SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended August 31, 1996
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)
Maryland 13-3698251
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
Ten Rockefeller Plaza, Suite 712
New York, New York 10020
===============================================================================
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (800) 888-6534
575 Fifth Avenue, 37th floor
New York, New York 10017
===============================================================================
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares of the Registrant's common outstanding at the close of
business on October 11, 1996 was 2,168,403.
<PAGE>
THE MICROCAP FUND, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Statements of Assets and Liabilities as of August 31, 1996 (Unaudited) and
February 29, 1996
Schedule of Portfolio Investments as of August 31, 1996 (Unaudited)
Statements of Operations for the Three Months Ended August 31, 1996 and 1995
(Unaudited)
Statements of Operations for the Six Months Ended August 31, 1996 and 1995
(Unaudited)
Statements of Changes in Net Assets for the Six Months ended August 31, 1996 and
1995 (Unaudited)
Statements of Cash Flows for the Six Months ended August 31, 1996 and 1995
(Unaudited)
Notes to Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities.
Item 3. Defaults upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
THE MICROCAP FUND, INC.
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
August 31, 1996 February 29,
(Unaudited) 1996
ASSETS
Portfolio investments at fair value (cost $2,712,250 at
<S> <C> <C> <C> <C> <C> <C>
August 31, 1996 and $4,783,156 at February 29, 1996) - Note 9 $ 3,700,375 $ 6,939,805
Cash and cash equivalents 5,606,111 9,878,280
Receivable from securities sold 270,632 199,375
Accrued interest receivable 91,734 349,781
Deferred organizational costs (net of accumulated amortization of
$135,943 at August 31, 1996 and $116,257 at February 29, 1996) 60,922 80,608
Other assets 123,232 120,862
--------------- ----------------
Total assets 9,853,006 17,568,711
--------------- ----------------
LIABILITIES
Accounts payable - legal fees 506,192 163,263
Accounts payable - other 113,189 170,290
--------------- ----------------
Total liabilities 619,381 333,553
--------------- ----------------
NET ASSETS
Preferred Stock, par value $.01; 2,000,000 shares authorized; 440,800 shares
issued and 207,103 shares outstanding at August 31, 1996 and 440,800 issued
and 265,317 shares outstanding at February 29, 1996
- Note 3 2,071 2,653
Common Stock, par value $.01; 10,000,000 shares authorized;
2,458,630 shares issued and 2,168,403 shares outstanding at
August 31, 1996 and 2,388,253 shares issued and 2,098,026
outstanding at February 29, 1996 - Note 3 24,586 23,883
Additional paid-in-capital - Note 3 11,611,405 19,441,478
Net unrealized appreciation of portfolio investments 988,125 2,156,649
Accumulated net investment loss (1,035,138) (37,743)
Distributions in excess of net investment loss (345,581) (345,581)
Accumulated net realized loss from portfolio investments (784,850) (2,779,188)
--------------- ----------------
Sub-total 10,460,618 18,462,151
Less: Treasury Stock at cost (290,227 shares of Common Stock) (1,226,993) (1,226,993)
--------------- ----------------
Net assets $ 9,233,625 $ 17,235,158
=============== ================
Net assets per share of common stock $ 3.80 $ 7.25
====== =======
Net assets per share of preferred stock $ 4.76 $ 7.61
====== =======
</TABLE>
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
August 31, 1996
<TABLE>
% of
Issuer / Position Cost Fair Value Net Assets(1)
Publicly-Held Securities:
Unigene Laboratories, Inc.(A)
Warrant to purchase 615,000 shares of Common Stock
<S> <C> <C> <C> <C> <C> <C>
at $1.375 per share, expiring 7/7/00 $ 0 $ 538,125 5.83%
------------- --------------
YES! Entertainment Corporation
Warrant to purchase 11,438 shares of Common Stock
at $15.30 per share, expiring 7/16/98 0 0 0%
------------- --------------
Privately-Held Securities:
Bennett Environmental Inc. (B)
450,000 shares of Common Stock 47,250 47,250 .51%
------------- --------------
First Colony Acquisition Corp.*
106,562 shares of Preferred Stock 594,174 594,174
6% Convertible Promissory Note due 11/1/97 1,343,326 1,343,326
Warrant to purchase 7,560 shares of Common Stock
at $5.00 per share, expiring 1/24/00 0 0
------------- --------------
1,937,500 1,937,500 20.98%
------------- --------------
Oh-La-La! Inc.
9% Convertible Senior Note 140,000 140,000
9% Convertible Senior Note 100,000 100,000
------------- --------------
240,000 240,000 2.60%
------------- --------------
Optiva Corporation
150,000 shares of Common Stock 487,500 937,500 10.15%
------------- -------------- -----
Total Portfolio Investments(C) $ 2,712,250 $ 3,700,375 40.07%
============= ============== =====
</TABLE>
<PAGE>
* May be deemed an "affiliated person" of the Fund as defined in the Investment
Company Act of 1940.
(1) Represents fair value as a percentage of net assets.
(A) On July 1, 1996, the Fund transferred warrants to purchase 60,000 shares of
Unigene Laboratories, Inc. common stock to certain individuals for payment
of consulting and portfolio transaction costs incurred in connection with
the Fund's investment in Unigene.
(B) Subsequent to the end of the quarter, in September 1996, Bennett
Environmental Inc. became a listed public company on the Montreal Stock
Exchange. In connection with the listing, the company effected a
four-for-one reverse split of its outstanding common stock. As a result,
the Fund exchanged its 450,000 common shares of Bennett for 112,500 shares
of the company's common stock.
(C) In June 1996, the Fund sold warrants to purchase 60,000 shares of Accumed
International, Inc. common stock for $154,647, realizing a gain of
$149,630. In July 1996, the Fund sold its investment in Shells Seafood
Restaurants, Inc. for $2.7 million, realizing a gain of $2,110,000. Also in
July, the Fund received $163,205 from International Communication
Technologies, Inc., representing repayment of its $150,000 note due to the
Fund, along with accrued interest thereon.
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended August 31,
<TABLE>
1996 1995
--------------- -------
<S> <C> <C>
INVESTMENT INCOME AND EXPENSES
Income:
Interest from U.S. Treasury Bills and repurchase agreements $ 142,057 $ 84,983
Interest and dividends from portfolio investments 27,543 221,525
--------------- -------------
Total investment income 169,600 306,508
--------------- -------------
Expenses:
Administrative fee 29,033 43,291
Legal fees 189,061 57,004
Accounting fees 7,955 9,200
Salary expense 93,016 59,943
Amortization of deferred organizational costs 9,843 9,843
Transfer agent and custodian fees 5,822 5,688
Directors' fees and expenses 24,010 5,000
Consulting fees (39,946) -
Insurance expense 8,680 6,372
Mailing and printing 19,516 10,744
Other operating expenses 28,334 7,240
--------------- -------------
Total expenses 375,324 214,325
--------------- -------------
Net investment income (loss) (205,724) 92,183
--------------- -------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
FROM PORTFOLIO INVESTMENTS
Net realized gain from portfolio investments 2,364,630 -
Change in net unrealized appreciation or depreciation of
portfolio investments (3,449,058) 485,019
--------------- -------------
Net realized and unrealized gain (loss) from portfolio investments (1,084,428) 485,019
--------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ (1,290,152) $ 577,202
=============== =============
</TABLE>
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
For the Six Months Ended August 31,
<TABLE>
1996 1995
-------------- ----------
INVESTMENT INCOME AND EXPENSES
Income:
<S> <C> <C>
Interest from U.S. Treasury Bills and repurchase agreements $ 270,530 $ 200,948
Interest and dividends from portfolio investments 84,041 291,408
-------------- ---------------
Total investment income 354,571 492,356
-------------- ---------------
Expenses:
Administrative fee 81,997 86,023
Legal fees 769,605 70,494
Accounting fees 32,133 16,419
Salary expense 178,919 102,445
Amortization of deferred organizational costs 19,686 19,686
Transfer agent and custodian fees 9,279 11,378
Directors' fees and expenses 44,688 12,952
Consulting fees 85,094 -
Insurance expense 20,046 12,794
Mailing and printing 44,360 15,011
Other operating expenses 66,159 8,211
-------------- ---------------
Total expenses 1,351,966 355,413
-------------- ---------------
Net investment income (loss) (997,395) 136,943
-------------- ---------------
NET REALIZED AND UNREALIZED GAIN FROM
PORTFOLIO INVESTMENTS
Net realized gain (loss) from portfolio investments 2,659,872 (351,344)
Change in net unrealized appreciation or depreciation of
portfolio investments (1,168,524) 852,394
-------------- ---------------
Net realized and unrealized gain from portfolio investments 1,491,348 501,050
-------------- ---------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 493,953 $ 637,993
============== ===============
</TABLE>
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
For the Six Months Ended August 31,
<TABLE>
1996 1995
---------------- ----------
Change in net assets resulting from operations:
<S> <C> <C>
Net investment income (loss) $ (997,395) $ 136,943
Net realized gain (loss) from portfolio investments 2,659,872 (351,344)
Change in net unrealized appreciation or depreciation of
portfolio investments (1,168,524) 852,394
---------------- ----------------
Net increase in net assets resulting from operations 493,953 637,993
---------------- ----------------
Change in net assets from distributions:
Distribution from net realized gains (665,534) -
Return of capital distribution (7,829,952) -
----------------- ----------------
Decrease in net assets from distributions (8,495,486) -
----------------- ----------------
Change in net assets from capital stock transactions:
Common Stock repurchased - (1,079,868)
---------------- ----------------
Total decrease in net assets for the period (8,001,533) (441,875)
Net assets at beginning of period 17,235,158 17,715,073
---------------- ----------------
NET ASSETS AT END OF PERIOD $ 9,233,625 $ 17,273,198
================ ================
</TABLE>
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended August 31,
<TABLE>
1996 1995
-------------- ---------
CASH FLOWS USED FOR OPERATING ACTIVITIES
<S> <C> <C>
Net investment income (loss) $ (997,395) $ 136,943
Adjustments to reconcile net investment income (loss) to cash
used for operating activities:
Amortization of discounted receivable - (2,000)
Amortization of deferred organizational costs 19,686 19,686
Consulting fees paid in-kind 105,000 -
Increase (decrease) in payables 285,828 (56,347)
(Increase) decrease in receivables and other assets 255,677 (163,932)
-------------- ---------------
Cash flows used for operating activities (331,204) (65,650)
-------------- ---------------
CASH FLOWS PROVIDED FROM (USED FOR) INVESTING
ACTIVITIES
Purchase of portfolio investments (51,411) (3,750,000)
Net proceeds from the sale of portfolio investments 2,605,932 1,122,656
Repayment of notes 2,000,000 1,940,000
-------------- ---------------
Cash flows provided from (used for) investing activities 4,554,521 (687,344)
-------------- ---------------
CASH FLOWS USED FOR FINANCING ACTIVITIES
Common Stock repurchased - (1,079,868)
Cash distribution to stockholders (8,495,486) -
-------------- ---------------
Cash flows used for financing activities (8,495,486) (1,079,868)
-------------- ---------------
Decrease in cash and cash equivalents (4,272,169) (1,832,862)
Cash and cash equivalents at beginning of period 9,878,280 9,033,750
-------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,606,111 $ 7,200,888
============== ===============
</TABLE>
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Reference is made to the Fund's February 29, 1996 annual report included in Form
10-K as filed with the Securities and Exchange Commission for the Notes to
Financial Statements that remain unchanged. The following notes are included as
a result of changes during the quarter.
