SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended February 28, 1995
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 0-21160
THE MICROCAP FUND, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
Maryland 13-3698251
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
733 Third Avenue, 11th floor
New York, New York 10017
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (800) 888-6534
Not applicable
Former name, former address and former fiscal year, if changed since last report
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
Shares of Common Stock
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
(Cover page continues on next page)
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting common stock on May 12, 1995 held by
non-affiliates of the Registrant, based upon the last price reported by NASDAQ
on such date, was $11,910,729(1). The number of shares outstanding of the
Registrant's common stock at the close of business on May 12, 1995 was
2,221,587.
(1) This amount does not include the aggregate market value of 424,050 shares
of preferred stock currently convertible into 445,253 shares of common
stock, which would have an aggregate value of $2,448,892 on May 12, 1995.
Documents Incorporated By Reference
Portions of the Registration Statement of the Registrant dated March 19, 1993,
as supplemented by a supplement thereto dated March 29, 1993, are incorporated
by reference in Part I and Part III hereof.
Portions of the Registrant's Form 10-Q for the quarter ended May 31, 1994 filed
with the Securities and Exchange Commission on July 14, 1994 are incorporated by
reference in Part I hereof.
Portions of the Registrant's Form 10-Q for the quarter ended August 31, 1994
filed with the Securities and Exchange Commission on October 14, 1994 are
incorporated by reference in Part I hereof.
<PAGE>
PART I
Item 1. Business.
Formation
The MicroCap Fund, Inc., formerly Commonwealth Associates Growth Fund, Inc. (the
"Fund" or the "Registrant"), is a Maryland corporation formed on January 26,
1993. The Fund is a non-diversified, closed-end management investment company
operating as a business development company under the Investment Company Act of
1940 and has registered its securities under the Securities Act of 1933. The
Fund's investment objective is to achieve long-term capital appreciation of
assets, rather than current income, by investing in the debt and equity
securities of emerging and established companies that management believes offer
significant growth potential.
The investment activities of the Fund are managed by the Fund's employees. Mr.
Kamal Mustafa is the Fund's President, Chief Executive Officer and Portfolio
Manager. Information concerning Mr. Mustafa is included in Part III hereof.
Certain officers and employees of the Fund are also officers and employees of
Commonwealth Associates, a broker-dealer and investment banking firm.
Commonwealth Associates Asset Management, Inc. (the "Administrator"), an
affiliate of Commonwealth Associates, performs, or arranges for the performance
of, the accounting, reporting and administrative functions necessary for the
operation of the Fund.
On March 2, 1993, the Administrator purchased 10,000 shares of the Fund's common
stock for $100,000, or $10.00 per share. On March 19, 1993, a Registration
Statement on Form N-2 (File No. 33-57696) was declared effective and on March
29, 1993, the Fund completed its initial public offering of 2,100,000 shares of
common stock at $10.00 per share. During April 1993, the Fund sold an additional
94,000 shares of common stock at $10.00 per share as part of an over-allotment
option granted to Commonwealth Associates, the underwriter. The Fund sold a
total of 2,194,000 shares of common stock in the public offering for gross
proceeds totaling $21,940,000.
In connection with the public offering of its common stock, the Fund paid to
Commonwealth Associates selling commissions totaling $1,535,800 and an expense
allowance totaling $548,500. The Fund incurred additional offering and
organizational costs associated with the public offering totaling $589,332. Net
proceeds to the Fund from the public offering, after payment of all selling
commissions, offering and organizational costs, totaled $19.3 million.
Portfolio Investments
The Fund primarily invests in debt and equity securities of emerging and
established companies and offers certain managerial assistance to such
companies. To a lesser extent, the Fund invests in the marketable securities of
public companies with low market capitalizations that management believes offer
significant growth potential.
During the year ended February 28, 1995 ("fiscal 1995"), the Fund purchased
portfolio investments totaling $4,283,773. Also during fiscal 1995, the Fund
sold certain equity investments for an aggregate of $6,031,422 and promissory
notes due from two portfolio companies totaling $2,720,000 were repaid with
interest. At February 28, 1995, the Fund held investments in 12 portfolio
companies with an aggregate cost of $8,335,962 and a fair value of $8,371,350.
The descriptions of the Fund's investment in Radiator King International, Inc.
and investments in certain marketable securities set forth in Item 5 of Part II
of the Fund's quarterly report on Form 10-Q for the quarter ended May 31, 1994
are incorporated herein by reference.
The descriptions of the Fund's investment in Regency Holdings (Cayman), Inc. and
investments in certain marketable securities set forth in Item 5 of Part II of
the Fund's quarterly report on Form 10-Q for the quarter ended August 31, 1994
are incorporated herein by reference.
In January 1995, the Fund purchased a secured note from Shells Seafood
Restaurants, Inc. in the principal amount of $500,000, maturing on October 30,
1995 and bearing an interest rate of prime plus 2%. In connection with this
investment, the Fund received a warrant to purchase 10,000 shares of preferred
stock of Shells.
Competition
The Fund encounters competition from other entities and individuals having
similar investment objectives. Primary competition for desirable investments
comes from investment companies, investment partnerships and wealthy
individuals. Some of the competing entities and individuals have investment
managers or advisors with significantly greater experience, resources and
managerial capabilities than the Fund and are therefore in a better position
than the Fund to obtain access to attractive investments. To the extent that the
Fund can compete for such investments it may only be able to do so on less
favorable terms than those obtained by larger more established investors.
Employees
At February 28, 1995, the Fund had two full-time employees. Additionally,
certain officers and employees of the Fund are also officers or employees of the
Administrator and/or Commonwealth Associates. In order to facilitate the payroll
process, an affiliate of the Administrator pays the salaries of such officers
and employees. The Fund reimburses the Administrator on a quarterly basis for
allocated salary amounts.
Item 2. Properties.
The Fund does not own or lease physical properties. Office space for the Fund's
employees is provided by the Administrator under the Administrative Services
Agreement.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of shareholders during the fourth quarter of
the fiscal year covered by this report. The 1995 Annual Meeting of Shareholders
is scheduled to be held on July 31, 1995.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Fund has 10,000,000 shares of common stock authorized, of which 2,204,000
shares were issued and outstanding on February 28, 1995. The Fund also has
2,000,000 shares of preferred stock authorized, none of which had been issued as
of February 28, 1995. On February 28, 1995, the Fund declared a stock dividend,
payable on March 20, 1995 to shareholders of record on March 13, 1995 in shares
of preferred stock at the rate of .2 shares of preferred stock for each share of
common stock. The preferred stock is convertible into shares of the Fund's
common stock at any time until February 27, 1998. Each share of preferred stock
is convertible into (i) 1.05 shares of common stock from the date of issuance
through February 28, 1996, (ii) 1.25 shares of common stock from March 1, 1996
through February 28, 1997 and (iii) 1.33 shares of common stock from March 1,
1997 through February 27, 1998. The preferred stock will automatically convert
into common stock on the earlier of (i) a sale, transfer or other distribution
of the shares of common stock upon which the dividend has been paid or (ii)
February 27, 1998. The preferred stock is non-transferable. In connection with
such dividend, the Fund issued 440,800 shares of series A convertible preferred
stock on March 20, 1995.
