SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended September 30, 1998
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 0-29120
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
New York 13-7110611
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
c/o Raymond S. Troubh
Ten Rockefeller Plaza, Suite 712
New York, New York 10020
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (800) 888-6534
Not applicable
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date. As of November 1, 1998 there
were 2,427,281 units of beneficial interest outstanding.
<PAGE>
MICROCAP LIQUIDATING TRUST
(SUCCESSOR TO THE MICROCAP FUND, INC.)
Amendment to Form 10-Q
For the quarter ended September 30, 1998
Item 2 of Part I, Management's Discussion and Analysis of Financial Condition
and Results of Operations, on pages 13 to 15 of Form 10-Q of the MicroCap
Liquidating Trust for the quarterly period ended September 30, 1998, filed with
the Securities and Exchange Commission on November 13, 1998 is amended by adding
the following:
Year 2000 Issues
The Year 2000 ("Y2K") concern arose because many existing computer programs use
only the last two digits to refer to a year. Therefore, these computer programs
do not properly recognize a year that begins with "20" instead of "19". If not
corrected, many computer applications could fail or create erroneous results.
The impact of the Y2K concern on the operations of the Trust is currently being
assessed.
Palmeri Fund Administrators, Inc. (the "Administrator") provides certain
administrative and accounting services for the Trust, including maintenance of
the books and records of the Trust, preparation and issuance of financial
reports and tax information to beneficial holders of the Trust and other day to
day administrative and accounting functions.
The Administrator is currently assessing its computer hardware and software
systems, specifically as they relate to the operations of the Trust. As part of
its investigation of possible Y2K problems, the Administrator has contracted
with an outside computer service provider to examine all of the Administrator's
computer hardware and software applications, to identify any Y2K concerns. This
review and evaluation is in process and is expected to be completed by May 1999.
If Y2K problems are identified, the Administrator will purchase, install and
test the necessary software patches and new computer hardware to ensure that all
of its computer systems are Y2K compliant. This correction phase, if required,
is expected to be completed by September 1999.
Additionally, the Administrator has contacted all outside service providers used
to assist the Administrator with the administration of the Trust's operations to
ascertain whether these entities are addressing the Y2K issue within their own
operation. There can be no guarantee that the Administrator's systems or that
systems of other companies providing services to the Trust will be corrected in
a timely manner.
Costs to be incurred by the Trust relating to the investigation or correction of
potential Y2K problems affecting the Trust are expected to be nominal.
The Y2K issue is a global concern that may affect all business entities,
including the Trust's remaining portfolio companies. The Trustee is continuing
to assess the impact of Y2K concerns affecting these portfolio companies.
However, the extent to which any potential Y2K problems could affect the
valuations of these companies is presently unknown. At the time such Y2K
problems are identified, if any, the Trustee will take such issues into
consideration in adjusting the fair value of the Trust's remaining portfolio
investments.
<PAGE>
MICROCAP LIQUIDATING TRUST
(SUCCESSOR TO THE MICROCAP FUND, INC.)
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Statements of Net Assets in Liquidation as of September 30, 1998 (Unaudited) and
December 31, 1997
Schedule of Portfolio Investments as of September 30, 1998 (Unaudited)
Statements of Operations for the three months ended September 30, 1998 and 1997
(Unaudited)
Statements of Operations for the nine months ended September 30, 1998 and for
the period from February 25, 1997 to September 30, 1997 (Unaudited)
Statements of Changes in Net Assets for the nine months ended September 30,
1998 and for the period from February 25, 1997 to September 30, 1997
(Unaudited)
Statements of Cash Flows for the nine months ended September 30, 1998 and for
the period from February 25, 1997 to September 30, 1997(Unaudited)
Notes to Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities.
