1996
(Predecessor)
Statements of Cash Flows for the period from February 25, 1997 to December 31,
1997, for the period from March 1, 1996 to February 24, 1997 (Date of
Termination) (Predecessor) and for the fiscal year ended February 29, 1996
(Predecessor)
Notes to Financial Statements
Note - All schedules are omitted because of the absence of conditions under
which they are required or because the required information is included
in the financial statements or notes thereto.
<PAGE>
INDEPENDENT AUDITORS' REPORT
MicroCap Liquidating Trust
We have audited the accompanying statements of assets and liabilities, including
the schedules of portfolio investments, of the MicroCap Liquidating Trust (the
"Trust") as of December 31, 1997 and The MicroCap Fund, Inc. (the "Fund") as of
February 24, 1997 (Date of Termination), and the related statements of
operations, changes in net assets and cash flows of the Trust for the period
from February 25, 1997 to December 31, 1997 and for the Fund for the period from
March 1, 1996 to February 24, 1997 (Date of Termination) and for the year ended
February 29, 1996. These financial statements are the responsibility of the
Trust's and the Fund's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned at December 31, 1997 and February 24, 1997 by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Trust at December 31, 1997 and the Fund
at February 24, 1997 (Date of Termination) and the results of the Trust's
operations, changes in net assets and cash flows for the period from February
25, 1997 to December 31, 1997 and for the Fund for the period from March 1, 1996
to February 24, 1997 (Date of Termination) and for the year ended February 29,
1996 in conformity with generally accepted accounting principles.
As explained in Note 2, the financial statements include securities valued at
$1,622,500 and $2,696,593 at December 31, 1997 and February 24, 1997 (Date of
Termination), respectively, representing 23% and 28% of net assets,
respectively, whose values have been estimated by the Trustee of the Trust as of
December 31, 1997 and by the Board of Directors of the Fund as of February 24,
1997 in the absence of readily ascertainable market values. We have reviewed the
procedures used by the Trustee and the Board of Directors in arriving at the
estimated value of such securities and have inspected underlying documentation,
and, in the circumstances, we believe the procedures are reasonable and the
documentation appropriate. However, because of the inherent uncertainty of
valuation, those estimated values may differ significantly from the values that
would have been used had a ready market for the securities existed, and the
differences could be material.
Deloitte & Touche LLP
New York, New York
February 20, 1998
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
STATEMENTS OF ASSETS AND LIABILITIES
As of December 31, 1997 and February 24, 1997 (Date of Termination)
<TABLE>
February 24,
December 31, 1997
1997 (Predecessor)
ASSETS
Portfolio investments at fair value (cost $2,177,500 at December 31,
<S> <C> <C> <C> <C> <C>
1997 and cost $2,224,750 at February 24, 1997) $ 1,622,500 $ 2,696,593
Cash and cash equivalents - unrestricted 2,651,802 4,781,028
Cash and cash equivalents - restricted 2,790,218 2,790,218
Accrued interest receivable 18,644 25,959
Receivable from settlement agreement - 650,000
Other assets 883 24,846
--------------- ----------------
Total assets 7,084,047 10,968,644
--------------- ----------------
LIABILITIES
Accounts payable - legal 87,015 1,076,982
Accounts payable - other 65,662 108,351
--------------- ----------------
Total liabilities 152,677 1,185,333
--------------- ----------------
NET ASSETS IN LIQUIDATION $ 6,931,370 $ 9,783,311
=============== ================
Net assets per Unit of beneficial interest or
common equivalent share $ 2.86 $ 4.03
========== =========
Number of Units of beneficial interest or
common equivalent share 2,427,281 2,427,281
========= =========
</TABLE>
See notes to financial statements.
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
SCHEDULE OF PORTFOLIO INVESTMENTS
As of December 31, 1997
<TABLE>
% of
Issuer / Position Cost Fair Value Net Assets(1)
Publicly-Held Securities: (A)
Unigene Laboratories, Inc. (B)
Warrant to purchase 475,000 shares of Common Stock
<S> <C> <C> <C> <C> <C> <C>
at $1.375, expiring 7/7/00 $ 0 $ 593,750 8.57%
------------- -------------- -------
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 13.98%
------------- -------------- --------
Oh-La-La! Inc.
