SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 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.)
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(Exact Name of Registrant as Specified in its Charter)
New York 13-7110611
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(State or Other Jurisdiction of I.R..S. Employer Identification No.)
Incorporation or Organization)
c/o Raymond S. Troubh
Ten Rockefeller Plaza, Suite 712
New York, New York 10020
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (800) 888-6534
Not applicable
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Former name, former address and former fiscal year, if changed since last report
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 15, 1999, 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 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.
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. On
August 28, 1998, the Trust paid an additional interim liquidating distribution
totaling $1,820,461, or $.75 per Unit, to unit holders of record on August 14,
1998.
On March 2, 1999, the Trust announced that an additional liquidating
distribution will be paid to unit holders of record on March 16, 1999. This
distribution will total $1,820,461 or $.75 per Unit, and will be paid on March
31, 1999.
Portfolio Investments
On December 31, 1998, the Trust held two portfolio investments with an aggregate
cost of $1,937,500 and a fair value of $484,375. During 1998, the Trust
liquidated two of its remaining portfolio securities. 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.
<PAGE>
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 agreed to make settlement payments to the Fund or the Trust totaling
$1,150,000. In connection therewith, $500,000 was received in December 1996 and
an additional $650,000 was received 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
was 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. See note 6 of Notes to the Financial Statements for additional
information.
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
asserted that the foregoing payments were made from its funds, without
reasonably equivalent consideration, and were therefore avoidable as fraudulent
conveyances. The Fund served an answer denying the allegations of the amended
complaint and contested Regency's claims. Pursuant to an order filed with the
Bankruptcy Court, the Trust had set aside approximately $2.4 million in an
interest-bearing cash account pending resolution by the Bankruptcy Court of the
adversary proceeding. 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 was 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.
The settlement was finalized in March 1999 and the defendants agreed to pay a
total of $535,000, of which the Trust's share is $281,425 exclusive of legal and
other fees and expenses. As a result of the settlement, the $2.4 million
previously set aside is now available to the Trust.
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 15, 1999. Units of the Trust (CUSIP#
59501M) (symbol MCAPS) 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
Year ended December 31, 1998:
First quarter 1.00 0.53
Second quarter 1.63 0.63
Third quarter 1.63 0.50
Fourth quarter 1.31 0.52
Period from January 1, 1999 to March 15, 1999 1.31 0.88
</TABLE>
As of March 12, 1999, there were approximately 13 Unit holders of record of the
Trust. Certain holders of record held Units for approximately 246 beneficial
owners.
<PAGE>
Item 6. Selected Financial Data.
<TABLE>
Period From
Mar. 1, 1996 to Fiscal Year Fiscal Year
Feb. 24, 1997 Ended Ended
Period From (Date of Feb. 29, Feb. 28,
Year Ended Feb. 25, 1997 Termination) 1996 1995
Dec. 31, 1998 to Dec. 31, 1997 (Predecessor) (Predecessor) (Predecessor)
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Operating Data:
Net investment (loss) income (interest and
<S> <C> <C> <C> <C> <C>
dividend income less operating expenses) $ (179,246) $ (173,067) $ (1,243,927) $ (313,174) $ 220,352
Net realized (loss) gain from portfolio investments (240,000) 775,250 3,972,372 (1,061,009) (161,149)
Change in net unrealized appreciation or
depreciation of investments (898,125) (1,026,843) (1,684,806) 2,121,261 548,448
Net realized and unrealized (loss) gain from
portfolio investments (1,138,125) (251,593) 2,287,566 1,060,252 387,299
Net (decrease) increase in net assets resulting
from operations (1,317,371) (424,660) 1,043,639 747,078 607,651
Cash distributions 1,820,461 2,427,281 8,495,486 - 440,800
Per Unit or Common Equivalent Share*:
Net investment (loss) income $ (.07) $ (.07) $ (.51) $ (.13) $ .10
Net realized and unrealized (loss) gain from
portfolio investments (.47) (.10) .94 .44 .18
Net (decrease) increase in net assets resulting
from operations (.54) (.17) .43 .31 .28
Cash distributions .75 1.00 3.50 - .20
Feb. 24, 1997
(Date of
Termination) Feb. 29, 1996 Feb. 28, 1995
Dec. 31, 1998 Dec. 31, 1997 (Predecessor) (Predecessor) (Predecessor)
------------- ------------- ------------ ------------ ------------
Balance Sheet Data:
Total assets $ 4,153,251 $ 7,084,047 $ 10,968,644 $ 17,568,711 $ 18,054,440
Net assets 3,793,538 6,931,370 9,783,311 17,235,158 17,715,073
Cash and cash equivalents 3,604,050 5,442,020 7,571,246 9,878,280 9,033,750
Portfolio investments at fair value 484,375 1,622,500 2,696,593 6,939,805 8,371,350
Per Unit or Common Equivalent Share**:
Net assets $ 1.56 $ 2.86 $ 4.03 $ 7.25 $ 8.04
</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
As of December 31, 1998, the MicroCap Liquidating Trust (the "Trust") had cash
and cash equivalents totaling $3,604,050, 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 year ended December 31, 1998 and
for the period from February 25, 1997 to December 31, 1997 (the "1997 Period")
totaled $240,737 and $270,147, respectfully. 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"), totaled $450,528. 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
as of December 31, 1998, 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. Due to a
settlement reached in March 1999, the $2.4 million previously set aside for the
Regency litigation became available to the Trust. See Notes to Financial
Statements for additional information.
