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<PAGE>
TO OUR SHAREHOLDERS APRIL 30, 1997
We are pleased to present MassMutual Participation Investors' report for the
first three months of 1997.
The Trust got off to a good start this year with net assets per share increasing
to $10.91 from $10.54 per share on December 31, 1996. Based on the change in net
assets and reinvestment of dividends, the Trust's performance for the quarter
was 3.5%, which beat both the stock and bond markets as measured by the S&P 500
Composite Index and the Lehman Brothers Government/Corporate Bond Index which
were up 2.7% and down .9% respectively. The broad based stock market index
initially realized considerable gains until late March when the Federal Reserve
Board raised interest rates and most of the earlier gains were erased. The
Federal Reserve action was also felt throughout most of the domestic bond market
sectors which realized negative total returns.
We are also pleased to report that the regular quarterly dividend declared on
the day of the annual shareholders' meeting on April 24, 1997 was increased to
$.20 per share. Our regular quarterly dividend had been $.19 per share. The net
earnings of the Trust for the quarter ended March 31, 1997 were $1,923,676 or
20.9 cents per share as compared with $1,716,249 or 18.6 cents per share a
quarter ago. What we are seeing is one of the unique features of Participation
Investors which is the growth of the assets of the Trust through the retention
of long-term capital gains. Over time this growth in assets will help us
increase the earnings of the Trust and, ultimately, your dividends.
New private placement investments made during the quarter included Associated
Vintage Group, Inc., a Sonoma County, California provider of custom wine
production services which is one of the largest in the country; Hatco
Corporation, a specialty chemical company to whom we made a loan so it could
complete some acquisitions; Swing N'Slide Corporation, a manufacturer and
distributor of home playground equipment which refinanced its existing bank
facility while making an acquisition; and Trend Plastics, Inc., a manufacturer
and assembler of plastic injection molded parts which was acquired by a buyout
sponsor with whom we have worked in the past. Associated Vintage Group, Inc.,
Swing N'Slide Corporation and Trend Plastics, Inc. allow us to participate in
the long-term growth of the companies via their equity features while providing
a weighted average coupon of over 11.6%. The closing of these new investments
brings our holdings in private placement issuers, the primary investment
category of Participation Investors, to over 78% of the portfolio.
The Trust realized over $1.4 million (or $.15 per share) in net capital gains
during the quarter, roughly half of which came from partial or complete sales of
investments from our private placement portfolio. Of the $.15 per share, $.04
per share represents net short-term gains which, if not offset by year end, will
be distributed to shareholders. The majority of the quarter's gains were
realized early in the quarter while the markets were still strong.
At the ninth Annual Meeting of Shareholders held on April 24, 1997, Gary E.
Wendlandt, Milton Cooper, and Martin T. Hart were re-elected as Trustees for
three-year terms; Coopers & Lybrand L.L.P. was re-elected as auditor of the
Trust, and the Investment Services Contract between the Trust and Massachusetts
Mutual Life Insurance Company was approved. Also approved was an amendment to
the Trust's investment objectives to permit not more than 75% of the total
assets to be invested in non-investment grade securities. This amendment should
provide management with more flexibility with respect to the portfolio. By
increasing our exposure to non-investment grade securities, particularly those
with equity features, we create an opportunity for enhanced total return.
The Trustees and management appreciate the continued interest and support of the
shareholders of Participation Investors.
Sincerely,
/s/ Stuart H. Reese
Stuart H. Reese
President
1
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES MASSMUTUAL PARTICIPATION INVESTORS
March 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Assets:
Investments (Notes 2A, 2B and 5)
(See Schedule of Investments)
Corporate restricted securities at fair value
(Cost 1997 - $82,841,776; 1996 - $62,751,977) $ 88,392,070 $ 66,698,402
Corporate public securities at market value
(Cost 1997 - $17,404,931; 1996 - $22,315,358) 18,626,334 23,882,098
Short-term securities at cost plus earned discount which
approximates market value 1,998,938 15,166,686
------------ ------------
109,017,342 105,747,186
Cash 29,955 2,492,102
Interest and dividends receivable, net 1,777,761 1,846,497
Receivable for investments sold 2,589,794 921,655
Other assets 12,128 12,128
------------ ------------
Total assets $113,426,980 $111,019,568
============ ============
Liabilities:
Payable for investments purchased $ 300,000 $ 2,853,264
Management fee payable (Note 3) 226,310 215,209
Note payable (Note 4) 12,000,000 12,000,000
Interest payable (Note 4) 170,940 170,940
Accrued expenses 147,310 131,652
------------ ------------
Total liabilities 12,844,560 15,371,065
------------ ------------
Net Assets:
Shares of beneficial interest, par value $.01 per share;
an unlimited number authorized 92,167 92,167
Additional paid-in capital 84,895,820 84,895,820
Retained net realized gain on investments, prior years 5,423,509 582,457
Undistributed net investment income (Note 2D) 1,930,900 1,869,712
Accumulated net realized gain on investments 1,468,327 2,695,182
Net unrealized appreciation of investments (Notes 2A, 2B and 5) 6,771,697 5,513,165
------------ ------------
Total net assets 100,582,420 95,648,503
------------ ------------
Total liabilities and net assets $113,426,980 $111,019,568
============ ============
Shares of beneficial interest issued and outstanding 9,216,665 9,216,665
============ ============
Net asset value per share $ 10.91 $ 10.38
============ ============
</TABLE>
See Notes to Financial Statements
- --------------------------------------------------------------------------------
2
<PAGE>
STATEMENT OF OPERATIONS MASSMUTUAL PARTICIPATION INVESTORS
For the three months ended March 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Investment Income (Note 2B):
Interest $ 2,340,793 $ 2,172,547
Dividends 57,686 30,131
------------- -------------
Total income 2,398,479 2,202,678
------------- -------------
Expenses:
Management fee (Note 3) 226,310 215,209
Trustees' fees and expenses 12,874 11,812
Transfer Agent/Registrar's expenses 8,947 6,000
Interest (Note 4) 207,900 207,900
Reports to shareholders 4,000 8,513
Audit and legal 9,320 11,975
Other 5,452 6,305
------------- -------------
Total expenses 474,803 467,714
------------- -------------
Net investment income 1,923,676 1,734,964
------------- -------------
Net realized and unrealized gain (loss) on investments (Notes 2A and 2B):
Net realized gain on investments 1,429,871 2,695,182
Net change in unrealized appreciation of investments 75,014 (4,067,786)
------------- -------------
Net gain (loss) on investments 1,504,885 (1,372,604)
------------- -------------
Net increase in net assets resulting from operations $ 3,428,561 $ 362,360
============= =============
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
3
<PAGE>
STATEMENT OF CASH FLOWS MASSMUTUAL PARTICIPATION INVESTORS
For the three months ended March 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Net increase (decrease) in cash:
Cash flows from operating activities:
Interest and dividends received $ 2,048,468 $ 1,893,452
Interest expense paid (207,900) (207,900)
Operating expenses paid (269,397) (287,736)
Federal income tax paid (2,606,720) (203,518)
------------- -------------
Net cash (used for) provided by operating activities (1,035,549) 1,194,298
------------- -------------
Cash flows from investing activities:
Change in short-term portfolio securities, net 2,957,088 (3,364,368)
Purchase of portfolio securities (16,158,276) (7,702,841)
Proceeds from disposition of portfolio securities 18,041,111 14,087,774
------------- -------------
Net cash provided by investing activities 4,839,923 3,020,565
------------- -------------
Net cash provided by operating and investing activities 3,804,374 4,214,863
------------- -------------
Cash flows from financing activities:
Cash dividends paid from net investment income (1,893,871) (1,751,166)
Cash dividends paid from net realized gain on investments (1,884,962) --
------------- -------------
Net cash used for financing activities (3,778,833) (1,751,166)
------------- -------------
Net increase in cash 25,541 2,463,697
Cash - beginning of year 4,414 28,405
------------- -------------
Cash - end of period $ 29,955 $ 2,492,102
============= =============
Reconciliation of net increase (decrease) in net assets to net cash from
operating and investing activities:
Net increase in net assets resulting from operations $ 3,428,561 $ 362,360
------------- -------------
Decrease in investments 1,689,169 1,840,075
Increase in interest and dividends receivable, net (237,322) (41,623)
(Increase) decrease in receivable for investments sold 1,380,308 (55,645)
Increase in other assets (12,128) (12,128)
Increase in payable for investments purchased 165,000 2,353,264
Increase in management fee payable 7,714 815
Decrease in accrued expenses (10,208) (28,737)
Decrease in accrued taxes (2,606,720) (203,518)
------------- -------------
Total adjustments to net assets from operations 375,813 3,852,503
------------- -------------
Net cash provided by operating and investing activities $ 3,804,374 $ 4,214,863
============= =============
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
4
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS MASSMUTUAL PARTICIPATION INVESTORS
For the three months ended March 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 1,923,676 $ 1,734,964
Net realized gain on investments 1,429,871 2,695,182
Net change in unrealized appreciation of investments 75,014 (4,067,786)
------------- -------------
Net increase in net assets resulting from operations 3,428,561 362,360
Net Assets, beginning of year 97,153,859 95,286,143
------------- -------------
Net Assets, end of period (including undistributed net investment
income in 1997 - $1,930,900; 1996 - $1,869,712) $100,582,420 $ 95,648,503
============= =============
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
5
<PAGE>
SELECTED PER SHARE DATA MASSMUTUAL PARTICIPATION INVESTORS
Selected data for each share of beneficial interest outstanding for the periods
ended:
<TABLE>
<CAPTION>
For the
period For the
ended 3/31/97 year ended
(Unaudited) 12/31/96
------------- -------------
<S> <C> <C>
Net asset value:
Beginning of year $ 10.54 $ 10.34
------------- -------------
Net investment income .21 .76
Net realized and unrealized gain on investments .16 .42
------------- -------------
Total from investment operations .37 1.18
------------- -------------
Dividends from net investment income to common shareholders -- (.78)
Distributions from net realized gain on investments to common shareholders -- (.20)
------------- -------------
Total distributions -- (.20)
------------- -------------
Net asset value:
End of period $ 10.91 $ 10.54
============= =============
Per share market value:
End of period $ 9.63 $ 9.25
============= =============
Total investment return:
Market value 4.05%* 15.40%
Net asset value 3.51%* 14.60%
Net assets (in millions):
End of period $ 100.58 $ 97.15
Ratio of operating expenses to average net assets .27%* 1.11%
Ratio of interest expenses to average net assets .21%* .85%
Ratio of expenses to average net assets .48%* 1.96%
Ratio of net investment income to average net assets 1.95%* 7.18%
Portfolio turnover 15.24%* 68.48%
</TABLE>
*Percentages represent results for the period and are not annualized.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
6
<PAGE>
SCHEDULE OF INVESTMENTS MASSMUTUAL PARTICIPATION INVESTORS
March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares, Units,
Warrants or Fair Value
Principal Acquisition at Acquisition
Corporate Restricted Securities - 78.42%: (A) Amount Date Date
----------------- ----------------- ----------------
<S> <C> <C> <C>
AccTech, LLC
A designer and marketer of specialized cleaning products.