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 long-term
capital appreciation of assets by investing in securities of emerging and
established companies that management believes offer significant growth
potential. The Fund's shareholders have approved a Plan of Liquidation. See Note
5 below.
2. Related Party Transactions
Commonwealth Associates Asset Management Inc. ("CAAM"), an affiliate of
Commonwealth Associates, the underwriter of the Fund's initial public offering,
was the Fund's administrator from its inception to December 10, 1995. During
such time, CAAM was responsible for the management and administrative services
necessary for the operation of the Fund and received an administrative fee at an
annual rate of 1% of the Fund's net assets. Such fee was determined and paid
quarterly. On October 11, 1995, CAAM terminated the administrative agreement
with the Fund effective December 10, 1995. From such date to present, the Fund
has been self administered. For the three and six months ended August 31, 1996,
self-administration expenses totaled $29,033 and $81,997, respectively. The
administrative fee for the three and six months ended August 31, 1995, under the
previous administrative arrangement with CAAM, was $43,291 and $86,023,
respectively.
On July 24, 1996, the Fund entered into an agreement with Raymond S. Troubh,
whereby Mr. Troubh will provide management services to the Fund in connection
with its Plan of Liquidation. For services to be rendered under the agreement,
Mr. Troubh will receive $8,500 per month, plus 1% of the amount of each
distribution (other than the initial distribution paid on August 30, 1996),
plus, at the time any proceeds of sale or other revenues are received by the
Fund in excess of the Fund's investment in a particular asset, Mr. Troubh will
receive 5% of such excess for amounts received in 1996 or 1997, 4% of such
excess for amounts received in 1998, 2% in 1999 and 0% thereafter; provided,
however, that in no event shall the total compensation paid to Mr. Troubh be
less than $250,000.
<TABLE>
3. Capital Stock Transactions
Number of Additional Number of Number of
Common Paid-in Preferred Treasury
Shares Amount Capital Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at February 29, 1996 2,388,253 $ 23,883 $ 19,441,478 265,317 $ 2,653 290,227 $ 1,226,993
Conversion of preferred stock
into common stock 70,377 703 (121) (58,214) (582) - -
Return of capital distribution (7,829,952)
Balance at August 31, 1996 2,458,630 $ 24,586 $ 11,611,405 207,103 $ 2,071 290,227 $ 1,226,993
========== ========== ============== ========= ======= ======== ============
</TABLE>
On March 20, 1995, the Fund paid a stock dividend 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 29, 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. During the six months ended August 31, 1996, 58,214 shares
of preferred stock were converted into 70,377 shares of common stock.
4. Litigation
The Fund is a respondent in an arbitration claim Warner v. Commonwealth
Associates Growth Fund, Inc. before the American Arbitration Association
commenced in December 1995 by Stephen J. Warner, the former president, chief
executive officer and portfolio manager of the Fund. The claim alleges breach of
contract and fraud in connection with the termination of employment and
consulting agreements between him and the Fund and claims damages in the amount
of $200,000, plus punitive damages. The Fund has answered, moved to dismiss
portions of, and asserted affirmative defenses to, the Statement of Claim. This
arbitration, which had been stayed by agreement of the parties, has recently
been reopened by claimant, Warner. Management of the Fund believes that the
allegations in the Statement of Claim are without merit and intends to defend
the arbitration vigorously.
On April 19, 1996, the Fund filed a complaint against Commonwealth Associates, a
registered broker-dealer and the underwriter of the Fund's initial public
offering, Michael S. Falk, the chief executive officer of Commonwealth
Associates, a minority shareholder and a former director of the Fund, and
Stephen J. Warner, a former executive officer of Commonwealth Associates and the
former president of the Fund. The civil action, which was filed in federal court
in the Southern District of New York, alleges fraud, breach of fiduciary duties
and violations of the Investment Company Act of 1940. 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.
The Fund is a creditor of PSSS, Inc. f/k/a Oh-La-La! Inc. ("PSSS"), which is the
subject of proceedings under chapter 11 of the United States Bankruptcy Code
pending in San Francisco, California (the "Bankruptcy Case"). In connection with
the Bankruptcy Case, Oh-La-La! International, S.A. ("International"), one of
PSSS's largest shareholders, has filed a precautionary proof of claim (the
"Precautionary Proof of Claim"), on behalf of International and other similarly
situated shareholders of PSSS, against, among others, the Fund, certain other
creditors of PSSS, and parties involved in the intended underwriting for, and
conduct of, an initial public offering which PSSS had anticipated would have
occurred in or about 1994. The Precautionary Proof of Claim alleges a claim for
damages as a result of, among other things, (a) the failure to effectuate the
intended initial public offering, and (b) the Bankruptcy Court-approved sale of
PSSS's assets, which was allegedly prejudicial to PSSS's shareholders. PSSS and
International have taken no other action regarding this claim. The Fund has
denied liability for the claims set forth in the Precautionary Proof of Claim.
Regency Holdings (Cayman) Inc. ("Holdings") and Regency Maritime Corp.
("Maritime"), Plaintiffs v. The MicroCap Fund, Inc. f/k/a Commonwealth
Associates Growth Fund, Inc., et al. Regency Holdings (Cayman) Inc. and Regency
Maritime Corp. (collectively "Regency") along with other related entities are
Debtors in a bankruptcy proceeding pending in the United States Bankruptcy Court
for the Southern District of New York, 95 B 45197 (TLB). In that bankruptcy
proceeding, Regency initiated an adversary proceeding against the Fund and
certain other persons and entities to recover monies that it paid them on the
ground that such payments constituted voidable preferences under the Bankruptcy
Code. Regency maintains that a payment Regency made to the Fund between 90 days
and one year prior to the filing of Regency's bankruptcy petition in the amount
of $1,940,000 to satisfy a bridge loan the Fund made to Regency, is a voidable
preference because Kamal Mustafa ("Mustafa"), the former president of the Fund,
was a director of Regency (and therefore an insider) for a portion of the time
that such amounts were due and owing. Regency also maintains that such
relationship had an impact on Regency's decision to pay these funds.
