<PAGE>
MassMutual
PARTICIPATION
INVESTORS
[LOGO OF PARTICIPATION INVESTORS APPEARS HERE]
REPORT for the NINE
MONTHS ENDED 9/30/98
<PAGE>
MassMutual Participation Investors
1295 State Street
Springfield, Massachusetts 01111
(413) 744-8480
[LOGO OF MPV APPEARS HERE]
[LOGO OF PARTICIPATION INVESTORS APPEARS HERE]
Adviser
Massachusetts Mutual
Life Insurance Company
Auditor
PricewaterhouseCoopers LLP
Springfield, Massachusetts 01101
Custodian
The Chase Manhattan Bank, N.A.
Transfer Agent & Registrar
Shareholder Financial Services, Inc.
P.O. Box 173673
Denver, Colorado 80217-3673
1-800-647-7374
Internet website: www.massmutual.com/mpv
Investment Objective and Policy
MassMutual Participation Investors, a closed-end investment company, had its
initial public offering in October 1988 and its shares are listed on the New
York Stock Exchange. The share price of Participation Investors can be found in
the financial section of most newspapers as "MasPrt" or "MassMuPrt" under the
New York Stock Exchange listings. The trading symbol is "MPV".
The investment objective of the Trust is to maximize total return by providing a
high level of current income, the potential for growth of income, and capital
appreciation, by investing primarily in a portfolio of privately placed
fixed-income securities, at least half of which normally include equity
features. The Trust will also invest in publicly-traded securities, again with
emphasis on convertible issues. Equity related issues provide the opportunity to
realize capital gains, which, if realized, will be reinvested in
income-producing securities, permitting the Trust to increase its future
dividend payments.
The Trust pays quarterly dividends from net investment income and intends to
distribute substantially all of its net income to shareholders each year. All
registered shareholders are automatically enrolled in Dividend Reinvestment and
Cash Purchase Plan unless cash distributions are requested.
Dividends are distributed in January, May, August, and November.
<PAGE>
TO THE SHAREHOLDERS OF MASSMUTUAL PARTICIPATION INVESTORS:
The following is a report for the first nine months of 1998.
The financial markets experienced significant turmoil during the third quarter.
Emerging market volatility and economic uncertainty caused high yield bonds,
small cap stocks, and convertible securities to post one of the worst quarters
on record. As tough as the markets were, the Trust experienced only a modest
decline in value with net assets falling to $11.82 per share at September 30,
1998 from $12.21 per share at June 30, 1998. As a result, the total return of
the Trust for the quarter was down 1.27%, but still up 6.77% year-to-date, as
measured by change in net assets with reinvestment of dividends.
By comparison, the S&P Industrial Stock Index was down 7.78% for the quarter and
up 9.56% year-to-date while the Lehman Government/Corporate Bond Index was up
4.95% for the quarter and up 9.33% year-to-date. However, the companies in which
we invest are generally much smaller than those found in the S&P or Lehman
Indices. Indices more representative of the type of companies in which we invest
would be the Merrill Lynch High Yield Index, which posted a loss of 3.58% during
the quarter, and the Russell 2000 Index, which declined 20.15% during the
quarter. Year-to-date these indices were up 0.77% and down 16.21% respectively.
Net investment income for the third quarter was $2,086,535 or 22.5 cents per
share compared to $2,186,277 or 23.6 cents per share a quarter ago. Part of the
decline in net income was attributable to a one-time expense of 0.5 cents per
share that the Trust incurred during the quarter. A quarterly dividend of $.24
per share was declared and is payable on November 12, 1998 to shareholders of
record on October 30, 1998.
The Trust realized over $6.4 million in gains (or $0.69 per share) during the
quarter. This brings our year-to-date capital gains to $10.0 million (or $1.08
per share.) Of the $1.08 per share, $.28 per share represents short-term capital
gains which, if not offset, must be distributed to shareholders each year.
However, given the recent market volatility, there can be no assurance that the
entire amount of short-term gains will not be offset by short-term losses before
year-end.
Of the $6.4 million in gains realized during the quarter, $5.1 million came from
four of our private placement investments. Sequentia, Inc., a manufacturer and
distributor of fiberglass reinforced panels, struggled initially, but ended up
repaying its subordinated notes and partnership interests leaving the Trust with
a realized gain of nearly $1.9 million. Unipac Corporation, a manufacturer of
laminated materials that are used to seal a variety of packaging containers,
repaid its senior notes and partnership interests leaving the Trust with a gain
of $1.2 million. TAAC International Corporation, a leading domestic manufacturer
of adhesives and sealants, also repaid its notes and preferred stock leaving the
Trust with a realized gain of $0.7 million. And finally, an additional gain was
realized from a sale that occurred in January 1998. We sold our warrants of
Hein-Werner Corporation back to the company in January of 1998. At that time, we
realized a gain on the sale. However, we also entered into an "option purchase
agreement", which stated that if another company acquired more than 51% of the
shares of Hein-Werner, there would be a price adjustment to the warrants we
sold. This indeed did occur when Snap-On Inc. bought Hein-Werner, and the Trust
received an additional $1.3 million.
Before the markets' volatility began to slow the flow of new private placement
investments, we were able to add some new and old names to our private placement
portfolio. The investment transactions included Diversco, Inc., Maloney
Industries Inc., Merit Industries, Olympic Boat Centers and Sharp International.
These investments have a weighted average coupon of over 11.79% on their fixed
income components. (A brief description of these investments is provided in the
Schedule of Investments.)
Our shareholders are probably aware of the global Year 2000 or "Y2K" issue.
MassMutual has been addressing the Y2K issue since 1996 and it is one of the
company's highest priorities. MassMutual's multi-year Project 2000 is currently
estimated to cost slightly less than $90 million enterprise-wide. Code
correction of all information technology department-supported applications is
expected to be substantially complete by December 31, 1998. MassMutual's
critical computer technology hardware and software is also expected to be "Year
2000 Compliant" according to MassMutual's standards by December 31, 1998. All
business areas are expected to be "Year 2000 Compliant" by June 30, 1999.
Testing will continue through 1999. MassMutual is currently identifying areas
requiring Year 2000 contingency plans and the decision points to execute them.
To address the issue of interdependency between the company and external
entities, MassMutual is seeking assurances from vendors, service providers and
governments to determine their Year 2000 readiness, and is verifying those
assurances wherever possible.
Although we approach this period of market volatility with caution, we view it
as an opportunity to prudently select portfolio companies. The Trustees and
management appreciate the continued interest and support of the shareholders of
MassMutual Participation Investors.
Sincerely,
/s/ Stuart H. Reese
Stuart H. Reese
President
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES MASSMUTUAL PARTICIPATION INVESTORS
September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Assets:
Investments (Notes 2A, 2B and 5)
(See Schedule of Investments)
Corporate restricted securities at fair value
(Cost 1998 - $94,106,974; 1997 - $104,641,759) $ 93,448,773 $ 112,419,920
Corporate public securities at market value
(Cost 1998 - $34,146,001; 1997 - $15,648,992) 32,532,091 17,412,982
Short-term securities at cost plus earned discount which
approximates market value 2,936,366 --
------------- -------------
128,917,230 129,832,902
Cash 262,815 2,296,531
Interest and dividends receivable, net 2,567,653 2,420,697
Receivable for investments sold 2,054,392 1,172,472
Other assets 4,043 4,043
------------- -------------
Total assets $ 133,806,133 $ 135,726,645
============= =============
Liabilities:
Payable for investments purchased $ 1,107,510 $ 3,583,377
Management fee payable (Note 3) 246,032 257,780
Note payable (Note 4A) 12,000,000 12,000,000
Revolving Credit Agreement (Note 4B) 10,500,000 5,000,000
Interest payable (Notes 4A and 4B) 248,899 197,140
Accrued expenses 108,787 119,289
------------- -------------
Total liabilities 24,211,228 21,157,586
------------- -------------
Net Assets:
Shares of beneficial interest, par value $.01 per share;
an unlimited number authorized 92,724 92,167
Additional paid-in capital 85,553,051 84,895,820
Retained net realized gain on investments, prior years 13,703,839 5,423,509
Undistributed net investment income (Note 2D) 2,497,586 2,208,865
Undistributed net realized gain on investments 10,019,816 12,406,547
Net unrealized appreciation (depreciation) of investments (Notes 2A, 2B and 5) (2,272,111) 9,542,151
------------- -------------
Total net assets 109,594,905 114,569,059
------------- -------------
Total liabilities and net assets $ 133,806,133 $ 135,726,645
============= =============
Shares of beneficial interest issued and outstanding 9,272,411 9,216,665
============= =============
Net asset value per share $ 11.82 $ 12.43
============= =============
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
2
<PAGE>
STATEMENT OF OPERATIONS MASSMUTUAL PARTICIPATION INVESTORS
For the nine months ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Investment Income (Note 2B):
Interest $ 8,336,117 $ 7,306,936
Dividends 268,160 210,102
------------ ------------
Total income 8,604,277 7,517,038
------------ ------------
Expenses:
Management fee (Note 3) 750,503 725,742
Trustees' fees and expenses 64,815 45,032
Transfer Agent/Registrar's expenses 40,755 32,947
Custodian's fees 6,000 --
Interest (Notes 4A and 4B) 1,107,865 660,479
Reports to shareholders 9,000 10,000
Audit and legal 30,960 29,960