Senior Floating Rate Revolving Credit Note
due 2002 $ 274,380 10/31/96 $ 274,380
Senior Secured Series A Floating Rate
Note due 2002 $ 388,417 10/31/96 382,594
10.1% Senior Secured Series A Note
due 2002 $ 583,117 10/31/96 568,189
12% Senior Secured Series B Note due 2004 $ 549,000 10/31/96 577,603
Membership Interest 2 int. 10/31/96 131,756
Warrant, exercisable until 2004, to purchase
1 Membership Interest at $.01 per interest (B) 1 int. 10/31/96 --
------------
1,934,522
------------
American Exploration Company - A.S.E.
An independent oil and gas company engaged
principally in the acquisition, development and
management of oil and gas properties.
11% Senior Subordinated Note due 2004 $ 1,500,000 12/27/91 1,482,300
Warrant, exercisable until 2004, to purchase
51,671 shares of common stock at $15.53
per share (B) 51,671 shs. 12/27/91 24,857
------------
1,507,157
------------
Ammirati & Puris, Inc.
An advertising agency that specializes
in representing a limited number of large and high
quality clients.
14% Senior Secured Note due 1998 $ 166,667 11/23/93 163,267
------------
Associated Vintage Group, Inc.
A provider of custom wine production services in
the United States.
11% Senior Subordinated Note due 2005 $ 1,667,500 3/19/97 1,637,318
Common Stock (B) 15,675 shs. 3/19/97 61,875
Warrant, exercisable until 2005, to purchase
47,044 shares of common stock at $.01 per
share (B) 47,044 shs. 3/19/97 47,044
------------
1,746,237
------------
Atlantic Aviation Corporation
An operator and provider of business aircraft
services and fueling services to commercial airlines.
10.05% Senior Note due 1999 $ 568,798 1/31/90 549,361
------------
J. Baker, Inc. - O.T.C.
A wholesaler and retailer of shoes.
11.21% Senior Subordinated Note due 1999 $ 900,000 6/21/89 897,660
Warrant, exercisable until 1999, to purchase
27,355 shares of common stock at $18.80
per share (B) 27,355 shs. 6/21/89 2,736
------------
900,396
------------
Berkshire Medical Center, Inc.
A non-profit, regional acute care hospital.
10.5% Senior Note due 1999 $ 616,364 5/15/89 616,364
------------
Boyle Leasing Technologies, Inc.
A leasing company specializing in the leasing
and rental of microticket business equipment.
12% Senior Subordinated Note due 2001 $ 1,000,000 8/16/94 899,723
------------
<CAPTION>
Fair Value
Cost at 3/31/97
Corporate Restricted Securities - 78.42%: (A) (Note 2B) (Note 2A)
------------- -------------
<S> <C> <C>
AccTech, LLC
A designer and marketer of specialized cleaning products.
Senior Floating Rate Revolving Credit Note
due 2002 $ 274,380 $ 269,003
Senior Secured Series A Floating Rate
Note due 2002 388,417 383,096
10.1% Senior Secured Series A Note
due 2002 583,117 567,839
12% Senior Secured Series B Note due 2004 495,968 574,089
Membership Interest 166,000 131,760
Warrant, exercisable until 2004, to purchase
1 Membership Interest at $.01 per interest (B) 54,900 --
------------- -------------
1,962,782 1,925,787
------------- -------------
American Exploration Company - A.S.E.
An independent oil and gas company engaged
principally in the acquisition, development and
management of oil and gas properties.
11% Senior Subordinated Note due 2004 1,480,644 1,440,450
Warrant, exercisable until 2004, to purchase
51,671 shares of common stock at $15.53
per share (B) 19,356 51,671
------------- -------------
1,500,000 1,492,121
------------- -------------
Ammirati & Puris, Inc.
An advertising agency that specializes
in representing a limited number of large and high
quality clients.
14% Senior Secured Note due 1998 166,667 177,517
------------- -------------
Associated Vintage Group, Inc.
A provider of custom wine production services in
the United States.
11% Senior Subordinated Note due 2005 1,581,040 1,631,315
Common Stock (B) 82,500 61,875
Warrant, exercisable until 2005, to purchase
47,044 shares of common stock at $.01 per
share (B) 86,673 47,044
------------- -------------
1,750,213 1,740,234
------------- -------------
Atlantic Aviation Corporation
An operator and provider of business aircraft
services and fueling services to commercial airlines.
10.05% Senior Note due 1999 568,798 562,883
------------- -------------
J. Baker, Inc. - O.T.C.
A wholesaler and retailer of shoes.
11.21% Senior Subordinated Note due 1999 898,956 884,340
Warrant, exercisable until 1999, to purchase
27,355 shares of common stock at $18.80
per share (B) 73,285 2,736
------------- -------------
972,241 887,076
------------- -------------
Berkshire Medical Center, Inc.
A non-profit, regional acute care hospital.
10.5% Senior Note due 1999 616,364 629,739
------------- -------------
Boyle Leasing Technologies, Inc.
A leasing company specializing in the leasing
and rental of microticket business equipment.
12% Senior Subordinated Note due 2001 946,120 990,700
------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
7
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares, Units,
Warrants or Fair Value
Principal Acquisition at Acquisition
Corporate Restricted Securities: (A) (Continued) Amount Date Date
----------------- ----------- --------------
<S> <C> <C> <C>
BP Prudhoe Bay Royalty Trust - N.Y.S.E.
A trust which shares in the production
of petroleum from the Alaskan North Slope.
13,190 Units of Beneficial Interest 13,190 uts. 2/28/89 $ 329,750
------------
C&K Manufacturing and Sales Company
A manufacturer and distributor of branded
packaging and supply products.
Senior Secured Floating Rate Revolving
Credit Facility due 2002 $ 159,600 8/29/96 159,600
Senior Secured Series A Floating Rate
Term Note due 2002 $ 1,212,042 8/29/96 1,199,074
12% Series B Term Note due 2004 $ 266,000 8/29/96 261,877
Membership Interest 133 int. 8/29/96 106,400
Warrant, exercisable until 2004, to purchase
37 Membership Interests at $.01 per interest (B) 37 int. 8/29/96 --
------------
1,726,951
------------
Cains Foods, L.P.
A producer of mayonnaise, sauce and pickle products
for both the retail and food
service markets.
Senior Secured Floating Rate Revolving
Credit Note due 2000 $ 216,216 9/29/95 216,216
10% Senior Secured Term Note due 2004 $ 756,756 9/29/95 750,778
11.5% Senior Subordinated Note due 2004 $ 472,975 9/29/95 471,414
8% Junior Subordinated Convertible Note
due 2004, convertible into 39 partnership
points at $1,388.89 per point $ 54,054 9/29/95 42,148
Warrant, exercisable until 2006, to purchase
19 partnership points at $.01 per point (B) 19 pts. 9/29/95 19
------------
1,480,575
------------
Catalina Lighting, Inc. - N.Y.S.E.
A designer, importer and distributor of residential
and office lighting fixtures.
8% Convertible Subordinated Note due 2002,
convertible into 50,000 shares of common
stock at $7.50 per share $ 375,000 3/31/94 355,013
------------
Cirrus Logic, Inc.
A designer and manufacturer of integrated circuits.
10.22% Secured Leverage Lease Notes
due 2002 $ 716,154 11/1/96 700,256
10.14% Secured Leverage Lease Notes
due 2004 $ 719,092 11/1/96 697,879
------------
1,398,135
------------
Classic Sports, Inc.
A cable sports television network.
Convertible Preferred Stock, convertible
into 322 shares of common stock at $1,000
per share 322 shs. * 28,980
------------
The Coast Distribution System - A.S.E.
A wholesale distributor of recreational vehicle and
marine parts and accessories.
11.2% Senior Subordinated Secured Note
due 1999 $ 700,100 6/26/89 722,434
------------
<CAPTION>
Fair Value
Cost at 3/31/97
Corporate Restricted Securities - 78.42%: (A) (Note 2B) (Note 2A)
------------- -------------
BP Prudhoe Bay Royalty Trust - N.Y.S.E.
A trust which shares in the production
of petroleum from the Alaskan North Slope.
13,190 Units of Beneficial Interest $ 202,134 $ 212,689
------------- -------------
C&K Manufacturing and Sales Company
A manufacturer and distributor of branded
packaging and supply products.