The Fund's common stock is traded on the NASDAQ Small-Cap Market under the
symbol MCAP. The following table sets forth, for each of the periods indicated,
the high and low closing bid prices for the common stock as reported by NASDAQ.
These per share quotations represent inter-dealer prices on the over-the-counter
market, do not include retail markups, markdowns or commissions and may not
represent actual transactions.
<TABLE>
Price Per Share
High Low
Fiscal year ended February 28, 1994:
<S> <C> <C>
First Quarter (commencing March 19, 1993) $ 10.50 $ 9.75
Second Quarter 10.00 8.50
Third Quarter 9.25 8.25
Fourth quarter 9.00 8.50
Fiscal year ended February 28, 1995:
First quarter 8.25 7.00
Second quarter 8.00 7.50
Third quarter 8.00 6.25
Fourth quarter 6.75 6.00
Fiscal year ending February 28, 1996:
First quarter (through May 12, 1995) 6.00 4.75
</TABLE>
The closing sale price of the Fund's common stock on May 12, 1995 as reported by
NASDAQ was $5.50 per share. As of May 12, 1995, there were nine holders of
record of common stock. Certain holders of record hold common shares for
approximately 400 beneficial owners.
<PAGE>
Item 6. Selected Financial Data.
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Period From
March 19, 1993
Fiscal (Commencement
Year Ended of Operations) to
February 28, 1995 February 28, 1994
----------------- -----------------
Operating Data:
Net investment income (interest and dividend income
<S> <C> <C>
less operating expenses) $ 220,352 $ 55,079
Net realized loss from portfolio investments $ (161,149) $ (1,557,030)
Net change in unrealized appreciation or depreciation
of investments $ 548,448 $ (513,060)
Net realized and unrealized gain (loss) from portfolio
investments $ 387,299 $ (2,070,090)
Net increase (decrease) in net assets resulting from
operations $ 607,651 $ (2,015,011)
Distributions from net realized gains $ 70,150 -
Distributions from net investment income $ 275,178 -
Distributions in excess of net investment income $ 95,472 -
Total cash distributions $ 440,800 -
Per Share Amounts:
Net investment income $ .10 $ 0.03
Net realized and unrealized gain (loss) from portfolio investments $ .18 $ (0.94)
Net increase (decrease) in net assets resulting from operations $ .28 $ (0.91)
Cash distributions $ .20 -
As of As of
February 28, 1995 February 28, 1994
----------------- -----------------
Balance Sheet Data:
Total assets $ 18,054,440 $ 17,739,168
Net assets $ 17,715,073 $ 17,548,222
Cash and cash equivalents $ 9,033,750 $ 4,475,544
Portfolio investments at fair value $ 8,371,350 $ 11,645,538
Per Share Amount:
Net assets $ 8.04 $ 7.96
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Realized and Unrealized Gains and Losses from Portfolio Investments - During the
year ended February 28, 1995 ("fiscal 1995"), the Fund had a net realized and
unrealized gain from portfolio investments of $387,299, comprised of a $548,448
increase in unrealized appreciation of investments and a $161,149 net realized
loss from portfolio investments.
The net realized loss for fiscal 1995 resulted from the sale of certain
portfolio investments. In September 1994, the Fund sold 47,852 common shares of
Loronix Information Systems, Inc. in the public market for $258,400, realizing a
gain of $258,400. Such shares were received by the Fund in September 1994
through a non-cash exercise of a net issuance provision included in the Fund's
warrants to purchase common stock of Loronix. In May and June 1994, the Fund
sold 100,000 common shares of Alamar Biosciences, Inc. in the public market for
$210,625, realizing a gain of $18,987. These gains were offset by a $438,536 net
realized loss from the liquidation of the Fund's portfolio of marketable
securities during the first half of fiscal 1995.
The $548,448 increase to net unrealized appreciation for fiscal 1995 includes a
$710,397 net unrealized gain primarily reflecting the upward revaluation of the
Fund's investment in Silverado Foods, Inc. due to that company's initial public
offering completed in August 1994. This increase was offset by the transfer of
net unrealized gains totaling $161,949 to realized gains related to portfolio
investments sold during fiscal 1995, as discussed above.
For the period from March 19, 1993 (commencement of operations) to February 28,
1994 (the "1994 period"), the Fund had a net realized and unrealized loss from
portfolio investments of $2,070,090 comprised of a $1,557,030 net realized loss
from portfolio investments and a $513,060 decrease in net unrealized
appreciation of investments. In February 1994, the $1,200,000 promissory note
due from Computer Integration Corporation ("CIC") was canceled in exchange for
cash payments totaling $1,000,000 over a 10 month period. This transaction
resulted in a realized loss of $248,094 on the Fund's investment in CIC. Also
during the 1994 period, the Fund wrote-off its $450,000 investment in The
Complete Systems Corporation, genesys and $960,000 of its $1,200,000 investment
in Oh-La-La! Inc. due to business and financial difficulties at these companies.
Additionally, the Fund realized a $101,064 gain from the sale of certain
marketable securities during the 1994 period.
The $513,060 decrease to net unrealized appreciation for the period primarily
resulted from the downward revaluation of the Fund's investment in Bennett
Environmental U.S., Inc., a privately-held portfolio company.
Investment Income and Expenses
For fiscal 1995 and for the 1994 period, the Fund had net investment income of
$220,352 and $55,079, respectively. The $165,273 increase in net investment
income for fiscal 1995 from the 1994 period resulted from a $392,977 increase in
investment income, partially offset by a $227,704 increase in operating expenses
for fiscal 1995. Investment income was $1,053,967 and $660,990 for fiscal 1995
and for the 1994 period, respectively. The increase for fiscal 1995 primarily
was the result of a $332,375 increase in interest and dividend income earned
from portfolio investments, due to an increase in the number of interest bearing
debt securities held during fiscal 1995 compared to the 1994 period. For fiscal
1995 and for the 1994 period, the Fund's operating expenses were $833,615 and
$605,911, respectively. The increase in operating expenses for fiscal 1995
primarily was the result of a $132,991 increase in professional fees and a
$48,619 increase in other operating expenses for fiscal 1995. These increases
primarily were due to an increase in legal fees and mailing and printing
expenses for fiscal 1995 compared to the 1994 period.
Commonwealth Associates Asset Management, Inc. (the "Administrator") is
responsible for providing, or arranging for the provision of, the administrative
services necessary for the operation of the Fund. In return for such services,
the Administrator receives an administrative fee at the annual rate of 1% of the
net assets of the Fund. Such fee is determined and payable quarterly. For fiscal
1995 and for the 1994 period, the administrative fee was $181,052 and $181,816,
respectively.
Net Assets
For fiscal 1995, the Fund had a net increase in net assets resulting from
operations of $607,651, or $.28 per share of common stock, comprised of net
investment income totaling $220,352 and net realized and unrealized gain from
portfolio investments of $387,299. Additionally, the Fund's net assets declined
$440,800 as a result of the cash distribution of $.20 per share of common stock
paid to shareholders on December 12, 1994. As a result, the Fund's net assets
increased $166,851 to $17,715,073 at February 28, 1995, or $8.04 per share, an
increase of $.08 per share from $17,548,222, or $7.96 per share, at February 28,
1994.