Other 59,644 32,405
------------ ------------
Total expenses 2,069,542 1,536,565
------------ ------------
Net investment income (1998 - $.70 per share; 1997 - $.65 per share) 6,534,735 5,980,473
------------ ------------
Net realized and unrealized gain (loss) on investments (Notes 2A and 2B):
Net realized gain on investments 10,023,855 12,368,092
Net change in unrealized appreciation/depreciation of investments (9,337,204) 2,845,468
------------ ------------
Net gain on investments 686,651 15,213,560
------------ ------------
Net increase in net assets resulting from operations $ 7,221,386 $ 21,194,033
============ ============
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
3
<PAGE>
STATEMENT OF CASH FLOWS MASSMUTUAL PARTICIPATION INVESTORS
For the nine months ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Net increase (decrease) in cash:
Cash flows from operating activities:
Interest and dividends received $ 8,077,413 $ 6,343,852
Interest expense paid (1,081,787) (634,279)
Operating expenses paid (1,057,225) (862,631)
Federal income tax paid (4,438,637) (2,606,720)
------------ ------------
Net cash provided by operating activities 1,499,764 2,240,222
------------ ------------
Cash flows from investing activities:
Change in short-term portfolio securities, net (1,422,796) 5,012,546
Purchase of portfolio securities (53,498,018) (70,732,435)
Proceeds from disposition of portfolio securities 60,997,589 68,341,950
------------ ------------
Net cash provided by investing activities 6,076,775 2,622,061
------------ ------------
Net cash provided by operating and investing activities 7,576,539 4,862,283
------------ ------------
Cash flows from financing activities:
Increase in receipts for shares issued on reinvestment of dividends 657,788 (5,672,704)
Cash dividends paid from net investment income (6,289,638) (1,884,962)
Cash dividends paid from net realized gain on investments (1,744,715) 5,000,000
Cash paid for issuance of debt -- (12,500)
------------ ------------
Net cash used for financing activities (7,376,565) (2,570,166)
------------ ------------
Net increase in cash 199,974 2,292,117
Cash - beginning of year 62,841 4,414
------------ ------------
Cash - end of period $ 262,815 $ 2,296,531
============ ============
Reconciliation of net increase (decrease) in net assets to net cash from
operating and investing activities:
Net increase in net assets resulting from operations $ 7,221,386 $ 21,194,033
------------ ------------
(Increase) decrease in investments 6,026,990 (19,126,391)
Increase in interest and dividends receivable, net (177,299) (880,258)
(Increase) decrease in receivable for investments sold (1,970,060) 2,797,630
Increase in other assets (4,043) (4,043)
Increase in payable for investments purchased 1,007,510 3,448,377
Increase in management fee payable 7,182 39,184
Increase in interest payable 26,078 26,200
Increase in amortized bond issuance costs -- 12,500
Decrease in accrued expenses (102,566) (38,229)
Decrease in accrued taxes (4,458,639) (2,606,720)
------------ ------------
Total adjustments to net assets from operations 355,153 (16,331,750)
------------ ------------
Net cash provided by operating and investing activities $ 7,576,539 $ 4,862,283
============ ============
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
4
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS MASSMUTUAL PARTICIPATION INVESTORS
For the nine months ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 6,534,735 $ 5,980,473
Net realized gain on investments 10,023,855 12,368,092
Net change in unrealized appreciation/depreciation of investments (9,337,204) 2,845,468
------------- -------------
Net increase in net assets resulting from operations 7,221,386 21,194,033
Increase in receipts for shares issued on reinvestment of dividends 657,788 --
Dividends to shareholders from:
Net investment income (1998 - $.48 per share; 1997 - $.41 per share) (4,439,854) (3,778,833)
------------- -------------
Total increase 3,439,320 17,415,200
Net Assets, beginning of year 106,155,585 97,153,859
------------- -------------
Net Assets, end of period (including undistributed net investment
income in 1998 - $2,497,586; 1997 - $2,208,865) $ 109,594,905 $ 114,569,059
============= =============
</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
nine months For the
ended 9/30/98 year ended
(Unaudited) 12/31/97
------------- ----------
<S> <C> <C>
Net asset value:
Beginning of year $ 11.52 $ 10.54
---------- ----------
Net investment income .71 .87
Net realized and unrealized gain on investments .07 1.13
---------- ----------
Total from investment operations .78 2.00
---------- ----------
Dividends from net investment income to common shareholders (.48) (.83)
Distributions from net realized gain on investments to common shareholders -- (.19)
---------- ----------
Total distributions (.48) (1.02)
---------- ----------
Net asset value:
End of period $ 11.82 $ 11.52
========== ==========
Per share market value:
End of period $ 11.88 $ 11.63
========== ==========
Total investment return:
Market value 6.21%* 43.05%
Net asset value 6.77%* 24.10%
Net assets (in millions):
End of period $ 109.59 $ 106.16
Ratio of operating expenses to average net assets .88%* 1.12%
Ratio of interest expenses to average net assets 1.01%* .93%
Ratio of expenses to average net assets 1.89%* 2.05%
Ratio of net investment income to average net assets 5.96%* 7.59%
Portfolio turnover 42.34%* 70.88%
</TABLE>
*Percentages represent results for the period and are not annualized.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
6
<PAGE>
SCHEDULE OF INVESTMENTS MASSMUTUAL PARTICIPATION INVESTORS
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Shares, Units,
Warrants or Fair Value Fair Value
Principal Acquisition at Acquisition Cost at 9/30/98
Corporate Restricted Securities - 85.27%: (A) Amount Date Date (Note 2B) (Note 2A)
-------------- ----------- -------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Private Placement Investments - 72.40%
AccTech, LLC
A designer and marketer of specialized cleaning
products.
Senior Floating Rate Revolving Credit Note $ 406,260 10/31/96 $ 406,260 $ 406,260 $ 203,130
due 2002
Senior Secured Series A Floating Rate Note $ 357,694 10/31/96 352,333 357,695 178,847
due 2002
10.1% Senior Secured Series A Note due 2002 $ 493,420 10/31/96 480,788 493,420 246,710
12% Senior Secured Series B Note due 2004 $ 549,000 10/31/96 577,603 503,822 274,500
Membership Interests (B) 2 int. 10/31/96 131,756 114,271 16,469
Warrant, exercisable until 2004, to purchase 1 int. 10/31/96 -- 54,900 --
Membership Interests at $.01 per interest (B)
---------- ---------- ----------
1,948,740 1,930,368 919,656
---------- ---------- ----------
Adventure Entertainment Corporation
An owner and operator of themed family
entertainment centers.
7% Redeemable Series B Preferred Stock 873 shs. 10/31/97 85,047 845,135 844,712
Warrant, exercisable until 2005, to purchase 3,222 shs. 10/31/97 32 12,495 32
Class A Common Stock at $.01 per share (B)
---------- ---------- ----------
85,079 857,630 844,744
---------- ---------- ----------
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 $ 83,333 11/23/93 81,633 83,333 83,883
---------- ---------- ----------
Ardent Software, Inc.
A manufacturer and distributor of database
management software.
Common Stock (B) 41,885 shs. 12/14/95 125,655 343,375 418,850
---------- ---------- ----------
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 1,593,841 1,700,516
Common Stock (B) 15,675 shs. 3/19/97 61,875 82,500 61,875
Warrant, exercisable until 2005, to purchase 47,044 shs. 3/19/97 47,044 86,673 47,044
common stock at $.01 per share (B)
---------- ---------- ----------
1,746,237 1,763,014 1,809,435
---------- ---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
7
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Shares, Units,
Warrants or Fair Value Fair Value
Principal Acquisition at Acquisition Cost at 9/30/98
Corporate Restricted Securities: (A) (Continued) Amount Date Date (Note 2B) (Note 2A)
-------------- ----------- -------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Averstar, Inc.
A provider of software systems, services and
products to a variety of information technology
users.
Senior Floating Rate Revolving Term Note $ 626,106 8/31/95 $ 626,106 $ 621,980 $ 626,106
due 2002
Senior Secured Floating Rate Note due 2001 $ 1,100,000 2/27/98 1,090,320 1,100,000 1,100,000
13% Senior Subordinated Note due 2002 $ 399,659 8/31/95 4,068 363,697 422,240
Class A Common Stock (B) 6,726 shs. 8/31/95 6,895 9,192 16,951
Class B Common Stock (B) 18,600 shs. 8/31/95 19,087 25,418 46,872
Class G Common Stock (B) 48,423 shs. 8/31/95 1,059 52,000 122,026
Class A Common Stock of I E S Holdings (B) 1,471 shs. 2/27/98 -- -- --
Class B Common Stock of I E S Holdings (B) 4,067 shs. 2/27/98 -- -- --
Warrants of I E S Holdings (B) 10,588 shs. 2/27/98 -- -- --
---------- ---------- ----------
1,747,535 2,172,287 2,334,195
---------- ---------- ----------
Berkshire Medical Center, Inc.
A non-profit, regional acute care hospital.
10.5% Senior Note due 1999 $ 430,909 5/15/89 430,909 430,909 437,459
---------- ---------- ----------
Beta Brands, Inc. - T.S.E
A manufacturer of hard candy and chocolate-
coated products sold primarily to the
Canadian market.
Senior Secured Revolving Credit note due 2005 $ 23,239 12/23/97 23,239 23,239 23,239
Senior Secured Tranche A Floating Rate $ 1,147,000 12/23/97 1,136,906 1,147,000 1,137,939
Note due 2004
14.75% Senior Secured Tranche B Note due 2005 $ 332,255 12/23/97 345,545 332,255 345,545
Limited Partnership Interests of CM Equity 405,584 int. 12/22/97 324,467 405,584 324,467
Partners (B)
Warrant, exercisable until 2005, to purchase 107,267 shs. 12/23/97 1,073 -- 1,073
common stock at $.81 per interest(B)
---------- ---------- ----------
1,831,230 1,908,078 1,832,263
---------- ---------- ----------
Boyle Leasing Technologies, Inc.
A leasing company specializing in the
leasing and rental of microticket business
equipment.
12% Senior Subordinated Note due 2001 $ 600,000 8/16/94 539,832 572,544 621,600
---------- ---------- ----------
C&K Manufacturing and Sales Company
A manufacturer and distributor of branded
packaging and supply products.