Senior Secured Floating Rate Revolving
Credit Facility due 2002 159,600 158,132
Senior Secured Series A Floating Rate
Term Note due 2002 1,212,042 1,200,285
12% Series B Term Note due 2004 253,274 262,701
Membership Interest 131,420 106,400
Warrant, exercisable until 2004, to purchase
37 Membership Interests at $.01 per interest (B) 13,300 --
------------- -------------
1,769,636 1,727,518
------------- -------------
Cains Foods, L.P.
A producer of mayonnaise, sauce and pickle products
for both the retail and food
service markets.
Senior Secured Floating Rate Revolving
Credit Note due 2000 216,216 216,216
10% Senior Secured Term Note due 2004 756,756 741,091
11.5% Senior Subordinated Note due 2004 450,961 461,860
8% Junior Subordinated Convertible Note
due 2004, convertible into 39 partnership
points at $1,388.89 per point 54,054 104,303
Warrant, exercisable until 2006, to purchase
19 partnership points at $.01 per point (B) 25,130 41,109
------------- -------------
1,503,117 1,564,579
------------- -------------
Catalina Lighting, Inc. - N.Y.S.E.
A designer, importer and distributor of residential
and office lighting fixtures.
8% Convertible Subordinated Note due 2002,
convertible into 50,000 shares of common
stock at $7.50 per share 375,000 348,263
------------- -------------
Cirrus Logic, Inc.
A designer and manufacturer of integrated circuits.
10.22% Secured Leverage Lease Notes
due 2002 716,154 700,112
10.14% Secured Leverage Lease Notes
due 2004 719,092 697,375
------------- -------------
1,435,246 1,397,487
------------- -------------
Classic Sports, Inc.
A cable sports television network.
Convertible Preferred Stock, convertible
into 322 shares of common stock at $1,000
per share 152,062 386,666
------------- -------------
The Coast Distribution System - A.S.E.
A wholesale distributor of recreational vehicle and
marine parts and accessories.
11.2% Senior Subordinated Secured Note
due 1999 700,100 703,180
------------- -------------
</TABLE>
*4/18/95 and 6/3/96.
- --------------------------------------------------------------------------------
8
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares, Units,
Warrants or Fair Value
Principal Acquisition at Acquisition
Corporate Restricted Securities: (A) (Continued) Amount Date Date
----------------- ----------- --------------
<S> <C> <C> <C>
CompuCom Systems, Inc. - O.T.C.
A personal computer dealer specializing in
serving corporate accounts.
Common Stock (B) 183,711 shs. 9/24/92 $ 399,557
-------------
Consumer Product Enterprises, Inc.
A manufacturer of colored acrylic felt for
consumer use.
10.75% Senior Secured Term Note due 2003 $ 607,103 12/8/95 614,261
12% Senior Subordinated Note due 2005 $ 400,287 12/8/95 401,928
Common Stock (B) 92,280 shs. 12/8/95 69,210
Warrant, exercisable until 2005, to purchase
69,210 shares of common stock at $.01
per share (B) 69,210 shs. 12/8/95 692
-------------
1,086,091
-------------
Contico International, Inc.
A developer, manufacturer and marketer of
consumer, commercial and industrial plastic
products.
12% Senior Subordinated Note due 2003 $ 500,000 3/23/93 522,800
-------------
Control Devices, Inc. - O.T.C.
A producer of high quality electromechanical
circuit protector devices and photo-optic sensors.
Common Stock (B) 58,000 shs. 7/29/94 8,737
-------------
Corrections Corporation of America - O.T.C.
An operator of private prisons and correctional
facilities for federal, state and local governments.
11.08% Senior Secured Note due 2000 $ 258,522 12/11/90 258,373
-------------
Discount Auto Parts
A retailer of auto parts.
9.8% Senior Secured Note due 2003 $ 1,050,000 11/2/89 1,014,405
-------------
Diversco, Inc.
A contract provider of janitorial and equipment
maintenance services and temporary production
labor to industrial customers.
Senior Secured Floating Rate Revolving
Credit Facility due 2002 $ 227,200 10/24/96 225,314
Senior Floating Rate Term Note due 2002 $ 223,453 10/24/96 222,090
10.16% Senior Term Note due 2002 $ 670,359 10/24/96 671,163
12% Senior Subordinated Note due 2003 $ 624,000 10/24/96 638,414
Membership Interest 1,491 int. 10/24/96 111,821
Warrant, exercisable to 2003, to purchase 896
Membership Interests at $.01 per interest (B) 896 int. 10/24/96 9
-------------
1,868,811
-------------
Elgin National Industries, Inc.
An operator in the specialty fastener, mineral
processing equipment, engineering, construction
and electrical distribution industries.
13% Senior Subordinated Note due 2001 $ 1,333,333 9/24/93 1,330,578
10% Preferred Stock 1,559 shs. 9/24/93 117,976
Common Stock (B) 107 shs. 9/24/93 10,717
Warrant, exercisable from 1998 until 2001,
to purchase 112 shares of common stock at
$.01 per share (B) 112 shs. 9/24/93 11
-------------
1,459,282
-------------
<CAPTION>
Fair Value
Cost at 3/31/97
Corporate Restricted Securities: (A) (Continued) (Note 2B) (Note 2A)
-------------- -------------
<S> <C> <C>
CompuCom Systems, Inc. - O.T.C.
A personal computer dealer specializing in
serving corporate accounts.
Common Stock (B) $ 404,164 $ 1,047,153
-------------- -------------
Consumer Product Enterprises, Inc.
A manufacturer of colored acrylic felt for
consumer use.
10.75% Senior Secured Term Note due 2003 607,103 595,507
12% Senior Subordinated Note due 2005 379,781 381,274
Common Stock (B) 92,280 69,210
Warrant, exercisable until 2005, to purchase
69,210 shares of common stock at $.01
per share (B) 25,426 692
-------------- -------------
1,104,590 1,046,683
-------------- -------------
Contico International, Inc.
A developer, manufacturer and marketer of
consumer, commercial and industrial plastic
products.
12% Senior Subordinated Note due 2003 500,000 511,950
-------------- -------------
Control Devices, Inc. - O.T.C.
A producer of high quality electromechanical
circuit protector devices and photo-optic sensors.
Common Stock (B) 8,737 652,498
-------------- -------------
Corrections Corporation of America - O.T.C.
An operator of private prisons and correctional
facilities for federal, state and local governments.
11.08% Senior Secured Note due 2000 258,199 268,941
-------------- -------------
Discount Auto Parts
A retailer of auto parts.
9.8% Senior Secured Note due 2003 1,050,000 1,093,365
-------------- -------------
Diversco, Inc.
A contract provider of janitorial and equipment
maintenance services and temporary production
labor to industrial customers.
Senior Secured Floating Rate Revolving
Credit Facility due 2002 227,200 225,428
Senior Floating Rate Term Note due 2002 223,453 222,224
10.16% Senior Term Note due 2002 670,359 669,420
12% Senior Subordinated Note due 2003 553,444 634,982
Membership Interest 152,095 111,821
Warrant, exercisable to 2003, to purchase 896
Membership Interests at $.01 per interest (B) 73,745 9
-------------- -------------
1,900,296 1,863,884
-------------- -------------
Elgin National Industries, Inc.
An operator in the specialty fastener, mineral
processing equipment, engineering, construction
and electrical distribution industries.
13% Senior Subordinated Note due 2001 1,322,145 1,355,333
10% Preferred Stock 155,950 129,283
Common Stock (B) 10,717 61,414
Warrant, exercisable from 1998 until 2001,
to purchase 112 shares of common stock at
$.01 per share (B) 11,188 64,180
-------------- -------------
1,500,000 1,610,210
-------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
9
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares, Units,
Warrants or Fair Value Fair Value
Principal Acquisition at Acquisition Cost at 3/31/97
Corporate Restricted Securities: (A) (Continued) Amount Date Date (Note 2B) (Note 2A)
------------- ----------- -------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Exide Electronics Group, Inc. - O.T.C.
A manufacturer and servicer of uninterruptible
power systems
Common Stock (B) 114,679 shs. 9/2/92 $1,486,200 $1,500,000 $1,184,776
---------- ---------- ----------
Firth Rixson, Inc.
A U.S. subsidiary of Johnson & Firth Brown;
a producer of specialty metal components, steel
and iron castings, and specialty engineering
9.82% Senior Guaranteed Note due 2001 $ 214,261 4/5/91 214,225 214,261 217,475
---------- ---------- ----------
Fleming Acquisition Corporation
A supplier of high-quality, premium printed
labels for distilled spirits, wine, food
and household products
15% Senior Subordinated Note due 2005 $1,384,691 * 1,378,466 1,314,463 1,390,092
Common Stock (B) 270shs. 4/28/95 70,559 135,000 10,182
Warrant, exercisable until 2005, to purchase 190
shares of common stock at $.01 per share (B) 190shs. 4/28/95 49,116 85,227 4,342
Incentive Warrant, exercisable from 1998 until
2000, to purchase 10 shares
of common stock
at $.01 per share (B) 10shs. 4/28/95 1,656 1,136 220
---------- ---------- ----------
1,499,797 1,535,826 1,404,836
Hardy Oil & Gas USA, Inc. ---------- ---------- ----------
Engages in the exploration and development of
oil and gas reserves
8.46% Guaranteed Senior Note due 2004 $1,500,000 1/11/95 1,452,600 1,500,000 1,490,250
Warrant, exercisable until 2005, to purchase
136,245 shares of common stock at o1.53
per share (B) 136,245shs. 1/11/95 13,500 -- 183,499
---------- ---------- ----------
1,466,100 1,500,000 1,673,749
Hatco Corporation ---------- ---------- ----------
A speciality chemical company focused on the
production of industrial synthetic lubricants
and plasticizers
Senior Secured Floating Rate Term Loan
due 2003 $1,750,000 1/31/97 1,739,675 1,750,000 1,740,025
---------- ---------- ----------
Hein-Werner Corp. - A.S.E
A manufacturer of automotive service and collision
repair equipment and hydraulic cylinders
8% Convertible Subordinated Note due 1999,
convertible into 179,140 shares of common
stock at $6.28 per share $1,125,000 9/29/89 1,094,738 1,125,000 1,128,713
Warrant, exercisable until 1999, to purchase
59,713 shares of common stock at $6.28 per
share (B) 59,713shs. 9/3/96 -- -- 4,538
---------- ---------- ----------
1,094,738 1,125,000 1,133,251
Highland Homes Holdings, Inc. ---------- ---------- ----------
A single family homebuilder operating in the
Dallas-Fort Worth and Atlanta areas
12.75% Senior Note due 1999 $ 562,500 11/18/93 556,931 554,824 580,838
Warrant, exercisable until 2001, to purchase
3 shares of common stock at $17,897.31
per share (B) 3shs. 11/18/93 1 5,118 26
---------- ---------- ----------
556,932 559,942 580,864
---------- ---------- ----------
</TABLE>
*4/28/95, 5/1/96 and 2/1/97.
