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 MicroCapLiquidating 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> <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> <C> <C> <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> <C> <C> <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>