On August 28, 1998, the Trust paid an interim liquidating distribution totaling
$1,820,461, or $.75 per Unit, to unit holders of record on August 14, 1998. 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.
On March 2, 1999, the Trust announced that an additional liquidating
distribution will be paid to unit holders of record on March 16, 1999. This
distribution will total $1,820,461 or $.75 per Unit, and will be paid on March
31, 1999.
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
year ended December 31, 1998 and for the 1997 Period, the Trust had a net
realized and unrealized loss from its portfolio investments of $1,138,125 and
$251,593, respectively. For Fiscal 1997, the Fund had a net realized and
unrealized gain from its portfolio investments of $2,287,566.
1998:
The $1,138,125 net realized and unrealized loss for 1998 was comprised of a
$240,000 realized loss and an $898,125 unfavorable change to net unrealized
depreciation of portfolio investments. 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 unfavorable change in net unrealized depreciation for the
year ended December 31, 1998 was comprised of a net downward revaluation of
$593,750, relating to the Trust's investment in Unigene Laboratories, Inc., and
a downward revaluation of $484,375, relating to the Trust's investment in First
Colony Acquistion Corp. These downward revaluations were partially offset by the
transfer of $180,000 from unrealized loss to realized loss resulting from the
write-off of the remaining cost of Oh-La-La!, as discussed above. See the
caption heading "Summary of Portfolio Transactions and Change in Net Assets
during 1998" presented below for additional information.
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.
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:
o 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.
o 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.
o 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.
o 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.
o 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.
Investment Income and Expenses
For the year ended December 31, 1998 and for the 1997 period, the Trust had a
net investment loss (interest and other income less operating expenses) of
$179,246 and $173,067, respectively. For Fiscal 1997, the Fund had a net
investment loss of $1,243,927.
The significantly reduced net investment loss of $179,246 and $173,067 for 1998
and the 1997 Period, respectively, 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.
The $6,179 increase in net investment loss for 1998 as compared to the 1997
Period, resulted from a $154,427 increase in operating expenses partially offset
by a $148,248 increase in investment income. The increase in operating expenses
for 1998 compared to the 1997 Period primarily was due to the $278,200
litigation settlement reserve, relating to the Regency Holdings, (Cayman) Inc.
litigation as discussed in Note 4 of Notes to Financial Statements. This
settlement expense was partially offset by a $123,773 decrease in other
operating expenses. The decrease in other expenses primarily was the result of a
$98,575 decrease in legal and accounting fees, and a $27,830 decrease in trustee
fees. The decrease in legal and accounting fees reflects the declining legal
work relating to activities of the Trust during 1998 as compared to 1997 and the
reduction of certain expenses that had been accrued for in prior periods.
Total investment income for 1998 was $452,804 as compared to $304,556 for the
1997 Period. The increase in investment income primarily was due to $186,298 of
other income recorded during 1998 relating to litigation settlements as
discussed in Note 6 of Notes to Financial Statements. The increase in other
income was partially offset by a $29,410 decrease in interest income from
short-term investments, due to a decrease in funds available for investment in
such securities during 1998 as compared to the 1997 Period. Interest income is
expected to continue to decline as the Trust continues with the liquidation of
its remaining assets and completes subsequent distributions of such proceeds to
Unit holders.