- --------------------------------------------------------------------------------
10
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares, Units,
Warrants or Fair Value
Principal Acquisition at Acquisition Cost
Corporate Restricted Securities: (A) (Continued) Amount Date Date (Note 2B)
---------------- ------------- ---------------- -----------
<S> <C> <C> <C> <C>
Hudson River Capital
Acquires controlling or substantial interests in
manufacturing and marketing entities
3% Convertible Preferred Stock, convertible
into 25,000 shares of common stock at $10
per share (B) 25,000 shs. 7/21/94 $ 250,000 $ 250,000
---------- ----------
Hunton & Williams
A major law firm in Richmond, Virginia
10.06% Senior Secured Note due 2000 $ 137,625 12/21/90 135,324 137,625
---------- ----------
Hussey Seating Company
A manufacturer of spectator seating products
Senior Secured Floating Rate Revolving Note
due 2003 $ 247,500 6/12/96 245,075 247,500
Senior Secured Floating Rate Note due 2003 $ 450,000 6/12/96 445,545 450,000
10% Senior Secured Note due 2003 $ 450,000 6/12/96 438,120 450,000
12% Subordinated Secured Note due 2006 $ 675,000 6/12/96 663,660 567,967
Warrant, exercisable until 2006, to purchase
1,776 shares of common stock at $.01 per
share (B) 1,776 shs. 6/12/96 18 112,500
---------- ----------
1,792,418 1,827,967
---------- ----------
Intermetrics, Inc.
A provider of software systems, services and
products to a variety of information technology users
Senior Floating Rate Revolving Term Note
due 2002 $ 666,072 8/31/95 666,072 666,072
13% Senior Subordinated Note due 2002 $ 399,659 8/31/95 406,413 354,883
Common Stock (B) 5,538 shs. 8/31/95 25,959 34,610
Warrant, exercisable until 2007, to purchase
10,588 shares of Class D common stock at
$.01 per share (B) 10,588 shs. 8/31/95 1,059 52,000
---------- ----------
1,099,503 1,107,565
---------- ----------
Jackson Products, Inc.
Manufactures and distributes a variety of
industrial and highway safety products
12.25% Senior Subordinated Note due 2004 $ 985,000 8/16/95 962,148 966,226
13.25% Cumulative Exchangeable Preferred
Stock 49 shs. 8/16/95 407,467 411,708
Common Stock (B) 217 shs. 8/16/95 21,702 21,702
Warrant, exercisable until 2005, to purchase
999 shares of common stock at $.01
per share (B) 999 shs. 8/16/95 999 99,866
---------- ----------
1,392,316 1,499,502
---------- ----------
Kappler Safety Group, Inc.
A manufacturer of protective apparel for the
industrial/safety, cleanroom and healthcare
markets
13% Senior Subordinated Note due 2004 $ 1,667,000 12/2/96 1,692,505 1,506,589
Warrants, exercisable until 2004, to purchase
28,717 shares of common stock at $.01
per share (B) 28,717 shs. 12/2/96 28,717 166,700
---------- ----------
1,721,222 1,673,289
---------- ----------
Kuhlman Corporation - N.Y.S.E.
A manufacturer of non-automotive engine components
Warrant, exercisable until 2002, to purchase
48,075 shares of common stock at $8.32
per share (B) 48,075 shs. 4/30/92 53,000 81,000
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
Fair Value
at 3/31/97
Corporate Restricted Securities: (A) (Continued) (Note 2A)
------------
<S> <C>
Hudson River Capital
Acquires controlling or substantial interests in
manufacturing and marketing entities
3% Convertible Preferred Stock, convertible
into 25,000 shares of common stock at $10
per share (B) $ 237,500
------------
Hunton & Williams
A major law firm in Richmond, Virginia
10.06% Senior Secured Note due 2000 140,873
------------
Hussey Seating Company
A manufacturer of spectator seating products
Senior Secured Floating Rate Revolving Note
due 2003 245,322
Senior Secured Floating Rate Note due 2003 442,125
10% Senior Secured Note due 2003 446,355
12% Subordinated Secured Note due 2006 671,288
Warrant, exercisable until 2006, to purchase
1,776 shares of common stock at $.01 per
share (B) 18
------------
1,805,108
------------
Intermetrics, Inc.
A provider of software systems, services and
products to a variety of information technology users
Senior Floating Rate Revolving Term Note
due 2002 650,086
13% Senior Subordinated Note due 2002 393,624
Common Stock (B) 25,957
Warrant, exercisable until 2007, to purchase
10,588 shares of Class D common stock at
$.01 per share (B) 1,059
------------
1,070,726
------------
Jackson Products, Inc.
Manufactures and distributes a variety of
industrial and highway safety products
12.25% Senior Subordinated Note due 2004 974,264
13.25% Cumulative Exchangeable Preferred
Stock 407,055
Common Stock (B) 19,532
Warrant, exercisable until 2005, to purchase
999 shares of common stock at $.01
per share (B) 999
------------
1,401,850
------------
Kappler Safety Group, Inc.
A manufacturer of protective apparel for the
industrial/safety, cleanroom and healthcare
markets
13% Senior Subordinated Note due 2004 1,651,997
Warrants, exercisable until 2004, to purchase
28,717 shares of common stock at $.01
per share (B) 36,298
------------
1,688,295
------------
Kuhlman Corporation - N.Y.S.E.
A manufacturer of non-automotive engine components
Warrant, exercisable until 2002, to purchase
48,075 shares of common stock at $8.32
per share (B) 580,236
------------
</TABLE>
- --------------------------------------------------------------------------------
11
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares, Units,
Warrants or Fair Value Fair Value
Principal Acquisition at Acquisition Cost at 3/31/97
Corporate Restricted Securities: (A) (Continued) Amount Date Date (Note 2B) (Note 2A)
------------ ------------ --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Latin Communications Group
An operator of Spanish-language media in
North America
Common Stock (B) 44,219 shs. * $ 247,170 $ 406,252 $ 442,190
------------ ------------ -------------
Maloney Industries, Inc.
Engineers and manufactures process systems for
the oil and gas industry.
13% Subordinated Note due 2004 $ 1,012,500 10/26/95 1,070,213 1,012,500 1,096,740
Limited Partnership Interest 284 uts. 10/20/95 253,125 366,629 253,125
Warrant, exercisable until 2004, to purchase
148 units of Limited Partnership Interest at $.01
per unit (B) 148 uts. 10/26/95 148 -- 148
------------ ------------ -------------
1,323,486 1,379,129 1,350,013
------------ ------------ -------------
Maxtex International Corp.
A manufacturer and distributor of precision
test and measurement equipment and overhead
crane control systems.
Senior Floating Rate Revolving Credit
Facility due 2001 $ 329,670 6/28/95 325,516 329,670 326,769
Senior Secured Floating Rate Note due 2001 $ 47,741 6/28/95 47,335 47,741 47,697
12.5% Subordinated Secured Note due 2003 $ 51,165 6/28/95 52,234 39,760 51,129
Common Stock (B) 38,462 shs. 6/28/95 96,059 115,386 86,540
Warrant, exercisable from 1998 until 2005,
to purchase 19,795 shares of common stock
at $.01 per share (B) 19,795 shs. 6/28/95 49,291 85,714 19,795
------------ ------------ -------------
570,435 618,271 531,930
------------ ------------ -------------
NM Holdings LLC
A company created to acquire motion picture film
rights from Twentieth Century Fox.
10% Senior Note due 2001 $ 500,000 6/28/96 490,300 500,000 489,600
12% Subordinated Note due 2001 $ 490,000 6/28/96 491,078 490,000 488,971
Membership Interest 10,000 int. 6/28/96 7,500 9,938 7,500
------------ ------------ -------------
988,878 999,938 986,071
------------ ------------ -------------
Nu Horizons Electronics Corp. - O.T.C.
A distributor of high technology active and
passive electronic devices.
8.25% Convertible Subordinated Note due
2002, convertible into 78,433 shares of
common stock at $9 per share $ 705,900 8/31/94 714,159 705,900 734,277
------------ ------------ -------------
PanEnergy Corporation - N.Y.S.E.
An owner and operator of natural gas gathering,
transmission and processing facilities.
9% Convertible Subordinated Note due 2004,
convertible into 67,781 shares of common
stock at $22.13 per share $ 1,500,000 12/30/92 1,467,000 1,500,000 2,630,700
------------ ------------ -------------
PAR Acquisition Corp.
A manufacturer of fuel handling systems for nuclear
power plants and hazardous waste.