Senior Secured Floating Rate Revolving $ 325,850 8/29/96 325,850 325,850 162,925
Credit Facility due 2002
Senior Secured Series A Floating Rate Term $ 1,172,085 8/29/96 1,159,544 1,172,085 586,043
Note due 2002
12% Series B Term Note due 2004 $ 266,000 8/29/96 261,877 254,990 133,000
Membership Interests (B) 133 int. 8/29/96 106,400 98,371 13,300
Warrant, exercisable until 2004, to purchase 8 int. 8/29/96 -- 13,300 --
Membership Interests at $.01 per interest (B)
---------- ---------- ----------
1,853,671 1,864,596 895,268
---------- ---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
8
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Shares, Units,
Warrants or Fair Value Fair Value
Principal Acquisition at Acquisition Cost at 9/30/98
Corporate Restricted Securities: (A) (Continued) Amount Date Date (Note 2B) (Note 2A)
-------------- ----------- --------------- --------- ----------
<S> <C> <C> <C> <C> <C>
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 $ 270,270 9/29/95 $ 270,270 $ 270,270 $ 266,919
Credit Note due 2000
10% Senior Secured Term Note due 2004 $ 648,648 9/29/95 648,648 648,648 655,848
11.5% Senior Subordinated Note due 2004 $ 472,975 9/29/95 447,855 454,613 483,191
8% Junior Subordinated Convertible Note due 2004, $ 54,054 9/29/95 54,054 54,054 67,043
convertible into partnership
points at $1,388.89 per point
Warrant, exercisable until 2006, to
purchase partnership points at $.01 19 pts. 9/29/95 25,130 25,130 31,428
per point (B)
---------- ---------- ----------
1,445,957 1,452,715 1,504,429
---------- ---------- ----------
Capitol Vial, Inc.
A producer of plastic vial containers.
19% Senior Subordinated Note due 2004 $ 1,829,997 12/30/97 1,791,567 1,829,997 1,806,939
Common Stock (B) 33 shs. 12/30/97 131 164 131
---------- ---------- ----------
1,791,698 1,830,161 1,807,070
---------- ---------- ----------
Catalina Lighting, Inc. - N.Y.S.E
A designer, importer and distributor
of residential and office lighting
fixtures.
8% Convertible Subordinated Note due 2002, $ 375,000 3/31/94 355,012 375,000 338,700
convertible into common stock at $7.31
per share
---------- ---------- ----------
355,012 375,000 338,700
---------- ---------- ----------
Chaparral Resources, Inc. - O.T.C
An international oil and gas exploration and
production company.
Common Stock (B) 2,460 shs. 12/3/97 1,599 1,599 2,837
---------- ---------- ----------
Cirrus Logic, Inc. - O.T.C
A designer and manufacturer of integrated
circuits.
10.22% Secured Leverage Lease Notes due 2002 $ 622,578 11/1/96 608,757 622,578 618,158
10.14% Secured Leverage Lease Notes due 2004 $ 660,580 11/1/96 641,093 660,580 653,117
---------- ---------- ----------
1,249,850 1,283,158 1,271,275
---------- ---------- ----------
Coast Distribution System, The - A.S.E
A wholesale distributor of recreational
vehicle and marine parts and accessories.
11.2% Senior Subordinated Secured Note $ 233,500 6/26/89 240,948 233,500 214,727
due 1999 ---------- ---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
9
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Shares, Units,
Warrants or Fair Value Fair Value
Principal Acquisition at Acquisition Cost at 9/30/98
Corporate Restricted Securities:(A) (Continued) Amount Date Date (Note 2B) (Note 2A)
------------- ----------- -------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Consumer Product Enterprises, Inc.
A manufacturer of colored acrylic felt for
consumer use.
Senior Secured Floating Rate Revolving $ 73,055 12/8/95 $ 73,055 $ 73,055 $ 72,361
Credit Notes due 2000
10.75% Senior Secured Term Note due 2003 $ 607,103 12/8/95 613,386 607,103 608,195
12% Senior Subordinated Note due 2005 $ 400,287 12/8/95 401,929 381,836 398,206
Common Stock (B) 92,280 shs. 12/8/95 69,210 92,280 69,210
Warrant, exercisable until 2005, to purchase 69,210 shs. 12/8/95 692 25,426 692
common stock at $.01 per share (B) ---------- ---------- ----------
1,158,272 1,179,700 1,148,664
---------- ---------- ----------
Contico International, Inc.
A developer, manufacturer and marketer of consumer,
commercial and industrial plastic products.
12% Senior Subordinated Note due 2003 $ 500,000 3/23/93 522,800 500,000 536,050
---------- ---------- ----------
Control Devices, Inc. - O.T.C
A producer of high quality electromechanical circuit
protector devices and photo-optic sensors.
Common Stock (B) 96,666 shs. * 14,562 8,737 1,056,076
---------- ---------- ----------
Dealer Solutions Holdings, Inc.
A vertical application software company.
Convertible Preferred Stock (B) 111,111 shs. 5/12/98 250,000 250,000 200,000
Warrant to purchase common stock at $.01 21,556 shs. 5/12/98 -- -- 216
per share (B)
---------- ---------- ----------
250,000 250,000 200,216
---------- ---------- ----------
Discount Auto Parts
A retailer of auto parts.
9.8% Senior Secured Note due 2003 $ 750,000 11/2/89 724,575 750,000 796,500
---------- ---------- ----------
Diversco, Inc./DHI Holdings, Inc.
A contract provider of janitorial and equipment
maintenance services and temporary production
labor to industrial customers.
12% Senior Subordinated Note due 2006 $ 1,407,000 8/28/98 1,399,543 1,279,345 1,405,593
Membership Interests of DHI Holdings, Inc. (B) 3,665 int. 8/27/98 293,196 366,495 293,196
Warrant, exercisable to 2003 & 2006, to 1,814 int. ** 18 201,654 18
purchase Membership Interests at $.01 per
interest (B)
---------- ---------- ----------
1,692,757 1,847,494 1,698,807
---------- ---------- ----------
Eagle Pacific Industries, Inc. - O.T.C
An extruder of small and medium diameter plastic
pipe and tubing in the United States.
8% Redeemable Convertible Preferred Stock, 1,700 shs. 5/9/97 1,692,860 1,700,000 1,749,980
convertible into common stock at $4.26 per share ---------- ---------- ----------
</TABLE>
*7/29/94 and 10/8/96.
**10/24/96 and 8/28/98.
- --------------------------------------------------------------------------------
10
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Shares, Units,
Warrants or Fair Value Fair Value
Principal Acquisition at Acquisition Cost at 9/30/98
Corporate Restricted Securities: (A) (Continued) Amount Date Date (Note 2B) (Note 2A)
-------------- ----------- -------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Evans Consoles, Inc.
A designer and manufacturer of consoles
and control center systems.
Senior Secured Tranche A Floating Rate $ 640,000 3/2/98 $ 635,136 $ 640,000 $ 635,520
Note due 2005
8.85% Senior Secured Tranche A Note due 2005 $ 640,000 3/2/98 596,096 640,000 606,592
11.75% Senior Secured Tranche B Note due 2006 $ 350,000 3/2/98 371,875 296,268 376,215
Common Stock (B) 13,524 shs. * 38,000 47,691 38,000
Limited Partnership Interests of CM Equity 635 int. * 50,820 63,525 50,820
Partners (B)
Warrant, exercisable until 2006, to purchase 17,391 shs. 3/2/98 174 56,000 174
common stock at $.01 per share (B) ---------- ---------- ----------
1,692,101 1,743,484 1,707,321
---------- ---------- ----------
Fleming Acquisition Corporation
A supplier of high-quality, premium printed labels
for distilled spirits, wine, food and household
products.
Common Stock (B) 270 shs. 4/28/95 609,908 135,000 13,867
Warrant, exercisable until 2005, to purchase 190 shs. 4/28/95 49,116 85,226 9,750
common stock at $.01 per share (B)
Incentive Warrant, exercisable from 1998 10 shs. 4/28/95 1,671 1,136 493
until 2000, to purchase common stock at $.01
per share (B) ---------- ---------- ----------
660,695 221,362 24,110
---------- ---------- ----------
Golden Bear Oil Specialties
A manufacturer of asphalt and specialty
lubricating and processing oils.
17% Senior Subordinated Note due 2005 $ 1,618,862 7/18/97 1,634,403 1,585,632 1,609,797
12% Series A Convertible Preferred Stock 126 shs. 6/19/98 125,880 125,884 124,470
12% Preferred Stock 156 shs. 7/18/97 15,746 155,556 81,000
Common Stock (B) 10,400 shs. 7/18/97 43,369 38,920 104
Warrant, exercisable until 2005, to purchase 11,670 shs. 7/18/97 117 35,010 117
common stock at $.001 per share (B)
Warrant, exercisable until 2010, to purchase 8,556 shs. 7/18/97 86 -- 86
common stock at $.001 per share (B)
---------- ---------- ----------
1,819,601 1,941,002 1,815,574
---------- ---------- ----------
Grand Lyon Enterprises LLC
A manufacturer and marketer of Grand Lyon
Bordeaux Ketchup.
Limited Liability Interests (B) 1,102 int. 5/15/98 110,174 110,174 99,157
---------- ---------- ----------
Hardy Oil & Gas PLC - L.S.E.
Engages in exploration and development
of oil and gas reserves.
8.46% Senior Note due 2004 $ 1,500,000 1/11/95 1,452,150 1,500,000 1,564,950
---------- ---------- ----------
</TABLE>
*2/11/98 and 4/8/98.
- --------------------------------------------------------------------------------
11
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Shares, Units,
Warrants or Fair Value Fair Value
Principal Acquisition at Acquisition Cost at 9/30/98
Corporate Restricted Securities: (A) (Continued) Amount Date Date (Note 2B) (Note 2A)
------------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Hartzell Manufacturing, Inc.
A provider of contract engineering, manufacturing,
and assembly services for a variety of industrial
manufacturing companies.
12.5% Senior Subordinated note due 2005 $ 1,313,100 4/18/97 $1,329,514 $1,174,139 $1,340,019
Common Stock (B) 35,322 shs. 4/18/97 299,165 398,889 299,165
Warrant, exercisable until 2005, to purchase 16,689 shs. 4/18/97 1,669 157,572 1,669
common stock at $.01 per share (B)
---------- ---------- ----------
1,630,348 1,730,600 1,640,853
---------- ---------- ----------
Hatco Corporation
A specialty 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 1,750,000
---------- ---------- ----------
Highland Homes Holdings, Inc.
A single family home builder operating in the
Dallas-Fort Worth and Atlanta areas.
12.75% Senior Note due 1999 $ 375,000 11/18/93 371,288 372,572 383,850
---------- ---------- ----------
Hudson River Capital, LLC
Acquires controlling or substantial interests
in manufacturing and marketing
entities.