The $1,070,860 decrease in net investment loss for the 1997 Period as compared
to Fiscal 1997, resulted from a $2,458,529 decrease in operating expenses
partially offset by a $1,387,669 decrease in investment income. The decrease in
operating expenses primarily was attributable to two major factors. First,
significantly lower legal fees were 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,
(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.
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 Note 4 to 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. 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.
Net Assets in Liquidation
For the year ended December 31, 1998, the Trust had a $1,317,371 decrease in net
assets resulting from operations, comprised of the $1,138,125 net realized and
unrealized loss from portfolio investments and the $179,246 net investment loss.
The Trust's net assets also were reduced by the $1,820,461 cash distribution
paid to unit holders on August 28, 1998. As a result, the Trust's net assets
declined by $3,187,382, from $6,931,370 as of December 31, 1997 to $3,793,538 as
of December 31, 1998.
On a per Unit basis, the results of operations for the year ended December 31,
1998 decreased the Trust's net assets by $.543 per Unit and the cash
distribution paid to Unit holders on August 28, 1998 reduced the Trust's net
assets by $.75 per Unit. As a result, the Trust's net asset value declined
$1.293 per Unit from $2.856 as of December 31, 1997, to $1.563 per Unit as of
December 31, 1998.
Summary of Portfolio Transactions and Change in Net Assets during 1998
As discussed above, the write-off of the Trust's investment in Oh-la-la! Inc.
during 1998, resulted in a realized loss of $240,000. However, as shown below,
due to prior period loss reserves totaling $180,000, this write-off decreased
the net asset value of the Trust for the period by $60,000. Also, as discussed
above, the Trust's net assets were further reduced by a $1,078,125 net decrease
in net assets resulting from the downward revaluation of the Trust's remaining
portfolio investments. The completed portfolio transactions and revaluations
decreased the Trust's net asset value on a net basis by $1,138,125 for the year
ended December 31, 1998.
<TABLE>
Effect on Net Assets
1998 Fair Value for the year ended
Investment Proceeds at 2/24/97 December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------
Write-offs and expirations during 1998:
- --------------------------------------
<S> <C> <C> <C>
Oh-la-la! Inc. $ 0 $ 60,000 $ (60,000)
YES! Entertainment Corporation 0 0 0
--------------- -------------- ---------------
Sub-total from liquidations $ 0 $ 60,000 (60,000)
=============== ============== ---------------
Revaluations during 1998:
First Colony Acquistion Corp. (484,375)
Unigene Laboratories, Inc. (Warrants) (593,750)
---------------
Sub-total from revaluations (1,078,125)
---------------
Sub-total from portfolio transactions (1,138,125)
Net investment loss for 1998 (179,246)
---------------
Change in Net Assets for 1998 $ (1,317,371)
===============
</TABLE>
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,
or $2.86 per Unit, as of December 31, 1997, representing a decrease of
$2,851,941, or $1.17 per Unit, from net assets of $9,783,311 as of February 24,
1997, the Fund's termination date.
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, representing a decrease of $17,235,158, or $7.25 per common
equivalent share, as of February 29, 1996.
Year 2000 Issue - 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 not expected to be material.
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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Trust is subject to market risk arising from changes in the value of its
portfolio investments, investments in U.S. Treasury Bills and interest-bearing
cash equivalents, which may result from fluctuations in interest rates and
equity prices. The Trust has calculated its market risk related to its holdings
of these investments based on changes in interest rates and equity prices
utilizing a sensitivity analysis. The sensitivity analysis estimates the
hypothetical change in fair values, cash flows and earnings based on an assumed
10% change (increase or decrease) in interest rates and equity prices. To
perform the sensitivity analysis, the assumed 10% change is applied to market
rates and prices on investments held by the Trust at the end of the accounting
period.
The Trust's portfolio investments had an aggregate fair value of $484,375 as of
December 31, 1998. An assumed 10% decline from this December 31, 1998 fair
value, would result in a reduction to the fair value of such investments and an
unrealized loss of $48,438.