Item 3. Defaults upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
STATEMENTS OF NET ASSETS IN LIQUIDATION
<TABLE>
September 30,
1998 December 31,
(Unaudited) 1997
ASSETS
Portfolio investments at fair value (cost $1,937,500 at September 30,
<S> <C> <C> <C> <C> <C>
1998 and $2,177,500 at December 31, 1997) $ 998,438 $ 1,622,500
Cash and cash equivalents - unrestricted 831,470 2,651,802
Cash and cash equivalents - restricted 2,790,218 2,790,218
Accrued interest receivable 16,469 18,644
Other receivables 50,923 883
--------------- ----------------
Total assets 4,687,518 7,084,047
--------------- ----------------
LIABILITIES
Accounts payable and accrued expenses 73,983 152,677
Litigation settlement reserve 278,200 -
--------------- ----------------
Total liabilities 352,183 152,677
--------------- ----------------
NET ASSETS IN LIQUIDATION $ 4,335,335 $ 6,931,370
=============== ================
Net assets per unit of beneficial interest $ 1.79 $ 2.86
============ ==========
Number of units of beneficial interest 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 (Unaudited)
September 30, 1998
<TABLE>
% of
Issuer / Position Cost Fair Value Net Assets(1)
Publicly-Held Securities:
Unigene Laboratories, Inc.
Warrant to purchase 475,000 shares of Common Stock
<S> <C> <C> <C> <C> <C> <C>
at $1.375, expiring 7/7/00 $ 0 $ 29,688 0.68%
------------- -------------- -------
Privately-Held Securities:
First Colony Acquisition Corp.
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 22.35%
------------- -------------- --------
Total Portfolio Investments(A)(B) $ 1,937,500 $ 998,438 23.03%
============= ============== ========
</TABLE>
(1) Represents fair value as a percentage of net assets.
(A) The Trust's warrant to purchase 11,437 common shares of Yes! Entertainment
Corporation expired unexercised on July 16, 1998. Additionally, in
September 1998, the Trust wrote-off the remaining cost of its investment in
Oh-La-La! Inc., realizing a loss of $240,000.
(B) All portfolio securities held at September 30, 1998 are non-income
producing.
See notes to financial statements.
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
Three Months Three Months
Ended Ended
September 30, September 30,
1998 1997
------------------- --------------------
INVESTMENT INCOME AND EXPENSES
Income:
<S> <C> <C>
Interest from short-term investments $ 65,810 $ 70,378
Other interest income - 4,301
--------------- ----------------
Total 65,810 74,679
--------------- ----------------
Expenses:
Litigation settlement 278,200 -
Administrative fees 20,648 20,045
Legal fees 33,076 32,862
Accounting fees (1,250) 14,600
Trustee fees 43,705 71,772
Transfer agent and custodian fees 5,473 5,835
Other operating expenses 154 1,772
--------------- ----------------
Total expenses 380,006 146,886
--------------- ----------------
NET INVESTMENT LOSS (314,196) (72,207)
--------------- ----------------
NET REALIZED AND UNREALIZED LOSS
FROM PORTFOLIO INVESTMENTS
Net realized (loss) gain from portfolio investments (240,000) 440,000
Change in net unrealized depreciation of investments (72,343) (614,384)
--------------- ----------------
Net realized and unrealized loss from portfolio investments (312,343) (174,384)
--------------- ----------------
NET DECREASE IN NET ASSETS IN LIQUIDATION $ (626,539) $ (246,591)
=============== ================
</TABLE>
See notes to financial statements.
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
Period From
Nine Months February 25,
Ended 1997 to
September 30, September 30,
1998 1997
----------------- ------------------
INVESTMENT INCOME AND EXPENSES
Income:
<S> <C> <C>
Interest from short-term investments $ 209,823 $ 202,532
Other interest income - 13,166
Other income 198,113 1,196
--------------- ---------------
Total investment income 407,936 216,894
--------------- ---------------
Expenses:
Litigation settlement 278,200 -
Administrative fees 57,485 46,023
Legal fees 90,058 156,949
Accounting fees 22,639 46,025
Trustee fees 94,705 105,772
Transfer agent and custodian fees 15,887 12,573
Other operating expenses 474 3,865
--------------- ---------------
Total expenses 559,448 371,207
--------------- ---------------
NET INVESTMENT LOSS (151,512) (154,313)
--------------- ---------------
NET REALIZED AND UNREALIZED LOSS
FROM PORTFOLIO INVESTMENTS
Net realized (loss) gain from portfolio investments (240,000) 440,000
Change in net unrealized depreciation of investments (384,062) (262,597)
--------------- ---------------
Net realized and unrealized (loss) gain from portfolio investments (624,062) 177,403
--------------- ---------------
NET (DECREASE) INCREASE IN NET
ASSETS IN LIQUIDATION $ (775,574) $ 23,090
=============== ===============
</TABLE>
See notes to financial statements.