9% Convertible Senior Note 140,000 34,800
9% Convertible Senior Note 100,000 25,200
------------- --------------
240,000 60,000 .87%
------------- -----------------------
Total Portfolio Investments(D) $ 2,177,500 $ 1,622,500 23.42%
============= ============== ========
</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. The Trust realized a net gain of $335,250 as a result of this
transaction.
(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. In July 1997,
a portion of the option was exercised for 140,000 warrants at $2.875 per
warrant, or $402,500. The remaining portion of the option expired on July
30, 1997. 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 First Colony
Acquisition Corp., the Trust's convertible 6% promissory note was exchanged
for 240,179 shares of the company's Series B1 preferred stock.
(D) All portfolio securities held at December 31, 1997 are non-income producing.
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC. (Predecessor)
SCHEDULE OF PORTFOLIO INVESTMENTS
As of February 24, 1997 (Date of Termination)
<TABLE>
% of
Issuer / Position Cost Fair Value Net Assets(1)
Publicly-Held Securities:
Bennett Environmental Inc.
<S> <C> <C> <C>
112,500 shares of Common Stock $ 47,250 $ 91,905 .94%
------------- --------------
Unigene Laboratories, Inc.
Warrant to purchase 615,000 shares of Common Stock
at $1.375, expiring 7/7/00 0 1,575,938 16.11%
------------- --------------
YES! Entertainment Corporation
Warrant to purchase 11,437 shares of Common Stock
at $15.30 per share, expiring 7/16/98 0 0 0%
------------- --------------
Privately-Held Securities:
First Colony Acquisition Corp.
106,562 shares of Preferred Stock 594,174 297,087
6% Convertible Promissory Note due 11/1/97 1,343,326 671,663
Warrant to purchase 7,560 shares of Common Stock
at $5.00, expiring 1/24/00 0 0
------------- --------------
1,937,500 968,750 9.90%
------------- --------------
Oh-La-La! Inc.
9% Convertible Senior Note 140,000 34,800
9% Convertible Senior Note 100,000 25,200
------------- --------------
240,000 60,000 .61%
------------- -------------- --------
Total Portfolio Investments $ 2,224,750 $ 2,696,593 27.56%
============= ============== ======
</TABLE>
(1) Represents fair value as a percentage of net assets.
See notes to financial statements.
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
STATEMENTS OF OPERATIONS
For the Period from February 25, 1997 to December 31, 1997 and for the Period
from March 1, 1996 to February 24, 1997 (Date of Termination) and for the Fiscal
Year Ended February 29, 1996
<TABLE>
Fiscal Year
February 25, March 1, 1996 Ended
1997 to to February 24, February 29,
December 31, 1997 1996
1997 (Predecessor) (Predecessor)
INVESTMENT INCOME AND EXPENSES
Income:
Interest from U.S. Treasury Bills and
<S> <C> <C> <C>
repurchase agreements $ 270,147 $ 450,528 $ 444,621
Interest and dividends from portfolio
investments - 36,578 405,849
Other interest income 15,467 - -
Other income 18,942 1,205,119 -
-------------- -------------- -------------
Total income 304,556 1,692,225 850,470
-------------- -------------- -------------
Expenses:
Administrative expenses 73,498 125,741 167,113
Legal fees 167,602 1,991,383 384,993
Accounting fees 63,825 96,805 61,169
Trustee fees 148,035 127,319 -
Transfer agent and custodian fees 17,461 22,392 23,332
Mailing and printing 4,677 66,972 16,308
Other operating expenses 2,525 89,012 46,163
Salary expense - 178,919 328,901
Amortization of deferred
organizational costs - 80,608 39,372
Directors' fees and expenses - 47,879 13,665
Consulting fees - 74,400 56,103
Insurance expense - 34,722 26,525
-------------- -------------- -------------
Total expenses 477,623 2,936,152 1,163,644
-------------- -------------- -------------
NET INVESTMENT LOSS (173,067) (1,243,927) (313,174)
-------------- -------------- -------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) FROM PORTFOLIO INVESTMENTS
Net realized gain (loss) from portfolio
investments 775,250 3,972,372 (1,061,009)
Change in net unrealized appreciation or
(depreciation) of investments (1,026,843) (1,684,806) 2,121,261
-------------- -------------- -------------
Net realized and unrealized (loss) gain
from portfolio investments (251,593) 2,287,566 1,060,252
-------------- -------------- -------------
NET (DECREASE) INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ (424,660) $ 1,043,639 $ 747,078
============== ============== =============
</TABLE>
See notes to financial statements.