Market risk relating to the Trust's interest-bearing cash equivalents,
investments in U.S. Treasury Bills and overnight repurchase agreements
collateralized by securities issued by the U.S. Government or its agencies held
as of December 31, 1998 are considered to be immaterial.
<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, 1998 and 1997
Schedules of Portfolio Investments as of December 31, 1998 and 1997
Statements of Operations for the year ended December 31, 1998, 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) (Predecessor)
Statements of Changes in Net Assets for the year ended December 31, 1998, 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) (Predecessor)
Statements of Cash Flows for the year ended December 31, 1998, 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) (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, 1998 and 1997, and the related statements of
operations, changes in net assets and cash flows of the Trust for the year ended
December 31, 1998, for the period from February 25, 1997 to December 31, 1997
and for The MicroCap Fund, Inc. (the "Fund") for the period from March 1, 1996
to February 24, 1997 (Date of Termination). 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 as of December 31, 1998 and 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 as of December 31, 1998 and 1997
and the results of the Trust's operations, changes in net assets and cash flows
for the year ended December 31, 1998, 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) in conformity with generally accepted accounting
principles.
As explained in Note 2, the financial statements include securities valued at
$484,375 and $1,622,500 as of December 31, 1998 and 1997, respectively,
representing 13% and 23% of net assets, respectively, whose values have been
estimated by the Trustee of the Trust as of December 31, 1998 and 1997 in the
absence of readily ascertainable market values. We have reviewed the procedures
used by the Trustee 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 22, 1999
(March 2, 1999 as to Notes 4 and 7)
<PAGE>
<TABLE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
STATEMENTS OF ASSETS AND LIABILITIES
As of December 31, 1998 and 1997
1998 1997
--------------- ----------------
Assets
Portfolio investments at fair value (cost $1,937,500 as of
December 31,1998 and $2,177,500 as of December 31, 1997) $ 484,375 $ 1,622,500
<S> <C> <C>
Cash and cash equivalents - unrestricted 813,832 2,651,802
Cash and cash equivalents - restricted 2,790,218 2,790,218
Accrued interest receivable 14,826 18,644
Other receivables 50,000 -
Other assets - 883
--------------- ----------------
Total assets 4,153,251 7,084,047
--------------- ----------------
Liabilities
Accounts payable and accrued expenses 81,513 152,677
Litigation settlement reserve 278,200 -
--------------- ----------------
Total liabilities 359,713 152,677
--------------- ----------------
Net Assets in Liquidation $ 3,793,538 $ 6,931,370
=============== ================
Net assets in liquidation per Unit of beneficial interest $ 1.56 $ 2.86
====== ======
Number of Units of beneficial interest outstanding 2,427,281 2,427,281
========= =========
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
SCHEDULE OF PORTFOLIO INVESTMENTS
As of December 31, 1998
Issuer / Position Cost Fair Value Net Assets(1)
Publicly-Held Securities:
Unigene Laboratories, Inc.
<S> <C>
Warrant to purchase 475,000 shares of Common Stock
at $1.375, expiring 7/7/00 $ 0 $ 0 0.00%
------------- -------------- -------
Privately-Held Securities:
First Colony Acquisition Corp.
106,562 shares of Series A1 Preferred Stock 594,174 148,544
240,179 shares of Series B1 Preferred Stock 1,343,326 335,831
Warrant to purchase 7,560 shares of Common Stock
at $5.00, expiring 1/24/00 0 0
------------- --------------
1,937,500 484,375 12.77%
------------- -------------- --------
Total Portfolio Investments(A) (B) $ 1,937,500 $ 484,375 12.77%
============= ============== ========
</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 as of December 31, 1998, are non-income
producing. As of December 31, 998, all of the Trust's portfolio companies
were located in the eastern United States. The investments, using fair
value as a percentage of net assets, represented biotechnology, 12.77%,
consumer products, 0%, preferred stock, 12.77%, and common stock, 0%.
See notes to financial statements.
<PAGE>
<TABLE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
SCHEDULE OF PORTFOLIO INVESTMENTS
As of December 31, 1997
% of
Issuer / Position Cost Fair Value Net Assets(1)
Publicly-Held Securities:
Unigene Laboratories, Inc.
<S> <C>
Warrant to purchase 475,000 shares of Common Stock
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.