Series A Preferred Units (B) 22,183 uts. 7/21/94 196,827 142,752 210,735
---------- ---------- ----------
Hunton & Williams
A major law firm in Richmond, Virginia.
9.84% Senior Secured Note due 2000 $ 90,875 12/21/90 89,356 90,875 93,547
---------- ---------- ----------
Hussey Seating Company
A manufacturer of spectator seating products.
Senior Secured Floating Rate Revolving $ 225,000 6/12/96 222,795 225,000 225,000
Note due 2003
Senior Secured Floating Rate Note due 2003 $ 337,500 6/12/96 334,159 337,500 337,500
10% Senior Secured Note due 2003 $ 337,500 6/12/96 328,590 337,500 337,500
12% Subordinated Secured Note due 2006 $ 675,000 6/12/96 663,660 579,939 739,800
Warrant, exercisable until 2006, to purchase 1,776 shs. 6/12/96 18 112,500 170,981
common stock at $.01 per share (B)
---------- ---------- ----------
1,549,222 1,592,439 1,810,781
---------- ---------- ----------
Iron Mountain Inc. - O.T.C
A records management company.
Common Stock (B) 1,768 shs. 6/26/98 -- 33,795 47,736
---------- ---------- ----------
J. Baker, Inc. - O.T.C
A wholesaler and retailer of shoes.
12.21% Senior Subordinated Note due 1999 $ 300,000 6/21/89 299,220 300,000 281,070
Warrant, exercisable until 1999, to purchase $ 27,355 6/21/89 2,736 73,285 274
common stock at $18.80 per share (B)
---------- ---------- ----------
301,956 373,285 281,344
---------- ---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
12
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Shares, Units,
Warrants or Fair Value Fair Value
Principal Acquisition at Acquisition Cost at 9/30/98
Corporate Restricted Securities: (A) (Continued) Amount Date Date (Note 2B) (Note 2A)
------------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Jackson Products, Inc.
Manufactures and distributes a variety of
industrial and highway safety products.
Common Stock (B) 217 shs. 8/16/95 $ 21,702 $ 21,702 $ 89,065
Warrant, exercisable until 2005, to purchase 999 shs. 8/16/95 99,838 99,866 410,060
common stock at $.01 per share (B)
---------- ---------- ----------
121,540 121,568 499,125
---------- ---------- ----------
Kappler Safety Group, Inc.
A manufacturer of protective apparel for the
industrial/safety, clean room and healthcare
markets.
13% Senior Subordinated Note due 2004 $ 1,667,000 12/2/96 1,692,505 1,537,287 1,693,005
Warrant, exercisable until 2004, to purchase 28,717 shs. 12/2/96 28,717 166,700 52,150
common stock at $.01 per share (B)
---------- ---------- ----------
1,721,222 1,703,987 1,745,155
---------- ---------- ----------
Latin Communications Group
An operator of Spanish-language media in
North America.
5% Subordinated Note due 2005 $ 23,297 2/4/98 16,308 16,758 16,739
Common Stock (B) 44,918 shs. * 319,444 413,242 449,180
---------- ---------- ----------
335,752 430,000 465,919
---------- ---------- ----------
Lloyd's Barbecue Company
A manufacturer and marketer of packaged
barbecue meats and related products.
18% Senior Subordinated Note due 2006 $ 863,307 9/30/97 863,307 863,307 906,473
Membership Interests of LFPI Mainstreet (B) 9,362 uts. 9/30/97 936,250 936,372 842,625
---------- ---------- ----------
1,799,557 1,799,679 1,749,098
---------- ---------- ----------
Louis Dreyfus Natural Gas Corporation - A.S.E
An independent oil and gas company engaged
principally in the acquisition, development and
management of oil and gas properties.
Warrant, exercisable until 2004, to purchase 51,671 shs. 12/27/91 24,857 19,356 5,167
common stock at $17.81 per share (B) ---------- ---------- ----------
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 1,189,125 1,012,500 1,100,486
Limited Partnership Interests (B) 284 uts. 10/20/95 253,125 338,915 285,071
Limited Partnership Interests of APS Growth 335 uts. 9/28/98 341,292 400,000 401,508
LLC (B)
Warrant, exercisable until 2004, to purchase 148 uts. 10/26/95 148 -- 148,908
Limited Partnership Interests at $.01 per unit (B)
---------- ---------- ----------
1,783,690 1,751,415 1,935,973
---------- ---------- ----------
</TABLE>
*2/14/95, 12/1/95, 2/27/96 and 2/4/98.
- --------------------------------------------------------------------------------
13
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Shares, Units,
Warrants or Fair Value Fair Value
Principal Acquisition at Acquisition Cost at 9/30/98
Corporate Restricted Securities: (A) (Continued) Amount Date Date (Note 2B) (Note 2A)
-------------- ----------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Maxtec International Corp.
A manufacturer and distributor of remote
control operating systems for overhead
cranes.
Senior Floating Rate Revolving Credit $ 164,839 6/28/95 $ 164,839 $ 164,839 $ 164,839
Facility due 2001
Common Stock (B) 38,462 shs. 6/28/95 96,059 115,386 103,848
Warrant, exercisable from 1998 until 2005, to 19,795 shs. 6/28/95 49,325 85,714 19,795
purchase common stock at $.01 per share (B)
---------- ---------- ----------
310,223 365,939 288,482
---------- ---------- ----------
Merit Industries, Inc.
A designer and manufacturer of coin-operated
video and dart games.
12% Senior Sub Note due 2006 $ 1,258,146 8/19/98 1,234,619 1,165,858 1,240,155
Limited Partnership Interest 491,854 int. 8/12/98 442,668 463,772 442,668
Warrants, exercisable until 2006, to purchase 927 int. 8/19/98 9 92,706 9
Limited Partnership interests at $.01 per share (B)
---------- ---------- ----------
1,677,296 1,722,336 1,682,832
---------- ---------- ----------
MW Investors I LLC
A structured investment relying on Tenneco, Inc.,
whose business includes natural gas, auto parts
and packaging.
Floating Rate Subordinated Note due 2007 $ 1,685,250 12/29/97 1,685,250 1,685,250 1,687,778
5.05% Membership Interest 2,590 int. 12/29/97 28,208 62,280 64,750
---------- ---------- ----------
1,713,458 1,747,530 1,752,528
---------- ---------- ----------
N2K, Inc. - O.T.C
A music entertainment company which uses the
internet as a global platform for the promoting
and merchandising of music and related merchandise.
Warrant, exercisable until 2004, to purchase 13,889 shs. 8/6/97 139 -- 1,389
common stock at $12 per share (B) ---------- ---------- ----------
Nu Horizons Electronics Corp.- O.T.C
A distributor of high technology active and
passive electronic devices.
8.25% Convertible Subordinated Note due $ 705,900 8/31/94 712,959 705,900 759,125
2002, convertible into common stock at $9 ---------- ---------- ----------
per share
Olympic Boat Centers, Inc.
An operator of boat dealerships in Washington
state and British Columbia.
12% Senior Subordinated Note due 2006 $ 1,387,000 8/7/98 1,382,284 1,212,559 1,385,613
Limited Partnership Interest (B) 413,023 int. 8/7/98 371,721 369,193 371,721
Warrant, exercisable until 2007, to purchase 12,896 int. 8/7/98 129 175,200 129
Limited Partnership Interests at $.01 per
interest (B)
---------- ---------- ----------
1,754,134 1,756,952 1,757,463
---------- ---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
14
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Shares, Units,
Warrants or Fair Value Fair Value
Principal Acquisition at Acquisition Cost at 9/30/98
Corporate Restricted Securities: (A) (Continued) Amount Date Date (Note 2B) (Note 2A)
------------- ----------- -------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Pacific Coast Feather Company
A manufacturer and marketer of natural fill and
synthetic fill bed pillows and comforters.
15.5% Senior Subordinated Note due 2004 $ 1,750,000 6/27/97 $1,768,025 $1,750,000 $1,814,400
---------- ---------- ----------
PAR Acquisition Corp.
A manufacturer of fuel handling systems for
nuclear power plants and hazardous waste.
14.5% Senior Subordinated Note due 2000 $ 525,000 2/5/93 524,160 525,000 525,000
8% Convertible Preferred Stock due 2001, 83,333 shs. 2/5/93 166,667 166,667 293,333
convertible into common stock at $2 per share
Common Stock (B) 133,333 shs. 2/5/93 333,333 333,333 469,333
---------- ---------- ----------
1,024,160 1,025,000 1,287,666
---------- ---------- ----------
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 $ 1,750,000 * 1,743,472 1,750,000 1,740,550
---------- ---------- ----------
PG+E Gas Transmission
An owner and operator of a specialized petroleum
refinery and engages in petroleum product
marketing operations.
10.58% Senior Note due 2000 $ 214,286 12/20/90 217,858 214,286 216,686
---------- ---------- ----------
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 $ 362,812 11/30/95 378,087 362,812 380,844
10.5% Senior Secured Convertible Note due $ 97,500 11/30/95 102,668 97,500 111,832
2005, convertible into common stock at
$50,000 per share
Common Stock 3 shs. 11/30/95 113,906 169,000 100,401
---------- ---------- ----------
594,661 629,312 593,077
---------- ---------- ----------
Plastipak Packaging, Inc.
A manufacturer of plastic containers.
10.64% Senior Subordinated Note due 2006 $ 1,750,000 10/25/96 1,701,875 1,711,460 1,792,525
Warrant, exercisable until 2006, to purchase 49 shs. 10/25/96 27,799 46,812 36,071
common stock at $.01 per share (B)
---------- ---------- ----------
1,729,674 1,758,272 1,828,596
---------- ---------- ----------
</TABLE>
*12/20/96, 3/20/97 and 6/20/97.