Additionally, Regency maintains that a payment of $145,728 made by Regency to
the Fund to redeem certain warrants issued with respect to the loan transaction
was made within 90 days of the filing of the bankruptcy petition and is
therefore a voidable preference without regard to whether Mustafa was an
insider. In an amended complaint, Regency also asserted that the payments to the
Fund constitute a fraudulent transfer, as the payments were in fact made by
Maritime and not Holdings. Regency asserts that Maritime had no obligation to
make such payments and received no value for them. The Fund has served an answer
denying the allegations of the amended complaint and is vigorously contesting
Regency's claims. At the present time, discovery is underway to determine the
validity of the allegations asserted by Regency.
The Fund is a defendant in an action brought by Michael S. Falk, a former
director of the Fund, in the Supreme Court of New York on June 19, 1996. The
complaint alleges that Kamal Mustafa, the former president and a former director
of the Fund, and president of Bluestone Capital Partners, an investment banking
firm controlled by Mr. Mustafa, caused the Fund to defame Mr. Falk. The
complaint seeks $20 million in damages from the defendants, including the Fund.
In light of the conclusory nature of the complaint, the Fund has no basis upon
which to conclude it has any liability and intends to contest the action.
5. Plan of Liquidation
On May 9, 1996, the Fund's Board of Directors adopted a Plan of Liquidation
pursuant to which the Fund will convert its remaining assets into cash, provide
for all of its liabilities and distribute the net cash to shareholders. The Plan
of Liquidation was approved at a special meeting of shareholders on July 23,
1996.
<PAGE>
6. Distribution
On August 30, 1996, the Fund made an initial liquidating cash distribution
totaling $8,495,486 to shareholders of record on August 15, 1996. Common
shareholders received $3.50 per share and preferred shareholders received $4.375
per share. The amount paid to common shareholders was comprised of $0.274 of
long-term capital gain and $3.226 of return of capital. The amount paid to
preferred shareholders was comprised of $0.343 of long-term capital gain and
$4.032 of return of capital. The Fund expects that additional distributions will
be made from time to time from the proceeds of asset sales, after the payment of
and reserve for liabilities. At any time prior to one year from the date of
approval of the Plan of Liquidation, any remaining assets of the Fund will be
transferred to a liquidating trust to be supervised by an independent trustee.
7. Director's Fees and Expenses
During the periods reported, each non-affiliated director of the Fund's Board of
Directors received an annual fee of $2,500 and $250 for each meeting of the
Board of Director's and each committee meeting of the Board attended. Each
non-affiliated director also received reimbursement for all out-of-pocket costs
incurred to attend such meetings.
8. Other Information
On July 15, 1996, the Fund entered into a settlement agreement with a group of
shareholders of the Fund's common stock that had solicited proxies in opposition
to the Fund's Plan of Liquidation (the "13D Group"). Under the settlement
agreement, the Fund and the 13D Group agreed that, (i) certain members of the
13D Group and affiliated persons would cease to have business dealings with or
receive compensation from the Fund, (ii) a 13D Group member would have the right
to receive notice of and attend all meetings of the Board of Directors and any
committee meeting thereof, and (iii) subject to the approval of the Securities
and Exchange Commission (the "SEC"), the Fund would reimburse the 13D Group for
its reasonable out of pocket expenses up to $120,000 in connection with the 13D
Group's efforts. An application relating to such reimbursement by the Fund to
the 13D Group was filed with the SEC on September 27, 1996.
Effective on August 1, 1996, the Fund entered into indemnification agreements
with Mr. Raymond Troubh and certain of the Fund's former directors and officers.
Pursuant to such agreements, the Fund will establish an escrow account
containing $250,000 in cash or cash equivalents to provide for any potential
legal fees and settlement payments relating to certain actions that may arise
against such individuals relating to activity involving the Fund.
9. Classification of Portfolio Investments
As of August 31, 1996, the Fund's investments in portfolio companies were
categorized as follows:
<TABLE>
% of
Type of Investments Cost Fair Value Net Assets*
<S> <C> <C> <C>
Preferred Stock $ 594,174 $ 594,174 6.43%
Common Stock and Warrants 534,750 1,522,875 16.49%
Debt Securities 1,583,326 1,583,326 17.15%
---------------- --------------- ----------
Total $ 2,712,250 $ 3,700,375 40.07%
================ =============== ==========
Country/Geographic Region
Eastern United States $ 1,937,500 $ 2,475,625 26.81%
Western United States 727,500 1,177,500 12.75%
Canada 47,250 47,250 .51%
---------------- --------------- ----------
Total $ 2,712,250 $ 3,700,375 40.07%
================ =============== ==========
Industry
Biotechnology $ 0 $ 538,125 5.83%
Consumer Products 2,425,000 2,875,000 31.13%
Environmental Services 47,250 47,250 .51%
Food Services 240,000 240,000 2.60%
---------------- --------------- ----------
Total $ 2,712,250 $ 3,700,375 40.07%
================ =============== ==========
</TABLE>
* Percentage of net assets is based on fair value.
10. Reclassifications
Certain reclassifications were made to the prior period financial statements in
order to conform to the current period presentation.
11. Subsequent Event
In connection with the Fund's liquidation process, each of the Fund's directors,
other than Mr. Troubh, has resigned from the Board of Directors.
12. Interim Financial Statements
The unaudited financial statements presented as of August 31, 1996 and for the
three and six month periods then ended, reflect all adjustments necessary for
the fair presentation of the interim periods.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
On July 23, 1996, the Fund's shareholders approved a Plan of Liquidation
pursuant to which the Fund will convert its remaining assets into cash, provide
for all of its liabilities and distribute the net cash to shareholders. On
August 30, 1996, in connection with the Plan of Liquidation, the Fund made an
initial liquidating distribution of $8,495,486 to shareholders of record on
August 15, 1996. The Fund will continue to liquidate its remaining assets and
make additional cash distributions to shareholders after the payment of and
reserve for all current and contingent liabilities. At any time prior to July
23, 1997, any remaining assets of the Fund will be transferred to a liquidating
trust to be supervised by an independent trustee.
As of August 31, 1996, the Fund had cash and cash equivalents of $5,606,111. The
Fund invests its available cash in U.S. Treasury Bills or overnight repurchase
agreements collateralized by securities issued by the U.S. Government or its
agencies. Interest earned from such investments for the three and six months
ended August 31, 1996 was $142,057 and $270,530, 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.
Effective on August 1, 1996, the Fund entered into indemnification agreements
with Mr. Raymond Troubh and certain of the Fund's former directors and officers.
Pursuant to such agreements, the Fund will establish an escrow account
containing $250,000 in cash or cash equivalents to provide for any potential
legal fees and settlement payments relating to certain actions that may arise
against such individuals relating to activity involving the Fund.
Results of Operations
Realized and Unrealized Gains and Losses from Portfolio Investments
For the three months ended August 31, 1996, the Fund had a net realized and
unrealized loss from its portfolio investments of $1,084,428, comprised of a
$2,364,630 net realized gain from portfolio investments and a $3,449,058
decrease in net unrealized appreciation of investments for the three month
period. For the six months ended August 31, 1996, the Fund had a net realized
and unrealized gain from its portfolio investments of $1,491,348, comprised of a
$2,659,872 net realized gain from portfolio investments and a $1,168,524
decrease in net unrealized appreciation of investments.
The $2,364,630 net realized gain for the three months ended August 31, 1996,
includes the sale of the Fund's investment in Shells Seafood Restaurants, Inc.
for $2,700,000, which resulted in a realized gain of $2,110,000. Also during the
quarter, the Fund sold its remaining 60,000 Accumed International, Inc. common
stock warrants for $154,647, realizing a gain of $149,630. Additionally, during
the period, the Fund completed the transfer of 60,000 Unigene Laboratories, Inc.
common stock warrants to certain individuals representing the payment of
consulting fees incurred in connection with the Fund's investment in Unigene.
The transaction resulted in the recognition of a $105,000 realized gain, which
has been equally offset by $105,000 of consulting fee expense recorded by the
Fund over several fiscal quarters. During its first fiscal quarter ended May 31,
1996, the Fund had a net realized gain of $295,242, resulting from the sale of
190,000 Accumed common stock warrants and 12,500 shares of Accumed common stock.
For the three and six months ended August 31, 1996, the Fund had a decrease in
net unrealized appreciation of investments of $3,449,058 and $1,168,524,
respectively. The $1,168,524 decrease in net unrealized appreciation for the six
months ended August 31, 1996, is comprised of a $1,381,261 net unrealized gain
due to the upward revaluation of certain portfolio investments for the period,
primarily Shell's Seafood Restaurants, Inc., offset by a $2,549,785 reduction in
net unrealized appreciation due to the transfer from unrealized gain to realized
gain relating to the portfolio sales completed during the period, as discussed
above.
For the six months ended August 31, 1995, the Fund had a net realized loss from
its portfolio investments of $351,344. The Fund had no realized gains or losses
from its portfolio investments during the fiscal quarter ended August 31, 1995.
During the quarter ended May 31, 1995, the Fund sold its 337,500 shares of
Silverado Foods, Inc. common stock for $822,656, realizing a gain of $672,656.