The Fund completed its initial public offering in March and April 1993, selling
2,194,000 shares of its common stock at $10 per share. Gross proceeds raised in
the offering totaled $21,940,000. For the 1994 period, the Fund had a net
decrease in net assets resulting from operations of $2,015,011, or $.91 per
share of common stock, comprised of a $2,070,090 net realized and unrealized
loss from portfolio investments offset by $55,079 of net investment income.
Additionally, the Fund's net assets decreased $2,476,767, or $1.13 per share, as
a result of the selling and offering expenses incurred in connection with the
Fund's initial public offering. The Fund's net assets at February 28, 1994 were
$17,548,222, or $7.96 per share, a decrease of $2.04 per share from the initial
public offering price of $10.00 per share.
Liquidity and Capital Resources
The Fund commenced operations on March 19, 1993 and completed its initial public
offering of common stock in two separate closings in March and April 1993. The
Fund sold a total of 2,194,000 shares of common stock at $10.00 per share in the
offering. Additionally, in March 1993, Commonwealth Associates Asset Management,
Inc. purchased 10,000 shares of the Fund's common stock for $100,000, or $10.00
per share. Gross proceeds received by the Fund from the sale of its common stock
during the 1994 period totaled $22,040,000 and net proceeds after the payment of
selling commissions, offering and organizational expenses totaled $19,366,368.
For fiscal 1995, cash provided from investing activities totaled $4,722,649.
During fiscal 1995, the Fund purchased portfolio investments totaling
$4,283,773. The Fund also sold certain portfolio investments for $6,031,422 and
the debt investments of two portfolio companies totaling $2,720,000 were repaid
with interest. Additionally, a $255,000 deposit in escrow relating to a
potential follow-on investment in Radiator King International, Inc. was returned
during fiscal 1995. Cash provided from operating activities for fiscal 1995 was
$276,357.
At February 28, 1995, the Fund had cash and cash equivalents of $9,033,750, an
increase of $4,558,206 from February 28, 1994. The Fund's cash balances provide
the liquidity necessary to purchase additional portfolio investments as
opportunities arise. The increase in cash and cash equivalents resulted from the
$4,999,006 of cash provided from operating and investing activities offset by
the $440,800 cash distribution paid to shareholders in December 1994. The Fund
invests its available cash in overnight repurchase agreements collateralized by
securities issued by the U.S. Government or its agencies. Interest earned from
repurchase agreements for fiscal 1995 and for the 1994 period totaled $367,122
and $306,520, respectively. Interest earned from such investments in future
periods is subject to fluctuations in short-term interest rates and changes in
the Fund's available cash balances.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
THE MICROCAP FUND, INC.
INDEX
Independent Auditors' Report
Statements of Assets and Liabilities as of February 28, 1995 and February 28,
1994
Schedules of Portfolio Investments as of February 28, 1995 and February 28, 1994
Statements of Operations for the year ended February 28, 1995 and for the period
from March 19, 1993 (commencement of operations) to February 28, 1994
Statements of Changes in Net Assets for the year ended February 28, 1995 and for
the period from March 19, 1993 (commencement of operations) to February 28, 1994
Statements of Cash Flows for the year ended February 28, 1995 and for the period
from March 19, 1993 (commencement of operations) to February 28, 1994
Notes to Financial Statements
Note - All schedules are omitted because of the absence of conditions under
which they are required or because the required information is included
in the financial statements or notes thereto.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The MicroCap Fund, Inc.
We have audited the accompanying statements of assets and liabilities of The
MicroCap Fund, Inc. (the "Fund") including the schedules of portfolio
investments as of February 28, 1995 and 1994, and the related statements of
operations, changes in net assets and cash flows for the year ended February 28,
1995 and for the period March 19, 1993 (commencement of operations) to February
28, 1994. These financial statements are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned at February 28, 1995 by correspondence with the
custodian; where confirmation was not possible, we satisfied ourselves by other
audit procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Fund at February 28, 1995 and 1994 and
the results of its operations, changes in its net assets and its cash flows for
the year ended February 28, 1995 and the period March 19, 1993 (commencement of
operations) to February 28, 1994 in conformity with generally accepted
accounting principles.
As explained in Note 2, the financial statements include securities valued at
$8,371,350 and $9,809,475 at February 28, 1995 and 1994, respectively,
representing 47% and 56% of net assets, respectively, whose values have been
estimated by the Board of Directors in the absence of readily ascertainable
market values. We have reviewed the procedures used by the Board of Directors in
arriving at its estimate of value of such securities and have inspected
underlying documentation, and, in the circumstances, we believe the procedures
are reasonable and the documentation appropriate. However, because of the
inherent uncertainty of valuation, those estimated values may differ
significantly from the values that would have been used had a ready market for
the securities existed, and the differences could be material.
Deloitte & Touche LLP
New York, New York
May 12, 1995
<PAGE>
THE MICROCAP FUND, INC.
STATEMENTS OF ASSETS AND LIABILITIES
FEBRUARY 28,
<TABLE>
1995 1994
---- ----
ASSETS
Portfolio investments at fair value (cost $8,335,962 at
<S> <C> <C>
February 28, 1995 and $12,158,598 at February 28, 1994) - Note 2 $ 8,371,350 $ 11,645,538
Cash and cash equivalents 9,033,750 4,475,544
Receivable (net of unamortized discount of $0 at February 28, 1995
and $45,088 at February 28, 1994) - Note 6 100,000 954,912
Deposit in escrow - 255,000
Accrued interest receivable 422,938 237,111
Deferred organizational costs (net of accumulated amortization of $76,885 at
February 28, 1995 and $37,513 at February 28, 1994)
- Note 2 119,980 159,352
Other assets 6,422 11,711
----- ------
Total assets 18,054,440 17,739,168
---------- ----------
LIABILITIES
Deferred interest income 53,350 -
Payable for securities purchased - 48,750
Accounts payable and accrued expenses 141,965 38,431
Due to Administrator - Note 4 144,052 103,765
------- -------
Total liabilities 339,367 190,946
------- -------
NET ASSETS
Preferred Stock, par value $.01; 2,000,000 shares authorized;
no shares issued or outstanding - Note 8 - -
Common Stock, par value $.01; 10,000,000 shares
authorized; 2,204,000 shares issued and outstanding 22,040 22,040
Additional paid-in-capital 19,541,193 19,541,193
Net unrealized appreciation (depreciation) of portfolio investments 35,388 (513,060)
Undistributed (distribution in excess of) net investment income (95,219) 55,079
Accumulated net realized loss from portfolio investments (1,788,329) (1,557,030)
---------- ----------
Net Assets $ 17,715,073 $ 17,548,222
= ========== = ==========
Net assets per share of common stock $ 8.04 $ 7.96
= ==== = ====
</TABLE>
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
SCHEDULE OF PORTFOLIO INVESTMENTS
FEBRUARY 28, 1995
<TABLE>
% of
Issuer / Position Cost Fair Value Net Assets(1)
Publicly-Held Securities:
Alamar Biosciences, Inc.(A)
<C> <C> <C>
150,000 shares of Common Stock $ 287,456 $ 151,875
Warrants to purchase 250,000 shares of Common Stock
at $5.00 per share, expiring 10/14/97 20,906 62,500
------ ------
308,362 214,375 1.21%
------- -------
Silverado Foods, Inc.*(B)
337,500 shares of Common Stock 150,000 759,375 4.29%
------- -------
Privately-Held Securities:
Bennett Environmental Inc.