14.5% Senior Subordinated Note due 2000 $ 833,333 2/5/93 832,000 833,333 850,750
8% Convertible Preferred Stock due 2001,
convertible into 83,333 shares of common
stock at $2 per share 83,333 shs. 2/5/93 166,667 166,667 151,783
Common Stock (B) 133,333 shs. 2/5/93 333,333 333,333 160,000
------------ ------------ -------------
1,332,000 1,333,333 1,162,533
------------ ------------ -------------
*12/1/95, 2/27/96 and 8/5/96.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares, Units,
Warrants or Fair Value Fair Value
Principal Acquisition at Acquisition Cost at 3/31/97
Corporate Restricted Securities: (A) (Continued) Amount Date Date (Note 2B) (Note 2A)
--------------- ------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Paribas Capital Funding LLC
A collateralized loan obligation managed by
the U.S. Merchant Banking Group of Banque
Paribas
Subordinated Floating Rate Note due 2010 $ 1,312,500 * $ 1,307,600 $ 1,312,500 $ 1,305,281
--------------- ------------ ------------
Pharmaceutical Buyers, Inc.
A group purchasing organization which specializes
in arranging and negotiating contracts for the
purchase of pharmaceutical goods and medical equipment
10.5% Senior Secured Note due 2005 $ 408,750 11/30/95 425,958 408,750 409,404
10.5% Senior Secured Convertible Note due
2005, convertible into 2 shares of common
stock at $50,000 per share $ 97,500 11/30/95 102,677 97,500 102,609
Common Stock (B) 3 shs. 11/30/95 126,750 169,000 126,750
--------------- ------------ ------------
655,385 675,250 638,763
--------------- ------------ ------------
Piedmont Holding, Inc.
A general aviation fixed based operator with repair,
maintenance and overhaul certification
12% Senior Subordinated Note due 2001 $ 1,357,151 7/15/92 1,368,280 1,357,151 1,392,030
Senior Redeemable Cumulative Preferred Stock 140,983 shs. 7/15/92 140,983 140,983 140,983
Common Stock (B) 1,887 shs. 7/15/92 1,283 1,887 33,513
Warrant, exercisable until 2001, to purchase
2,521 shares of common stock at $.05 per
share (B) 2,521 shs. 7/15/92 1,613 -- 44,672
--------------- ------------ ------------
1,512,159 1,500,021 1,611,198
--------------- ------------ ------------
Plastipak Packaging, Inc.
A manufacturer of plastic containers
10.64% Senior Subordinated Note due 2006 $ 1,750,000 10/25/96 1,701,875 1,705,073 1,696,275
Warrant, exercisable until 2006, to purchase 49
shares of common stock at $.01 per share (B) 49 shs. 10/25/96 27,796 46,813 31,101
--------------- ------------ ------------
1,729,671 1,751,886 1,727,376
--------------- ------------ ------------
Precision Dynamics, Inc.
A manufacturer of custom-designed solenoid
valves and controls
Senior Secured Floating Rate Revolving
Credit Facility due 2003 $ 195,600 7/22/96 193,664 195,600 193,800
Senior Secured Floating Rate Term Note
due 2003 $ 1,467,000 7/22/96 1,452,623 1,467,000 1,454,530
12% Senior Secured Term Note due 2004 $ 245,000 7/22/96 241,766 198,375 242,403
8% Preferred Stock 116 shs. 7/22/96 110,115 115,911 110,115
Common Stock (B) 300 shs. 7/22/96 10,868 14,489 10,868
Warrant, exercisable until 2004, to purchase
161 shares of common stock at $.01 per
share (B) 161 shs. 7/22/96 2 49,000 2
--------------- ------------ ------------
2,009,038 2,040,375 2,011,718
--------------- ------------ ------------
Protein Genetics, Inc.
A producer of bovine artificial insemination
products, related breeding and healthcare products
and specialty genetics sold to the dairy and beef
industries
11.67% Senior Secured Note due 2004 $ 400,000 8/12/94 394,720 400,000 326,560
11.51% Junior Secured Note due 1999 $ 266,667 8/12/94 261,014 266,667 209,040
9.8% Redeemable Exchangeable Preferred Stock 3,333 shs. 8/12/94 282,634 333,333 128,000
Common Stock (B) 497 shs. 8/12/94 5 -- 4
--------------- ------------ ------------
938,373 1,000,000 663,604
--------------- ------------ ------------
</TABLE>
*12/20/96 and 3/20/97.
- --------------------------------------------------------------------------------
13
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares, Units,
Warrants or Fair Value Fair Value
Principal Acquisition at Acquisition Cost at 3/31/97
Corporate Restricted Securities: (A) (Continued) Amount Date Date (Note 2B) (Note 2A)
-------------- ----------- -------------- -------- ----------
<S> <C> <C> <C> <C> <C>
RailTex, Inc. - O.T.C.
An operator of short-line railroads in the
Midwest, West and Canada.
12% Senior Subordinated Note due 2002 $ 750,000 2/16/93 $ 799,575 $ 750,000 $ 836,850
Common Stock (B) 17,750shs. 2/16/93 170,454 170,400 280,339
---------- ---------- ----------
970,029 920,400 1,117,189
Rent-Way, Inc. - O.T.C. ---------- ---------- ----------
Operates rent-to-own stores in Ohio,
Pennsylvania and New York.
10% Convertible Subordinated Note due 2002,
convertible into 100,604 shares of common
stock at $9.94 per share $1,000,000 7/18/95 1,000,000 1,000,000 1,059,900
Warrant, exercisable until 2002, to purchase
10,000 shares of common stock at $9.94
per share (B) 10,000shs. 7/18/95 -- -- 5,530
---------- ---------- ----------
1,000,000 1,000,000 1,065,430
Rogers Cablesystems Limited ---------- ---------- ----------
A provider of cable television service in Canada.
11.09% Senior Subordinated Note due 2000 $ 500,000 6/20/90 493,450 500,000 506,650
---------- ---------- ----------
A.T.-Sentinel, Inc.
A leveraged lease transaction guaranteed by E.I.
Dupont, the chemical company.
9.52% First Preferred Ship Mortgage Note
due 1998 $ 538,827 8/22/89 533,007 546,910 542,330
---------- ---------- ----------
Sequentia, Inc.
A manufacturer and distributor of fiberglass
reinforced panels used in commercial,
industrial and residential applications.
12% Subordinated Note due 2004 $1,140,700 12/14/95 1,209,142 922,805 855,525
Limited Partnership Interest of KS Holdings, L.P. 3,593uts. 12/14/95 265,425 339,371 35,930
Warrant, exercisable until 2004, to purchase
2,725 units of Limited Partnership Interest of
KS Holdings, L.P. at $.01 per unit (B) 2,725uts. 12/14/95 2,725 239,547 1,363
---------- ---------- ----------
1,477,292 1,501,723 892,818
Star International Holdings, Inc. ---------- ---------- ----------
A manufacturer of commercial cooking appliances.
9.65% Senior Secured Note due 2004 $ 416,417 5/27/94 397,387 416,417 408,755
10.5% Subordinated Note due 2004 $ 179,104 5/27/94 162,913 179,104 169,665
Common Stock (B) 1,077shs. 5/27/94 58,414 64,904 11,269
Warrant, exercisable until 2004, to purchase 806
shares of common stock at $.01 per share (B) 806shs. 5/27/94 8 -- 8,427
---------- ---------- ----------
618,722 660,425 598,116
Stonehurst I LLC ---------- ---------- ----------
A wholly owned subsidiary of Tenneco, Inc., whose
business includes natural gas, auto parts and
packaging.
Floating Rate Subordinated Note due 2004 $1,444,500 12/29/94 1,444,500 1,444,500 1,444,500
5.05% Membership Interest 5,050int. 12/29/94 55,000 51,237 55,500
---------- ---------- ----------
1,499,500 1,495,737 1,500,000
---------- ---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
14
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares, Units
Warrants or Fair Value
Principal Acquisition at Acquisition Cost
Corporate Restricted Securities: (A) (Continued) Amount Date Date (Note 2B)
---------------- ------------- ---------------- -----------
<S> <C> <C> <C> <C>
Swing N'Slide Corporation - A.S.E. A manufacturer
and distributor of home playground equipment
and accessories.
12% Subordinated Note due 2005 $ 1,562,500 3/13/97 $ 1,292,500 $ 1,223,286
Limited Partnership Interest of Green Grass
Capital II, LLC 40,774 uts. 3/13/97 146,786 223,750
Warrant, exercisable until 2005, to purchase
74,002 units of Limited Partnership Interest of
Green Grass Capital II, LLC at $.01 per unit (B) 74,022 uts. 3/13/97 265,887 340,361
----------- -----------
1,705,173 1,787,397
----------- -----------
Team Rental Group, Inc. - O.T.C.
An operator of Budget Rent-A-Car franchises, retail
used car sales facilities and van pool territories.
7% Convertible Subordinated Note due 2003,
convertible into 49,611 shares of common stock
at $20.16 per share $ 1,000,000 12/18/96 899,220 1,000,000
----------- -----------
Telex Communications, Inc.
A producer of electronic and communications products.
Warrant, exercisable until 2004, to purchase 5,544
shares of common stock at $.01 per share (B) 5,544 shs. 5/30/89 55 6
----------- -----------
Tidewater Holdings, Inc.
An operator of a barge transportation line on the
Columbia/Snake River system.
12.5% Senior Subordinated Note due 2006 $ 1,190,000 7/25/96 1,194,046 1,167,146
Convertible Preferred Stock, convertible into
560 shares of common stock at $1,000 per
share (B) 560 shs. 7/25/96 504,000 560,000
Warrant, exercisable until 2008, to purchase
237 shares of common stock at $.01 per
share (B) 237 shs. 7/25/96 21 24,103
----------- -----------
1,698,067 1,751,249
----------- -----------
TransMontaigne Oil Company - A.S.E. An independent
petroleum products marketing company.