In March 1995, the Fund sold its investment in SR Communications Corp. ("SRC")
for $200,000 in cash and a $40,000 promissory note (including $4,000 of imputed
interest). This transaction resulted in a net realized loss of $14,000. Also, in
May 1995, the Fund wrote-off its $60,000 investment in Radiator King
International, Inc. and its $950,000 investment in Weir-Jones Marketing, Inc.
due to continued operating and financial difficulties at these companies.
For the three and six months ended August 31, 1995, the Fund had a net increase
in unrealized appreciation of its portfolio investments totaling $485,019 and
$852,394, respectively. The $852,394 increase for the six months ended August
31, 1995 consisted of a $1,461,769 net unrealized gain due to the upward
revaluation of the Fund's portfolio investments for the six month period, offset
by a $609,375 transfer from unrealized gain to realized gain due to the sale of
the Fund's investment in Silverado Foods during the quarter ended May 31, 1995.
Investment Income and Expenses
For the three months ended August 31, 1996 and 1995, the Fund had a net
investment loss of $205,724 and net investment income of $92,183, respectively.
For the six months ended August 31, 1996 and 1995, the Fund had a net investment
loss of $997,395 and net investment income of $136,943, respectively. The
increase in net investment loss for the six months ended August 31, 1996
compared to the same period in 1995 was due to a $137,785 decrease in investment
income and a $996,553 increase in operating expenses for the 1996 period. The
Fund's reduced investment income primarily resulted from a sharp decline in
interest earned from portfolio investments, due to the reduced amount of
interest bearing portfolio securities held by the Fund during the 1996 period
compared to the same period in 1995. The increase in operating expenses
primarily is attributable to the increase in legal fees for the 1996 period,
which totaled $769,605, as compared to $70,494 for the 1995 period. The rise in
legal fees reflects the increased legal proceedings involving the Fund (see Note
4 of Notes to Financial Statements), the continued restructuring of certain of
the Fund's portfolio investments during the 1996 period and matters relating to
the Fund's July 23, 1996 special meeting of shareholders and plan of
liquidation.
The Fund had additional increases in certain other operating expenses for the
six months ended August 31, 1996 compared to the same period in 1995. Consulting
fees of $85,094 incurred during the 1996 period, primarily resulted from the
July 1, 1996 transfer of 60,000 Unigene Laboratories, Inc. common stock warrants
to consultants for payment of portfolio transaction fees and consulting services
relating to the Fund's investment in Unigene. There were no such consulting fees
incurred during the 1995 period. Salary expense increased $76,474, including
severance payments, totaling $60,000, made to officers and employees in
connection with the Fund's plan of liquidation. Other operating expenses
increased $57,948 for the 1996 period compared to 1995 period primarily due to
an increase in investor relations expenses relating to press releases and other
announcements made by the Fund.
From the inception of the Fund to December 10, 1995, Commonwealth Associates
Asset Management, Inc. ("CAAM") was responsible for the administrative services
necessary for the operation of the Fund. In return for such services, CAAM
received an administrative fee at the annual rate of 1% of the net assets of the
Fund. Such fee was determined and payable quarterly. Since December 11, 1995,
the Fund has been self administered. As a result, the Fund provided for and paid
its own administrative expenses for the three and six months ended August 31,
1996. The administration expense incurred by the Fund for the three months ended
August 31, 1996 and 1995 was $29,033 and $43,291, respectively. The
administration expense incurred by the Fund for the six months ended August 31,
1996 and 1995 was $81,997 and $86,023, respectively.
On July 15, 1996, the Fund entered into a settlement agreement with a group of
shareholders of the Fund's common stock that had solicited proxies in opposition
to the Fund's Plan of Liquidation (the "13D Group"). Under the settlement
agreement, the Fund and the 13D Group agreed that, (i) certain members of the
13D Group and affiliated persons would cease to have business dealings with or
receive compensation from the Fund, (ii) a 13D Group member would have the right
to receive notice of and attend all meetings of the Board of Directors and any
committee meeting thereof, and (iii) subject to the approval of the Securities
and Exchange Commission (the "SEC"), the Fund would reimburse the 13D Group for
its reasonable out of pocket expenses up to $120,000 in connection with the 13D
Group's efforts. An application relating to such reimbursement by the Fund to
the 13D Group was filed with the SEC on September 27, 1996.
Net Assets
For the six months ended August 31, 1996, the Fund had a $493,953 increase in
net assets from operations, comprised of the $1,491,348 net realized and
unrealized gain from portfolio investments offset by the $997,395 net investment
loss for the 1996 period. The Fund's net assets were reduced by the $8,495,486
cash distribution made to shareholders on August 30, 1996. As a result, the
Fund's net assets were $9,233,625 at August 31, 1996, representing a decrease of
$8,001,533 from net assets of $17,235,158 at February 28, 1996. At August 31,
1996, the net asset value per share of common stock and preferred stock was
$3.80 and $4.76 per share, respectively, compared to $7.25 and $7.61 per share,
respectively, at February 29, 1996.
On March 1, 1996, the conversion ratio of the Fund's preferred stock into common
stock increased from 1.05 per share to 1.25 per share. The change in such
conversion ratio resulted in an additional allocation of net assets to preferred
shareholders of approximately $332,289, or $1.25 per share of preferred stock
and the dilution to common shareholders of $332,289, or $.16 per share of common
stock. Additionally, the results from operations for the six months ended August
31, 1996 increased the Fund's net assets by $.20 and $.21 per share of common
and preferred stock, respectively. The distribution paid to shareholders on
August 30, 1996, reduced the Fund's net assets by $3.50 per share of common
stock and $4.375 per share of preferred stock.
At August 31, 1995, the Fund's net assets were $17,273,198, a decrease of
$441,875 from net assets of $17,715,073 at February 28, 1995. Net assets
resulting from operations for the period increased $637,993 which was comprised
of $136,943 of net investment income and $501,050 of net realized and unrealized
gain from portfolio investments. This increase was more than offset by a
$1,079,868 decrease in net assets due to the repurchase of 262,727 shares of the
Fund's common stock in the public market during the period.
At August 31, 1995, the net asset value per share of common stock and preferred
stock was $7.18 and $7.54 per share, respectively. At February 28, 1995, the net
asset value per share of common stock was $8.04. There was no preferred stock
outstanding on February 28, 1995. The changes in the net asset value per share
of common stock and preferred stock for the six months ended August 31, 1995 are
discussed below.
On March 20, 1995, the Fund issued a 20% preferred stock dividend to
shareholders of record on March 13, 1995. Based on the Fund's net assets of
$17,715,073 at February 28, 1995, such dividend resulted in an initial
allocation of net assets to preferred shareholders of approximately $3.1
million, or $6.97 per share of preferred stock. The allocation of net assets to
preferred shareholders, therefore, resulted in a dilution to common shareholders
of approximately $3.1 million, or $1.40 per share of common stock. Furthermore,
during the six months ended August 31, 1995, the Fund repurchased 262,727 shares
of common stock for $1,079,868. The effect of such repurchases increased the net
asset value per share of common stock and preferred stock by $.28 and $.29,
respectively. The results from operations for the six months ended August 31,
1995 of $637,993 increased the Fund's net asset value by $.26 and $.28 per share
of common stock and preferred stock, respectively.
Summary of Changes to Net Assets for the Six Months Ended August 31, 1996
Portfolio transactions completed during the six months ended August 31, 1996,
resulted in a realized gain of $2,659,872. As shown below, these transactions
returned $4,632,189 to the Fund and increased its net asset value for the six
month period by $1,266,627. The Fund's net asset value was further increased for
the period from the $224,721 upward revaluation of the Fund's 615,000 Unigene
common stock warrants. The completed portfolio transactions and revaluations
increased the Fund's net asset value on a net basis by $1,491,348 for the six
months ended August 31, 1996. The increase in net assets from portfolio
transactions for the period was offset by a $997,395 net investment loss for the
six month period.
<TABLE>
Fair Value Effect on
Investment Return at 2/29/96 Net Assets
<S> <C> <C> <C>
Sales and Write-Offs for six months ended 8/31/96:
Shell's Seafood Restaurants, Inc. $ 4,010,000 $ 3,058,750 $ 951,250
Accumed International, Inc. warrants 467,976 224,825 243,151
Accumed International, Inc. stock (1) 49,213 51,411 (2,198)
Unigene Laboratories, Inc. warrants (2) 105,000 30,576 74,424
------------- --------------- ---------------
Sub-total from sales and write-offs $ 4,632,189 $ 3,365,562 1,266,627
=============== ==============
Revaluations for six months ended 8/31/96:
Unigene Laboratories, Inc. (warrants) 224,721
Sub-total from portfolio transactions 1,491,348
Net investment loss for six months ended 8/31/96 (997,395)
---------------
Net Change to Net Assets for Six Months Ended
August 31, 1996 $ 493,953
===============
</TABLE>
(1) The 12,500 shares of Accumed common stock sold during the period, was
acquired by the Fund during the same period for $51,411. (2) The return shown
from the Unigene warrants is a non-cash item resulting from the transfer of
60,000 warrants to cover consulting costs.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Fund is a respondent in an arbitration claim Warner v. Commonwealth
Associates Growth Fund, Inc. before the American Arbitration Association
commenced in December 1995 by Stephen J. Warner, the former president, chief
executive officer and portfolio manager of the Fund. The claim alleges breach of
contract and fraud in connection with the termination of employment and
consulting agreements between him and the Fund and claims damages in the amount
of $200,000, plus punitive damages. The Fund has answered, moved to dismiss
portions of, and asserted affirmative defenses to, the Statement of Claim. This
arbitration, which had been stayed by agreement of the parties, has recently
been reopened by claimant, Warner. Management of the Fund believes that the
allegations in the Statement of Claim are without merit and intends to defend
the arbitration vigorously.