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
STATEMENTS OF CHANGES IN NET ASSETS
For the Period from February 25, 1997 to December 31, 1997 and for the Period
from March 1, 1996 to February 24, 1997 (Date of Termination) and for the Fiscal
Year Ended February 29, 1996
<TABLE>
March 1, Fiscal Year
February 25, 1996 to Ended
1997 to February 24, February 29,
December 31, 1997 1996
1997 (Predecessor) (Predecessor)
Change in net assets resulting from operations:
<S> <C> <C> <C>
Net investment loss $ (173,067) $ (1,243,927) $ (313,174)
Net realized gain (loss) from portfolio investments 775,250 3,972,372 (1,061,009)
Change in net unrealized appreciation or (depreciation)
of portfolio investments (1,026,843) (1,684,806) 2,121,261
---------------- ---------------- ---------------
Net (decrease) increase in net assets resulting from
operations (424,660) 1,043,639 747,078
---------------- ---------------- ---------------
Change in net assets from distributions:
Cash distributions paid (2,427,281) (8,495,486) -
---------------- ---------------- ---------------
Change in net assets from capital stock transactions:
Common stock repurchased - - (1,226,993)
---------------- ---------------- ---------------
Net decrease in net assets for the period (2,851,941) (7,451,847) (479,915)
Net assets in liquidation at beginning of period 9,783,311 17,235,158 17,715,073
---------------- ---------------- ---------------
NET ASSETS IN LIQUIDATION AT
END OF PERIOD $ 6,931,370 $ 9,783,311 $ 17,235,158
================ ================ ===============
Net assets per Unit of beneficial interest or
common equivalent share $ 2.86 $ 4.03 $ 7.25
======== ======== =======
Number of Units of beneficial interest or
common equivalent shares 2,427,281 2,427,281 2,376,609
============= ============== =============
</TABLE>
See notes to financial statements.
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
STATEMENTS OF CASH FLOWS
For the Period from February 25, 1997 to December 31, 1997 and for the Period
from March 1, 1996 to February 24, 1997 (Date of Termination) and for the Fiscal
Year Ended February 29, 1996
<TABLE>
March 1, Fiscal Year
February 25 1996 to Ended
1997 to February 24, February 29,
December 31, 1997 1996
1997 (Predecessor) (Predecessor)
CASH FLOWS USED FOR
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net investment loss $ (173,067) $ (1,243,927) $ (313,174)
Adjustments to reconcile net investment loss
to cash used for operating activities:
(Decrease) increase in accounts payable and other liabilities (1,032,656) 851,780 (5,814)
Decrease (increase) in accounts receivable and other assets 668,557 (130,265) (41,763)
Depreciation expense 12,721 5,103 480
Amortization of deferred organizational costs - 80,608 39,372
Amortization of discount on accounts receivable - - (4,000)
--------------- -------------- --------------
Cash flows used for operating activities (524,445) (436,701) (324,899)
--------------- -------------- --------------
CASH FLOWS PROVIDED FROM
INVESTING ACTIVITIES
Net proceeds from the sale of portfolio investments 822,500 4,676,564 2,393,922
Repayment of notes - 2,000,000 3,940,000
Purchase of portfolio investments - (51,411) (3,937,500)
--------------- -------------- --------------
Cash flows provided from investing activities 822,500 6,625,153 2,396,422
--------------- -------------- --------------
CASH FLOWS USED FOR FINANCING
ACTIVITIES
Cash distributions paid (2,427,281) (8,495,486) -
Common stock repurchased - - (1,226,993)
--------------- -------------- --------------
Cash flows used for financing activities (2,427,281) (8,495,486) (1,226,993)
--------------- -------------- --------------
(Decrease) increase in cash and cash equivalents (2,129,226) (2,307,034) 844,530
Cash and cash equivalents at beginning of period 7,571,246 9,878,280 9,033,750
--------------- -------------- --------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 5,442,020 $ 7,571,246 $ 9,878,280
=============== ============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
NOTES TO FINANCIAL STATEMENTS
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, the Fund's termination date.
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 each publicly-held
portfolio security is adjusted to the closing public market price on the last
day of the calendar quarter discounted by a factor of 0% to 20% for sales
restrictions, if any. 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 - continued
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.