12.75% Senior Subordinated Debenture due 2000 $ 1,200,000 3/28/91 1,274,280 1,179,333
Common Stock (B) 203,165 shs. * 490,810 598,597
Warrant, exercisable until 2001, to purchase
74,606 shares of common stock at $3.60
per share (B) 74,606 shs. 3/28/91 7,461 42,000
----------- -----------
1,772,551 1,819,930
----------- -----------
Trend Plastics, Inc.
A manufacturer and assembler of plastic injection
molded parts.
12% Subordinated Note due 2005 $ 1,256,800 3/21/97 1,296,389 1,255,236
Limited Partnership Interest of Riverside V
Holding Company L.P. 1,091 uts. 3/21/97 133,532 147,832
Limited Partnership Interest of Riverside V-A
Holding Company L.P. 2,335 uts. 3/21/97 302,512 316,309
Warrant, exercisable until 2005, to purchase
1,564 units of Limited Partnership Interest at
$.01 per unit (B) 1,564 uts. 3/21/97 1,564 1,564
----------- -----------
1,733,997 1,720,941
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Fair Value
at 3/31/97
Corporate Restricted Securities: (A) (Continued) (Note 2A)
--------------
<S> <C>
Swing N'Slide Corporation - A.S.E. A manufacturer
and distributor of home playground equipment
and accessories.
12% Subordinated Note due 2005 $ 1,287,500
Limited Partnership Interest of Green Grass
Capital II, LLC 140,670
Warrant, exercisable until 2005, to purchase
74,002 units of Limited Partnership Interest of
Green Grass Capital II, LLC at $.01 per unit (B) 254,784
-------------
1,682,954
-------------
Team Rental Group, Inc. - O.T.C.
An operator of Budget Rent-A-Car franchises, retail
used car sales facilities and van pool territories.
7% Convertible Subordinated Note due 2003,
convertible into 49,611 shares of common stock
at $20.16 per share 934,400
-------------
Telex Communications, Inc.
A producer of electronic and communications products.
Warrant, exercisable until 2004, to purchase 5,544
shares of common stock at $.01 per share (B) 2,494,800
-------------
Tidewater Holdings, Inc.
An operator of a barge transportation line on the
Columbia/Snake River system.
12.5% Senior Subordinated Note due 2006 1,197,854
Convertible Preferred Stock, convertible into
560 shares of common stock at $1,000 per
share (B) 504,000
Warrant, exercisable until 2008, to purchase
237 shares of common stock at $.01 per
share (B) 21
-------------
1,701,875
-------------
TransMontaigne Oil Company - A.S.E. An independent
petroleum products marketing company.
12.75% Senior Subordinated Debenture due 2000 1,246,920
Common Stock (B) 1,904,672
Warrant, exercisable until 2001, to purchase
74,606 shares of common stock at $3.60
per share (B) 538,282
-------------
3,689,874
-------------
Trend Plastics, Inc.
A manufacturer and assembler of plastic injection
molded parts.
12% Subordinated Note due 2005 1,290,985
Limited Partnership Interest of Riverside V
Holding Company L.P. 133,532
Limited Partnership Interest of Riverside V-A
Holding Company L.P. 302,512
Warrant, exercisable until 2005, to purchase
1,564 units of Limited Partnership Interest at
$.01 per unit (B) 1,564
-------------
1,728,593
-------------
</TABLE>
- --------------------------------------------------------------------------------
15
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares, Units,
Warrants or Fair Value Fair Value
Principal Acquisition at Acquisition Cost at 3/31/97
Corporate Restricted Securities: (A) (Continued) Amount Date Date (Note 2B) (Note 2A)
-------------- ------------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Unidata, Inc.
A manufacturer and distributor of database
management software.
11.5% Senior Subordinated Note due 2003 $ 1,250,000 12/14/95 $1,269,250 $1,198,932 $1,149,500
Common Stock (B) 62,500 shs. 12/14/95 187,500 250,000 187,500
Warrant, exercisable until 2003, to purchase
31,250 shares of common stock at $1 per
share (B) 31,250 shs. 12/14/95 313 62,125 313
-------------- ------------- ------------
1,457,063 1,511,057 1,337,313
-------------- ------------- ------------
Unipac Corporation
A manufacturer of laminated materials which are
used to seal a variety of packaging containers.
Senior Secured Floating Rate Note due 2002 $ 425,156 2/9/96 420,649 425,156 425,156
12% Senior Secured Note due 2004 $ 121,875 2/9/96 123,435 110,102 125,105
Acquisition Line of Credit due 2002 $ 375,000 9/30/96 375,000 375,000 375,000
Limited Partnership Interest of Riverside II
Holding Company L.P. 61 uts. * 56,368 108,617 162,594
Warrant, exercisable from 2000 until 2004,
to purchase 21 units of Limited Partnership
Interest of Riverside II Holding Company L.P.
at $.01 per unit (B) 21 uts. 2/9/96 2 20,156 54,711
-------------- ------------- ------------
975,454 1,039,031 1,142,566
-------------- ------------- ------------
Uno-Ven Company
A partnership in an oil refinery and related
midwestern marketing operations.
10.1% Senior Secured Note due 2003 $ 771,429 12/1/89 752,299 771,429 802,054
-------------- ------------- ------------
USAir, Inc.
A domestic and international airline.
10.8% Series A Secured Loan Certificates
due 2003 $ 427,743 6/29/94 363,582 376,608 408,956
-------------- ------------- ------------
U.S. Netting, Inc.
A manufacturer of plastic netting for a wide
variety of industries.
11% Senior Secured Note due 2005 $ 838,800 5/3/95 927,545 838,800 887,367
12% Subordinated Note due 2005 $ 326,200 5/3/95 326,200 310,161 349,295
Common Stock (B) 2,457 shs. 5/3/95 81,376 195,720 18,177
Warrant, exercisable until 2005, to purchase
1,398 shares of common stock at $.01
per share (B) 1,398 shs. 5/3/95 46,291 17,971 10,330
-------------- ------------- ------------
1,381,412 1,362,652 1,265,169
-------------- ------------- ------------
U.S. Silica Company
A producer of high grade industrial and specialty
ground silica sands in North America.
15% Senior Subordinated Notes due 2005 $ 1,172,534 ** 1,245,102 1,172,469 1,228,581
Redeemable Preferred Stock Series A (B) 20,999 shs. 12/19/96 145,827 194,435 145,825
Convertible Preferred Stock Series B,
convertible into 41,988 shares of Series B
common stock at $9.26 per share (B) 41,998 shs. 12/19/96 291,648 388,865 291,650
Warrants, exercisable until 2005, to purchase
3,241 units of Series A Preferred Stock and
6,482 units of Series B Preferred Stock at $.01
per unit (B) 3,241 uts. 12/19/96 6,482 65 3,241
-------------- ------------- ------------
1,689,059 1,755,834 1,669,297
-------------- ------------- ------------
</TABLE>
*2/9/96 and 9/25/96.