On April 19, 1996, the Fund filed a complaint against Commonwealth Associates, a
registered broker-dealer and the underwriter of the Fund's initial public
offering, Michael S. Falk, the chief executive officer of Commonwealth
Associates, a minority shareholder and a former director of the Fund, and
Stephen J. Warner, a former executive officer of Commonwealth Associates and the
former president of the Fund. The civil action, which was filed in federal court
in the Southern District of New York, alleges fraud, breach of fiduciary duties
and violations of the Investment Company Act of 1940. 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.
The Fund is a creditor of PSSS, Inc. f/k/a Oh-La-La! Inc. ("PSSS"), which is the
subject of proceedings under chapter 11 of the United States Bankruptcy Code
pending in San Francisco, California (the "Bankruptcy Case"). In connection with
the Bankruptcy Case, Oh-La-La! International, S.A. ("International"), one of
PSSS's largest shareholders, has filed a precautionary proof of claim (the
"Precautionary Proof of Claim"), on behalf of International and other similarly
situated shareholders of PSSS, against, among others, the Fund, certain other
creditors of PSSS, and parties involved in the intended underwriting for, and
conduct of, an initial public offering which PSSS had anticipated would have
occurred in or about 1994. The Precautionary Proof of Claim alleges a claim for
damages as a result of, among other things, (a) the failure to effectuate the
intended initial public offering, and (b) the Bankruptcy Court-approved sale of
PSSS's assets, which was allegedly prejudicial to PSSS's shareholders. PSSS and
International have taken no other action regarding this claim. The Fund has
denied liability for the claims set forth in the Precautionary Proof of Claim.
Regency Holdings (Cayman) Inc. ("Holdings") and Regency Maritime Corp.
("Maritime"), Plaintiffs v. The MicroCap Fund, Inc. f/k/a Commonwealth
Associates Growth Fund, Inc., et al. Regency Holdings (Cayman) Inc. and Regency
Maritime Corp. (collectively "Regency") along with other related entities are
Debtors in a bankruptcy proceeding pending in the United States Bankruptcy Court
for the Southern District of New York, 95 B 45197 (TLB). In that bankruptcy
proceeding, Regency initiated an adversary proceeding against the Fund and
certain other persons and entities to recover monies that it paid them on the
ground that such payments constituted voidable preferences under the Bankruptcy
Code. Regency maintains that a payment Regency made to the Fund between 90 days
and one year prior to the filing of Regency's bankruptcy petition in the amount
of $1,940,000 to satisfy a bridge loan the Fund made to Regency, is a voidable
preference because Kamal Mustafa ("Mustafa"), the former president of the Fund,
was a director of Regency (and therefore an insider) for a portion of the time
that such amounts were due and owing. Regency also maintains that such
relationship had an impact on Regency's decision to pay these funds.
Additionally, Regency maintains that a payment of $145,728 made by Regency to
the Fund to redeem certain warrants issued with respect to the loan transaction
was made within 90 days of the filing of the bankruptcy petition and is
therefore a voidable preference without regard to whether Mustafa was an
insider. In an amended complaint, Regency also asserted that the payments to the
Fund constitute a fraudulent transfer, as the payments were in fact made by
Maritime and not Holdings. Regency asserts that Maritime had no obligation to
make such payments and received no value for them. The Fund has served an answer
denying the allegations of the amended complaint and is vigorously contesting
Regency's claims. At the present time, discovery is underway to determine the
validity of the allegations asserted by Regency.
The Fund is a defendant in an action brought by Michael S. Falk, a former
director of the Fund, in the Supreme Court of New York on June 19, 1996. The
complaint alleges that Kamal Mustafa, the former president and a former director
of the Fund, and president of Bluestone Capital Partners, an investment banking
firm controlled by Mr. Mustafa, caused the Fund to defame Mr. Falk. The
complaint seeks $20 million in damages from the defendants, including the Fund.
In light of the conclusory nature of the complaint, the Fund has no basis upon
which to conclude it has any liability and intends to contest the action.
<PAGE>
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
A special meeting of the Fund's shareholders was held on July 23, 1996. At the
meeting, the shareholders approved the Plan of Liquidation, pursuant to which
the Fund will convert its remaining assets into cash, provide for all of its
liabilities and distribute the net cash to shareholders.
The results of the voting on the proposal to approve the Plan of Liquidation
were as follows:
FOR AGAINST ABSTENTION
Common stock and
Preferred stock
voting as a single class
1,379,504.50 18,428.75 0
Preferred stock 104,906 2,239 0
Item 5. Other Information.
In July 1996, Raymond S. Troubh was appointed President, Chief Executive
Officer, Treasurer, Secretary and Director of the Fund. All of the Fund's other
officers and employees have resigned. It is expected that Mr. Troubh will hold
such offices and maintain responsibility for the liquidation of the Fund's
remaining assets, until the Fund is terminated and its remaining assets are
transferred to a liquidating trust. At that time, it is expected that Mr. Troubh
will become the independent liquidating trustee responsible for liquidating the
remaining assets.
On August 30, 1996, in connection with the Plan of Liquidation, the Fund made an
initial liquidating cash distribution totaling $8,495,486 to shareholders of
record on August 15, 1996. Common shareholders received $3.50 per share and
preferred shareholders received $4.375 per share. The amount paid to common
shareholders was comprised of $0.274 of long-term capital gain and $3.226 of
return of capital. The amount paid to preferred shareholders was comprised of
$0.343 of long-term capital gain and $4.032 of return of capital.
In connection with the Fund's liquidation process, each of the Fund's directors,
other than Mr. Troubh, has resigned from the Board of Directors.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(2) Plan of Liquidation (incorporated herein by reference to Exhibit A to the
Fund's proxy statement dated June 26, 1996)
(10.1) Agreement dated as of July 24, 1996 between the Fund and Mr. Raymond S.
Troubh
(10.2) Form of Indemnification Agreement effective as of August 1, 1996 between
the Fund and the Indemnitee named therein (entered into with James E. Brands,
Richard L. Hubbell, Leonard J. DeRoma, Jeffrey Lewis, Robert W. Naismith,
Raymond S. Troubh and Robert D. Tucker)
(27) Financial Data Schedule
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized and in the capacity indicated.
THE MICROCAP FUND, INC.
/s/ Raymond S. Troubh
Raymond S. Troubh
President, Chief Executive Officer, Treasurer, Secretary and Director
(Principal Executive and Principal Financial and Accounting Officer)
Date: October 15, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MICROCAP
FUND, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED August 31, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-1-1996
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 2,712,250
<INVESTMENTS-AT-VALUE> 3,700,375
<RECEIVABLES> 362,366
<ASSETS-OTHER> 184,154
<OTHER-ITEMS-ASSETS> 5,606,111
<TOTAL-ASSETS> 9,853,006
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 619,381
<TOTAL-LIABILITIES> 619,381
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,611,405
<SHARES-COMMON-STOCK> 2,168,403
<SHARES-COMMON-PRIOR> 2,098,026
<ACCUMULATED-NII-CURRENT> (1,035,138)
<OVERDISTRIBUTION-NII> (345,581)
<ACCUMULATED-NET-GAINS> (784,850)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 988,125
<NET-ASSETS> 9,233,625
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 354,571
<OTHER-INCOME> 0
<EXPENSES-NET> 1,351,966
<NET-INVESTMENT-INCOME> (997,395)
<REALIZED-GAINS-CURRENT> 2,659,872
<APPREC-INCREASE-CURRENT> (1,168,524)
<NET-CHANGE-FROM-OPS> 493,953
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 665,534
<DISTRIBUTIONS-OTHER> 7,829,952
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (7,715,705)
<ACCUMULATED-NII-PRIOR> (37,743)
<ACCUMULATED-GAINS-PRIOR> (2,779,188)
<OVERDISTRIB-NII-PRIOR> (345,581)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 7.25
<PER-SHARE-NII> (0.41)
<PER-SHARE-GAIN-APPREC> 0.62
<PER-SHARE-DIVIDEND> (0.16)
<PER-SHARE-DISTRIBUTIONS> (0.27)
<RETURNS-OF-CAPITAL> (3.23)
<PER-SHARE-NAV-END> 3.80
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
Agreement dated as of July 24, 1996 by and between The MicroCap Fund, Inc. (the
"Fund") and Raymond S. Troubh (the "Consultant").