Reclassifications - Certain reclassifications were made to the prior period
financial statements in order to conform to the current period -----------------
presentation.
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 has continued 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 a percentage of
any proceeds of sale or other revenues received by the Fund or the Trust in
excess of the investment in the particular asset. Mr. Troubh was paid 5% of such
excess for amounts received in 1996 and 1997 and will be paid 4% in 1998, 2% in
1999 and 0% thereafter.
During the periods reported for the Fund, each non-affiliated director of the
Fund's Board of Directors received an annual fee of $2,500 and $250 for each
meeting of the Board of Director's and each committee meeting of the Board
attended. Each non-affiliated director also received reimbursement for all
out-of-pocket costs incurred to attend such meetings.
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 former 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 made settlement payments to the Fund and the Trust totaling
$1,150,000. In connection therewith, the Fund received $500,000 in December 1996
and an additional $650,000 in installments during 1997. Interest of $20,415 was
also paid to the Trust with the final installment payment in December 1997. As
part of the settlement, the Fund and the defendants agreed to pursue claims
against former counsel to the Fund. The Trust is entitled to receive 50% of any
recovery from such claims after reimbursement to Commonwealth Associates of all
costs and expenses associated with pursuing the claims.
The Trust is a creditor of PSSS, Inc., formerly 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
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
NOTES TO FINANCIAL STATEMENTS - continued
"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 for PSSS.
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 based upon written submissions to
address the validity of Regency's preference claims was held in December 1997
and resulted in a judgment in favor of the Trust, dismissing the preference
claims with prejudice. It is expected that a trial on the fraudulent conveyance
claims will be held during 1998.
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 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.
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
NOTES TO FINANCIAL STATEMENTS - continued
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 Distributions
On August 30, 1996, the Fund made an initial liquidating cash distribution
totaling $8,495,486 to shareholders of record on August 15, 1996. Common
shareholders received $3.50 per share and preferred shareholders received $4.375
per share. The amount paid to common shareholders was comprised of $0.274 of
long-term capital gain and $3.226 of return of capital. The amount paid to
preferred shareholders was comprised of $0.343 of long-term capital gain and
$4.032 of return of capital.
On 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. Classification of Portfolio Investments
The Trust's investments were categorized as follows as of December 31, 1997:
<TABLE>
Percentage of
Type of Investments Cost Fair Value Net Assets*
- ------------------- --------------- --------------- -----------
<S> <C> <C> <C>
Preferred Stock $ 1,937,500 $ 968,750 13.98%
Common Stock 0 593,750 8.57%
Debt Securities 240,000 60,000 .87%
---------------- -------------- ------
Total $ 2,177,500 $ 1,622,500 23.42%
================ ============== ======
Country/Geographic Region
Western U.S. $ 240,000 $ 60,000 .87%
Eastern U.S. 1,937,500 1,562,500 22.55%
---------------- -------------- ------
Total $ 2,177,500 $ 1,622,500 23.42%
================ ============== ======
Industry
Biotechnology $ 0 $ 593,750 8.57%
Consumer Products 1,937,500 968,750 13.98%
Food Services 240,000 60,000 .87%
---------------- -------------- -------
Total $ 2,177,500 $ 1,622,500 23.42%
================ ============== ======
</TABLE>
* Represents fair value as a percentage of net assets.
<PAGE>
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers.
The following table sets forth certain information with respect to the Trustee
of the Trust.
<TABLE>
Year First
Elected a
Director Position with
Name Age or Officer the Trust
<S> <C> <C>
Raymond S. Troubh 71 1996 Trustee
</TABLE>
Raymond S. Troubh served as President, Chief Executive Officer, Treasurer,
Secretary and Director of the Fund since July 1996, and has been the independent
Trustee of the Trust since its formation on February 25, 1997. Mr. Troubh is a
financial consultant, a former governor of the American Stock Exchange and a
former general partner of Lazard Freres & Co., an investment banking firm. Mr.
Troubh is a director of America West Airlines, Inc., an airline; ARIAD
Pharmaceuticals, Inc., a pharmaceutical company; Becton, Dickinson and Company,
a healthcare products manufacturer; Diamond Offshore Drilling, Inc., an offshore
drilling company; Foundation Health Systems, Inc., a healthcare company; General
American Investors Company, an investment advisory company; Olsten Corporation,
a temporary personnel and healthcare services company; Petrie Stores Liquidating
Trust, a liquidating trust holding the assets of a former women's apparel
retailer; Time Warner Inc., a media and entertainment company; WHX Corporation,
a holding company; and Triarc Companies, Inc., a diversified holding company.