Warrants to purchase 900,000 shares of Common Stock
at $.79 per share, expiring 9/1/98 900 900
Bennett Environmental U.S., Inc.
8% Secured Promissory Note due 9/14/95 1,200,000 720,000
--------- -------
1,200,900 720,900 4.07%
--------- -------
International Communication Technologies, Inc.
9% Convertible Promissory Note due 6/30/96 150,000 150,000 .85%
------- -------
Oh-La-La! Inc.(C)
9% Convertible Senior Note due 6/30/95 140,000 140,000
9% Convertible Senior Note due 11/30/95 100,000 100,000
------- -------
240,000 240,000 1.35%
------- -------
Optiva Corporation
150,000 shares of Common Stock 487,500 487,500 2.75%
------- -------
Radiator King International, Inc.
9% Promissory Notes 60,000 60,000 .34%
------ ------
Regency Holdings (Cayman), Inc.*(D)
18% Promissory Note due 4/24/95 1,940,000 1,940,000
Warrant to purchase 211,200 shares of Common Stock
at $9.00 per share, expiring 7/20/98 0 0
- -
1,940,000 1,940,000 10.95%
--------- ---------
Shells Seafood Restaurants, Inc.*
9% Senior Secured Note due 10/30/95 1,310,000 1,310,000
300,000 shares of Common Stock 90,000 90,000
Secured note at prime plus 2% due 10/30/95 500,000 500,000
Warrant to purchase 10,000 shares of Preferred Stock
at $25 per share, expiring 12/31/99 0 0
- -
1,900,000 1,900,000 10.73%
--------- ---------
SR Communications Corp.*(E)
250,000 shares of Preferred Stock 247,500 247,500
250,000 shares of Common Stock 2,500 2,500
----- -----
250,000 250,000 1.41%
------- -------
</TABLE>
<PAGE>
THE MICROCAP FUND, INC.
SCHEDULE OF PORTFOLIO INVESTMENTS - continued
FEBRUARY 28, 1995
<TABLE>
% of
Issuer / Position Cost Fair Value Net Assets(1)
Weir-Jones Marketing, Inc.
<C> <C> <C> <C>
9% Convertible Subordinated Note due 1/28/96 $ 950,000 $ 950,000 5.36%
- ------- - -------
YES! Entertainment Corporation
608,696 shares of Preferred Stock 699,200 699,200
Warrant to purchase 116,667 shares of Preferred Stock
at $1.50 per share, expiring 7/16/98 0 0
- -
699,200 699,200 3.95%
------- ------- ------
Total Portfolio Investments(F) $ 8,335,962 $ 8,371,350 47.26%
= ========= = ========= =====
</TABLE>
* May be deemed an "affiliated person" of the Fund as such term is defined in
the Investment Company Act of 1940.
(1) Represents fair value as a percentage of net assets.
(A) During May and June 1994, the Fund sold 100,000 shares of Alamar
Biosciences, Inc. for $210,625, realizing a gain of $18,987.
(B) On August 4, 1994, Silverado Foods, Inc. completed its initial public
offering. In connection with the offering, the Fund converted subordinated
notes totaling $150,000 into 337,500 common shares of Silverado.
Additionally, in August 1994, the Fund received repayment for $1.35 million
of senior notes due from Silverado with accrued interest thereon.
(C) During fiscal 1995, Oh-La-La! Inc. filed for Chapter 11 bankruptcy
protection. The assets of Oh-La-La! are being liquidated through court
proceedings. The Fund currently expects to receive cash and/or equity
securities of a public company at the conclusion of these proceedings.
(D) In January 1995, under the terms of the note agreement, the maturity date
of the Fund's promissory note due from Regency Holdings (Cayman), Inc. was
extended to April 24, 1995. In consideration for such extension, the Fund's
warrant to purchase common stock was adjusted, increasing the number of
shares from 120,000 to 211,200. In March 1995, the Fund agreed to extend
the maturity date of its promissory note due from Regency, contingent upon
certain future events, to July 19, 1995. In consideration for such
extension, the terms of the Fund's warrant to purchase common shares of
Regency was adjusted, increasing the number of shares from 211,200 to
291,456 and reducing the exercise price from $9.00 per share to $6.75 per
share.
(E) Subsequent to the end of fiscal 1995, on March 23, 1995, the Fund sold its
investment in SR Communications Corp. ("SRC") for $200,000 in cash and a
$40,000 non-interest bearing promissory note from SRC payable on March 24,
1996.
(F) During 1994, the Fund liquidated its $1,370,000 investment in Loronix
Information Systems, Inc. for $1,628,400, realizing a gain of $258,400.
Also during fiscal 1995, the Fund sold common stock of certain other
publicly-held securities for $3,207,485, realizing a loss of $438,536 and
sold its investment in EMARC, Inc. for an amount equal to the original cost
of $1,500,000 plus accrued interest on the debt portion of the investment.
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
SCHEDULE OF PORTFOLIO INVESTMENTS
FEBRUARY 28, 1994
<TABLE>
% of
Issuer / Position Cost Fair Value Net Assets(1)
Publicly-Held Securities:
Aaon Inc.
<C> <C> <C> <C>
17,500 shares of Common Stock $ 162,500 $ 207,813 1.18%
Alamar Biosciences, Inc.
250,000 shares of Common Stock 479,094 421,875
Warrants to purchase 250,000 shares of Common Stock
at $5.00, expiring 10/14/97 20,906 75,000
------ ------
500,000 496,875 2.83%
------- -------
Lottery Enterprises, Inc.
20,000 shares of Common Stock 265,000 220,000 1.25%
Lumex Inc.
5,000 shares of Common Stock 52,810 63,125 .36%
Mountasia Entertainment International, Inc.
35,000 shares of Common Stock 367,500 358,750 2.03%
National Vision Associates, Ltd.
20,000 shares of Common Stock 201,875 105,000 .60%
Primadonna Resorts, Inc.
5,000 shares of Common Stock 139,375 127,500 .73%
Rio Hotel and Casino, Inc.
5,000 shares of Common Stock 80,625 85,625 .49%
Spiezman Industries, Inc.
21,000 shares of Common Stock 310,313 288,750 1.65%
Syncor International Corp.
9,000 shares of Common Stock 189,000 195,750 1.12%
Transmedia Network, Inc.
10,000 shares of Common Stock 97,000 183,750 1.05%
Privately-Held Securities:
Bennett Environmental Inc.
Warrants to purchase 900,000 shares of Common Stock
at $.79, expiring 9/1/98 900 900
Bennett Environmental U.S., Inc.