**12/19/96 and 2/15/97.
- --------------------------------------------------------------------------------
16
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares, Units,
Warrants or Fair Value Fair Value
Principal Acquisition at Acquisition Cost at 3/31/97
Corporate Restricted Securities: (A) (Continued) Amount Date Date (Note 2B) (Note 2A)
-------------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Valero Energy Corporation
An owner and operator of a specialized
petroleum refinery and engages in
petroleum product marketing operations
10.58% Senior Note due 2000 $ 285,714 12/20/90 $ 290,478 $ 285,714 $ 294,257
-------------- ------------ ------------
Sub-Total Corporate Restricted Securities $ 71,584,135 73,138,341 78,870,982
============== ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Market Value
Interest Due Principal Cost at 3/31/97
Rule 144A Securities: (A) Rate Date Amount (Note 2B) (Note 2A)
-------------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Convertible Bonds -- 3.13%
Continental Airlines, Inc. 6.750% 4/15/06 $ 300,000 278,625 366,000
CUC International Inc. 3.000 2/15/02 600,000 600,000 588,000
Grand Metropolitan PLC 6.500 1/31/00 300,000 300,000 349,500
Imax Corporation 5.750 4/01/03 550,000 525,125 539,000
Marriott International, Inc. 0.000 3/25/11 500,000 277,698 272,500
Molten Metal Technology 5.500 5/01/06 450,000 450,000 261,000
Renal Treatment Centers, Inc. 5.625 7/15/06 225,000 225,000 204,750
The Sports Authority, Inc. 5.250 9/15/01 70,000 70,000 63,350
Sunglass Hut International, Inc. 5.250 6/15/03 380,000 352,913 285,000
Thermo Electron Corporation 4.250 1/01/03 175,000 175,000 181,563
Thermo Terratech, Inc. 4.625 5/01/03 45,000 45,000 41,738
------------- ------------ -----------
Sub-Total Rule 144A Convertible Bonds $ 3,595,000 3,299,361 3,152,401
============= ------------ -----------
Bonds -- 6.02%
Anchor Advanced Products 11.750 4/01/04 $ 300,000 300,000 302,250
Atlantic Express 10.750 2/01/04 500,000 500,000 503,750
Enserch Exploration, Inc. 7.540 1/02/09 1,000,000 1,000,000 968,750
Keystone Auto Grantor Trust 6.150 4/15/03 843,899 843,637 838,167
Paiton Energy Funding 9.340 2/15/14 1,000,000 1,000,000 990,000
Petroleum Enhanced Trust 6.062 2/05/03 952,937 952,937 952,937
T C W Leveraged Income Trust, LP 8.410 3/31/04 1,500,000 1,500,000 1,500,000
------------- ------------ -----------
Sub-Total Rule 144A Bonds $ 6,096,836 6,096,574 6,055,854
============= ------------ -----------
</TABLE>
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares, Warrants Market Value
Interest Due or Principal Cost at 3/31/97
Rule 144A Securities: (A) (Continued) Rate Date Amount (Note 2B) (Note 2A)
---------- ------ ------------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
Convertible Preferred Stock - .31%
McKesson Corporation 2,290 $ 114,500 $ 120,798
Qualcomm Financial Trust 3,860 193,000 192,035
----------- ------------
Sub-Total Rule 144A Convertible
Preferred Stock 307,500 312,833
----------- ------------
Total Rule 144A Securities 9,703,435 9,521,088
----------- ------------
Total Corporate Restricted Securities 82,841,776 88,392,070
----------- ------------
Corporate Public Securities:
Convertible Bonds - 2.77%
Continental Airlines 6.750% 4/15/06 $ 200,000 185,500 244,000
Diamond Offshore Drilling 3.750 2/15/07 125,000 125,000 133,438
Hilton Hotels, Inc. 5.000 5/15/06 695,000 695,000 695,000
Home Depot, Inc. 3.250 10/1/01 450,000 443,500 450,000
Magna International, Inc. 5.000 10/15/02 250,000 255,625 269,375
Savoy Pictures Entertainment, Inc. 7.000 7/1/03 650,000 505,375 526,500
USA Waste Services, Inc. 4.000 2/1/02 450,000 450,000 465,750
------------ ----------- ------------
Total Convertible Bonds $ 2,820,000 2,660,000 2,784,063
============ ----------- ------------
Bonds - 11.11%
Airplanes Pass Thru Trust 8.150 3/15/19 $ 1,500,000 1,498,674 1,575,000
American Airlines, Inc. 9.780 11/26/11 1,000,000 1,000,000 1,118,750
Central Rents, Inc. 12.875 12/15/03 800,000 751,650 808,000
Comdisco Inc. 7.750 9/1/99 1,500,000 1,598,265 1,529,775
Data Documents, Inc. 13.500 7/15/02 1,429,000 1,433,158 1,586,190
Decorative Home Accents, Inc. 13.000 6/30/02 350,000 350,000 175,000
Florist Transworld Delivery, Inc. 14.000 12/15/01 375,000 364,059 378,750
Great American Cookie Co. 10.875 1/15/01 300,000 289,500 288,000
Hosiery Corporation of America 13.750 8/1/02 500,000 493,900 550,000
Key Plastics, Inc. 14.000 11/15/99 350,000 354,912 386,750
Northwest Airlines Corp. 12.091 12/31/00 808,683 834,965 847,095
Northwest Airlines Corp. 8.970 1/2/15 986,709 986,709 1,045,911
Telex Communications, Inc. 12.000 7/15/04 750,000 750,000 840,000
Vintage Petroleum 8.625 2/1/09 50,000 46,579 47,125
------------ ----------- ------------
Total Bonds $ 10,699,392 10,752,371 11,176,346
============ ----------- ------------
Warrants - .01%
Barringer Technologies, Inc. (B) 5,800 290 5,800
----------- ------------
Total Warrants 290 5,800
----------- ------------
</TABLE>
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Market Value
Cost at 3/31/97
Corporate Public Securities: (Continued) Shares (Note 2B) (Note 2A)
------------ ------------ ------------
<S> <C> <C> <C>
Common Stock - 3.16%
America West Airlines, Inc. (B) 2,100 $ 42,126 $ 32,813
Atlas Air, Inc. (B) 2,600 52,650 68,250
Barringer Technologies, Inc. (B) 4,500 38,534 41,625
Benson Petroleum, Ltd. (B) 100,000 77,204 75,800
Central Rents, Inc. (B) 930 33,722 46,500
Chesapeake Energy Corporation (B) 5,000 168,125 104,375
Collins & Aikman Corporation (B) 17,400 104,238 150,075
Computer Horizons Corporation 16,650 146,925 516,150
Data Documents, Inc. (B) 10,717 16 111,189
Dawson Production Services (B) 14,000 175,000 171,500
Decorative Home Accents, Inc. (B) 350 -- --
Florist Transworld Delivery, Inc. (B) 4,687 13,754 23,435
4Health Inc. (B) 6,000 33,375 33,378
Health and Retirement Property Trust 5,000 94,375 90,000
Hosiery Corporation of America 500 -- 35,000
Hvide Marine, Inc. (B) 5,400 134,325 122,850
LCS Industries, Inc. 15,000 234,356 213,750
Marker International (B) 30,000 187,500 135,000
Red Roof Inns, Inc. (B) 19,200 272,607 302,400
Staffing Resources, Inc. 45,000 247,500 652,500
U.S. Rentals Inc. (B) 9,000 180,000 163,125
Western Systems Corporation (B) 54,000 188,722 91,152
------------ ------------
Total Common Stock 2,425,054 3,180,867
------------ ------------
Convertible Preferred Stock - 1.47%
Merrill Lynch & Co. 13,500 308,813 276,750
Occidental Petroleum Corporation 6,830 341,500 454,195
RXI Holdings, Inc. 112,720 112,753 113
SFX Broadcasting, Inc. 17,400 804,150 748,200
------------ ------------
Total Convertible Preferred Stock 1,567,216 1,479,258
------------ ------------
Total Corporate Public Securities 17,404,931 18,626,334
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
19
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Market Value
Due Principal Cost at 3/31/97
Short-Term Securities: Yield Date Amount (Note 2B) (Note 2A)
--------- -------- -------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Commercial Paper - 1.99%
Aristar, Inc. 5.776% 4/1/97 $ 194,000 $ 194,000 $ 194,000
Aristar, Inc. 6.250 4/1/97 1,300,000 1,300,000 1,300,000
ConAgra, Inc. 5.975 4/1/97 110,000 110,000 110,000
Countrywide Home Loans, Inc. 5.651 4/2/97 395,000 394,938 394,938
------------- ------------ ------------
Total Short-Term Securities $ 1,999,000 1,998,938 1,998,938
============= ------------ ------------
Total Investments - 108.39% $102,245,645 109,017,342
============ ------------
Other Assets - 4.38 4,409,638
Liabilities - (12.77) (12,844,560)
------ ------------
Total Net Assets - 100.00% $100,582,420
====== ============
</TABLE>
(A) In each of the convertible note, warrant, convertible preferred and common
stock investments, the issuer has agreed to provide certain registration
rights.
(B) Non-income producing security.
INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
Fair Value
at 3/31/97
Corporate Restricted Securities: (Note 2A)
------------
<S> <C>
ADVERTISING - .18%
Ammirati & Puris, Inc. $ 177,517
------------
BEVERAGE - 1.73%
Associated Vintage Group, Inc. 1,740,234
------------
BUILDING MATERIALS - .58%
Highland Homes Holdings, Inc. 580,864
------------
CHEMICAL - 4.18%
AccTech, LLC 1,925,787
Hatco Corporation 1,740,025
A.T.-Sentinel, Inc. 542,330
------------
4,208,142
------------
COMMUNICATIONS - 3.81%
Classic Sports, Inc. 386,666
Latin Communications Group 442,190
Rogers Cablesystems Limited 506,650
Telex Communications, Inc. 2,494,800
------------
3,830,306
------------
ELECTRICAL EQUIPMENT/
ELECTRONICS - 8.58%
Catalina Lighting, Inc. 348,263
Cirrus Logic, Inc. 1,397,487
CompuCom Systems, Inc. 1,047,143
Control Devices, Inc. 652,498
Exide Electronics Group, Inc. 1,184,776
Intermetrics, Inc. 1,070,726
Nu Horizons Electronics Corp. 734,277
Precision Dynamics, Inc. 2,011,718
Thermo Electron Corporation 181,563
------------
8,628,461
------------
HEALTH CARE - .95%
Berkshire Medical Center, Inc. 629,739
McKesson Corporation 120,798
Renal Treatment Centers, Inc. 204,750
------------
955,287
------------
LEASING - .98%
Boyle Leasing Technologies, Inc. 990,700
------------
</TABLE>
- --------------------------------------------------------------------------------
20
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
March 31, 1997
INDUSTRY CLASSIFICATION (Continued)
<TABLE>
<CAPTION>
Fair Value
at 3/31/97
Corporate Restricted Securities: (Continued) (Note 2A)
--------------
<S> <C>
MANUFACTURING-INDUSTRIAL AND
CONSUMER PRODUCTS - 28.37%
Anchor Advanced Products $ 302,250
C&K Manufacturing and Sales Company 1,727,518
Consumer Product Enterprises, Inc. 1,046,683
Contico International, Inc. 511,950
CUC International Inc. 588,000
Elgin National Industries, Inc. 1,610,210
Firth Rixson, Inc. 217,475
Fleming Acquisition Corporation 1,404,836
Hein-Werner Corp. 1,133,251
Hudson River Capital 237,500
Hussey Seating Company 1,805,108
Imax Corporation 539,000
Jackson Products, Inc. 1,401,850
Kappler Safety Group, Inc. 1,688,295
Kuhlman Corporation 580,236
Maxtec International Corp. 531,930
PAR Acquisition Corp. 1,162,533
Plastipak Packaging, Inc. 1,727,376
Sequentia, Inc. 892,818
Star International Holdings, Inc. 598,116
Swing N'Slide Corporation 1,682,954
Trend Plastics, Inc. 1,728,593
Unidata, Inc. 1,337,313
Unipac Corporation 1,142,566
U.S. Netting, Inc. 1,265,169
U.S. Silica Company 1,669,297
------------
28,532,827
------------
METAL FABRICATING - .26%
Molten Metal Technology 261,000
------------
MISCELLANEOUS - 9.16%
Enserch Exploration, Inc. 968,750
Keystone Auto Grantor Trust 838,167
Marriott International, Inc. 272,500
NM Holdings LLC 986,071
Paiton Energy Funding 990,000
Paribas Capital Funding LLC 1,305,281
Protein Genetics, Inc. 663,604
Qualcomm Financial Trust 192,035
Stonehurst I LLC 1,500,000
T C W Leveraged Income Trust, LP 1,500,000
------------
9,216,408
------------
OIL AND GAS SERVICE - 13.02%
American Exploration Company 1,492,121
BP Prudhoe Bay Royalty Trust 212,689
Hardy Oil & Gas USA, Inc. 1,673,749
Maloney Industries, Inc. 1,350,013
PanEnergy Corporation 2,630,700
Petroleum Enhanced Trust 952,937
TransMontaigne Oil Company 3,689,874
Uno-Ven Company 802,054
Valero Energy Corporation 294,257
------------
13,098,394
------------
RECREATIONAL SUPPLIES/
EQUIPMENT - .70%
The Coast Distribution System 703,180
------------
RETAILING - 5.91%
J. Baker, Inc. 887,076
Cains Foods, L.P. 1,564,579
Discount Auto Parts 1,093,365
Grand Metropolitan PLC 349,500
Pharmaceutical Buyers, Inc. 638,763
Rent-Way, Inc. 1,065,430
The Sports Authority, Inc. 63,350
Sunglass Hut International, Inc. 285,000
------------
5,947,063
------------
SERVICES - 9.47%
Atlantic Aviation Corporation 562,883
Atlantic Express 503,750
Continental Airlines, Inc. 366,000
Corrections Corporation of America 268,941
Diversco, Inc. 1,863,884
Hunton & Williams 140,873
Piedmont Holding, Inc. 1,611,198
RailTex, Inc. 1,117,189
Team Rental Group, Inc. 934,400
Thermo Terratech, Inc. 41,738
Tidewater Holdings, Inc. 1,701,875
USAir, Inc. 408,956
------------
9,521,687
------------
Total Corporate Restricted
Securities - 87.88% $ 88,392,070
============
</TABLE>
- --------------------------------------------------------------------------------
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS MASSMUTUAL PARTICIPATION INVESTORS
(Unaudited)
1. History
MassMutual Participation Investors (the "Trust") was organized as a
Massachusetts business trust under the laws of the Commonwealth of
Massachusetts pursuant to a Declaration of Trust dated April 7, 1988.