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 $ 2,177,500 $ 1,622,500 23.42%
============= ============== ========
</TABLE>
(1) Represents fair value as a percentage of net assets.
See notes to financial statements.
<PAGE>
<TABLE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
STATEMENTS OF OPERATIONS
For the Year ended December 31, 1998, 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)
March 1,
February 25, 1996 to
1997 to February 24,
December 31, 1997
1998 1997 (Predecessor)
--------------- ---------------- -----------------
Investment Income and Expenses
Income:
Interest from U.S. Treasury Bills and
<S> <C> <C> <C>
repurchase agreements $ 240,737 $ 270,147 $ 450,528
Interest from portfolio investments - - 36,578
Other interest income 13,954 15,467 -
Other income 198,113 18,942 1,205,119
---------------- -------------- -------------
Total income 452,804 304,556 1,692,225
---------------- -------------- -------------
Expenses:
Litigation settlement 278,200 - -
Administrative expenses 76,573 73,498 125,741
Legal fees 101,663 167,602 1,991,383
Accounting fees 31,189 63,825 96,805
Trustee fees 120,205 148,035 127,319
Transfer agent and custody fees 20,867 17,461 22,392
Mailing and printing 2,502 4,677 66,972
Other operating expenses 851 2,525 89,012
Salary expense - - 178,919
Amortization of deferred organizational costs - - 80,608
Directors' fees and expenses - - 47,879
Consulting fees - - 74,400
Insurance expense - - 34,722
---------------- -------------- -------------
Total expenses 632,050 477,623 2,936,152
---------------- -------------- -------------
Net Investment Loss (179,246) (173,067) (1,243,927)
---------------- -------------- -------------
Net Realized and Unrealized Gain (Loss) From
Portfolio Investments
Net realized (loss) gain from portfolio investments (240,000) 775,250 3,972,372
Change in net unrealized appreciation or
depreciation of investments (898,125) (1,026,843) (1,684,806)
---------------- -------------- -------------
Net realized and unrealized (loss) gain
from portfolio investments (1,138,125) (251,593) 2,287,566
------------ -------------- ----------------
Net (Decrease) Increase in Net Assets Resulting
From Operations $ (1,317,371)__$ (424,660) $ 1,043,639
============ =============== ==================
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
STATEMENTS OF CHANGES IN NET ASSETS
For the Year ended December 31, 1998, 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)
March 1,
February 25, 1996 to
1997 to February 24,
December 31, 1997
1998 1997 (Predecessor)
---------------- ---------------- -----------
Change in net assets resulting from operations:
<S> <C> <C> <C>
Net investment loss $ (179,246) (173,067) $ (1,243,927)
Net realized (loss) gain from portfolio investments (240,000) 775,250 3,972,372
Change in net unrealized appreciation or depreciation
of portfolio investments (898,125) (1,026,843) (1,684,806)
---------------- ---------------- ---------------
Net decrease in net assets resulting from operations (1,317,371) (424,660) 1,043,639
---------------- ---------------- ---------------
Change in net assets from distributions:
Cash distributions paid (1,820,461) (2,427,281) (8,495,486)
---------------- ---------------- ---------------
Net decrease in net assets for the period (3,137,832) (2,851,941) (7,451,847)
Net assets in liquidation at beginning of period 6,931,370 9,783,311 17,235,158
---------------- ---------------- ---------------
Net Assets in Liquidation at End of Period $ 3,793,538 $ 6,931,370 $ 9,783,311
================ ================ ===============
Net assets per Unit of beneficial interest or
common equivalent share $ 1.56 $ 2.86 $ 4.03
====== ====== ======
Number of Units of beneficial interest or
common equivalent shares 2,427,281 2,427,281 2,427,281
========= ========= =========
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
STATEMENTS OF CASH FLOWS
For the Year ended December 31, 1998, 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)
March 1,
February 25, 1996 to
1997 to February 24,
December 31, 1997
1998 1997 (Predecessor)
--------------- --------------- ---------------
Cash Flows Used For Operating Activities
<S> <C> <C> <C>
Net investment loss $ (179,246) $ (173,067) $ (1,243,927)
Adjustments to reconcile net investment loss
to cash used for operating activities:
Increase (decrease) in payables and other liabilities 207,036 (1,032,656) 851,780
(Increase) decrease in receivables and other assets (45,299) 668,557 (130,265)
Depreciation expense - 12,721 5,103
Amortization of deferred organizational costs - - 80,608
--------------- -------------- --------------
Cash flows used for operating activities (17,509) (524,445) (436,701)
--------------- -------------- --------------
Cash Flows Provided From Investing Activities
Net proceeds from the sale of portfolio investments - 822,500 4,676,564
Repayment of notes - - 2,000,000
Purchase of portfolio investments - - (51,411)
--------------- -------------- --------------
Cash flows provided from investing activities - 822,500 6,625,153
--------------- -------------- --------------
Cash Flows Used For Financing Activities
Cash distributions paid (1,820,461) (2,427,281) (8,495,486)
--------------- -------------- --------------
Decrease in cash and cash equivalents (1,837,970) (2,129,226) (2,307,034)
Cash and cash equivalents at beginning of period 5,442,020 7,571,246 9,878,280
--------------- -------------- --------------
Cash and Cash Equivalents at End of Period $ 3,604,050 $ 5,442,020 $ 7,571,246
=============== ============== ==============
</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 entity 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 - 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, 4% in 1998, and will be paid 2% in
1999 and 0% thereafter.