8% Secured Promissory Note due 9/14/95 1,200,000 720,000
--------- -------
1,200,900 720,900 4.11%
--------- -------
EMARC, Inc.*
9% Promissory Note due 12/7/94 900,000 900,000
312,500 shares of Common Stock 600,000 600,000
------- -------
1,500,000 1,500,000 8.55%
--------- ---------
</TABLE>
<PAGE>
THE MICROCAP FUND, INC.
SCHEDULE OF PORTFOLIO INVESTMENTS - continued
FEBRUARY 28, 1994
<TABLE>
% of
Issuer / Position Cost Fair Value Net Assets(1)
International Communication Technologies, Inc.
<C> <C> <C> <C>
9% Convertible Promissory Note due 6/30/96 $ 150,000 $ 150,000 .85%
- ------- - -------
Loronix Information Systems, Inc.
10% Promissory Note due 6/28/95 1,370,000 1,370,000
Warrants to purchase 235,000 shares of Common Stock
at $1.95, expiring 6/28/97 0 0
- -
1,370,000 1,370,000 7.81%
--------- ---------
Oh-La-La! Inc.
9% Convertible Senior Note due 6/30/95 140,000 140,000
9% Convertible Senior Note due 11/30/95 100,000 100,000
------- -------
240,000 240,000 1.37%
------- -------
Optiva Corporation
150,000 shares of Common Stock 487,500 487,500 2.78%
------- -------
Radiator King International, Inc.
9% Promissory Note due 4/27/94 45,000 45,000 .26%
------ ------
Shells Seafood Restaurants, Inc.*
9% Senior Secured Note due 10/30/95 1,310,000 1,310,000
300,000 shares of Common Stock 90,000 90,000
------ ------
1,400,000 1,400,000 7.98%
--------- ---------
Silverado Foods, Inc.*
9% Senior Notes due 5/4/96 1,350,000 1,350,000
9% Convertible Subordinated Notes due 5/4/96 150,000 150,000
------- -------
1,500,000 1,500,000 8.55%
--------- ---------
SR Communications Corp.*
250,000 shares of Preferred Stock 247,500 247,500
250,000 shares of Common Stock 2,500 2,500
----- -----
250,000 250,000 1.42%
------- -------
Weir-Jones Marketing, Inc.
9% Convertible Subordinated Note due 1/28/96 950,000 950,000 5.41%
------- -------
YES! Entertainment Corporation
608,696 shares of Preferred Stock 699,200 699,200
Warrants to purchase 116,667 shares of Preferred Stock
at $1.50, expiring 7/16/98 0 0
- -
699,200 699,200 3.98%
------- ------- ------
Total Portfolio Investments $ 12,158,598 $ 11,645,538 66.36%
= ========== = ========== ======
</TABLE>
* May be deemed an affiliated person of the Fund as such term is defined in the
Investment Company Act of 1940.
(1) Represents fair value as a percentage of net assets.
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
STATEMENTS OF OPERATIONS
<TABLE>
Period From
March 19, 1993
Fiscal (Commencement
Year Ended of Operations) to
February 28, 1995 February 28, 1994
----------------- -----------------
INVESTMENT INCOME AND EXPENSES
Income:
<S> <C> <C>
Interest from repurchase agreements $ 367,122 $ 306,520
Interest and dividends from portfolio investments 686,845 354,470
------- -------
Total investment income 1,053,967 660,990
--------- -------
Expenses:
Administrative fee - Note 4 181,052 181,816
Professional fees 251,826 118,835
Salary expense - Note 4 177,273 166,442
Consulting fees 28,000 6,113
Amortization of deferred organizational costs - Note 2 39,372 37,513
Transfer agent and custodian fees 13,927 14,147
Directors' fees and expenses - Note 5 26,032 13,531
Other operating expenses 116,133 67,514
------- ------
Total expenses 833,615 605,911
------- -------
NET INVESTMENT INCOME 220,352 55,079
------- ------
NET REALIZED AND UNREALIZED GAIN (LOSS)
FROM PORTFOLIO INVESTMENTS
Net realized loss from portfolio investments (161,149) (1,557,030)
Change in net unrealized appreciation or depreciation
of investments 548,448 (513,060)
------- --------
Net realized and unrealized gain (loss) from portfolio
investments 387,299 (2,070,090)
------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 607,651 $ (2,015,011)
= ======= = ==========
Per Share Net Increase (Decrease) in Net Assets Resulting
from Operations $.28 $(.91)
==== =====
</TABLE>
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
Period From
March 19, 1993
Fiscal (Commencement
Year Ended of Operations) to
February 28, 1995 February 28, 1994
----------------- -----------------
Change in net assets resulting from operations:
<S> <C> <C>
Net investment income $ 220,352 $ 55,079
Net realized loss from portfolio investments (161,149) (1,557,030)
Change in net unrealized appreciation or depreciation
of portfolio investments 548,448 (513,060)
------- --------
Net increase (decrease) in net assets resulting from operations 607,651 (2,015,011)
------- ----------
Change in net assets from distributions:
Distribution from net realized gains (70,150) -
Distribution from net investment income (275,431) -
Distribution in excess of net investment income (95,219) -
------- -
Decrease in net assets from distributions (440,800) -
-------- -
Change in net assets from capital stock transactions:
Gross proceeds from the sale of common stock - 21,940,000
Less:
Selling commissions - (1,535,800)
Expense allowance - (548,500)
Offering expenses - (392,467)
- --------
Net increase in net assets from capital stock transactions - 19,463,233
- ----------
Total increase in net assets for the period 166,851 17,448,222
Net assets at beginning of period 17,548,222 100,000
---------- -------
NET ASSETS AT END OF PERIOD $ 17,715,073 $ 17,548,222
= ========== = ==========
</TABLE>
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
Period From
March 19, 1993
Fiscal (Commencement
Year Ended of Operations) to
February 28, 1995 February 28, 1994
----------------- -----------------
CASH FLOWS PROVIDED FROM (USED FOR)
OPERATING ACTIVITIES
<S> <C> <C>
Net investment income $ 220,352 $ 55,079
Adjustments to reconcile net investment income to cash
provided from (used for) operating activities:
Amortization of discount on accounts receivable - (3,006)
Amortization of deferred organizational costs 39,372 37,513
Increase in payables and other liabilities 197,171 142,196
Increase in receivables and other assets (180,538) (248,822)
-------- --------
Cash flows provided from (used for) operating activities 276,357 (17,040)
------- -------
CASH FLOWS PROVIDED FROM (USED FOR)
INVESTING ACTIVITIES
Purchase of portfolio investments (4,283,773) (16,642,770)
Net proceeds from the sale of portfolio investments 5,131,422 2,023,986
Repayment of notes 3,620,000 -
Deposit released from (placed in) escrow 255,000 (255,000)
------- --------
Cash flows provided from (used for) investing activities 4,722,649 (14,873,784)
--------- -----------
CASH FLOWS PROVIDED FROM (USED FOR)
FINANCING ACTIVITIES
Cash distribution to shareholders (440,800) -
Gross proceeds from the sale of common stock - 21,940,000
Cost of selling common stock:
Selling commissions - (1,535,800)
Expense allowance - (548,500)
Offering expenses - (392,467)
Organizational expenses - (196,865)
- --------
Cash flows provided from (used for) financing activities (440,800) 19,266,368
-------- ----------
Increase in cash and cash equivalents 4,558,206 4,375,544
Cash and cash equivalents at beginning of period 4,475,544 100,000
--------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,033,750 $ 4,475,544
= ========= = =========
</TABLE>
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Purpose
The MicroCap Fund, Inc. (the "Fund"), formerly known as Commonwealth Associates
Growth Fund, Inc., is a non-diversified, closed-end management investment
company operating as a business development company under the Investment Company
Act of 1940. The Fund was incorporated under the laws of the State of Maryland
on January 26, 1993. The Fund's investment objective is to achieve intermediate
to long-term capital appreciation of assets by investing in securities of
emerging and established companies that management believes offer significant
growth potential.