- --------------------------------------------------------------------------------
15
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Shares, Units,
Warrants or Fair Value Fair Value
Principal Acquisition at Acquisition Cost at 9/30/98
Corporate Restricted Securities: (A) (Continued) Amount Date Date (Note 2B) (Note 2A)
-------------- ----------- -------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Playcore, Inc. - 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 $1,260,677 $1,415,156
Limited Partnership Interests of Green Grass 40,774 uts. 3/13/97 146,786 208,866 128,438
Capital II, LLC (B)
Warrant, exercisable until 2005, to purchase 74,022 uts. 3/13/97 265,887 340,361 232,577
Limited Partnership Interests of Green Grass
Capital II, LLC at $.01 per unit (B) ---------- ---------- ----------
1,705,173 1,809,904 1,776,171
---------- ---------- ----------
Precision Dynamics, Inc.
A manufacturer of custom-designed solenoid
valves and controls.
Senior Secured Floating Rate Revolving $ 391,200 7/22/96 387,327 391,200 388,266
Credit Facility due 2003
Senior Secured Floating Rate Term Note due 2003 $ 1,304,000 7/22/96 1,291,221 1,304,000 1,295,524
12% Senior Secured Term Note due 2004 $ 244,500 7/22/96 241,273 204,052 254,256
8% Preferred Stock 116 shs. 7/22/96 110,120 115,911 97,013
Common Stock (B) 299 shs. 7/22/96 10,849 14,489 9,953
Warrant, exercisable until 2004, to purchase 162 shs. 7/22/96 2 49,000 5,368
common stock at $.01 per share (B) ---------- ---------- ----------
2,040,792 2,078,652 2,050,380
---------- ---------- ----------
Process Chemicals, LLC
A specialty chemical company that manufactures
process chemicals for the fertilizers,
asphalt and concrete industries.
6% Redeemable Preferred Membership Interests 10,000 int. 7/31/97 983,800 975,419 1,008,400
Common Membership Interests 4 int. 7/31/97 11 12 11
---------- ---------- ----------
983,811 975,431 1,008,411
---------- ---------- ----------
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 8/12/94 394,720 400,000 280,000
11.51% Junior Secured Note due 1999 $ 200,000 8/12/94 195,760 200,000 120,000
9.8% Redeemable Exchangeable Preferred Stock 3,333 shs. 8/12/94 282,633 333,333 83,333
Common Stock (B) 497 shs. 8/12/94 5 -- 50
---------- ---------- ----------
873,118 933,333 483,383
---------- ---------- ----------
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 2/16/93 799,575 750,000 814,650
Common Stock (B) 17,750 shs. 2/16/93 170,400 170,400 198,135
---------- ---------- ----------
969,975 920,400 1,012,785
---------- ---------- ----------
Rent-Way, Inc. - O.T.C
Operates rent-to-own stores in Ohio,
Pennsylvania and New York.
Warrant, exercisable until 2002, to purchase 10,000 shs. 7/18/95 100 -- 143,247
common stock at $9.94 per share (B) ---------- ---------- ----------
</TABLE>
- -----------------------------------
16
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Shares, Units,
Warrants or Fair Value Fair Value
Principal Acquisition at Acquisition Cost at 9/30/98
Corporate Restricted Securities:(A) (Continued) Amount Date Date (Note 2B) (Note 2A)
------------ ------------ -------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Sharp International Corp.
A designer and distributor of wrist watches,
clocks, pens and mechanical pencils
11% Subordinated Debenture due 2006 $ 1,100,000 7/10/98 $1,054,130 $1,084,872 $1,055,230
Warrants, exercisable until 2006, to purchase 17,764 shs. 7/10/98 178 15,086 178
common stock at $.01 per share (B)
---------- ---------- ----------
1,054,308 1,099,958 1,055,408
---------- ---------- ----------
Star International Holdings, Inc.
A manufacturer of commercial cooking
appliances
9.65% Senior Secured Note due 2004 $ 338,059 5/27/94 338,059 338,059 343,941
10.5% Subordinated Note due 2004 $ 179,104 5/27/94 179,104 179,104 181,146
Common Stock (B) 1,077 shs. 5/27/94 64,904 64,904 37,280
Warrant, exercisable until 2004, to purchase 806 shs. 5/27/94 8 -- 27,892
common stock at $.01 per share (B)
---------- ---------- ----------
582,075 582,067 590,259
---------- ---------- ----------
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 1,169,717 1,237,600
Convertible Preferred Stock, convertible into 560 shs. 7/25/96 504,000 560,000 374,704
common stock at $1,000 per share (B)
Warrant, exercisable until 2008, to purchase 237 shs. 7/25/96 21 24,103 158,498
common stock at $.01 per share (B)
---------- ---------- ----------
1,698,067 1,753,820 1,770,802
---------- ---------- ----------
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 1,187,357 1,241,040
Common Stock (B) 203,165 shs. * 314,108 598,597 2,396,087
Warrant, exercisable until 2001, to purchase 74,606 shs. 3/28/91 7,461 42,000 651,586
common stock at $3.60 per share (B)
---------- ---------- ----------
1,595,849 1,827,954 4,288,713
---------- ---------- ----------
The Tranzonic Companies
A producer of commercial and industrial
supplies, such as safety products,
janitorial supplies, work apparel,
washroom and restroom supplies and
sanitary care products
12.5% Senior Subordinated Note due 2006 $ 1,356,000 2/4/98 1,381,086 1,180,317 1,391,798
Common Stock (B) 315 shs. 2/4/98 283,500 315,000 283,500
Warrants to purchase shares of class B 222 shs. 2/4/98 2 184,416 2
common stock at .01 per share (B)
---------- ---------- ----------
1,664,588 1,679,733 1,675,300
---------- ---------- ----------
</TABLE>
*3/28/91, 12/18/91, 9/30/92, 9/30/93, 9/30/94, 3/31/95 and 5/9/95.
- --------------------------------------------------------------------------------
17
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Shares, Units,
Warrants or Fair Value Fair Value
Principal Acquisition at Acquisition Cost at 9/30/98
Corporate Restricted Securities: (A) (Continued) Amount Date Date (Note 2B) (Note 2A)
-------------- ----------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Trend Technologies, Inc.
A manufacturer and assembler of plastic injection
molded parts.
12% Subordinated Note due 2005 $ 1,256,800 3/21/97 $ 1,296,389 $ 1,255,333 $ 1,256,800
Limited Partnership Interests of Riverside V 2,680 uts. * 327,880 295,558 327,881
Holding Company L.P.
Limited Partnership Interests of Riverside 5,734 uts. * 742,789 632,012 568,811
V-A Holding Company L.P.
Warrant, exercisable until 2005, to purchase 1,565 uts. 3/21/97 1,565 1,565 1,565
Limited Partnership Interests at $.01 per unit (B)
-------------- ------------ ----------
2,368,623 2,184,468 2,155,057
-------------- ------------ ----------
Tridex Corp. - O.T.C
A designer and manufacturer of point-of-sale
monitors and keyboards used by retailers and
restaurants.
12% Senior Subordinated Note due 2005 $ 1,500,000 4/17/98 15,000 1,500,000 1,467,750
Common Stock (B) 35,714 shs. 4/17/98 249,998 249,998 112,499
Warrant, exercisable until 2005, to purchase 47,854 shs. 4/17/98 -- -- 4,785
common stock at $7 per share (B)
-------------- ------------ ----------
264,998 1,749,998 1,585,034
-------------- ------------ ----------
Truseal Technologies, Inc.
A manufacturer of sealant systems for the
North American window and door market.
12.25% Senior Subordinated Note due 2006 $ 1,338,000 6/23/97 1,367,168 1,165,159 1,391,520
Limited Partnership Interests (B) 4,123 uts. 6/17/97 371,070 412,331 371,070
Warrant, exercisable until 2006, to purchase 630 uts. 6/23/97 6 188,536 6
Limited Partnership Interests at $.01 per
unit (B)
-------------- ------------ ----------
1,738,244 1,766,026 1,762,596
-------------- ------------ ----------
U.S. Netting, Inc.
A manufacturer of plastic netting for a wide
variety of industries.
11% Senior Secured Note due 2005 $ 722,300 5/3/95 798,719 722,300 751,048
12% Subordinated Note due 2005 $ 326,200 5/3/95 367,008 312,052 346,522
Common Stock (B) 2,457 shs. 5/3/95 81,376 195,720 13,091
Warrant, exercisable until 2005, to purchase 1,398 shs. 5/3/95 46,291 17,971 7,437
common stock at $.01 per share (B)
-------------- ------------ ----------
1,293,394 1,248,043 1,118,098
-------------- ------------ ----------
U.S. Silica Company
A producer of high grade industrial and
specialty ground silica sands in North America.
Redeemable Preferred Stock Series A (B) 20,999 shs. 12/19/96 145,826 194,435 145,825
Convertible Preferred Stock Series B, 41,998 shs. 12/19/96 291,655 388,865 291,651
convertible into Series B common stock at
$9.26 per share (B)
Warrant, exercisable until 2005, to purchase 3,241 uts. 12/19/96 6,482 65 2,071
Series A Preferred Stock and Series B
Preferred Stock at $.01 per unit (B)
-------------- ------------ ----------
443,963 583,365 439,547
-------------- ------------ ----------
*3/21/97, 10/16/97 and 11/19/97.
</TABLE>
- --------------------------------------------------------------------------------
18
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Shares, Units,
Warrants or Fair Value Fair Value
Principal Acquisition at Acquisition Cost at 9/30/98
Corporate Restricted Securities: (A) (Continued) Amount Date Date (Note 2B) (Note 2A)
-------------- ----------- --------------- --------- ----------
<S> <C> <C> <C> <C> <C>
US Airways Group - N.Y.S.E
A domestic and international airline.
10.8% Series A Secured Loan Certificates $ 378,528 6/29/94 $ 321,749 $ 346,846 $ 395,411
due 2003 ----------- ----------- -----------
Victory Ventures, LLC
Acquires controlling or substantial
interests in other entities.
Series A Preferred Units (B) 2,817 uts. 12/2/96 3,175 14,275 5,635
----------- ----------- -----------
Vitex Packaging, Inc.
A manufacturer of specialty packaging,
primarily envelopes and tags used on tea
bags.