Item 11. Executive Compensation.
On July 24, 1996, following approval by the Board of Directors of the Fund, Mr.
Troubh entered into a consulting agreement with the Fund and by extension, the
Trust, pursuant to which he is compensated for his management services to the
Trust in the amount of $8,500 per month, plus 1% of the amount of each
distribution (other than the initial distribution paid on August 30, 1996),
plus, a percentage of any proceeds of sale or other revenues received by the
Trust in excess of the Trust's investment in a particular asset. Mr. Troubh was
paid 5% of such excess for amounts received in 1996 and 1997, and will be paid
4% in 1998, 2% in 1999, and 0% thereafter. For the 1997 Period, the Trust paid
fees to Mr. Troubh totaling $148,035.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Security Ownership
As of March 16, 1998, Mr. Troubh, the sole Trustee of the Trust, held no units
of beneficial interest in the Trust.
Item 13. Certain Relationships and Related Transactions.
Not applicable.
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
(a) 1. Financial Statements
Independent Auditors' Report
Statements of Assets and Liabilities as of December 31, 1997 and February
24, 1997 (Date of Termination) Schedules of Portfolio Investments as of December
31, 1997 and February 24, 1997 (Date of Termination)
Statements of Operations for the period from February 25, 1997 to
December 31, 1997, for the period from March 1, 1996 to February 24,
1997 (Date of Termination) and for the fiscal year ended February 29,
1996
Statements of Changes in Net Assets for the period from February 25,
1997 to December 31, 1997, for the period from March 1, 1996 to
February 24, 1997 (Date of Termination) and for the fiscal year ended
February 29, 1996
Statements of Cash Flows for the period from February 25, 1997 to
December 31, 1997, for the period from March 1, 1996 to February 24,
1997 (Date of Termination) and for the fiscal year ended February 29,
1996
Notes to Financial Statements
2. Exhibits.
(2) Agreement and Declaration of Trust, dated as of January 28,
1997, between the Fund and Raymond S. Troubh as Trustee (1)
(3) (i) Certificate of Incorporation of the Fund (2)
(ii) (a) Bylaws of the Fund (2)
(b) Amendments to Bylaws of the Fund (3)
(27) Financial Data Schedule
(b) No reports on Form 8-K have been filed during the last quarter of the period
for which this report is filed.
- -----------------------
(1) Incorporated by reference to the Fund's Form 10-K for the period from
March 1, 1996 to February 24, 1997, filed on May 15, 1997. (2) Incorporated by
reference to the Fund's Form N-2, as amended, filed on January 29, 1993. (3)
Incorporated by reference to the Fund's Form 10-K for the fiscal year ended
February 29, 1996, filed on June 13, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROCAP LIQUIDATING TRUST
/s/ Raymond S. Troubh
Raymond S. Troubh
Trustee
Date: March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MICROCAP
LIQUIDATING TRUST'S TRANSITION REPORT ON FORM 10-K FOR THE PERIOD FROM FEBRUARY
25, 1997 TO DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> FEB-25-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 2,177,500
<INVESTMENTS-AT-VALUE> 1,622,500
<RECEIVABLES> 18,644
<ASSETS-OTHER> 883
<OTHER-ITEMS-ASSETS> 5,442,020
<TOTAL-ASSETS> 7,084,047
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 152,677
<TOTAL-LIABILITIES> 152,677
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 2,427,281
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (555,000)
<NET-ASSETS> 6,931,370
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 285,614
<OTHER-INCOME> 18,942
<EXPENSES-NET> 477,623
<NET-INVESTMENT-INCOME> (173,067)
<REALIZED-GAINS-CURRENT> 775,250
<APPREC-INCREASE-CURRENT> (1,026,843)
<NET-CHANGE-FROM-OPS> (424,660)
<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> (2,851,941)
<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> 8,357,341
<PER-SHARE-NAV-BEGIN> 4.03
<PER-SHARE-NII> (.07)
<PER-SHARE-GAIN-APPREC> (.10)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 1.00
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 2.86
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