Fund engages the Consultant (1) to provide management services to the Fund in
connection with its liquidation and dissolution pursuant to the Plan of
Liquidation (the "Plan") attached to the Fund's Proxy Statement dated June 26,
1996 and (2) upon transfer by the Fund of its remaining assets to the
Liquidating Trust (the "Trust") contemplated by the Plan, to act as Trustee
under the Trust. Consultant's responsibilities pursuant to clause (1) above will
include managing the disposition of the Fund's remaining assets, assessing
maximization of the action brought by the Fund against Commonwealth Associates
and others and acting on such assessment, assessing the liabilities of the Fund
and appropriate provision therefor, making recommendations to the Board of
Directors regarding distributions to shareholders, resolution of and reserves
for liabilities and other matters affecting liquidation of the Fund,
coordinating with the Fund's administrator, custodian and other service
providers, serving as a director of the Fund and such other tasks as the Board
shall assign to him. In performing the foregoing services Consultant shall
report to the Board and be subject to its guidance. Consultant's
responsibilities pursuant to clause (2) above will be to act in accordance with
the terms of the Trust and to exercise the full powers of the Trustee
thereunder.
Consultant accepts such engagement.
The Fund (during the period prior to funding of the Trust) and the Trust (after
its funding) will pay Consultant for his services hereunder at the rate of
$8,500 per month plus, at the time of each distribution to shareholders in
respect of the Plan, an amount equal to 1.0% of the amount of such distribution
(other than the initial distribution to shareholders out of available cash)
plus, at the time any proceeds of sale or other revenues are received by the
Fund in excess of the Fund's investment in a particular asset, an amount equal
to 5% of such excess received in 1996 or 1997, 4% of any incremental excess
received in 1998, 2% of any incremental excess received in 1999 and 0% of any
incremental excess received thereafter; provided, however, that (subject to
Section 6 below) in no event shall the total compensation to Consultant
hereunder be less than $250,000.
It is understood and agreed that Consultant will devote such time and effort to
the faithful performance of services hereunder and under the Trust as shall be
appropriate but that it is not anticipated that such services will require his
full working time.
This Agreement shall expire on the earlier of (1) December 31, 1999 or (2) the
making of the final distribution to shareholders after resolution of all
liabilities of the Fund.
If Fund terminates this Agreement without cause or breaches this Agreement in
any other material respect, Consultant will be entitled to a single lump sum
payment, in addition to any amounts earned hereunder, of $200,000. If Consultant
terminates this Agreement without cause or breaches this Agreement in any other
material respect, Fund will be entitled to a single lump sum payment of
$200,000. For purposes of this Agreement, Fund will have cause only for
dereliction of duty, gross incompetence, self dealing, violation of law that
would render Consultant unable to act as an officer of a registered investment
company under Section 9 of the Investment Company Act of 1940 in the absence of
an exemptive order by the SEC or disability on the part of Consultant for more
than six consecutive months. For purposes of this Agreement, Consultant will
have cause only if Fund prevents him from carrying out his responsibilities
hereunder and fails to cure such prevention within 30 days after notice of such
prevention by Consultant.
Consultant will be entitled to prompt reimbursement from Fund of all reasonable
business expense incurred by Consultant in performing services hereunder other
than general office overhead such as rent, utilities, secretarial services,
supplies and the like, provided such expenses are properly accounted for in
accordance with the normal practices of Fund. The foregoing shall include
reimbursement of reasonable expenses for valuations and other expert advice
sought by Consultant on behalf of the Fund and not billed directly to the Fund.
The Fund will indemnify Consultant to the maximum extent permitted under
Maryland law, the Investment Company Act of 1940 and the Articles of
Incorporation and by-laws of the Fund as in effect on the date hereof.
<PAGE>
Any disputes hereunder shall be settled by arbitration before a single
arbitrator acceptable to each party under the rules of the American Arbitration
Association.
This Agreement shall be construed under and governed by the laws of the State of
New York without giving effect to the principles of conflicts of law thereunder.
The MicroCap Fund, Inc.
By: /s/ ROBERT W. NAISMITH
Name: Robert W. Naismith
Title: Chairman
/s/ RAYMOND S. TROUBH
Raymond S. Troubh
AGREEMENT, effective as of August 1, 1996, between The MicroCap Fund, Inc., a
Maryland corporation (the "Company"), and ___________ (the "Indemnitee").
WHEREAS, it is essential to the Company to attract and
retain as directors and officers the most capable persons available;
WHEREAS, Indemnitee is a director or officer of the Company;
WHEREAS, both the Company and Indemnitee recognize the
increased risk of litigation and other claims being asserted against directors
and officers of public companies in today's environment;
WHEREAS, the Company's Board of Directors and stockholders
have approved a plan of liquidation of the Company;
WHEREAS, certain directors and officers are the subject of
actual or potential regulatory or court proceedings instituted or to be
instituted by the Securities and Exchange Commission arising out of relating to
the proceedings currently entitled In the Matter of Commonwealth Associates
Growth Fund, Inc. (NY-6290) (the "Proceedings");
WHEREAS, the By-laws of the Company require the Company to
indemnify and advance expenses to its directors and officers to the full extent
permitted by law and the Indemnitee has continued to serve as a director or
officer of the Company, notwithstanding the pendency or threat of such
Proceedings in part in reliance on such By-laws;
WHEREAS, in recognition of Indemnitee's need for substantial
protection against personal liability on the aforesaid By-laws, and in part to
provide Indemnitee with specific contractual assurance that the protection
promised by such By-laws will be available to Indemnitee (regardless of, among
other things, any amendment to or revocation of such By-laws or any change in
the composition of the Company's Board of Directors or transaction relating to
the Company), the Company wishes to provide in this Agreement for the
indemnification of and the advancing of expenses to Indemnitee to the fullest
extent (whether partial or complete) permitted by law and as set forth in this
Agreement, and, to the extent insurance is maintained, for the continued
coverage of Indemnitee under the Company's directors' and officers' liability
insurance policy;
NOW, THEREFORE, in consideration of the premises set out above
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, and intending to be legally bound hereby, the
parties hereto agree as follows:
Certain Definitions:
Claim: any threatened, pending or completed action, suit or
proceeding, or any inquiry or investigation, whether
instituted by the Company or any other party, that Indemnitee
in good faith believes might lead to the institution of any
such action, suit or proceeding, whether civil, criminal,
administrative, investigative or other.
Disabling Conduct: any action or failure of action on the
part of the Indemnitee constituting willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office;
Expenses: include attorneys' fees and all other costs,
expenses and obligations paid or incurred in connection with
investigating, defending, being a witness in or participating
in (including on appeal), or preparing to defend, be a witness
in or participate in, any Claim relating to any Indemnifiable
Event and any such costs, expenses and obligations incurred by
the Indemnitee in successfully establishing his right to
indemnification hereunder or to a payment under any insurance
policy maintained by the Company.
Indemnifiable Event: any event or occurrence related to the
fact that Indemnitee is or was a director, officer, employee,
agent or fiduciary of the Company, or is or was serving at the
request of the Company as a director, officer, employee,
trustee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or
other enterprise, or by reason of anything done or not done by
Indemnitee in any such capacity other than any such event or
occurrence constituting or arising out of Disabling Conduct on
the part of the Indemnitee and other than any such event or
occurrence arising out of, related to or constituting any
Claim initiated by Indemnitee unless the Board of Directors
has authorized or consented to the initiation of such Claim.
Independent Legal Counsel: an attorney or firm of attorneys,
selected by the Company and approved by the Indemnitee (or, if
there is more than one Indemnitee with respect to a particular
Indemnifiable Event, a majority of such Indemnitees), whose
approval may not be unreasonably withheld.
Reviewing Party: (i) any appropriate person or body consisting
of a member or members of the Company's Board of Directors
appointed by the Board who is not an "interested person" of
the Company as that term is used in the Investment Company Act
of 1940 and the rules, regulations and releases promulgated
thereunder and is not a party to the particular Claim for
which Indemnitee is seeking indemnification, or (ii)
Independent Legal Counsel.
Voting Securities: any securities of the Company which vote
generally in the election of directors.
Basic Indemnification Arrangement. In the event Indemnitee
was, is or becomes a party to or witness or other participant in, or is
threatened to be made a party to or witness or other participant in, a Claim by
reason of (or arising in part out of) an Indemnifiable Event, the Company shall
indemnify, defend and hold harmless Indemnitee to the fullest extent permitted
by law as soon as practicable but in any event no later than thirty days after
written demand is presented to the Company, against any and all Expenses
(subject to requirements relating to advances set forth below), judgments,
fines, penalties and amounts paid in settlement (including all interest,
assessments and other charges paid or payable in connection with or in respect
of such Expenses (subject to requirements relating to advances set forth below),
judgments, fines, penalties or amounts paid in settlement) of such Claim. If so
requested by Indemnitee, the Company shall advance (within thirty days of such
request) any and all Expenses to Indemnitee (an "Expense Advance").