The Trust is a closed-end diversified management investment company, whose
investment objective is to maximize total return by providing a high level
of current income, the potential for growth of such income, and capital
appreciation, by investing primarily in a portfolio of privately placed
fixed-income securities, at least half of which normally will include
equity features.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed
consistently by the Trust in the preparation of the financial statements in
conformity with generally accepted accounting principles.
A. Valuation of Investments:
Valuation of a security in the Trust's portfolio is made on the basis of
market price whenever market quotations are readily available and all
securities of the same class held by the Trust can be readily sold in such
market.
The value of restricted securities, and of any other assets for which there
are no reliable market quotations, is the fair value as determined in good
faith by the Board of Trustees of the Trust. Each restricted security is
valued by the Board at the time of the purchase thereof and at least
quarterly thereafter. The Trustees have established guidelines to aid in
the valuation of each security. Generally, restricted securities are
initially valued at cost or less to the Trust. Values greater or less than
cost are thereafter used for restricted securities in appropriate
circumstances. Among the factors ordinarily considered are the existence of
restrictions upon the sale of the security by the Trust; an estimate of the
existence and the extent of a market for the security; the extent of any
discount at which the security was acquired; the estimated period of time
during which the security will not be freely marketable; the estimated
expenses of registering or otherwise qualifying the security for public
sale; estimated underwriting commissions if underwriting would be required
to effect a sale; in the case of a convertible security, whether or not it
would trade on the basis of its stock equivalent; if it is a debt
obligation which would trade independently of any equity equivalent, the
current yields on comparable securities; the estimated amount of the
floating supply of such securities available; the proportion of the issue
held by the Trust; changes in the financial condition and prospects of the
issuer; the existence of merger proposals or tender offers affecting the
issuer; and in addition, any other factors affecting fair value, all in
accordance with the Investment Company Act of 1940. In making valuations,
opinions of counsel are relied upon as to whether or not securities are
restricted securities and as to the legal requirements for public sale.
When market quotations are readily available for unrestricted securities of
an issuer, restricted securities of the same class are generally valued at
a discount from the market price of such unrestricted securities. The
Board, however, considers all factors in fixing any discount, including the
filing of a registration statement for such securities under the Securities
Act of 1933 and any other developments which are likely to increase the
probability that the securities may be publicly sold by the Trust without
restriction.
The Board of Trustees of the Trust meets at least once in each quarter to
value the Trust's portfolio securities as of the close of business on the
last business day of the preceding quarter. This valuation requires the
approval of a majority of the Trustees of the Trust, including a majority
of the Trustees who are not interested persons of the Trust (otherwise than
as Trustees) or of Massachusetts Mutual Life Insurance Company
("MassMutual"), the Trust's investment adviser and administrator. In making
valuations, the Trustees will consider reports by MassMutual analyzing each
portfolio security in accordance with the relevant factors referred to
above. MassMutual has agreed to provide such reports to the Trust at least
quarterly.
The financial statements include restricted securities valued at
$88,392,070 (87.88% of net assets) as of March 31, 1997 ($66,698,402 at
March 31, 1996) whose values have been estimated by the Board of Trustees
in the absence of readily ascertainable market values. Due to 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.
The values for corporate public securities are stated at the last reported
sales price or at prices based upon quotations obtained from brokers and
dealers as of March 31, 1997, subject to discount where appropriate, and
are approved by the Trustees.
Short-term securities with more than sixty days to maturity are valued at
market and short-term securities having a maturity of sixty days or less
are valued at amortized cost which approximates market value.
- --------------------------------------------------------------------------------
22
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
B. Accounting for Investments:
Investment transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis.
The cost basis of debt securities is not adjusted for amortization of
premium since the Trust does not generally intend to hold such investments
until maturity; however, the Trust has elected to accrue for financial
reporting purposes, certain discounts which are required to be accrued for
federal income tax purposes.
Realized gains and losses on investment transactions and unrealized
appreciation and depreciation of investments are reported for financial
statement and federal income tax purposes on the identified cost method.
The Trust does not accrue income when payment is delinquent or when
management believes payment is questionable.
C. 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 revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
D. Federal Income Taxes:
No provision for federal taxes on net investment income and short-term
capital gains is considered necessary because the Trust has elected to be
taxed as a "regulated investment company" under the Internal Revenue Code,
and intends to maintain this qualification and to distribute substantially
all of its net taxable income to its shareholders. In any year when net
long-term capital gains are realized by the Trust, management, after
evaluating the prevailing economic conditions, will recommend to the
Trustees either to designate the net realized long-term gains as
undistributed and to pay the federal capital gains taxes thereon or to
distribute such net gains.
3. Investment Advisory and Administrative Services Fee
Under an investment advisory and administrative services contract with the
Trust, MassMutual has agreed to use its best efforts to present to the
Trust a continuing and suitable investment program consistent with the
investment objective and policies of the Trust. MassMutual has further
agreed that it will request each issuer of securities which MassMutual is
prepared to purchase in a private placement, and which would be consistent
with the investment policies of the Trust, to offer such securities also to
the Trust and that it will use its best efforts to insure that such request
is acceded to. MassMutual has agreed that, subject to such orders of the
Securities and Exchange Commission as may apply, it will invest
concurrently with the Trust in any such investment. MassMutual will also
represent the Trust in any negotiations with issuers, investment banking
firms, securities brokers or dealers and other institutions or investors
relating to the Trust's investments. Under the contract, MassMutual is
obligated to provide administration of the day-to-day operations of the
Trust and will provide the Trust with office space and office equipment,
safekeeping facilities, accounting and bookkeeping services, and necessary
executive, clerical and secretarial personnel for the performance of the
foregoing services.
For its services under the investment advisory and administrative services
contract, MassMutual is paid a quarterly advisory and administrative
services fee equal to .225% of the value of the Trust's net assets as of
the last business day of each fiscal quarter, an amount approximately
equivalent to .90% on an annual basis, provided that a majority of the
Trustees, including a majority of the Trustees who are not interested
persons of the Trust or of MassMutual, approve the valuation of the Trust's
net assets as of such day.
4. Note Payable
On July 15, 1995, the Trust sold to MassMutual at par a $12,000,000 Senior
Fixed Rate Convertible Note due July 15, 2002 (the "Note") which accrues at
6.93% per annum. The Note holder, at its option, can convert the principal
amount of the Note into common shares. The dollar amount of principal would
be converted into an equivalent dollar amount of common shares based upon
the average price of the common shares for ten business days prior to the
notice of conversion.
- --------------------------------------------------------------------------------
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. Purchases and Sales of Investments
<TABLE>
<CAPTION>
For the For the
three months three months
ended 3/31/97 ended 3/31/96
--------------- ---------------
Cost of Investments Acquired
----------------------------
<S> <C> <C>
Corporate restricted securities $ 13,087,901 $ 2,714,771
Corporate public securities 3,291,609 7,409,176
Short-term securities 66,782,394 86,724,182
Proceeds from Sales or Maturities
---------------------------------
Corporate restricted securities $ 6,365,793 $ 3,700,935
Corporate public securities 10,296,945 10,445,981
Short-term securities 69,739,482 83,359,815
</TABLE>
The aggregate cost of investments is the same for financial reporting and
federal income tax purposes as of March 31, 1997. The net unrealized
appreciation of investments for financial reporting and federal tax
purposes as of March 31, 1997 is $6,771,697 and consists of $11,917,819
appreciation and $5,146,122 depreciation.
The aggregate cost of investments was the same for financial reporting and
federal income tax purposes as of March 31, 1996. The net unrealized
appreciation of investments for financial reporting and federal tax
purposes as of March 31, 1996 was $5,513,165 and consisted of $8,630,563
appreciation and $3,117,398 depreciation.
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