Senior Secured Floating Rate Revolving $ 400,238 1/2/98 397,036 400,238 397,396
Credit Facility due 2003
Senior Secured Floating Rate Term Note due 2005 $ 1,092,000 1/2/98 1,083,373 1,092,000 1,084,356
12% Senior Secured Tranche B Note due 2007 $ 336,000 1/2/98 339,394 310,800 341,074
Limited Partnership Interests of Riverside VI 161,891 int. 12/30/97 1,295 150,222 129,513
Holding Company L.P.
Warrant, exercisable until 2007, to purchase 44 shs. 1/2/98 -- 25,201 --
common stock at $.01 per share (B)
----------- ----------- -----------
1,821,098 1,978,461 1,952,339
----------- ----------- -----------
Sub-Total Private Placement Investments $73,600,581 77,724,804 79,344,449
=========== =========== ===========
<CAPTION>
Shares,
Warrants or Market Value
Interest Due Principal Cost at 9/30/98
Rule 144A Securities - 12.87%: (A) Rate Date Amount (Note 2B) (Note 2A)
-------- -------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
Bonds - 9.42%
ADV Accessory & AAS CAP 9.750% 10/01/07 $ 575,000 575,043 543,375
Atlantic Coast Airlines Inc. 8.750 01/01/07 723,299 724,284 738,170
Bell Sports, Inc. 11.000 08/15/08 350,000 350,000 336,000
Brand Scaffold Services 10.250 02/15/08 350,000 336,008 325,500
Building Materials Corp. 7.750 07/15/05 125,000 121,258 121,875
Climachem, Inc. 10.750 12/01/07 100,000 96,011 96,000
Cuddy International Corp. 10.750 12/01/07 470,000 463,317 408,900
Derby Cycle Corp. 10.000 05/15/08 600,000 600,000 552,000
Enserch Exploration, Inc. 7.540 01/02/09 956,233 956,233 926,351
Great Lakes Dredge & Dock Corp. 11.250 08/15/08 350,000 350,000 343,000
Grove Worldwide 9.250 05/01/08 140,000 121,830 121,800
M J D Communications Inc. 10.000 05/01/08 200,000 200,000 198,000
M J D Communications Inc. 9.500 05/01/08 75,000 75,000 74,250
McLeodUSA Incorporated 8.375 03/15/08 275,000 284,281 270,188
Mediacom LLC 8.500 04/15/08 375,000 373,139 376,312
Mrs. Fields Original Cookies, Inc. 10.125 12/01/04 700,000 679,339 658,000
NE Restaurant Company, Inc. 10.750 07/15/08 465,000 461,625 455,700
Nortek Inc. 8.875 08/01/08 450,000 448,403 435,375
Numatics Inc. 9.625 04/01/08 350,000 355,156 311,500
Oxford Health Plans 11.000 05/15/05 85,000 85,000 73,950
Philipp Brothers Chemicals, Inc. 9.875 06/01/08 100,000 96,002 95,000
Renter's Choice, Inc. 11.000 08/15/08 350,000 350,000 338,625
T C W Leveraged Income Trust, LP 8.410 03/31/04 1,500,000 1,500,000 1,500,000
</TABLE>
- --------------------------------------------------------------------------------
19
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Shares,
Warrants or Market Value
Interest Due Principal Cost at 9/30/98
Rule 144A Securities: (A) (Continued) Rate Date Amount (Note 2B) (Note 2A)
-------- -------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Bonds (Continued)
Tenet Healthcare Corp. 8.125% 12/01/08 $ 400,000 $ 405,000 $ 405,000
Tjiwi Kima Fin Mauritius LTD 10.000 08/01/04 375,000 373,207 161,250
Von Hoffman Press, Inc. 10.375 05/15/07 455,000 458,950 455,000
----------- ----------- -----------
Total Bonds $10,894,532 10,839,086 10,321,121
=========== =========== ===========
Common Stock - 0.09%
Energy Conversion Devices Inc. 17,500 231,875 99,531
----------- -----------
Total Common Stock 231,875 99,531
----------- -----------
Convertible Bonds - 2.31%
Antec Corp. 4.500 05/15/03 $ 150,000 150,000 133,500
Arbor Software Corporation 4.500 03/15/05 100,000 100,000 68,341
Cymer Inc. 3.500 08/06/04 175,000 176,000 108,005
Equity Corporation International 4.500 12/31/04 200,000 200,000 221,108
Healthsouth Corporation 3.250 04/01/03 750,000 750,000 571,110
Key Energy Group 5.000 09/15/04 500,000 500,000 312,350
Mark IV Industries 4.750 11/01/04 450,000 427,125 373,036
Oak Industries 4.875 03/01/08 100,000 103,000 90,875
Smartalk Teleservices 5.750 09/15/04 150,000 150,000 74,625
Sunbeam Corporation 0.000 03/25/18 1,875,000 716,353 300,000
Tel-Save 4.500 09/15/02 540,000 538,731 281,972
----------- ----------- -----------
Total Convertible Bonds $ 4,990,000 3,811,209 2,534,922
=========== =========== ===========
Convertible Preferred Stock - 1.04%
D T Industries 20,000 1,000,000 572,500
Newell Financial Trust 10,000 500,000 567,500
----------- -----------
Total Convertible Preferred Stock 1,500,000 1,140,000
----------- -----------
Warrants - 0.01%
Energy Conversion Devices Inc. 17,500 -- 8,750
----------- -----------
Total Warrants -- 8,750
----------- -----------
Total Rule 144A Securities 16,382,170 14,104,324
----------- -----------
Total Corporate Restricted Securities 94,106,974 93,448,773
----------- -----------
Corporate Public Securities: (A)
Bonds - 19.36%
Advanced Micro Devices 11.000 08/01/03 $ 95,000 100,700 95,950
AEP Industries, Inc. 9.875 11/15/07 750,000 744,474 723,750
Airplanes Pass Thru Trust 8.150 03/15/19 1,482,000 1,488,421 1,692,874
AMC Entertainment 9.500 03/15/09 80,000 75,304 75,200
Amphenol Corporation 9.875 05/15/07 200,000 200,000 187,000
Amtran, Inc. 10.500 08/01/04 500,000 500,000 500,000
Anchor Advanced Products 11.750 04/01/04 560,000 581,750 588,000
Archibald Candy Corp. 10.250 07/01/04 420,000 420,000 429,450
Atlantic Express 10.750 02/01/04 575,000 589,219 586,500
Atlas Air, Inc. 10.750 08/01/05 1,000,000 1,000,000 1,010,000
Callon Petroleum Company 10.125 09/15/02 250,000 248,810 244,375
Canadian Airlines Corporation 10.000 05/01/05 230,000 230,500 213,900
Central Tractor Farm & Country, Inc. 10.625 04/01/07 300,000 293,250 291,000
Continental Airlines, Inc. 11.500 04/02/08 276,963 296,350 296,350
</TABLE>
- --------------------------------------------------------------------------------
20
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Shares,
Warrant or Market Value
Interest Due Principal Cost at 9/30/98
Corporate Public Securities: (A) (Continued) Rate Date Amount (Note 2B) (Note 2A)
-------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Bonds (Continued)
DecisionOne Corporation 9.750% 08/01/07 $ 75,000 $ 75,000 $ 48,750
Florist Transworld Delivery, Inc. 14.000 12/15/01 375,000 385,688 397,500
Fundy Cable LTD 11.000 11/15/05 515,000 543,625 540,750
Gray Communications System, Inc. 10.625 10/01/06 150,000 158,250 157,500
Hosiery Corporation of America 13.750 08/01/02 500,000 496,042 525,000
Indah Kiat Pulp & Paper Corporation 10.000 07/01/07 400,000 397,587 174,000
International Wire Group, Inc. 11.750 06/01/05 450,000 489,375 461,250
Jordan Industries, Inc. 10.375 08/01/07 300,000 300,000 286,500
Jordan Telecom Products 9.875 08/01/07 1,050,000 1,041,580 987,000
Key Plastics, Inc. 14.000 11/15/99 350,000 354,912 369,250
Keystone Consolidated Ind. Inc. 9.625 08/01/07 50,000 45,259 45,500
Kitty Hawk Inc. 9.950 11/15/04 500,000 500,000 505,000
Korea Development Bank 7.250 05/15/06 450,000 415,607 337,504
Loewen Group Inc. 8.250 10/15/03 75,000 71,256 71,625
Loewen Group Inc. 8.250 04/15/03 100,000 93,778 95,500
MCMS Inc. 9.750 03/01/08 500,000 500,000 280,000
Morris Materials Handling 9.500 04/01/08 300,000 300,000 216,000
Neenah Corporation 11.125 05/01/07 250,000 250,000 252,500
Neff Corp. 10.250 06/01/08 70,000 69,563 70,000
Nortek Inc. 9.125 09/01/07 70,000 67,904 68,250
Northwest Airlines Corp. 8.970 01/02/15 972,651 972,651 1,148,555
Numatics Inc. 9.625 04/01/08 110,000 100,762 99,000
Pillotex Corporation 9.000 12/15/07 30,000 29,402 28,350
Pillotex Corporation 10.000 11/15/06 50,000 51,500 51,375
Pohang Iron & Steel Company 7.125 11/01/06 350,000 317,960 250,138
Red Roof Inns, Inc. 9.625 12/15/03 175,000 175,438 171,062
Rogers Cantel Inc. 8.300 10/01/07 750,000 748,129 723,750
Rogers Cantel Inc. 9.375 06/01/08 125,000 126,875 127,500
Scotsman Group, Inc. 8.625 12/15/07 140,000 139,743 135,800
Scovill Fastener, Inc. 11.250 11/30/07 350,000 350,000 315,000
Sovereign Speciality Chemicals 9.500 08/01/07 175,000 175,000 168,875
Speedway Motorsports, Inc. 8.500 08/15/07 225,000 224,447 230,625
Sun Media Corporation 9.500 05/15/07 200,000 208,500 196,000
Sun Media Corporation 9.500 02/15/07 100,000 100,500 99,500
Telex Communications, Inc. 10.500 05/01/07 1,250,000 1,261,250 975,000
Therma-Wave, Inc. 10.625 05/15/04 510,000 481,171 244,800
Unicco Service Co. 9.875 10/15/07 275,000 273,781 253,000
United Refining Company 10.750 06/15/07 1,400,000 1,400,000 1,120,000
W R Carpenter North America 10.625 06/15/07 550,000 556,374 541,750
Wavetek Corporation 10.125 06/15/07 110,000 110,000 101,200
Williams Scotsman, Inc. 9.875 06/01/07 585,000 584,464 573,300
Windmere Durable Holdings, Inc. 10.000 07/31/08 180,000 174,724 154,800
Worldtex, Inc. 9.625 12/15/07 500,000 500,000 445,000
Ziff-Davis Inc. 8.500 05/01/08 250,000 249,107 242,500
----------- ----------- -----------
Total Bonds $22,611,614 22,635,982 21,220,608
=========== =========== ===========
Common Stock - 7.12%
A M R Corporation (B) 2,600 188,953 144,138
American Country Holdings Inc. (B) 54,000 188,722 84,375
Benson Petroleum, LTD. (B) 100,000 77,204 62,240
BP Prudhoe Bay Royalty Trust 13,190 187,570 123,655
Budget Group, The (B) 52,958 1,103,277 1,208,104
Career Blazers, Inc. (B) 45,000 247,500 298,125
Central Rents, Inc. (B) 930 33,722 27,900
Collins & Aikman Corporation (B) 17,400 104,238 119,625
Corporate Office Properties 30,250 317,625 240,109
Dura Automotive Systems Inc. (B) 3,560 116,590 92,115
Excalibur Technologies Corp. (B) 10,000 98,656 73,750
Florida Panthers Holdings, Inc. (B) 19,500 373,004 210,844
</TABLE>
- --------------------------------------------------------------------------------
21
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Shares,
Warrants or Market Value
Interest Due Principal Cost at 9/30/98
Corporate Public Securities: (A) (Continued) Rate Date Amount (Note 2B) (Note 2A)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Common Stock (Continued)
Florist Transworld Delivery, Inc. (B) 9,374 $ 13,754 $ 46,870
General Chemical Group, Inc. 4,400 112,772 83,050
General Instrument Corp. (B) 8,700 207,332 188,138
Hardy Oil & Gas PLC 139,113 409,869 381,506
Hosiery Corporation of America (B) 500 -- 25,000
Irwin Naturals (B) 6,000 33,375 30,000
LCS Industries, Inc. 15,000 234,356 198,750
Marker International (B) 23,250 145,312 23,250
McLeodUSA Incorporated (B) 5,777 224,742 126,372
Midway Airlines Corp. (B) 14,586 271,956 144,037
N2K, Inc. (B) 12,836 337,006 92,259
Oxford Health Plans (B) 13,125 247,639 136,172
Pathways Group Inc. (B) 15,435 344,964 246,960
Pool Energy Services Co. (B) 2,600 21,005 23,725
Princeton Video Image, Inc. (B) 30,000 210,000 123,750
Red Roof Inns, Inc. (B) 19,200 272,607 322,800
Rent-Way, Inc. (B) 100,603 1,000,000 2,477,349
Republic Industries, Inc. (B) 15,000 368,438 218,438
Swiss Army Brands, Inc. (B) 21,000 212,150 210,000
TSR Inc. (B) 3,500 22,960 22,960
------------- -------------
Total Common Stock 7,727,298 7,806,366
------------- -------------
Convertible Bonds - 3.20%
Advanced Micro Devices 6.000% 05/15/05 $ 245,000 195,547 190,076
Clear Channel Communications 2.625 04/01/03 350,000 350,000 353,500
Diamond Offshore Drilling 3.750 02/15/07 450,000 448,484 423,248
Dura Pharmaceuticals 3.500 07/15/02 315,000 319,219 215,948
EMCOR Group, Inc. 5.750 04/01/05 300,000 300,000 247,500
Family Golf Centers, Inc. 5.750 10/15/04 340,000 328,970 314,500
Hilton Hotels 5.000 05/15/06 695,000 695,000 600,021
Kellstorm Industries, Inc. 5.500 06/15/03 500,000 427,366 369,480
Oak Industries 4.875 03/01/08 125,000 112,760 113,594
Reptron Electronics Inc. 6.750 08/01/04 100,000 100,000 59,750
Savoy Pictures Entertainment 7.000 07/01/03 650,000 505,375 617,500
------------- ------------- -------------
Total Convertible Bonds $ 4,070,000 3,782,721 3,505,117
============= ============= =============
Total Corporate Public Securities 34,146,001 32,532,091
------------- -------------
Short-Term Securities: (A)
Commercial Paper - 2.68%
Humana, Inc. 5.913% 10/5/98 $ 847,000 846,444 846,444
IMC Global Inc. 5.906 10/1/98 1,625,000 1,625,000 1,625,000
Indiana Michigan Power Company 6.002 10/2/98 465,000 464,922 464,922
------------- ------------- -------------
Total Short-Term Securities $ 2,937,000 2,936,366 2,936,366
============= ------------- -------------
Total Investments - 117.63% $131,189,341 128,917,230
============= -------------
Other Assets - 4.46 4,888,903
Liabilities - (22.09) (24,211,228)
------ -------------
Total Net Assets - 100.00% $109,594,905
====== =============
</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.
- --------------------------------------------------------------------------------
22
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
INDUSTRY CLASSIFICATION
Fair Value Fair Value
at 9/30/98 at 9/30/98
Corporate Restricted Securities: (Note 2A) Corporate Restricted Securities: (Continued) (Note 2A)
----------- -----------
<S> <C> <C> <C>
AUTOMOBILE - 1.03% DIVERSIFIED/CONGLOMERATE -
ADV Accessory & AAS CAP $ 543,375 MANUFACTURING - 16.08%
Coast Distribution System, The 214,726 Cymer Inc. $ 108,005
Mark IV Industries 373,036 D T Industries 572,500
----------- Eagle Pacific Industries, Inc. 1,749,980
1,131,137 Energy Conversion Devices Inc. 108,281
----------- Evans Consoles, Inc. 1,707,321
BEVERAGE, FOOD & TOBACCO - 6.98% Fleming Acquisition Corporation 24,110
Associated Vintage Group, Inc. 1,809,436 Golden Bear Oil Specialties 1,815,574
Beta Brands, Inc. 1,832,263 Grove Worldwide 121,800
Cains Foods, L.P. 1,504,429 Hartzell Manufacturing, Inc. 1,640,853
Grand Lyon Enterprises LLC 99,157 Hudson River Capital, LLC 210,735
Lloyd's Barbecue Company 1,749,098 Hussey Seating Company 1,810,781
Mrs. Fields Original Cookies, Inc. 658,000 Jackson Products, Inc. 499,125
----------- Kappler Safety Group, Inc. 1,745,155
7,652,383 Maxtec International Corp. 288,482
----------- Pacific Coast Feather Company 1,814,400
BROADCASTING & ENTERTAINMENT - 0.77% PAR Acquisition Corp. 1,287,666
Latin Communications Group 465,919 The Tranzonic Companies 1,675,300
Mediacom LLC 376,312 U.S. Silica Company 439,547
----------- -----------
842,231 17,619,615
----------- -----------
DIVERSIFIED/CONGLOMERATE -
BUILDINGS & REAL ESTATE - 2.47% SERVICE - 2.61%
Building Materials Corp. 121,875 Ammirati & Puris, Inc. 83,883
Highland Homes Holdings, Inc. 383,850 Diversco, Inc./DHI Holdings, Inc. 1,698,807
Nortek Inc. 435,375 Great Lakes Dredge & Dock Corp. 343,000
Truseal Technologies, Inc. 1,762,596 Hunton & Williams 93,547
----------- Iron Mountain Inc. 47,736
2,703,696 Pharmaceutical Buyers, Inc. 593,077
----------- -----------
CARGO TRANSPORT - 2.54% 2,860,050
RailTex, Inc. 1,012,785 -----------
Tidewater Holdings, Inc. 1,770,802 ELECTRONICS - 8.89%
----------- Arbor Software Corporation 68,341
2,783,587 Ardent Software, Inc. 418,850
----------- Averstar, Inc. 2,334,195
CHEMICAL, PLASTICS & RUBBER - 6.92% Cirrus Logic, Inc. 1,271,275
AccTech, LLC 919,656 Control Devices, Inc. 1,056,076
Contico International, Inc. 536,050 Dealer Solutions Holdings, Inc. 200,216
Hatco Corporation 1,750,000 Nu Horizons Electronics Corp. 759,125
Philipp Brothers Chemicals, Inc. 95,000 Precision Dynamics, Inc. 2,050,380
Process Chemicals, LLC 1,008,411 Tridex Corp. 1,585,034
Trend Technologies, Inc. 2,155,057 -----------
U.S. Netting, Inc. 1,118,098 9,743,492
----------- -----------
7,582,272 FARMING & AGRICULTURE - 0.81%
----------- Cuddy International Corp. 408,900
CONSUMER PRODUCTS - 2.53% Protein Genetics, Inc. 483,383
Consumer Product Enterprises, Inc. 1,148,664 -----------
Newell Financial Trust 567,500 892,283
Sharp International Corp. 1,055,408 -----------
----------- FINANCE - 3.75%
2,771,572 Boyle Leasing Technologies, Inc. 621,600
----------- MW Investors I LLC 1,752,528
CONTAINERS, PACKAGING & Paribas Capital Funding LLC 1,740,550
GLASS - 5.92% -----------
C&K Manufacturing and Sales Company 895,268 4,114,678
Capitol Vial, Inc. 1,807,070 -----------
Plastipak Packaging, Inc. 1,828,596
Vitex Packaging, Inc. 1,952,339
-----------
6,483,273
-----------
</TABLE>
- --------------------------------------------------------------------------------
23
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
INDUSTRY CLASSIFICATION (Continued)
Fair Value Fair Value
at 9/30/98 at 9/30/98
Corporate Restricted Securities: (Continued) (Note 2A) Corporate Restricted Securities: (Continued) (Note 2A)
---------- ----------
<S> <C> <C> <C>
HEALTHCARE, EDUCATION & OIL AND GAS - 7.60%
CHILDCARE - 1.36% Chaparral Resources, Inc. $ 2,837
Berkshire Medical Center, Inc. $ 437,459 Hardy Oil & Gas PLC 1,564,950
Healthsouth Corporation 571,110 Key Energy Group 312,350
Oxford Health Plans 73,950 Louis Dreyfus Natural Gas Corporation 5,167
Tenet Healthcare 405,000 Maloney Industries, Inc. 1,935,973
------------- PG+E Gas Transmission 216,686
1,487,519 TransMontaigne Oil Company 4,288,713
------------- -------------
8,326,676
HOME & OFFICE FURNISHINGS, -------------
HOUSEWARES, AND DURABLE
CONSUMER PRODUCTS - 1.12% PERSONAL TRANSPORTATION - 1.03%
Catalina Lighting, Inc. 338,700 Atlantic Coast Airlines Inc. 738,170
Star International Holdings, Inc. 590,259 US Airways Group 395,411
Sunbeam orporation 300,000 -------------
------------- 1,133,581
1,228,959 -------------
-------------
PRINTING & PUBLISHING - 0.42%
HOTELS, MOTELS, INNS & Von Hoffman Press, Inc. 455,000
GAMING - 0.42% -------------
NE Restaurant Company, Inc. 455,700
------------- RETAIL STORES - 1.42%
Discount Auto Parts 796,500
LEISURE, AMUSEMENT, J. Baker, Inc. 281,344
ENTERTAINMENT - 6.34% Rent-Way, Inc. 143,247
Adventure Entertainment Corporation 844,744 Renter's Choice, Inc. 338,625
Bell Sports, Inc. 336,000 -------------
Derby Cycle Corp. 552,000 1,559,716
Merit Industries, Inc. 1,682,832 -------------
N2K, Inc. 1,389
Olympic Boat Centers, Inc. 1,757,463 TELECOMMUNICATIONS - 1.03%
Playcore, Inc. 1,776,171 Antec Corp. 133,500
------------- M J D Communications Inc. 272,250
6,950,599 McLeodUSA Incorporated 270,188
------------- Oak Industries 90,875
Smartalk Teleservices 74,625
MACHINERY - 0.28% Tel-Save 281,972
Numatics Inc. 311,500 -------------
------------- 1,123,410
-------------
MISCELLANEOUS - 2.95% Total Corporate Restricted
Brand Scaffold Services 325,500 Securities - 85.27% $ 93,448,773
Climachem, Inc. 96,000 =============
Enserch Exploration, Inc. 926,351
Equity Corporation International 221,108
T C W Leveraged Income Trust, LP 1,500,000
Tjiwi Kima Fin Mauritius LTD 161,250
Victory Ventures, LLC 5,635
-------------
3,235,844
-------------
</TABLE>
- --------------------------------------------------------------------------------
24
<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.