2. Significant Accounting Policies
Valuation of Investments - Portfolio investments are carried at fair value as
determined quarterly by the Fund's Board of Directors. Unrestricted portfolio
securities that are listed on a securities exchange or quoted on the NASDAQ
National Market System are valued at the closing public market price on the last
day of the fiscal quarter. Restricted securities that are listed on a securities
exchange or quoted on the NASDAQ National Market System are discounted from the
public market price by a factor typically ranging from 10% to 40%. Factors
considered in the determination of an appropriate discount include: underwriter
lock-up, sales restrictions on securities held where the Fund may be deemed an
affiliate by having a representative on the Board of Directors or by virtue of
being a greater than 10% shareholder, and other liquidity factors such as the
size of the Fund's position in a given portfolio company compared to the trading
history of the public security. Privately-held portfolio securities are carried
at cost until significant developments affecting the portfolio company provide a
basis for change in valuation, including adjustments to reflect meaningful
third-party transactions in the private market.
Investment Transactions - Investment transactions are recorded on the trade
date, which is the date the Fund obtains an enforceable right to demand the
securities or payment therefor. Realized gains and losses on investments sold
are computed on a specific identification basis. The Fund records all other
transactions on the accrual method.
Income Taxes - The Fund qualifies and intends to remain qualified as a regulated
investment company under the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), and as such will not be subject to federal income tax on
taxable income which is distributed in accordance with the provisions of the
Code. Therefore, no provision for federal income taxes is required.
Cash and Cash Equivalents - The Fund invests its available cash in overnight
repurchase agreements collateralized by securities issued by the U.S. Government
or its agencies. Securities received as collateral subject to repurchase
agreements are deposited with the Fund's custodian and, pursuant to the terms of
the repurchase agreement, must have an aggregate market value of no less than
102% of the purchase price plus accrued interest, at all times. The Fund's
custodian monitors the market value of the underlying securities to ensure the
existence of the proper level of collateral. Such investments are considered to
be cash equivalents for the statement of cash flows.
Organizational Costs - Organizational costs of $196,865 are being amortized over
a sixty-month period beginning March 19, 1993.
<PAGE>
THE MICROCAP FUND, INC.
NOTES TO FINANCIAL STATEMENTS - continued
3. Employee Profit Sharing Plan
The Fund has an employee profit sharing plan that provides for payment of a
performance fee to certain officers of the Fund. The fee is equal to 20% of
interest, dividends and realized capital gains from portfolio investments less
realized capital losses and net unrealized capital depreciation. Such fee is
calculated from the end of the fiscal year for which fees were last paid. No
performance fees have been paid from inception of the Fund to February 28, 1995.
4. Related Party Transactions
On March 2, 1993, Commonwealth Associates Asset Management, Inc. (the
"Administrator") purchased 10,000 shares of the Fund's common stock for
$100,000, or $10.00 per share. The Administrator is responsible for the
management and administrative services necessary for the operation of the Fund
and receives an administrative fee at an annual rate of 1% of the Fund's net
assets. Such fee is determined and payable quarterly.
Certain officers and employees of the Fund are also officers or employees of the
Administrator and/or Commonwealth Associates, an affiliate of the Administrator.
In order to facilitate the payroll process, Commonwealth Associates pays the
salaries of the Fund's officers and employees. The Fund reimburses the
Administrator for allocated salary amounts.
In connection with the closing of the Fund's public offering of common stock
held in March and April 1993, the Fund paid Commonwealth Associates selling
commissions totaling $1,535,800 and an expense allowance totaling $548,500.
Since its inception, the Fund has participated in private placement transactions
of certain portfolio companies in which Commonwealth Associates acted as
placement agent on behalf of such portfolio companies. From inception of the
Fund to February 28, 1995, Commonwealth Associates received compensation as
placement agent with respect to the Fund's participation in such transactions,
as detailed below:
<TABLE>
Warrants and
Portfolio Company Cash Exercise Price Per Share
- ----------------- ---- ------------------------
<S> <C>
Alamar Biosciences, Inc. $ 25,000 -
Bennett Environmental, Inc. $ 144,000 50,000 / $.79
Computer Integration Corporation $ 134,000 -
Oh-La-La! Inc. - 233,172 / $.15
Regency Holdings (Cayman), Inc. $ 60,000 -
Silverado Foods, Inc. $ 195,000 12,874 / $.97
The Complete Systems Corporation $ 58,500 -
Weir-Jones Marketing, Inc. $ 61,750 -
</TABLE>
In certain of these transactions, the portfolio company reimbursed Commonwealth
Associates for legal fees and other expenses incurred in connection with its
role as placement agent.
<PAGE>
THE MICROCAP FUND, INC.
NOTES TO FINANCIAL STATEMENTS - continued
In connection with the initial public offering of Loronix Information Systems,
Inc. completed in September 1994, the Fund sold 47,852 common shares of Loronix
for net proceeds of $258,400. In connection with such sale, Commonwealth
Associates, underwriter of the Loronix initial public offering, received
underwriting discounts and commissions from the Fund totaling $28,711 under the
same terms and conditions as Loronix and other selling shareholders.
For the fiscal year ended February 28, 1995 and for the period from March 19,
1993 to February 28, 1994, Commonwealth Associates acted as broker on behalf of
the Fund with respect to certain public security transactions and received
aggregate commissions from the Fund for such services totaling $20,870 and
$3,000, respectively.
5. Directors' Fees
As compensation for serving on the Board of Directors, each of the three
independent directors receives a fee of $2,500 for each Board of Directors
meeting attended plus out-of-pocket-expenses related to attendance at the
meetings.
6. Receivable
In February 1994, the Fund's $1,200,000 promissory note due from Computer
Integration Corporation was canceled in exchange for $1,000,000 in cash, payable
in 11 installments. As of February 28, 1995, the Fund had received ten
installment payments totaling $900,000. Subsequent to the end of the fiscal
year, the Fund received the final payment of $100,000 from the company.
7. Cash Distribution
On November 7, 1994, the Fund's Board of Directors declared a cash distribution
to shareholders totaling $440,800, or $0.20 per share of common stock. The
distribution was paid on December 12, 1994 to shareholders of record on November
30, 1994.
The treatment for financial statement purposes of distributions made during the
year from net investment income or net realized gains may differ from their
ultimate treatment for federal income tax purposes. These differences are caused
primarily by differences in the timing of the recognition of certain components
of income, expense and capital gain for federal income tax purposes. Where such
differences are permanent in nature, they are reclassified in the components of
net assets based on their ultimate characterization for federal income tax
purposes. Any such reclassifications will have no effect on the Fund's net
assets, results of operations or net asset value per share.