Reserves. The Company shall from time to time estimate its
potential obligations under this Agreement and all other similar indemnification
agreements in light of all proceedings known or threatened and shall set aside
and segregate, in addition to any reserves or accruals for other obligations,
expenses and liabilities, whether matured or contingent, of the Company, an
amount sufficient in the reasonable judgment of the Board of Directors or the
trustee of any liquidating trust holding assets of the Company for the Company
to discharge its obligations under this Agreement and such other agreements;
provided, however, that the aggregate amount reserved in connection with the
Proceedings (including amounts reserved under this Agreement and all similar
indemnification agreements) shall not be less than the excess of $250,000 over
any indemnification payments incurred and made hereunder in connection with the
Proceedings from and after the date hereof (the "Minimum Reserve"), except as
agreed by the Indemnitee and each indemnitee under any similar agreements;
provided, further, that the Minimum Reserve shall be released upon a
determination by the Board of Directors of the Company or the trustee of any
liquidating trust holding assets of the Company that there is no substantial
likelihood that further indemnification payments will be required in connection
with the Proceeings.
Within 30 days after the date this Agreement is executed, the
Company shall establish an escrow account pursuant to an escrow agreement to be
entered into between the Company and an escrow agent (the "Agent"), and shall
deliver $250,000 in cash and/or cash equivalents (the "Escrowed Assets") into
such escrow account. The Escrowed Assets will be held by the Agent to provide
for the Company's obligations under this Agreement arising in connection with
the Proceedings; provided, however, that no indemnification payment shall be
made hereunder out of the Escrowed Assets unless and until a determination shall
have been made by the Board of Directors of the Company or the trustee of any
liquidating trust holding assets of the Company that such indemnification
payment is permitted under this Agreement; provided, further, that the Escrowed
Assets shall be released upon a determination by the Board of Directors of the
Company or the trustee of any liquidating trust holding assets of the Company
that there is no substantial likelihood that further indemnification payments
will be required in connection with the Proceedings.
Partial Indemnity, Etc. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the Expenses, judgments, fines, penalties and amounts paid in
settlement of a Claim but not, however, for all of the total amount thereof, the
Company shall nevertheless indemnify Indemnitee for the portion thereof to which
Indemnitee is entitled.
Burden of Proof. In connection with any determination by the
Reviewing Party or otherwise as to whether Indemnitee is entitled to be
indemnified hereunder the burden of proof shall be on the Indemnitee to
establish that Indemnitee is so entitled.
No Presumptions. For purposes of this Agreement, the
termination of any claim, action, suit or proceeding, by judgment, order,
settlement (whether with or without court approval) or conviction, or upon a
plea of nolo contendere, or its equivalent, shall not create a presumption that
Indemnitee did not meet any particular standard of conduct or have any
particular belief or that a court has determined that indemnification is not
permitted by applicable law. In addition, neither the failure of the Reviewing
Party to have made a determination as to whether Indemnitee has met any
particular standard of conduct or had any particular belief, nor an actual
determination by the Reviewing Party that Indemnitee has not met such standard
of conduct or did not have such belief, prior to the commencement of legal
proceedings by Indemnitee to secure a judicial determination that Indemnitee
should be indemnified under applicable law shall be a defense to such proceeding
or create a presumption that Indemnitee has not met any particular standard of
conduct or did not have any particular belief.
Nonexclusivity, Etc. The rights of the Indemnitee hereunder
shall be in addition to any other rights Indemnitee may have, subject to the
Investment Company Act of 1940 and the rules, regulations and releases
promulgated thereunder, under the Company's By-laws or the Maryland General
Corporation Law or otherwise. To the extent that a change in the Maryland
General Corporation Law (whether by statute or judicial decision) and the
Investment Company Act of 1940 (or the rules, regulations and releases
promulgated thereunder) permits greater indemnification by agreement than would
be afforded currently under the Company's By-laws and this Agreement, it is the
intent of the parties hereto that Indemnitee shall enjoy by this Agreement the
greater benefits so afforded by such change.
Liability Insurance. To the extent the Company maintains an
insurance policy or policies providing directors' and officers' liability
insurance, Indemnitee shall be covered by such policy or policies, in accordance
with its or their terms, to the maximum extent of the coverage available for any
Company director or officer.
Amendments, Etc. No supplement, modification or amendment of
this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
No Duplication of Payments. The Company shall not be liable
under this Agreement to make any payment in connection with any Claim made
against Indemnitee to the extent Indemnitee has otherwise actually received
payment (under any insurance policy, By-law or otherwise) of the amounts
otherwise indemnifiable hereunder.
Binding Effect, Etc. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto and their
respective successors, assigns, including any direct or indirect successor by
purchase, merger, consolidation or otherwise to all or substantially all of the
business and/or assets of the Company, spouses, heirs, executors and personal
and legal representatives. This Agreement shall continue in effect regardless of
whether Indemnitee continues to serve as an officer or director of the Company
or of any other enterprise at the Company's request.
Severability. The provisions of this Agreement shall be
severable in the event that any of the provisions hereof (including any
provision within a single section, paragraph or sentence) is held by a court of
competent jurisdiction to be invalid, void or otherwise unenforceable in any
respect, and the validity and enforceability of any such provision in every
other respect and of the remaining provisions hereof shall not be in any way
impaired and shall remain enforceable to the fullest extent permitted by law.
14. Exhibit. Attached hereto as Exhibit A is the form of Escrow
Agreement required by Section 3 hereof.
15. Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Maryland
applicable to contracts made and to be performed in such state without giving
effect to the principles of conflicts of laws.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement this ___ day of September, 1996.
THE MICROCAP FUND, INC.
By _______________________
Name:
Title:
------------------------
[Indemnitee]
<PAGE>
Exhibit A
ESCROW AGREEMENT
This ESCROW AGREEMENT is made and entered into as of September
___, 1996, between The MicroCap Fund, Inc., a Maryland corporation (the
"Company"), and _________________, as escrow agent (the "Escrow Agent").
WHEREAS, the Company has entered into indemnification agreements
effective as of August 1, 1996 (the "Indemnification Agreements") with certain
of its current and former directors and officers (the "Indemnitees"), which,
among other things, require the Company to establish and deliver $250,000 in
cash and cash equivalents (the "Escrowed Assets") to an escrow account for the
purpose of discharging certain of its obligations under the Indemnification
Agreements.
NOW, THEREFORE, in consideration of the premise set forth above, the
Company hereby transfers physical possession of the Escrowed Assets for the uses
and purposes stated herein, subject to the terms and provisions set out below,
and the Escrow Agent hereby accepts such Escrowed Assets, subject to the
following terms and provisions:
1. Certain Definitions. For purposes of this Escrow Agreement,
upon the establishment of a liquidating trust that will hold the assets of the
Company (the "Trust"), references to the Company shall mean the trustee of the
Trust (the "Trustee") and references to the stockholders of the Company (the
"Stockholders") shall mean the beneficiaries of the Trust (the "Beneficiaries").
2. Appointment and Agreement of Escrow Agent. The Company
hereby appoints the Escrow Agent as escrow agent, and the Escrow Agent agrees
to perform the duties of Escrow Agent under this Agreement.
3. Establishment of Escrow.
3.1 Delivery of Property and Receipt. Simultaneously with the execution of this
Escrow Agreement, the Company is delivering to the Escrow Agent the Escrowed
Assets, initially consisting of $250,000 in cash and cash equivalents. The
Escrow Agent hereby acknowledges receipt of the Escrowed Assets and agrees to
hold and disburse the Escrowed Assets in accordance with the terms and
conditions of this Escrow Agreement for the uses and purposes stated herein.
3.2 Investment and Income. Pending the disbursement of the Escrowed Assets
pursuant to this Escrow Agreement, the Escrow Agent shall invest the Escrowed
Assets as directed by the Company in (i) direct obligations of the United States
of America or obligations of any agency or instrumentality thereof which mature
not later than one year from the date of the acquisition thereof; (ii) money
market deposit accounts, checking accounts, savings accounts, or certificates of
deposit, or other time deposit accounts which mature not later than one year
from the date of acquisition thereof which are issued by a commercial bank or
savings institution organized under the laws of the United States of America or
any state thereof; or (iii) any other instruments which may be permissible under
Revenue Procedure 82-58, as the same may be amended, supplemented or modified.
All dividends, interest and other amounts received
with respect to Escrowed Assets shall be treated
for Federal, state and local tax purposes as having been received by the Company
or, upon the establishment of the Trust, by the Trustee for the benefit of the
Beneficiaries.
4. Obligations Secured. This Escrow Agreement has been executed and the deposit
of the Escrowed Assets hereunder has been made for the purpose of satisfying the
Company's obligations under the Indemnification Agreements arising in connection
with the Proceedngs (as defined therein).