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
STATEMENTS OF CHANGES IN NET ASSETS (Unaudited)
<TABLE>
Period From
Nine Months February 25,
Ended 1997 to
September 30, September 30,
1998 1997
----------------- ------------------
<S> <C> <C>
Net investment loss $ (151,512) $ (154,313)
Net realized (loss) gain from portfolio investments (240,000) 440,000
Change in net unrealized depreciation of portfolio investments (384,062) (262,597)
--------------- ----------------
(Decrease) increase in net assets resulting from operations (775,574) 23,090
Cash distributions paid (1,820,461) (2,427,281)
--------------- ----------------
Decrease in net assets for the period (2,596,035) (2,404,191)
Net assets in liquidation at beginning of period 6,931,370 9,783,311
--------------- ----------------
NET ASSETS IN LIQUIDATION AT END OF PERIOD $ 4,335,335 $ 7,379,120
=============== ================
Net assets per unit of beneficial interest at end of period $ 1.79 $ 3.04
============ ============
Number of units of beneficial interest at end of period 2,427,281 2,427,281
============= ==============
</TABLE>
See notes to financial statements.
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
Period From
Nine Months February 25,
Ended 1997 to
September 30, September 30,
1998 1997
----------------- ------------------
CASH FLOWS PROVIDED FROM (USED FOR)
OPERATING ACTIVITIES
<S> <C> <C>
Net investment loss $ (151,512) $ (154,313)
Adjustments to reconcile net investment loss to cash
provided from (used for) operating activities:
Depreciation expense - 3,172
Increase (decrease) in payables and other liabilities 199,506 (1,020,088)
(Increase) decrease in receivables and other assets (47,865) 347,038
--------------- ---------------
Cash flows provided from (used for) operating activities 129 (824,191)
--------------- ---------------
CASH FLOWS PROVIDED FROM INVESTING ACTIVITIES
Net proceeds from the sale of portfolio investments - 440,000
--------------- ---------------
Cash flows provided from investing activities - 440,000
--------------- ---------------
CASH FLOWS USED FOR FINANCING ACTIVITIES
Cash distributions paid (1,820,461) (2,427,281)
--------------- ---------------
Cash flows used for financing activities (1,820,461) (2,427,281)
--------------- ---------------
Decrease in cash and cash equivalents (1,820,332) (2,811,472)
Cash and cash equivalents at beginning of period 5,442,020 7,571,246
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,621,688 $ 4,759,774
=============== ===============
</TABLE>
See notes to financial statements.
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. Organization and Purpose
The MicroCap Liquidating Trust (the "Trust"), a liquidating trust established
under the laws of the State of New York, is the successor to The MicroCap Fund,
Inc., formerly Commonwealth Associates Growth Fund, Inc. (the "Fund"). The Fund,
which was a Maryland corporation formed on January 26, 1993, was a
non-diversified, closed-end management investment company and operated as a
business development company under the Investment Company Act of 1940. The
Fund's investment objective was to achieve long-term capital appreciation of
assets, rather than current income, by investing in debt and equity securities
of emerging and established companies that management believed offered
significant growth potential.
Pursuant to its Plan of Liquidation, which was approved at a special meeting of
shareholders on July 23, 1996, the Fund transferred all of its remaining assets
and its remaining fixed and contingent liabilities to the Trust, effective as of
the close of business on February 24, 1997, 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.
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.
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
NOTES TO FINANCIAL STATEMENTS (Unaudited) - continued
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 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.
4. Litigation
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 maintained 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, was 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 maintained that such relationship
had an impact on the decision to pay these amounts. Additionally, Holdings
maintained 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 was therefore a voidable preference
without regard to whether Mustafa was an insider. Alternatively, Maritime has
asserted that the foregoing payments were made from its funds, without
reasonably equivalent consideration, and are therefore avoidable as fraudulent
conveyances. The Fund served an answer denying the allegations of the amended
complaint and has contested 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. A mediator has been
appointed to attempt to facilitate a mutually beneficial settlement of the
remaining fraudulent conveyance claims, and a mediation session occurred on
October 5, 1998. During that session, the parties reached a tentative consensual
resolution of the fraudulent conveyance claim. Pursuant to the proposed
settlement, the defendants will pay a total of $535,000, of which the Trust's
share would be approximately $278,200, exclusive of legal and other fees and
expenses. The settlement is expected to be finalized prior to the end of 1998.
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
NOTES TO FINANCIAL STATEMENTS (Unaudited) - continued
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.
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.
The Trust is a creditor of PSSS, Inc., formerly known as Oh-La-La! Inc.
("PSSS"). PSSS confirmed its reorganization plan on May 15, 1998. Pursuant to
the confirmed plan, the Trust may receive a payment on account of its claim
against PSSS if funds become available for distribution. Currently, it is
uncertain whether there will ever be any funds to distribute, or the timing of
any distribution if funds ever become available. As a result, the Trust
wrote-off the remaining $240,000 of cost of its investment in Oh-La-La during
the quarter ended September 30, 1998.
6. Other income
This includes income received as a result of the settlement of certain claims
against former counsel by the Fund, Commonwealth Associates, Falk and Warner.
The terms of the settlement agreement provide that there will be a further
payment on January 15, 1999.
7. Cash Distribution
On August 4, 1998, the Trust declared an interim liquidating distribution
totaling $1,820,461, or $.75 per Unit. Such distribution was paid on
August 28, 1998 to unit holders of record on August 14, 1998.
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
NOTES TO FINANCIAL STATEMENTS (Unaudited) - continued
8. Classification of Portfolio Investments
The Trust's investments were categorized as follows as of September 30, 1998:
<TABLE>
% of
Type of Investments Cost Fair Value Net Assets*
- ------------------- --------------- --------------- -----------
<S> <C> <C> <C>
Preferred Stock $ 1,937,500 $ 968,750 22.35%
Common Stock 0 29,688 0.68%
---------------- -------------- -------
Total $ 1,937,500 $ 998,438 23.03%
================ ============== ======
Country/Geographic Region
Eastern U.S. $ 1,937,500 $ 998,438 23.03%
--------------- ------------- ------
Total $ 1,937,500 $ 998,438 23.03%
================ ============== ======
Industry
Biotechnology $ 0 $ 29,688 0.68%
Consumer Products 1,937,500 968,750 22.35%
---------------- -------------- ------
Total $ 1,937,500 $ 998,438 23.03%
================ ============== ======
</TABLE>
* Represents fair value as a percentage of net assets
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Liquidity and Capital Resources
On September 30, 1998, the Trust had cash and cash equivalents totaling
$3,621,688, of which $2,790,218 was restricted due to certain contingencies, as
discussed below. The Trust's cash balances are invested in U.S. Treasury Bills
or overnight repurchase agreements collateralized by securities issued by the
U.S. Government or its agencies. Interest earned from such investments for the
three and nine months ended September 30, 1998, totaled $65,810 and $209,823,
respectively. Interest earned from such cash balances in future periods is
subject to fluctuations in short-term interest rates and changes in amounts
available for investment in such securities.
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.
On August 4, 1998, the Trust declared an interim liquidating distribution
totaling $1,820,461, or $.75 per Unit. Such distribution was paid on August 28,
1998 to unit holders of record on August 14, 1998. The Trust expects to make
additional cash distributions 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, or provision for, all
current, future and contingent liabilities. Prior to the creation of the Trust,
the Fund had begun to pursue this objective with the approval of its Plan of
Liquidation in July 1996.
Realized and Unrealized Gains and Losses from Portfolio Investments
For the three and nine months ended September 30, 1998, the Trust had a realized
loss from its portfolio investments of $240,000. Additionally, for the three and
nine months ended September 30, 1998, the Trust had an unfavorable change in the
net unrealized depreciation of its remaining portfolio investments of $72,343
and $384,062, respectively.
The $240,000 realized loss resulted from the September 1998 write-off of the
remaining cost of the Trust's investment in Oh-La-La! Inc. The change in the net
unrealized depreciation for the three and nine months ended September 30, 1998
included a net downward revaluation of $252,343 and $564,062, respectively, of
the Trust's investment in Unigene Laboratories, Inc., due to the decreased
public market price of Unigene common stock at the end of the respective
periods. This downward revaluation was offset in each of the respective periods
due to the transfer of $180,000 from unrealized loss to realized loss resulting
from the write-off of the remaining cost of Oh-La-La! during the quarter, as
discussed above. As a result of these portfolio transactions, the Trust's net
assets declined by $312,343 and $624,062, for the three and nine months ended
September 30, 1998, respectively.
For the three months ended September 30, 1997, and for the period from February
25, 1997 to September 30, 1997 (the "1997 period") the Trust had a net realized
gain from portfolio investments of $440,000. Additionally, for the three months
ended September 30, 1997, and for the 1997 period the Trust had an unfavorable
change in the net unrealized appreciation of its remaining portfolio investments
$614,384 and $262,597, respectively.
The $440,000 net realized gain resulted from the June 1997 sale of a covered
call option on certain warrants of Unigene Laboratories, Inc. for $37,500 and
the July 1997 sale of 140,000 Unigene warrants for $402,500. The change in
unrealized appreciation for the three months ended September 30, 1997 and for
the 1997 Period included a $211,884 net decrease and a $139,903 net increase,
respectively, in unrealized appreciation of investments, primarily due to the
net revaluation of the remaining Unigene warrants held by the Trust. Unrealized
appreciation of investments was further reduced for the respective periods due
to the transfer of $402,500 from unrealized gain to realized gain resulting from
the Unigene sales during the period, as discussed above.
Investment Income and Expenses
For the three months ended September 30, 1998 and 1997, the Trust had a net
investment loss of $314,196 and $72,207, respectively. For the nine months ended
September 30, 1998 and for the 1997 Period, the Trust had a net investment loss
of $151,512 and $154,313, respectively.
The increase in net investment loss for the three months ended September 30,
1998, as compared to the same period in 1997, resulted from a $8,869 decrease in
investment income and a $233,120 increase in operating expenses. The decrease in
investment income for the three months ended September 30, 1998, as compared to
the same period in 1997, primarily was due to a decrease in interest income from
short-term investments primarily due to a decrease in funds available for
investment in such securities during the three months ended September 30, 1998.
The increase in operating expenses for the three months ended September 30,
1998, as compared to the same period in 1997, primarily was due to a $278,200
litigation settlement reserve relating to the Regency Holdings, (Cayman) Inc.
litigation as discussed in Note 4 of Notes to Financial Statements.
The decrease in net investment loss for the nine months ended September 30, 1998
as compared to the 1997 Period, resulted from a $191,042 increase in investment
income partially offset by a $188,241 increase in operating expenses. The
increase in investment income primarily was due to $186,298 of other income
recorded during the nine months ended September 30, 1998 relating to the
litigation settlements as discussed in Note 6 of Notes to Financial Statements.
Interest income from short-term investments also increased $7,291, reflecting
the longer full nine month period for 1998 compared to the shorter 1997 Period
of slightly over seven months.
The increase in operating expenses for the nine months ended September 30, 1998
compared to the 1997 Period was due to the $278,200 litigation settlement
reserve, as discussed above, partially offset by an $89,959 decrease in other
operating expenses. The decrease in other expenses primarily was the result of a
$90,277 decrease in legal and accounting fees, reflecting the declining legal
work relating to activities of the Trust during 1998 as compared to 1997 and the
reversal of certain expenses that had been accrued for in prior periods.
Net Assets in Liquidation
For the nine months ended September 30, 1998, the Trust had a net decrease in
net assets in liquidation of $775,574, resulting from the $624,062 net realized
and unrealized loss from portfolio investments and the $151,512 net investment
loss for the nine month period. As of September 30, 1998, net assets in
liquidation totaled $4,335,335, a decrease of $2,596,035 from net assets in
liquidation of $6,931,370 at December 31, 1997. This decrease is the result of
the $1,820,461 cash distribution paid in August 1998 combined with the $775,574
net decrease net assets in liquidation for the nine months ended September 30,
1998. As of September 30, 1998, the net asset value per Unit was $1.79, compared
to $2.86 per Unit as of December 31, 1997.
For the 1997 Period, the Trust had a net increase in net assets in liquidation
of $23,090, resulting from the $177,403 net realized and unrealized gain from
portfolio investments partially offset by the $154,313 net investment loss for
the nine month period. As of September 30, 1997, net assets in liquidation
totaled $7,379,120, a decrease of $2,404,191 from net assets in liquidation of
$9,783,311 at February 24, 1997. This decrease is the result of the $2,427,281
cash distribution paid in July 1997 exceeding the $23,090 increase in net assets
in liquidation for the 1997 Period. At September 30, 1997, the net asset value
per unit of beneficial interest was $3.04, compared to $4.03 at February 24,
1997.
Year 2000 Issues
The Year 2000 ("Y2K") concern arose because many existing computer programs use
only the last two digits to refer to a year. Therefore, these computer programs
do not properly recognize a year that begins with "20" instead of "19". If not
corrected, many computer applications could fail or create erroneous results.
The impact of the Y2K concern on the operations of the Trust is currently being
assessed.
Palmeri Fund Administrators, Inc. (the "Administrator") provides certain
administrative and accounting services for the Trust, including maintenance of
the books and records of the Trust, preparation and issuance of financial
reports and tax information to beneficial holders of the Trust and other day to
day administrative and accounting functions.
The Administrator is currently assessing its computer hardware and software
systems, specifically as they relate to the operations of the Trust. As part of
its investigation of possible Y2K problems, the Administrator has contracted
with an outside computer service provider to examine all of the Administrator's
computer hardware and software applications, to identify any Y2K concerns. This
review and evaluation is in process and is expected to be completed by May 1999.
If Y2K problems are identified, the Administrator will purchase, install and
test the necessary software patches and new computer hardware to ensure that all
of its computer systems are Y2K compliant. This correction phase, if required,
is expected to be completed by September 1999.
Additionally, the Administrator has contacted all outside service providers used
to assist the Administrator with the administration of the Trust's operations to
ascertain whether these entities are addressing the Y2K issue within their own
operation. There can be no guarantee that the Administrator's systems or that
systems of other companies providing services to the Trust will be corrected in
a timely manner.
Costs to be incurred by the Trust relating to the investigation or correction of
potential Y2K problems affecting the Trust are expected to be nominal.
The Y2K issue is a global concern that may affect all business entities,
including the Trust's remaining portfolio companies. The Trustee is continuing
to assess the impact of Y2K concerns affecting these portfolio companies.
However, the extent to which any potential Y2K problems could affect the
valuations of these companies is presently unknown. At the time such Y2K
problems are identified, if any, the Trustee will take such issues into
consideration in adjusting the fair value of the Trust's remaining portfolio
investments.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
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 maintained 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, was 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 maintained that such relationship
had an impact on the decision to pay these amounts. Additionally, Holdings
maintained 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 was therefore a voidable preference
without regard to whether Mustafa was an insider. Alternatively, Maritime has
asserted that the foregoing payments were made from its funds, without
reasonably equivalent consideration, and are therefore avoidable as fraudulent
conveyances. The Fund served an answer denying the allegations of the amended
complaint and has contested 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. A mediator has been
appointed to attempt to facilitate a mutually beneficial settlement of the
remaining fraudulent conveyance claims, and a mediation session occurred on
October 5, 1998. During that session, the parties reached a tentative consensual
resolution of the fraudulent conveyance claim. Pursuant to the proposed
settlement, the defendants will pay a total of $535,000, of which the Trust's
share would be approximately $278,200, exclusive of legal and other fees and
expenses. The settlement is expected to be finalized prior to the end of 1998.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was brought to a vote of security holders during the period covered by
this report.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROCAP LIQUIDATING TRUST
s/s Raymond S. Troubh
Raymond S. Troubh
Trustee
Date: January 26, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE MICROCAP LIQUIDATING TRUST'S QUARTERLY
REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 1,937,500
<INVESTMENTS-AT-VALUE> 998,438
<RECEIVABLES> 67,392
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 3,621,688
<TOTAL-ASSETS> 4,687,518
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 352,183
<TOTAL-LIABILITIES> 352,183
<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> (939,062)
<NET-ASSETS> 4,335,335
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 209,823
<OTHER-INCOME> 198,113
<EXPENSES-NET> 559,448
<NET-INVESTMENT-INCOME> (151,512)
<REALIZED-GAINS-CURRENT> (240,000)
<APPREC-INCREASE-CURRENT> (384,062)
<NET-CHANGE-FROM-OPS> (775,574)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 1,820,461
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (2,596,035)
<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> 5,633,353
<PER-SHARE-NAV-BEGIN> 2.855
<PER-SHARE-NII> (.062)
<PER-SHARE-GAIN-APPREC> (.257)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.75)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.786
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