8. Preferred Stock Dividend
On February 28, 1995, the Fund declared a stock dividend, payable on March 20,
1995 to shareholders of record on March 13, 1995 in shares of preferred stock at
the rate of .2 shares of preferred stock for each share of common stock. The
preferred stock is convertible into shares of the Fund's common stock at any
time until February 27, 1998. Each share of preferred stock is convertible into
(i) 1.05 shares of common stock from the date of issuance through February 28,
1996, (ii) 1.25 shares of common stock from March 1, 1996
<PAGE>
THE MICROCAP FUND, INC.
NOTES TO FINANCIAL STATEMENTS - continued
through February 28, 1997 and (iii) 1.33 shares of common stock from March 1,
1997 through February 27, 1998. The preferred stock will automatically convert
into common stock on the earlier of (i) a sale, transfer or other distribution
of the shares of common stock upon which the dividend has been paid or (ii)
February 27, 1998. The preferred stock is non-transferable.
9. Common Stock Repurchase Program
On February 28, 1995, the Board of Directors approved the repurchase of up to an
aggregate amount of $500,000 of the Fund's common stock. In April 1995, the
Board of Director's increased the amount authorized for the repurchase of the
Fund's common stock to an aggregate amount of $1 million. As of May 12, 1995,
the Fund had repurchased 36,500 shares of its common stock for $156,000.
<PAGE>
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers.
Set forth below are names, ages, positions and certain other information
concerning the current directors and executive officers of the Fund as of May
12, 1995.
<TABLE>
Name Age Position
<S> <C> <C>
Michael S. Falk* 33 Chairman of the Board of Directors
Kamal Mustafa* 46 President, Chief Executive Officer, Portfolio Manager
and Director
Kerry Dukes 33 Managing Director
Mark T. Behrman 32 Chief Financial Officer and Treasurer
James E. Brands 57 Director
Leonard J. De Roma 42 Director
Jeffrey Lewis 55 Director
</TABLE>
* Indicates "interested person" of the Fund within the meaning of the Investment
Company Act of 1940.
Michael S. Falk has been Chairman of the Board of Directors of the Fund since
its inception. Since June 1988, Mr. Falk has been President and since January
1994, Mr. Falk has also been Chief Executive Officer and Chairman of the Board
of Commonwealth Associates, an investment banking firm, which is an affiliate of
Commonwealth Associates Asset Management, Inc. (the "Administrator"), the Fund's
administrator. Mr. Falk also serves as President of the Administrator. In
addition, since June 1988, Mr. Falk has been President and Chairman of the Board
of Commonwealth Associates Management Company, Inc. (formerly JMJ Management
Company Inc.), the general partner of Commonwealth Associates.
Kamal Mustafa has been President, Chief Executive Officer, Portfolio Manager and
a Director of the Fund since April 1994 and was Managing Director of the Fund
from inception to August 1993. In addition, Mr. Mustafa has been Chief Executive
Officer and Managing Director of Hamilton Capital Partners, a private investment
consulting firm, since its formation in October 1991. From March 1988 to October
1991, Mr. Mustafa was a Managing Director and Executive Vice President of KSP, a
leverage buyout fund and also a Managing Director of Kluge and Company,
responsible for the origination and financing of acquisitions. From 1986 to
March 1988, Mr. Mustafa was a Managing Director of Mergers and Acquisitions and
a Managing Director of Merchant Banking at Paine Webber, Inc. Mr. Mustafa is
currently a member of the Board of Directors of Shells Seafood Restaurants,
Inc., Silverado Foods, Inc., and Regency Holdings (Cayman), Inc.
Kerry Dukes has been Managing Director and Secretary of the Fund since October
1994. Since 1988, Mr. Dukes has been the Chief Operating Officer of Commonwealth
Associates, where he is responsible for the management and supervision of the
firm's daily activities. From August 1987 to May 1988, Mr. Dukes served as head
of operations for Beuret & Company. From June 1984 to August 1987, Mr. Dukes was
employed by Shearson Lehman Brothers.
Mark T. Behrman has been Chief Financial Officer and Treasurer of the Fund since
inception. Mr. Behrman has been Chief Financial Officer and Treasurer of the
Administrator since its inception in January 1993. Since May 1994, Mr. Behrman
has been Vice President - Corporate Finance and, from May 1992 to April 1994,
Mr. Behrman was Chief Financial Officer of Commonwealth Associates. From January
1990 to November 1991, Mr. Behrman served as controller of Fundamental Brokers,
Inc., a broker dealer. From March 1987 to January 1990, Mr. Behrman was employed
as an accounting supervisor at Drexel Burnham Lambert, Inc.
James E. Brands has been a director of the Fund since October 1993. Since 1982,
Mr. Brands has been a principal of Brands & Co., a financial consulting
business. From 1985 to 1995, Mr. Brands was an executive Vice President of RPS
Investors, Inc., a private investment company. From 1982 to 1995, Mr. Brands was
Vice Chairman and Chief Financial Officer of Scherer Healthcare, Inc., a public
company engaged in the provision of medical services. Mr. Brands was Chairman of
the Board of Directors from April 1993, and Chief Executive Officer from April
1994 of Marquest Medical Products, Inc. until February 1995.
Leonard J. DeRoma has been a director of the Fund since October 1994. Mr. DeRoma
has been Managing Director of Barclays deZoete Wedd Securities, Inc. since June
1988. From June 1987 to June 1988, Mr. DeRoma was Senior Vice President of Dean
Witter Reynolds, Inc.
Jeffrey Lewis has been a director of the Fund since August 1993. Since 1968, Mr.
Lewis has been President and Chief Executive Officer of J.B. Lewis Associates,
Inc., a development and real estate company. Mr. Lewis also serves as Chairman
of the Board and Chief Executive Officer of Food Integrated Technology, Inc.
The directors of the Fund will serve as directors until the next annual meeting
of stockholders and until their successors are elected and qualified. The
officers of the Fund will hold office until the next annual meeting of the Board
of Directors of the Fund and until their successors are elected and qualified.
Item 11. Executive Compensation.
At February 28, 1995, the Fund had two full-time employees. Additionally,
certain officers and employees of the Fund are also officers or employees of the
Administrator and/or Commonwealth Associates. In order to facilitate the payroll
process, an affiliate of the Administrator pays the salaries of the Fund's
employees and the Fund reimburses the Administrator for allocated salary
amounts. Kamal Mustafa, President, Chief Executive Officer and Portfolio
Manager, received compensation of $54,000 during the fiscal year ended February
28, 1995. No individual executive officer or employee of the Fund received
allocated salary amounts from the Fund in excess of $100,000. In addition, the
Fund has implemented an employee profit sharing plan which provides for payment
of a performance fee in an amount equal to 20% of investment income plus
realized capital gains in each fiscal year, computed from the end of the last
fiscal year in respect of which performance fees were paid, net of all realized
capital losses, and net unrealized capital depreciation. No performance fees
have been paid from the Fund's inception to February 28, 1995.