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 agreed to make settlement payments to the Fund or the Trust totaling
$1,150,000. In connection therewith, $500,000 was received in December 1996 and
an additional $650,000 was received 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
was 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. See note 6 of Notes to the Financial Statements for additional
information.
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
<PAGE>
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
NOTES TO FINANCIAL STATEMENTS - continued
was therefore a voidable preference without regard to whether Mustafa was an
insider. Alternatively, Maritime asserted that the foregoing payments were made
from its funds, without reasonably equivalent consideration, and were therefore
avoidable as fraudulent conveyances. The Fund served an answer denying the
allegations of the amended complaint and contested Regency's claims. Pursuant to
an order filed with the Bankruptcy Court, the Trust had 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 was 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.
The proposed settlement was finalized in March 1999 and the defendants agreed to
pay a total of $535,000, of which the Trust's share is $281,425, exclusive of
legal and other fees and expenses. As a result of the settlement, the $2.4
million previously set aside is now available to the Trust.
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.
Pursuant to the terms of this settlement agreement, a final payment of $50,000
was received by the Trust on February 1, 1999.
MICROCAP LIQUIDATING TRUST
(Successor to The MicroCap Fund, Inc.)
NOTES TO FINANCIAL STATEMENTS - continued
7. Cash Distributions
On August 28, 1998, the Trust paid an interim liquidating distribution
totaling $1,820,461, or $.75 per Unit. Such distribution was paid to unit
holders of record on August 14, 1998.
On March 2, 1999, the Trust announced that an additional liquidation
distribution will be paid to unit holders of record on March 16, 1999. This
distribution will total $1,820,461 or $.75 per Unit, and will be paid on March
31, 1999.
<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.
Year First
Elected a
Director Position with
Name Age or Officer the Trust
Raymond S. Troubh 72 1996 Trustee
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 in New York City and a former governor of the American
Stock Exchange. He is a graduate of Bowdoin College and Yale Law School and was
a general partner of Lazard Freres & Co., an investment banking firm. Mr. Troubh
is a director of 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; Starwood Hotels & Resorts, a hotel and gaming company; WHX Corporation,
a holding company; and Triarc Companies, Inc., a diversified holding company. He
is also a Trustee of Petrie Stores Liquidating Trust, a liquidating trust
holding the assets of a former women's apparel retailer.
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, 4% in 1998, and
will be paid 2% in 1999, and 0% thereafter. For the year ended December 31,
1998, the Trust paid fees to Mr. Troubh totaling $120,205.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Security Ownership
As of March 16, 1999, 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.
<PAGE>
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, 1998 and 1997
Schedules of Portfolio Investments as of December 31, 1998 and 1997
Statements of Operations for the year ended December 31, 1998, 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)
(Predecessor)
Statements of Changes in Net Assets for the year ended December 31,
1998, 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) (Predecessor)
Statements of Cash Flows for the year ended December 31, 1998, 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)
(Predecessor)
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 31, 1999
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MICROCAP
LIQUIDATING TRUST'S ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED DECEMBER 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
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