On January 27, 1998, the Board of Trustees authorized the formation of a
totally held subsidiary ("MMPI Subsidiary Trust") for the purpose of holding
certain investments. The results of MMPI Subsidiary Trust have been
consolidated in the accompanying financial statements.
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.
Nearly all securities which are acquired by the Trust directly from the
issuers and shares into which such securities may be converted or which may
be purchased on the exercise of warrants attached to such securities will be
subject to legal or contractual delays in or restrictions on resale and will
therefore be "restricted securities". Generally speaking, as contrasted with
open-market sales of unrestricted securities which may be effected
immediately if the market is adequate, restricted securities can be sold only
in a directly negotiated transaction to a limited number of purchasers or in
a public offering for which a registration statement is in effect under the
Securities Act of 1933.
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 (the "Trustees"). Each restricted
security is valued by the Trustees 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 Trustees,
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
- --------------------------------------------------------------------------------
25
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 $93,448,773
(85.27% of net assets) as of September 30, 1998 ($112,419,920 at September
30, 1997) 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 September 30, 1998, 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.
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 and 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.
- --------------------------------------------------------------------------------
26
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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. Senior Secured Indebtedness:
A. 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. For each of the periods ended September 30, 1998 and 1997, the
Trust incurred total interest expense on the Note of $207,900.
B. Revolving Credit Agreement
The Fund entered into a $15,000,000 senior secured, floating rate, revolving
credit agreement (the "Revolver") with Fleet National Bank (the "Agent
Bank"), pursuant to a credit agreement dated May 29, 1997, with a maturity
date of May 31, 2004.
The Revolver bears interest at a variable per annum rate equal to the one,
two, three or six-month Eurodollar rate plus a margin of .40 percent per
annum. Interest is paid to the Agent Bank as it becomes due. The Fund also
incurs expense on the undrawn portion of the total approved credit agreement
at a rate of .185 percent per annum.
As of September 30, 1998, there were $10,500,000 in outstanding loans against
the Revolver and the average blended rate of interest charged on the Revolver
was 6.15%. For the period ended September 30, 1998, the Fund incurred total
interest expense on the Revolver of $486,475, including $6,181 related to the
undrawn portion.
5. Purchases and Sales of Investments
For the For the
nine months nine months
ended 9/30/98 ended 9/30/97
-------------- --------------
Cost of Investments Acquired
------------------------------
Corporate restricted securities $ 34,281,262 $ 60,701,631
Corporate public securities 16,513,719 13,671,382
Short-term securities 219,959,351 168,830,059
Proceeds from Sales or Maturities
-----------------------------------
Corporate restricted securities $ 35,870,821 $ 41,028,759
Corporate public securities 23,174,449 24,521,685
Short-term securities 218,473,555 173,842,605
The aggregate cost of investments is the same for financial reporting and
federal income tax purposes as of September 30, 1998. The net unrealized
depreciation of investments for financial reporting and federal tax purposes as
of September 30, 1998 is $2,272,111 and consists of $10,309,059 appreciation and
$12,581,170 depreciation.
The aggregate cost of investments was the same for financial reporting and
federal income tax purposes as of September 30, 1997. The net unrealized
appreciation of investments for financial reporting and federal tax purposes as
of September 30, 1997 was $9,542,151 and consisted of $14,259,894 appreciation
and $4,717,743 depreciation.
- --------------------------------------------------------------------------------
27
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. Quarterly Results of Investment Operations
<TABLE>
<CAPTION>
Per Per
Amount Share Amount Share
--------- --------- -------- ----------
March 31, 1998 March 31, 1997
---------------------- ---------------------
<S> <C> <C> <C> <C>
Investment income $2,934,166 $2,398,479
Net investment income 2,261,923 $ .24 1,923,676 $ .21
Net realized and unrealized gain on investments 2,420,485 .26 1,504,885 .16
<CAPTION>
June 30, 1998 June 30, 1997
---------------------- ---------------------
<S> <C> <C> <C> <C>
Investment income 2,869,889 2,461,213
Net investment income 2,186,277 .24 1,959,604 .21
Net realized and unrealized gain on investments 1,793,007 .19 6,702,154 .73
<CAPTION>
September 30, 1998 September 30, 1997
---------------------- ---------------------
<S> <C> <C> <C> <C>
Investment income 2,800,222 2,657,346
Net investment income 2,086,535 .23 2,097,193 .23
Net realized and unrealized gain (loss) on
investments (3,526,841) (.38) 7,006,521 .76
</TABLE>
- --------------------------------------------------------------------------------
28
<PAGE>
Trustees
Donald E. Benson*
Marshall D. Butler
Milton Cooper
Richard G. Dooley
Donald Glickman
Martin T. Hart*
Jack A. Laughery
Corine T. Norgaard
Gary E. Wendlandt
*Member of the Audit Committee
[LOGO APPEARS HERE]
Officers
Gary E. Wendlandt, Chairman
Richard G. Dooley, Vice Chairman
Stuart H. Reese, President
Robert E. Joyal, Senior Vice
President
Charles C. McCobb, Jr., Vice President &
Chief Financial
Officer
Stephen L. Kuhn, Vice President &
Secretary
Michael P. Hermsen, Vice President
William N. Holm, Vice President
Mary Wilson Kibbe, Vice President
Michael L. Klofas, Vice President
John B. Joyce, Vice President
Richard C. Morrison, Vice President
Clifford M. Noreen, Vice President
Mark B. Ackerman, Treasurer
Victoria Fortier, Comptroller
Dividend Reinvestment and Cash Purchase Plan
MassMutual Participation Investors offers a Dividend Reinvestment and Cash
Purchase Plan. The Plan provides a simple and automatic way for shareholders to
add to their holdings in the Trust through the receipt of dividend shares issued
by the Trust or through the reinvestment of cash dividends in Trust shares
purchased in the open market. The dividends of each shareholder will be
automatically reinvested in the Trust by Shareholder Financial Services Inc.,
the Transfer Agent, in accordance with the Plan, unless such shareholder elects
not to participate by providing written notice to the Transfer Agent. A
shareholder may terminate his or her participation by notifying the Transfer
Agent in writing.
Participating shareholders may also make additional contributions to the Plan
from their own funds. Such contributions may be made by personal check or other
means in an amount not less than $100 nor more than $5,000 per quarter.
Whenever the Trust declares a dividend payable in cash or shares, the Transfer
Agent, acting on behalf of each participating shareholder, will take the
dividend in shares only if the net asset value is lower than the market price
plus an estimated brokerage commission as of the close of business on the
valuation day. The valuation day is the last day preceding the day of dividend
payment. When the dividend is to be taken in shares, the number of shares to be
received is determined by dividing the cash dividend by the net asset value as
of the close of business on the valuation date or, if greater than net asset
value, 95% of the closing share price. If the net asset value of the shares is
higher than the market value plus an estimated commission, the Transfer Agent,
consistent with obtaining the best price and execution, will buy shares on the
open market at current prices promptly after the dividend payment date.
The reinvestment of dividends does not, in any way, relieve participating
shareholders of any federal, state or local tax. For federal income tax
purposes, the amount reportable in respect of a dividend received in
newly-issued shares of the Trust will be the fair market value of the shares
received, which will be reportable as ordinary income and/or capital gains.
As compensation for its services, the Transfer Agent receives a fee of 5% of any
dividend and cash contribution (in no event in excess of $2.50 per distribution
per shareholder.)
Any questions regarding the Plan should be addressed to Shareholder Financial
Services, Inc., Agent for MassMutual Participation Investors' Dividend
Reinvestment and Cash Purchase Plan, P.O. Box 173673, Denver CO 80217-3673.