The Fund and Kamal Mustafa entered into an employment agreement, effective April
1, 1994, pursuant to which Mr. Mustafa serves as the Fund's President, Chief
Executive Officer and Portfolio Manager for a five-year period for an annual
salary of $50,000, subject to a mandatory cost of living increase, and further
increases at the discretion of the Fund's Board of Directors. The employment
agreement was amended in November 1994 to increase Mr. Mustafa's annual salary
to $100,000 as of November 1, 1994. In addition, during the term of the
employment agreement, Mr. Mustafa is entitled to receive a performance fee equal
to the sum of (i) 10% of all amounts eligible to be distributed under the Fund's
employment profit sharing plan (the "Plan") which are attributable to
investments made by the Fund prior to April 1, 1994 (excluding (x) such
investments which result in losses during a given year and (y) the Fund's
investments set forth in paragraph (iii) of this sentence), but not less than
zero, plus (ii) 30% of all amounts eligible to be distributed under the Plan
which are attributable to investments made by the Fund during the employment
period (including additional investments in a company) plus (iii) 30% of all
amounts eligible to be distributed under the Plan which are attributable to
investments made by the Fund prior to April 1, 1994 which are renegotiated or
restructured by Mr. Mustafa; provided, however, that Mr. Mustafa shall not
receive an amount greater than 30% of all amounts eligible to be distributed
under the Plan. In the event Mr. Mustafa's employment under the employment
agreement terminates for any reason, including, without limitation, termination
of the period of the employment agreement, but excluding the termination of Mr.
Mustafa's employment for cause, the Fund shall pay to Mr. Mustafa or his legal
representative the foregoing amounts whether Plan Income as to which such
amounts relate were earned during the period of the employment agreement or
thereafter; provided, however, that the amount so payable to Mr. Mustafa in any
given year shall not exceed 30% of all amounts eligible to be distributed under
the Plan. Any amount payable to Mr. Mustafa pursuant to the foregoing provisions
for any given year but not so paid in such year shall be paid to Mr. Mustafa in
the next subsequent year in which such amount is eligible to be paid pursuant to
the provisions of the 1940 Act.
Non-management directors receive a fee of $2,500 for each Board of Directors
meeting attended plus out-of-pocket expenses for each meeting attended. For the
fiscal year ended February 28, 1995 and for the period from March 19, 1993
(commencement of operations) to February 28, 1994, the independent directors of
the Fund received compensation plus out-of-pocket expenses totaling $26,032 and
$13,531, respectively.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Security Ownership
The following table sets forth information as of May 12, 1995, based on
information obtained from the persons named below, with respect to the
beneficial ownership of common stock by (i) each person known by the Fund to be
the owner of more than 5% of the outstanding shares of common stock, (ii) each
of the directors, (iii) the Chief Executive Officer and (iv) all officers and
directors of the Fund as a group.
<TABLE>
Amount and Nature
Name of of Beneficial Percentage of
Beneficial Owner (1) Ownership Outstanding Shares
<S> <C> <C>
Michael S. Falk 25,500 1.2%
Kamal Mustafa 15,000 *
Leonard DeRoma 5,000 *
James E. Brands 5,000 *
Jeffrey Lewis 3,500 *
Kerry Dukes 2,000 *
All officers and directors as a group (7 persons) 56,000 2.5%
</TABLE>
* Less than 1%
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days upon the exercise of warrants or
options. Each beneficial owner's percentage ownership is determined by
assuming that options or warrants that are held by such person (but not
those held by any other person) and which are exercisable within 60 days
have been exercised.
Item 13. Certain Relationships and Related Transactions.
The description of the administrative fee set forth under the caption "the
Administration Agreement" on page 20 of the Registration Statement is
incorporated herein by reference.
Since its inception, the Fund has completed investments in certain portfolio
companies in which Commonwealth Associates acted as placement agent on behalf of
the portfolio companies. During the year ended February 28, 1995, Commonwealth
Associates received a placement fee of $60,000 from Regency Holdings (Cayman),
Inc. relating to the Fund's $1,940,000 investment in Regency.
With respect to certain public security transactions, Commonwealth Associates
has acted as the broker on behalf of the Fund and receives a commission for such
services. For the year ended February 28, 1995 Commonwealth Associates received
an aggregate of $20,870 for such services.
Certain of the Fund's officers and employees are also officers or employees of
Commonwealth Associates, the Administrator and/or an affiliate of Commonwealth
Associates. Michael S. Falk, Chairman of the Board of Directors of the Fund, is
President of the Administrator and President of Commonwealth Associates
Management Company, Inc. ("CAMI"), the general partner of Commonwealth
Associates, and President of Commonwealth Associates. Mark T. Behrman, Chief
Financial Officer and Treasurer of the Fund, is Chief Financial Officer of
Commonwealth Associates and CAMI, and Chief Financial Officer and Treasurer of
the Administrator.
In connection with the initial public offering of Loronix Information Systems,
Inc. completed in September 1994, the Fund sold 47,852 common shares of Loronix
for net proceeds of $258,400. In connection with such sale, Commonwealth
Associates, underwriter of the Loronix initial public offering, received
underwriting discounts and commissions from the Fund totaling $28,711 under the
same terms and conditions as Loronix and other selling shareholders.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
(a) 1. Financial Statements
Independent Auditors' Report
Statements of Assets and Liabilities as of February 28, 1995 and
1994
Schedules of Portfolio Investments as of February 28, 1995 and
1994
Statements of Operations for the year ended February 28, 1995 and
for the period from March 19, 1993 (commencement of operations)
to February 28, 1994
Statements of Changes in Net Assets for the year ended February
28, 1995 and for the period from March 19, 1993 (commencement of
operations) to February 28, 1994
Statements of Cash Flows for the year ended February 28, 1995 and
for the period from March 19, 1993 (commencement of operations)
to February 28, 1994
Notes to Financial Statements
2. Exhibits.
(3) (a) Certificate of Incorporation of the Fund (1)
(3) (b) Bylaws of the Fund (1)
(10) (a) Administrative Agreement (1)
(10) (b) Profit Sharing Plan (1)
(13) (a) Page 13 of the quarterly report on Form 10-Q for the
quarter ended May 31, 1994.
(13) (b) Page 13 of the quarterly report on Form 10-Q for the
quarter ended August 31, 1994.
(27) Financial Data Schedule
(b) No reports on Form 8-K have been filed during the last quarter of
the period for which this report is filed.
- -----------------------
(1) Incorporated by reference to the Fund's Form N-2, as amended, filed January
29, 1993.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MICROCAP FUND, INC.
/s/ Michael S. Falk
Michael S. Falk
Chairman of the Board of Directors
/s/ Kamal Mustafa
Kamal Mustafa
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Mark T. Behrman
Mark T. Behrman
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
/s/ James E. Brands
James E. Brands
Director
/s/ Jeffrey Lewis
Jeffrey Lewis
Director
/s/ Leonard J. DeRoma
Leonard J. DeRoma
Director
Date: May 25, 1995
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MICROCAP
FUND, INC.'S ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED FEBRUARY 28, 1995
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-START> MAR-1-1994
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 8,335,962
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