5. Procedures for Disbursement of Escrowed Assets. The Escrow Agent shall hold
and distribute the Escrowed Assets as follows:
5.1 Disbursement of Escrowed Assets. Whenever there shall be delivered to the
Escrow Agent a certificate signed by the Company to the Escrow Agent (i) that a
payment under the Indemnification Agreement is due and payable and/or (ii) that
the Company believes that there is no substantial likelihood that further
indemnification payments will be required under the Indemnification Agreements
in connection with the Proceedings, then the Escrow Agent shall deliver to or at
the direction of the Company such amount of Escrowed Assets equal in value to
the amount requested in (i) above and/or, in case of (ii) above, any remaining
Escrowed Assets; provided, however, that the Escrow Agent shall not deliver any
Escrowed Assets pursuant to this Section 5.1 unless it shall have given each of
the Indemnitees at least three days' prior written notice of its intent to make
such delivery. The Escrow Agent shall deliver any such amount by wire transfer
upon request or by check.
5.2 Interim Distributions. Notwithstanding anything in this Escrow Agreement to
the contrary, any dividends, income or other amounts attributable to the
Escrowed Assets will be distributed to the Company for the benefit of its
Stockholders.
6. Termination of Escrow. This Escrow Agreement shall
terminate (the "Termination Date") upon the earliest of (i) a finding by the
Board of Directors of the Company or, upon establishment of the Trust, the
Trustee, that there is no substantial likelihood that further indemnification
payments will be required under the Indemnification Agreements in connection
with the Proceedings, and (ii) the disbursement of all of the Escrowed Assets in
accordance with Section 5. As soon as practicable following the Termination
Date, the Escrow Agent shall cause notice of such termination to be delivered to
each of the Indemnitees. On the fourth day following such notice of termination,
the Escrow Agent shall deliver the Escrowed Assets, if any, to the Company. With
respect to subparagraph (i) above, this Escrow Agreement shall be terminated
only upon the receipt by the Escrow Agent of a written notice of termination
executed by the Company directing the distribution of all Escrowed Assets then
held by the Escrow Agent under and pursuant to this Escrow Agreement.
7. The Escrow Agent.
7.1 Indemnification of Escrow Agent. The Company hereby agrees to indemnify and
hold the Escrow Agent and its respective directors, officers, agents and
employees harmless from and against any and all liabilities, claims, losses,
costs, charges, damages, and attorneys' fees which the Escrow Agent in good
faith may incur or suffer in connection with or arising out of this Escrow
Agreement.
7.2 Duties of Escrow Agent. The Escrow Agent shall have no duties other than
those expressly imposed on it herein. The Escrow Agent shall not be liable for
any act or omission except for its own negligence or willful misconduct. In no
event shall the Escrow Agent be liable for any action taken or omitted to be
taken in accordance with the instructions of the Company pursuant to this
Agreement.
7.3 Fees of Escrow Agent. The fees and charges of the Escrow Agent with respect
to this Escrow Agreement shall be paid by the Company in accordance with the
Escrow Agent's customary fees as charged from time to time. The Company agrees
that the Escrow Agent may deduct any unpaid fees from Escrowed Assets prior to
the Escrow Agent's distributing any assets in connection with the termination of
this Escrow Agreement.
7.4 Escrow Agent to Follow Instructions of the Company. Any provision herein
contained to the
contrary notwithstanding, the Escrow Agent shall at any time and from time to
time take such action hereunder with respect to the Escrowed Assets as shall be
agreed to in writing by the Company, provided that the Escrow Agent shall first
be indemnified to its satisfaction by the Company with respect to any of its
costs, expenses (including reasonable attorneys' fees) or liabilities which
might be incurred; provided, however, that distributions of Escrowed Assets
shall be made only in accordance with the provisions hereof.
7.5 Resignation of Escrow Agent. The Escrow Agent may resign at any time by
providing the Company with thirty days' written notice of its intention to do
so. Upon receiving such notice, the Company shall endeavor to appoint a
successor Escrow Agent. If the Company is unable to appoint a successor Escrow
Agent within thirty days of receipt by the Company of the Escrow Agent's notice
of its intention to resign, the Escrow Agent may petition a court of competent
jurisdiction to appoint a successor. The Escrow Agent's resignation shall be
effective upon delivery of the remaining Escrowed Assets to the successor Escrow
Agent and the successor assuming the obligations, rights and duties of the
Escrow Agent hereunder.
8. Provisions.
8.1 Notices. A copy of all notices and communications delivered by the Escrow
Agent pursuant to
this Agreement shall be sent to the Indemnitees. All notices and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered personally or sent by cable, telegram, telecopier or
telex to the parties hereto and to the Indemnitees at the following addresses or
at such other addresses as shall be specified by the parties by like notice:
If to the Company or to the Trust:
The MicroCap Fund, Inc.
c/o Raymond S. Troubh
Ten Rockefeller Plaza
Suite 712
New York, New York 10020
Facsimile: (212) 489-7484
with a copy to:
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, New York 10022
Attention: Richard T. Prins, Esq.
Facsimile: (212) 735-2000
If to the Escrow Agent:
==============================
------------------------------
(c) If to the Indemnitees:
James E. Brands
4330 Bancroft Valley
Alpharetta, Georgia 30201
Facsimile: (770) 751-0834
Richard L. Hubbell
Hub Associates
P.O. Box 759
East Dennis, Massachusetts 02641
Facsimile: (508) 385-7433
Leonard J. DeRoma
BZW Securities Inc.
222 Broadway
8th Floor
New York, New York 10038
Facsimile: (212) 412-6826
Jeffrey Lewis
J.B. Lewis Associates, Inc.
415 East 52nd Street
New York, New York 10022
Facsimile: (212) 826-0384
Robert W. Naismith, Ph.D.
William Naismith & Associates
P.O. Box 3994
Scranton, Pennsylvania 18505-0994
Facsimile: (717) 941-7884
Raymond S. Troubh
Ten Rockefeller Plaza, Suite 712
New York, New York 10020
Facsimile: (212) 489-7484
Robert D. Tucker
405 Townsend Place
Atlanta, Georgia 30327
Facsimile: (404) 816-0449
Notwithstanding the foregoing, the Escrow Agent agrees in respect of any action,
suit or proceeding it might initiate against the Company, the Trust, the
Stockholders or the Beneficiaries to furnish a duplicate copy of all such papers
so served to the Company, up until the time it dissolves, and thereafter to the
Trustee by a nationally recognized overnight courier at the address of each such
party set forth above.
8.2 Benefit and Assignment. The rights and obligations of each party under this
Escrow Agreement may not be assigned without the prior written consent of the
other party except that the Company in connection with its dissolution may
assign this Escrow Agreement to the Trustee on behalf of the Beneficiaries. This
Escrow Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns (and, in the case of the
Company, the Beneficiaries and the Trustee). Nothing in this Escrow Agreement,
expressed or implied, is intended to or shall (i) confer on any person other
than the parties hereto, or their respective successors or assigns, any rights,
remedies, obligations or liabilities under or by reason of this Escrow Agreement
other than in respect to the rights conferred hereunder on the Indemnitees, or
(ii) constitute the parties hereto as partners or participants in a joint
venture. The Escrow Agent shall not be obligated to recognize any such
succession or assignment, until satisfactory written evidence thereof shall have
been received by it.
8.3 Third Party Beneficiary. (a) The Company and the Escrow Agent each
acknowledge that each of the Indemnitees is a third party beneficiary of this
Escrow Agreement.
8.4 Entire Agreement; Amendment. This Escrow Agreement and the Indemnification
Agreements contain all the terms agreed upon by the parties with respect to the
subject matter hereof. This Escrow Agreement may be amended only by a written
instrument signed by the party against which enforcement of any waiver, change,
modification, extension or discharge is sought.
8.5 Headings. The headings of the sections and subsections of this Escrow
Agreement are for ease of reference only and shall not be deemed to evidence or
affect the meaning or construction of any of the provisions hereof.
8.6 Governing Law and Submission to Jurisdiction. This Escrow Agreement shall be
construed, as to
both validity and performance, enforced in accordance with and interpreted and
governed by the laws of the State of New York, without regard to any of the
conflicts of laws provisions thereof.
The Company and the Trustee agree that any claim, suit, action or other
proceeding for indemnity or otherwise provided for in this Escrow Agreement,
brought by the Company, the Stockholders, the Trustee or the Beneficiaries shall
be brought only in a court sitting in New York, New York.
8.7 Counterparts. This Escrow Agreement may be executed in multiple
counterparts, all of which taken together shall constitute one instrument.
IN WITNESS WHEREOF, the parties have caused this Escrow
Agreement to be executed by their respective duly authorized officers, all as of
the day and year first above written.
THE MICROCAP FUND, INC.
By:
Raymond S. Troubh
President and Chief Executive Officer
[ESCROW AGENT]
By:
Name:
Title:
