SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [X] Confidential, for Use
of the Commission only
(as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
THE MICROCAP FUND, INC.
(Name of Registrant as Specified in its Charter)
(Name of Persons(s) Filing Proxy Statement,
if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1),
or 14a-6(i)(2) or Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Ex-
change Act Rule 14a-6(i)(3).
[X] Fee computed on table below per Exchange Act Rules
14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which
transaction applies:
Common Shares, par value $0.01 per share
Series A Convertible Preferred Shares,
par value $0.01 per share
(2) Aggregate number of securities to which trans-
action applies:
2,110,573 Common Shares
253,367 Series A Convertible Pre-
ferred Shares
(3) Per unit price or other underlying value of
transaction computed pursuant to Exchange Act
Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was
determined):
$6.375 Common Shares
$7.96875 Series A Convertible Pre-
ferred Shares
(4) Proposed maximum aggregate value of transac-
tion:
$15,473,922
(5) Total fee paid:
$ 3,095
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for
which the offsetting fee was paid previously. Identify
the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
THE MICROCAP FUND, INC.
575 FIFTH AVENUE
37TH FLOOR
NEW YORK, NEW YORK 10017
Dear Shareholders:
Enclosed is the proxy statement for a special meeting of
shareholders of The MicroCap Fund, Inc. (the "Fund") to be
held at the offices of Skadden, Arps, Slate, Meagher & Flom,
919 Third Avenue, 33rd Floor, New York, New York 10022, on
________ __, 1996 at __:__ a.m.
SHAREHOLDERS ARE BEING ASKED TO APPROVE THE COMPLETE LIQUIDA-
TION AND DISSOLUTION OF THE FUND AND THE DISTRIBUTION OF ITS
NET ASSETS TO SHAREHOLDERS. Although current management has
more than recovered the millions of dollars of losses generat-
ed by prior management's investment practices, based on our
discussions with several of the Fund's original investors and
our own experience with the Fund, current management believes
that liquidation of the Fund would be in the best interests of
the shareholders. On May 9, 1996 the Board of Directors of
the Fund carefully reviewed and adopted a plan of liquidation
and recommends that shareholders approve the plan.
If shareholders approve the plan, the Fund will promptly make
a liquidating distribution out of cash in hand and will then
seek to dispose of its remaining assets as expeditiously as
possible. As the Fund generates additional cash and satisfies
or posts reserves for its liabilities, it will make additional
distributions to shareholders.
Upon approval of the plan by shareholders, I will resign as
President, Chief Executive Officer and Portfolio Manager of
the Fund although I will make myself available without compen-
sation to assist in the Fund's liquidation, and the Board will
engage the services of one or more individuals to act as
independent trustees in order to complete the liquidation.
Your vote is very important. The enclosed proxy statement
describes the plan of liquidation and its background in more
detail and also summarizes the Board's reasons for recommend-
ing that you vote in favor of the plan. Please take a few
minutes right now to read the enclosed proxy statement. Then
check the box "FOR" the plan on the enclosed proxy card, sign
it and drop it in the nearest mailbox.
Sincerely,
/s/ Kamal Mustafa
President, Chief Executive
Officer and Portfolio
Manager
THE MICROCAP FUND, INC.
575 FIFTH AVENUE
37TH FLOOR
NEW YORK, NEW YORK 10017
NOTICE OF SPECIAL SHAREHOLDERS MEETING
TO BE HELD ________ __, 1996
NOTICE IS HEREBY GIVEN to the holders of common
shares, par value $0.01 per share (the "Common Stock"), and
the holders of preferred shares, par value $0.01 per share
designated as Series A Convertible Preferred Shares (the
"Preferred Stock"), that a special meeting of such sharehold-
ers of The MicroCap Fund, Inc. (the "Fund") shall be held at
the offices of Skadden, Arps, Slate, Meagher & Flom, 919 Third
Avenue, 33rd Floor, New York, New York 10022, on ________ __,
1996 at __:__ a.m. for the following purpose:
To consider and vote upon the liquidation and dissolution
of the Fund pursuant to the provisions of the Plan of
Complete Liquidation and Dissolution of the Fund approved
by the Fund's Board of Directors on May 9, 1996.
Shareholders of record on June 10, 1996 are the only
persons entitled to notice of and to vote at the meeting and
any adjournment thereof.
Your attention is directed to the attached Proxy
Statement. Whether or not you expect to be present at the
upcoming meeting, please fill in, sign, date and mail the
enclosed proxy as promptly as possible. A stamped return
envelope is enclosed for your convenience.
/s/ Joseph Lucchese
Secretary
YOUR VOTE IS IMPORTANT
PLEASE RETURN YOUR PROXY CARD PROMPTLY
NO MATTER HOW MANY SHARES YOU OWN
PROXY STATEMENT
THE MICROCAP FUND, INC.
575 FIFTH AVENUE
37TH FLOOR
NEW YORK, NEW YORK 10017
SPECIAL SHAREHOLDERS MEETING
TO BE HELD ________ __, 1996
This Proxy Statement is furnished in connection with
the solicitation by the Board of Directors of The MicroCap
Fund, Inc. (the "Fund") of proxies to be voted at a Special
Shareholders Meeting of the Fund to be held at the offices of
Skadden, Arps, Slate, Meagher & Flom, 919 Third Avenue, 33rd
Floor, New York, New York 10022 on ________ __, 1996 at __:__
a.m. and at any and all adjournments thereof (the "Meeting").
The approximate date of mailing of this Proxy Statement and
the accompanying form of proxy card is ________ __, 1996. The
purpose of the Meeting is to consider and vote upon the
liquidation and dissolution of the Fund pursuant to the
provisions of the Plan of Complete Liquidation and Dissolution
of the Fund (the "Plan") approved by the Fund's Board of
Directors on May 9, 1996. The costs of this solicitation will
be paid for by the Fund.
The Fund's Board of Directors has selected June 10,
1996 as the record date (the "Record Date") to determine those
shareholders of the Fund that are entitled to vote. Only the
holders of record of common shares, par value $0.01 per share
(the "Common Stock"), and holders of record of preferred
shares, par value $0.01 per share designated as Series A
Convertible Preferred Shares (the "Preferred Stock"), on the
Record Date may vote at the Meeting. As of the Record Date,
there were ________ issued and ________ outstanding shares of
Common Stock with ___ holders and ________ issued and ________
outstanding shares of Preferred Stock with ___ holders. The
holders of shares representing a majority of the Common Stock
and Preferred Stock together and of the Preferred Stock by
itself that are outstanding on the Record Date must be present
in person or by proxy in order for action to be taken on the
Plan.
When the holders of Common Stock and Preferred Stock
vote together, each holder of a share of the Fund's Common
Stock is entitled to one vote per share of such Common Stock
and each holder of a share of the Fund's Preferred Stock is
currently entitled to one and one-quarter (1.25) vote per
share of such Preferred Stock. When the holders of Preferred
Stock vote by themselves as a separate class, each holder of a
share of the Fund's Preferred Stock is entitled to one vote
per share of such Preferred Stock.
Pursuant to the Articles of Incorporation of the
Fund and Maryland law, approval of the Plan requires the
affirmative vote of a majority of the shares of Common Stock
and Preferred Stock outstanding on the Record Date voting
together as a single class. In addition, pursuant to the
provisions of the Investment Company Act of 1940, as amended
(the "Investment Company Act"), approval of the Plan will also
require the affirmative vote of a majority of the shares of
Preferred Stock outstanding on the Record Date voting as a
separate class.
A proxy may be revoked before the Meeting by giving
written notice of revocation in person or by mail to the
Secretary of the Fund, by delivering a duly executed proxy
bearing a later date or by attending and voting at the Meet-
ing. Where a choice is specified by the shareholder in the
proxy, the proxy will be voted in accordance with the
shareholder's choice. If no specification is made in the
proxy, it will be voted "FOR" approval of the Plan. Absten-
tions will be counted as present for purposes of determining
whether a quorum of shares is present at the Meeting, but will
not be counted as a vote "FOR" the Plan. The proposal to
approve the Plan is considered a "non-discretionary" proposal,
which means that brokers who hold the Fund's shares in street
name for customers are not authorized to vote on such proposal
on behalf of their customers without specific voting instruc-
tions from such customers. If a broker returns a "non-vote"
proxy, indicating a lack of authority to vote on the proposal,
then the shares covered by such non-vote shall be deemed
present at the Meeting for purposes of determining a quorum
but shall not be deemed to be represented at the Meeting for
purposes of calculating the vote with respect to the proposal.
No matters other than the proposal to approve the
Plan may be acted upon at the Meeting.
In the event that sufficient votes in favor of the
proposal to approve the Plan are not received, the persons
named as proxies may propose one or more adjournments of the
Meeting to permit further solicitation of proxies. Such
adjournments will require the affirmative vote of the holders
of a majority of the shares present in person or by proxy at
the Meeting. The persons named as proxies will vote in favor
of such adjournments if they are instructed by a majority of
the shares represented in person or by proxy to vote for the
liquidation proposal. The Fund believes that dissenters
rights do not exist in connection with voting on the Plan.
THE FUND'S ANNUAL REPORT FOR THE FISCAL YEAR ENDED
FEBRUARY 29, 1996, INCLUDING FINANCIAL STATEMENTS, ACCOMPANIES
THIS PROXY STATEMENT. IF YOU HAVE NOT RECEIVED THE ANNUAL
REPORT OR WOULD LIKE TO RECEIVE ANOTHER COPY OF SUCH REPORT,
PLEASE CONTACT THE FUND AT 575 FIFTH AVENUE, 37TH FLOOR, NEW
YORK, NEW YORK 10017, OR CALL (800) 888-6534, AND COPIES WILL
BE SENT, WITHOUT CHARGE, BY FIRST-CLASS MAIL WITHIN THREE
BUSINESS DAYS OF YOUR REQUEST.
APPROVAL OF THE PLAN OF LIQUIDATION AND DISSOLUTION
Introduction
At a meeting held on May 9, 1996, the Board of
Directors considered and approved a Plan of Complete Liquida-
tion and Dissolution of the Fund (the "Plan"). A copy of the
Plan is attached as Exhibit A to this Proxy Statement. If the
Plan is approved by the shareholders, the investment securi-
ties and other assets of the Fund will be sold, creditors will
be paid or reserves for such payments established, and the
remaining net proceeds of such sales distributed to the
shareholders in cash, pro rata, in accordance with their
Record Date holdings. THE BOARD OF DIRECTORS RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" THE PLAN.
Background
The Fund, formerly known as Commonwealth Associates
Growth Fund, Inc., is a Maryland corporation formed on January
23, 1993. The Fund is a non-diversified, closed-end manage-
ment investment company operating as a business development
corporation under the Investment Company Act. The Fund's
primary investment objective is to achieve long-term capital
appreciation of assets, rather than current income, by invest-
ing in the securities, including equity, debt securities and
debt securities convertible into equity, of emerging companies
and established companies that management believes offer
significant potential opportunities for growth ("Portfolio
Companies"). In addition, the Fund offers managerial assis-
tance to certain Portfolio Companies. The Fund's investment
objective is intended to provide investors with the opportuni-
ty to participate in investments which are generally not
available to the public and which typically require substan-
tial financial commitment. The Fund is managed internally by
its officers under the supervision of its Board of Directors.
The Fund's principal office is located at 575 Fifth Avenue,
New York, New York 10017 and its telephone number is (800)
888-6534.
The Fund completed an initial public offering of
2,194,000 shares of its Common Stock at $10.00 per share in
the Spring of 1993. The sole underwriter of the Fund's
initial public offering was Commonwealth Associates, a broker-
dealer and investment banker. The Fund's Common Stock is
traded on the NASDAQ Small-Cap Market under the symbol MCAP.
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
0.2 shares of Preferred Stock for each share of Common Stock
then outstanding. The Preferred Stock is convertible into
shares of the Fund's Common Stock at any time until February
28, 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 28,
1998. The Preferred Stock is non-transferable.
From the Fund's inception to December 10, 1995,
Commonwealth Associates Asset Management, Inc. ("CAAM"), an
affiliate of Commonwealth Associates, acted as the Fund's
administrator. Since December 11, 1995, the Fund has been
self-administered. Until December 10, 1995, the Fund did not
own or lease physical properties. Office space and equipment
were provided to the Fund by CAAM pursuant to its administra-
tive services agreement. The Fund rented temporary space from
December 10, 1995 to March 3, 1996. Since March 4, 1996, the
Fund has leased office space from an affiliate of the Fund's
president on a monthly basis, at a rate of $1,800 per month,
and has leased or purchased its own furniture and fixtures and
other office equipment.
Based on conversations of management with some of
the original investors in the Fund and the records relating to
Commonwealth Associate's original marketing of the Fund's
Common Stock, it appears that such investors believed the Fund
would invest in debt instruments that would provide high
income and that the Fund would receive warrants and common
stock that were expected to appreciate in value, thereby
leading to recurring substantial distributions of income to
shareholders.
However, the Fund's prior management, which consist-
ed of employees of Commonwealth Associates, invested the
Fund's assets in a series of 15 private placements of issuers
consisting primarily of new clients of Commonwealth Associ-
ates. The Fund received notes, warrants and/or common stock
in these investments and the Fund experienced losses of over
$3 million while Commonwealth Associates received substantial
investment banking fees in cash plus warrants for millions of
shares of the same investments. Although the details of each
investment differed, documents obtained by the Fund show what
appears to have been a pattern in which Commonwealth Associ-
ates and its employees, who were affiliated with the Fund,
would (i) promise to lead a future private placement or
initial public offering for a client; (ii) secure the right to
provide short-term bridge financing for fees often approaching
15% of the amount placed; (iii) commit the Fund to participate
in the bridge financing with inadequate protective covenants
and without performing adequate due diligence or obtaining
commitments from other investors sufficient to meet the
client's near-term financing requirements; (iv) collect
substantial placement fees and warrants based on the invest-
ment made by the Fund and other investors enticed to follow
the Fund's lead; (v) abandon further efforts to raise capital,
leaving the Fund without a good prospect of being repaid; and
(vi) go on to the next deal.
As a result of Commonwealth Associates' investment
program for the Fund, the Fund performed in a manner quite
different to the glowing picture painted by the Commonwealth
Associates sales people. As the Fund's dismal performance
became apparent, its stock price discount from net asset value
widened. Faced with an investment that did not perform as
anticipated, the Fund's original shareholders understandably
became disenchanted.
Prior to alerting the Fund's Board of Directors to
the deteriorating nature of the Fund's portfolio, Commonwealth
Associates brought in current management in April 1994.
Current management spent the balance of 1994 constructing
records regarding the Fund's investments and addressing
immediate problems with some of these investments. Current
management then embarked on a program of seeking to restruc-
ture the terms of the Fund's existing portfolio securities.
Current management also made four significant new investments.
The existing investments that current management was
able to radically restructure and its new investments have on
balance performed very well in the past year. However,
current management has concluded that, in its judgment, in
view of the constraints and costs imposed by the Investment
Company Act, the Fund does not have sufficient capital to
support the staff necessary to source promising investments,
perform appropriate due diligence, structure investments with
appropriate protections for the Fund and provide the manage-
ment assistance required by the Investment Company Act for
business development companies. Furthermore, the highly
illiquid nature of the Fund's investments and the need to
value them conservatively both while the Portfolio Company is
private and during the lengthy lockup periods required after a
public offering period is completed tends to cause the Fund's
shares to trade at a discount from net asset value and an even
greater discount from potential value.
By the Fall of 1995 current management had begun to
suspect that Commonwealth Associate's treatment of the Fund
may have violated the Investment Company Act and other appli-
cable laws, and current management asked the Board of Direc-
tors in November 1995 to appoint a special committee of non-
management directors to study these issues. A preliminary
report by independent counsel to the special committee in
early 1996 concluded that there were likely serious violations
of the Investment Company Act and fiduciary duties by Common-
wealth Associates and its principles.
After receiving the initial report of counsel, the
special committee of the Board engaged a second law firm to
further review these findings. This law firm also concluded
that there appeared to be serious violations of federal and
state law. At this point the Fund engaged new counsel experi-
enced in the Investment Company Act both to assist the Fund in
ensuring that it would operate in compliance with the Invest-
ment Company Act in the future and to assist the Fund in
pursuing whatever claims might be appropriate against Common-
wealth Associates and its principals. At a board of directors
meeting held on April 9, 1996, on the recommendation of the
special committee, the Board asked for the resignation of
Michael Falk, the chief executive and majority shareholder of
Commonwealth Associates as a member of the Fund's board of
directors. Mr. Falk refused to resign and remains a director.
On April 19, 1996, the Fund commenced an action in
the U.S. District Court for the Southern District of New York
against Commonwealth Associates, Michael Falk and Steven
Warner (the former president and portfolio manager of the Fund
and former head of corporate finance at Commonwealth Associ-
ates). The complaint claims that the defendants, through a
pattern of deception and fraudulent concealments, used the
Fund to collect underwriting, placement, consulting and other
fees and warrants from the Fund's Portfolio Companies for the
benefit of the defendants instead of acting in the best
interests of the Fund and its shareholders. The claim alleges
that the defendants' illegal actions have damaged the Fund in
an amount of not less than $5 million.
At the end of April 1996, current management met
with several of the original investors in the Fund to solicit
their views regarding the Fund. These investors primarily
were of the view that, although current management had stabi-
lized the Fund and might be able to achieve acceptable re-
turns, the Fund was not at all the type of investment Common-
wealth Associates had marketed to them and, in view of the
large market discount and illiquid trading market for the
Fund's Common Stock, the Fund should liquidate.
Prior to that time, on April 9, 1996, a group of
investors in the Fund filed a beneficial ownership report in
which they suggested, among other things, that the Fund should
liquidate. Several of the members of this group are princi-
pals of, investors in or close business associates of Common-
wealth Associates.
At the May 9, 1996 board meeting, management recom-
mended, in light of the factors and events discussed above,
that the Board adopt a plan of liquidation and submit it to
shareholders for approval. In addition, Mr. Mustafa has
stated his intention to resign as President, Chief Executive
Officer and Portfolio Manager of the Fund upon shareholder
adoption of such a plan although he will continue to make
himself available without compensation to assist in the Fund's
liquidation. The directors (with the exception of Mr. Falk,
who left the meeting shortly after the plan of liquidation was
introduced) carefully reviewed the Plan, discussed various
aspects of the Plan among themselves, with counsel and with
current management and subsequently adopted the Plan by
unanimous vote of all of the directors other than Mr. Falk who
had not returned to the meeting.
Recommendation of the Board of Directors
For the reasons discussed in the preceding para-
graphs, the Board of Directors unanimously (with the exception
of Mr. Falk, whose views are not known) recommends that
shareholders vote "FOR" the Plan.
Description of the Plan and Related Transactions
If the Plan is approved by the Fund's shareholders,
the Fund will voluntarily dissolve and completely liquidate in
accordance with the requirements of Maryland General Corporate
Law ("MGCL") and the Internal Revenue Code of 1986, as amended
(the "Code"). The effective date (the "Effective Date") of
the Plan will be the date on which the Plan is approved by
shareholders. The period from the Effective Date until June
30, 1997 is referred to herein as the "Liquidation Period".
After the Effective Date, the Fund will promptly
seek to convert all of its investment securities and other
assets into cash, including the claims set forth in the
lawsuit by the Fund against Commonwealth Associates and
Messrs. Falk and Warner. The Fund anticipates that sharehold-
ers of record will receive an initial liquidating distribu-
tion(s) on or about ________, 19__ in an amount approximating
$ ___ per Common Stock equivalent share and that further
distributions will be made as investments are sold, and that
the Fund will be dissolved prior to June 30, 1997.
To the extent the Fund cannot dispose of any assets
during the Liquidation Period or cannot locate shareholders
for purposes of sending liquidating distributions, the Fund
will establish and contribute any such assets to a liquidating
trust. The liquidating trust will be administered by certain
trustees for the benefit of the Fund's shareholders of record
and will have terms substantially similar to those of the
liquidating trust attached to the Plan as Exhibit A thereto.
Distributions will be made from the trust to shareholders
pursuant to the trust's terms and no assets will revert back
to the Fund. The expenses of any such trust will be charged
against the liquidation distributions held therein.
Any liabilities of the Fund and any claims made
against the Fund must be paid or provided for by the Fund
prior to making liquidating distributions to shareholders. If
the Plan is approved by shareholders, the Fund will promptly
seek to dispose of any claim against it or otherwise enter
into trusts or other arrangements whereby all of the estimated
costs and expenses involved with such claims will be held back
from the liquidating distributions to shareholders until the
final resolution of such claims. Upon final resolution of
such claims, any assets will be paid from the trust or other
arrangement to shareholders pursuant to such instrument's
terms and no assets will revert back to the Fund.
The exact date of the liquidation distribution(s)
will depend on the time required to liquidate the Fund's
assets and the extent to which the Fund may need to hold back
sufficient assets to deal with any disputed claims or other
contingent liabilities which may then exist against the Fund.
Liquidating distributions will be made on a pro rata basis to
shareholders of record of the Fund treating holders of out-
standing Preferred Stock as having been converted at the ratio
of 1.33 shares of Common Stock per share of Preferred Stock.
It is anticipated that Articles of Dissolution will be filed
with the Maryland State Department of Assessments and Taxation
pursuant to the MGCL during the Liquidation Period, but such
articles may not be filed by the Fund until claims of all
known creditors and claimants have been paid or adequately
provided for. In the event that claims are not adequately
provided for or are brought after dissolution by previously
unknown creditors or claimants, the Fund's directors and
officers could be held personally liable. In addition, claims
possibly could be pursued against shareholders to the extent
of distributions received by them in liquidation.
As soon as practicable after the distribution of all
of the Fund's assets in complete liquidation, the Fund will
close the books and prepare and file, in a timely manner, any
and all required income tax returns and other documents and
instruments. The Fund will also file, or cause to be filed,
any and all other documents and instruments necessary to
terminate the regulation of the Fund and its business and
affairs by the Securities and Exchange Commission (the "SEC").
Exchange of Stock Certificates for Liquidation Distributions
Prior to completion of the liquidation, the Fund
will send to its shareholders of record a letter of transmit-
tal form for the purpose of exchanging each shareholder's Fund
shares for liquidation distributions. Shareholders whose
shares are held in the name of their broker or other financial
institution will receive their distributions through their
nominee firms. No amount will be distributed by the Fund to a
shareholder of record unless and until such shareholder
delivers to the Fund a signed letter of transmittal form and
the certificates representing the shareholder's shares or, in
the event a share certificate has been lost, a lost certifi-
cate affidavit and such surety bonds and other documents and
instruments as are reasonably required by the Fund, together
with appropriate forms of assignment, endorsed and with any
and all signatures thereon guaranteed by a financial institu-
tion reasonably acceptable to the Fund.
The right of a holder to sell his or her shares of
Common Stock on the NASDAQ at any time prior to the Fund's
filing of a notice of intent to dissolve will not be impaired
by the adoption of the Plan. The Fund expects that on or
about the date that the Fund files such notice, the trading of
the Fund's shares on NASDAQ will terminate.
Federal Income Tax Consequences
PAYMENT BY THE FUND OF LIQUIDATION DISTRIBUTIONS TO
SHAREHOLDERS WILL BE A TAXABLE EVENT. BECAUSE THE INCOME TAX
CONSEQUENCES FOR A PARTICULAR SHAREHOLDER MAY VARY DEPENDING
ON INDIVIDUAL CIRCUMSTANCES, EACH SHAREHOLDER IS URGED TO
CONSULT HIS OR HER OWN TAX ADVISER CONCERNING THE FEDERAL,
STATE AND LOCAL TAX CONSEQUENCES OF RECEIPT OF A LIQUIDATING
DISTRIBUTION.
The Fund currently qualifies, and intends to contin-
ue to qualify through the end of the Liquidation Period, for
treatment as a regulated investment company under the Code so
that it will be relieved of federal income tax on any invest-
ment company taxable income or net capital gain (the excess of
net long-term capital gain over net short-term capital loss)
from the sale of its assets. The payment of liquidation
distributions will be a taxable event to shareholders. Each
shareholder will be viewed as having sold his or her shares
for an amount equal to the liquidation distribution(s) he or
she receives. Each shareholder will recognize gain or loss in
an amount equal to the difference between (a) the
shareholder's adjusted basis in the shares, and (b) such
liquidation distribution(s). The gain or loss will be capital
gain or loss to the shareholder if the shares were capital
assets in the shareholder's hands and generally will be
long-term if the shares were held for more than one year
before the liquidation distribution is received.
As of February 29, 1996, the Fund had $2,420,000 in
net capital loss carryforwards and current capital losses that
could be used to offset current or future capital gains. The
Fund had $2,156,659 of unrealized capital gains as of the same
date. If the liquidation and dissolution of the Fund is
approved and all or a portion of such capital gains or any
additional capital gains are realized, the Fund will be able
to use a portion of its net capital loss carryforwards to
offset such gains. Any remaining capital loss carryforwards
that are not used to offset capital gains realized upon
liquidation will be lost, and the benefit of such capital loss
carryforwards will not pass through to shareholders. If the
Fund did not liquidate, it is possible that sufficient capital
gains could be generated in the future to use the entire
amount of the Fund's capital loss carryforwards.
The foregoing summary is generally limited to the
material federal income tax consequences to shareholders who
are individual United States citizens and who hold shares as
capital assets. It does not address the federal income tax
consequences to shareholders who are corporations, trusts,
estates, tax-exempt organizations or non-resident aliens.
This summary does not address state or local tax consequences.
Shareholders are urged to consult their own tax advisers to
determine the extent of the federal income tax liability they
would incur as a result of receiving a liquidation distribu-
tion, as well as any tax consequences under any applicable
state, local or foreign laws.
Financial Highlights
The following financial highlights for the Fund have
been audited by Deloitte & Touche LLP, independent auditors,
whose report thereon appears in the Fund's annual report to
shareholders for the year ended February 29, 1996. Represen-
tatives of Deloitte & Touche LLP are expected to be present at
the meeting and available to respond to appropriate questions,
and they will have the opportunity to make a statement if they
desire to do so.
FISCAL YEAR ENDED
-----------------------
1996 1995 1994
PER-SHARE DATA*
Net asset value, beginning of period $8.04 7.96 8.87(A)
Operations:
Net investment income (.13) .10 .03
Net realized and unrealized gains
(losses) on investments .44 .1 (.94)
Total from operations .31 .28 (.91)
Distributions to shareholders:
From net investment income - .13 -
In excess of net investment income - .04 -
From net realized gains - .03 -
Total distributions to shareholders - .20 -
Net asset value, end of period $7.25 8.04 7.96
Per-share market value, end of period $4.88 8.42 7.19
SELECTED INFORMATION
Total investment return, market value** 8.80% (21.55%) (28.13%)
Total investment return, net asset 9.11% 5.05% (20.40%)
value***
* Based on weighted average number of common shares
outstanding; for each respective period.
** Based on the change in market price of a share
during the period. Assumes reinvestment of distri-
butions at actual prices pursuant to the Fund's
dividend reinvestment plan.
*** Based on the change in net asset value ("NAV") of a
share during the period. Assumes reinvestment of
distributions at net asset value.
(A) Initial purchase price per share of Common Stock of
$10.00 less selling commissions and offering expens-
es of $1.13. Operations commenced on March 19,
1993.
Net Asset Value and Market Price
The Fund's shares of Common Stock currently trade on
the NASDAQ under the symbol MCAP. The following table shows
the history of public trading of the Fund's shares, by quar-
ter, for the last two fiscal years and for each full fiscal
quarter since the beginning of the current fiscal year, as
reported by NASDAQ.
PERCENTAGE
PREMIUM OR
QUARTER NET ASSET VALUE MARKET PRICE DISCOUNT
ENDED HIGH LOW HIGH LOW HIGH LOW
05/31/94 $8.00 $8.00 $8.25 $7.00 3.13% (12.50%)
08/31/94 8.63 8.63 8.00 7.50 (7.30) (13.09)
11/30/94 8.08 8.08 8.00 6.25 (0.99) (22.65)
02/28/95 8.04 8.04 6.75 6.00 (16.04) (25.37)
05/31/95 6.86 6.86 6.50 4.00 (5.25) (41.69)
08/31/95 7.18 7.18 5.25 4.00 (26.88) (44.29)
11/30/95 7.06 7.06 5.38 4.38 (23.80) (37.96)
02/29/96 7.25 7.25 6.00 4.50 (17.24) (37.93)
On May 8, 1996, the last trading day before the
public announcement of the approval of the liquidation of the
Fund by the Board of Directors, the high, low and closing bid
prices of the shares of Common Stock reported by the NASDAQ
were $4.75, $4.75 and $4.75, respectively. The closing bid
price on such date was at a discount of 34.48% from the net
asset value of $7.25 per weighted average shares of Common
Stock at February 29, 1996.
Security Ownership
The following table sets forth information as of May
15, 1996, based on information obtained by the Fund or 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.
Amount and Nature
of Beneficial Percentage of
Beneficial Owner(1) Ownership Outstanding
Shares
Kamal Mustafa 29,400 1.39%
Joseph Lucchese 6,400 *
Michael S. Falk(3) 23,500 1.11%
Leonard DeRoma 5,000 *
James E. Brands 5,000 *
Jeffrey Lewis 3,500 *
Robert W. Naismith 0 *
Richard L. Hubbell 0 *
All officers and directors as
a group (5 persons) 72,800 3.45%
13D Group(2) 312,100 14.79%
Robert L. Priddy(3) 132,600 6.28%
____________________
* 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 exer-
cised.
(2) On April 9, 1996, a group of holders of the
Fund's Common Stock (the "13D Group") filed a
Form 13D with the SEC, disclosing the 13D
Group's intention to nominate individuals to
the Fund's board of directors who will support
the 13D Group's plan to increase shareholder
value and reduce the discount between the
market price of the Fund's Common Stock and
its net asset value per share of Common Stock.
Actions supported by the 13D Group include a
change in the Fund's dividend policy, conver-
sion to an open-end fund, liquidation of a
material amount of the Fund's assets and a
merger, reorganization or liquidation of the
Fund. On May 3, 1996 and on May 20, 1996, the
13D Group filed with the SEC Amendments No. 1 and
No. 2, respectively, to the Form 13D filed on
April 9, 1996. The amendments disclose a
request by various shareholders including
the members of the 13D Group for a special
meeting of shareholders for the purpose of modi-
fying certain bylaws of the Fund and replacing
the existing members of the Fund's board of di-
rectors with new directors who will support
the 13D Group's action plan. There are nine
members of the 13D Group that hold an aggregate
of 312,000 shares of the Fund's Common Stock as
follows:
13D Group Member Number of Common Shares
Robert M. Pergament 23,000
Gerald B. Cramer 66,000
Ingleside Company 40,000
Edward J. Rosenthal 12,000
Goodness Gardens, Inc. 5,000
Robert L. Priddy 132,600
Michael S Falk 23,500
Commonwealth Associates
Asset Management, Inc. 10,000
The filing submitted by the 13D Group states that the
Group also owns shares of Preferred Stock of the Fund that
are convertible into an additional 26,625 shares of the
Fund's Common Stock.
(3) Member of 13D Group.
SUPPLEMENTAL INFORMATION AND SHAREHOLDER PROPOSALS
Based on the Fund's records and other information,
the Fund believes that all SEC filing requirements applicable
to its directors and officers pursuant to Section 16 of the
Securities Exchange Act of 1934, with respect to the Fund's
fiscal year ended February 29, 1996, were satisfied.
In the event that the Fund has not previously been
dissolved, proposals of shareholders intended to be presented
at the next meeting of shareholders must be received at the
Fund's offices, 575 Fifth Avenue, New York, New York, 10017,
no later than __________, 1996.
Additional solicitation may be made by letter,
telephone or telegraph by officers or employees of the Fund,
or by dealers and their representatives. In addition, the
Fund has engaged D.F. King to assist in the solicitation of
proxies, the cost of which will be borne by the Fund.
/s/ Joseph Lucchese
Secretary
THE MICROCAP FUND, INC.
SPECIAL MEETING OF STOCKHOLDERS - , 1996
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned holder of shares of Common Stock of THE MICROCAP
FUND, INC. (the "Fund"), a Maryland corporation, hereby appoints James
E. Brands and Joseph Lucchese and each of them, with full power of
substitution and revocation, as proxies to represent the undersigned at
the Special Meeting of Stockholders to be held at the offices of
Skadden, Arps, Slate, Meagher & Flom, 919 Third Avenue, 33rd Floor, New
York, New York 10022, on ________ __, 1996 at __:__ a.m. and at any
and all adjournments thereof, and thereat to vote all shares of Common
Stock of the Fund which the undersigned would be entitled to vote, with
all powers the undersigned would possess if personally present, in
accordance with the following instructions.
If more than one of the proxies, or their substitute, are present
at the Special Meeting or any adjournment thereof, they jointly (or, if
only one is present and voting, then that one) shall have authority
and may exercise all powers granted hereby. This Proxy, when properly
executed, will be voted in accordance with the instructions marked
herein by the undersigned. IF NO SPECIFICATION IS MADE, THIS
PROXY WILL BE VOTED "FOR" THE PROPOSAL DESCRIBED HEREIN.
HAS YOUR ADDRESS CHANGED?
__________________________
__________________________
__________________________
--- PLEASE MARK
X VOTES AS IN
--- THIS EXAMPLE
Authority to vote for
the Plan of Complete For Against Abstain
Liquidation and Dis- -- -- --
solution of the Fund:
The undersigned
hereby acknowledges
receipt of the ac-
companying Notice of
Special Meeting and
Proxy Statement for
the Special Meeting
to be held on
_____________, 1996.
PLEASE BE SURE TO SIGN Date
AND DATE THIS PROXY.
Mark box at right if
comments or address
change have been not-
ed on the reverse ---
side of this card. ---
RECORD DATE SHARES:
Shareholder sign here Co-owner sign here
THE MICROCAP FUND, INC.
SPECIAL MEETING OF STOCKHOLDERS - , 1996
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned holder of shares of Preferred Stock of THE MICROCAP
FUND, INC. (the "Fund"), a Maryland corporation, hereby appoints James
E. Brands and Joseph Lucchese and each of them, with full power of
substitution and revocation, as proxies to represent the undersigned at
the Special Meeting of Stockholders to be held at the offices of
Skadden, Arps, Slate, Meagher & Flom, 919 Third Avenue, 33rd Floor, New
York, New York 10022, on ________ __, 1996 at __:__ a.m. and at any
and all adjournments thereof, and thereat to vote all shares of Pre-
ferred Stock of the Fund which the undersigned would be entitled to
vote, with all powers the undersigned would possess if personally
present, in accordance with the following instructions.
If more than one of the proxies, or their substitute, are present
at the Special Meeting or any adjournment thereof, they jointly (or, if
only one is present and voting, then that one) shall have authority
and may exercise all powers granted hereby. This Proxy, when properly
executed, will be voted in accordance with the instructions marked
herein by the undersigned. IF NO SPECIFICATION IS MADE, THIS
PROXY WILL BE VOTED "FOR" THE PROPOSAL DESCRIBED HEREIN.
HAS YOUR ADDRESS CHANGED?
__________________________
__________________________
__________________________
--- PLEASE MARK
X VOTES AS IN
--- THIS EXAMPLE
Authority to vote for
the Plan of Complete For Against Abstain
Liquidation and Dis- -- -- --
solution of the Fund:
The undersigned
hereby acknowledges
receipt of the ac-
companying Notice of
Special Meeting and
Proxy Statement for
the Special Meeting
to be held on
______________, 1996.
PLEASE BE SURE TO SIGN Date
AND DATE THIS PROXY.
Mark box at right if
comments or address
change have been not-
ed on the reverse ---
side of this card. ---
RECORD DATE SHARES:
Shareholder sign here Co-owner sign here
EXHIBIT A
PLAN OF COMPLETE LIQUIDATION AND DISSOLUTION
OF
THE MICROCAP FUND, INC.
This Plan of Complete Liquidation and Dissolu-
tion (the "Plan") of The MicroCap Fund, Inc., a Maryland
corporation (the "Company"), and the transactions contem-
plated thereby have been approved by the Board of Direc-
tors for the Company (the "Board") as being advisable and
in the best interests of the Company and its stockhold-
ers. The Board has directed that this Plan be submitted
to the holders of the outstanding shares of the Company's
Common Stock and Preferred Stock (the "Stockholders") for
their adoption or rejection at a special meeting of
stockholders and has authorized the distribution of a
Proxy Statement (the "Proxy Statement") in connection
with the solicitation of proxies for such meeting. Upon
such adoption the Company shall voluntarily dissolve and
completely liquidate in accordance with the requirements
of the Maryland General Corporation Law (the "MGCL") and
the Internal Revenue Code of 1986, as amended (the
"Code"), as follows:
1. Adoption of Plan. The effective date of
the Plan (the "Effective Plan") shall be the date on
which the Plan is adopted by the Stockholders. Such
approval of the Plan shall constitute approval by the
Company's shareholders of the sale of substantially all
of the assets of the Company in accordance with Section
___ of the MGCL and approval of each of the other actions
contemplated by the Plan. The period commencing on the
Effective Date and continuing until June 30, 1997 is
referred to herein as the Liquidation Period.
2. Disposition of Assets. Prior to and after
the Effective Date the Company shall use all commercially
reasonable efforts to dispose of all of its investment
securities and other assets (other than the Claims re-
ferred to in Section 3 below) and shall hold or reinvest
the proceeds thereof in cash and such short-term fixed
income securities as the Company may lawfully hold or
invest in. To the extent the Company cannot dispose of
any such asset or assets prior to expiration of the
Liquidation Period, the Company shall contribute such
asset or assets to the trust referred to in Section 7
below (the "Liquidating Trust").
3. Disposition of Claims. Prior to and after
the Effective Date the Company shall use all commercially
reasonable efforts to assert, prosecute, reduce to judg-
ment, settle and collect all claims (the "Claims") of the
Company against persons other than the Company, including
the Claims set forth in The MicroCap Fund, Inc. v. Com-
monwealth Associates et al., [docket information]. To
the extent the Company cannot resolve any Claim prior to
expiration of the Liquidation Period, then not later than
the last day of such period the Company shall contribute
all such unresolved Claims to the Liquidation Trust along
with such amounts of cash and other assets as the Company
shall determine might reasonably be required to resolve
such unresolved claims.
4. Transactions. Within the Liquidation
Period, the Company shall have the authority to engage in
such other transactions as may be appropriate to its
complete liquidation and dissolution, including without
limitation, the authority to mortgage, pledge, sell,
lease, exchange or otherwise dispose of all or any part
of its other assets for cash and/or shares, bonds, or
other securities or property upon such terms and condi-
tions as the Company shall determine, with no further
approvals by the Company shareholders except as required
by law.
5. Provisions for Liabilities. Within the
Liquidation Period, the Company shall pay or discharge or
otherwise provide for the payment or discharge of, any
liabilities and obligations, including, without limita-
tion, contingent or unascertained liabilities and obliga-
tions determined or otherwise reasonably estimated to be
due either by the Company or a court of competent juris-
diction (the "Liabilities"). The foregoing may be accom-
plished by use of one or more trusts (including a liqui-
dating trust), escrows, reserve funds, plans or other
arrangements as determined by the Company or required by
law (collectively, the "Reserve Funds"), and the
Company's stockholders by adoption of this Plan do con-
stitute and appoint any agent or trustee under the ar-
rangements provided by the Company pursuant to this
Section 5 as the agent or trustee for the limited purpos-
es provided in the agreement in which such purposes are
set forth.
6. Distributions to Stockholders. Promptly
after the Effective Time and from time to time thereaf-
ter, the Company shall distribute to Stockholders of
record as of the Effective Date, cash or other assets
(other than cash or other assets held in the Reserve
Funds) and all other properties held by it, by way of pro
rata liquidating distributions to such Stockholders of
the Company, treating holders of Preferred Stock out-
standing at such time as having converted into Common
Stock at the ratio of 1.33 shares of Common Stock per
share of Preferred Stock. Cash and other assets held in
the Reserve Funds (including any income earned thereon)
or the Liquidating Trust in excess of the amounts re-
quired for the payment or discharge of the Company's
liabilities and obligations shall be distributed to the
Stockholders at the time and under the conditions set
forth in the instruments establishing the Reserve Fund
and the Liquidating Trust.
7. Liquidating Trust. The Company, at such
time as it shall deem practicable, but in any event
within the Liquidation Period, shall (i) create and
execute with trustees ("Trustees") selected by the Compa-
ny, a liquidating trust agreement substantially in the
form annexed hereto as Exhibit A, as the same may be
amended from time to time (the "Liquidating Trust Agree-
ment") to establish a liquidating trust (the "Liquidating
Trust"), (ii) grant, assign, and convey to the Trustees
of the Liquidating Trust all rights of ownership of the
Reserve Funds and any other assets not yet distributed to
stockholders, subject to all of the Liabilities and (iii)
distribute interests in the Liquidating Trust to its
shareholders (the transactions contemplated by this
Section 7, together with the Initial Distribution, shall
be referred as the "Liquidation").
(a) No distributions of any of the assets
held by the Trustees of the Liquidating Trust
shall be made by the Trustees other than as
provided by the express terms and provisions of
the Liquidating Trust Agreement, and no assets
held by the Trustees shall ever revert or be
distributed to the Company or to any Stockhold-
er, as such, other than a former Stockholder
entitled thereto as provided in the Liquidating
Trust Agreement. Assets held in the Liquidat-
ing Trust shall be distributed to the benefi-
ciaries of the Liquidating Trust at the time
and under the conditions set forth in the ex-
press terms and provisions of the Liquidating
Trust Agreement.
(b) It is intended that the assignment of
the assets to the Trustees of the Liquidating
Trust shall, subject to the terms and provi-
sions of the Liquidating Trust Agreement, con-
stitute a final liquidating distribution by the
Company to its Shareholders of their pro rata
interests in such assets, and the Company's
Stockholders shall be the owners of the Liqui-
dating Trust within the meaning of Sections 671
through 679 of the Code.
8. Notice of Liquidation. As soon as practi-
cable after the Effective Date but in no event later than
20 days prior to the filing of Articles of Dissolution as
provided in Section 9 below, the Company shall mail
notice to all its creditors and employees that this Plan
has been approved by the Board and the Stockholders as
provided in the MGCL.
9. Articles of Dissolution. Within the
Liquidation Period and pursuant to the MGCL, the Company
shall prepare and file Articles of Dissolution (the
"Articles") with and for acceptance by the Maryland State
Department of Assessments and Taxation (the "Depart-
ment"). Thereafter, the Company shall conduct no busi-
ness except as permitted by the MGCL.
10. Termination of BDC Status. At any time
after the Effective Date and consistent with seeking to
maximize the net distribution to Stockholders the Company
may terminate its status as a business development compa-
ny.
11. Amendment or Abandonment of Plan. The
Company may modify or amend this Plan at any time without
Stockholder approval if it determines that such action
would be advisable and in the best interests of the
Company and its Stockholders. If any amendment or modi-
fication appears necessary and in the judgment of the
Company will materially and adversely affect the inter-
ests of the Stockholders, such an amendment or modifica-
tion will be submitted to the Stockholders for approval.
In addition, the Company may abandon this Plan without
Stockholder approval at any time prior to the filing of
the Articles if it determines that abandonment would be
advisable and in the best interests of the Company and
its Stockholders.
12. Powers of Committee and Officers. Except
as required by applicable law, all of the rights and
duties of the Company relating to the Plan and completion
of the transactions contemplated thereby, including
modification, amendment or abandonment of the Plan, shall
be made solely by or under the direction of a Committee
of the Board of Directors of the Company whose members
shall consist solely of individuals who are not interest-
ed persons of the Company or Commonwealth Associates (as
the term "interested person" is defined in the Investment
Company Act of 1940 as if the Company and Commonwealth
Associates were registered investment companies). Any
rights and duties of the Company relating to the Plan and
completion of the transactions contemplated thereby that
are reserved by law exclusively to the Stockholders or
the Board of Directors of the Company as a whole shall be
exercised by the Board or the Stockholders, as the case
may be. In addition to exercising the specific powers
granted to the Company by the Plan, such Committee is
authorized to approve such changes to the terms of any of
the transactions referred to herein, to interpret any of
the provisions of this Plan, to delegate the exercise of
its rights and duties to Officers of the Company and to
make, execute and deliver or authorize the Officers of
the Company to make, execute and deliver such other
agreements, conveyances, assignments, transfers, certifi-
cates and other documents and take such other action as
the Committee deems necessary or desirable in order to
carry out the provisions of this Plan and effect the
complete liquidation and dissolution of the Company in
accordance with the Plan, the Code and the MGCL.
EXHIBIT A to the
Plan of Complete
Liquidation and Dissolution
[FORM OF LIQUIDATING TRUST AGREEMENT]
