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 May 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)
575 Fifth Avenue, 37th Floor
New York, New York 10017
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (800) 888-6534
Not applicable
================================================================================
Former name, former address and former fiscal year, if changed since last report
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
<PAGE>
THE MICROCAP FUND, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Statements of Assets and Liabilities as of May 31, 1996 (Unaudited) and February
29, 1996
Schedule of Portfolio Investments as of May 31, 1996 (Unaudited)
Statements of Operations for the Three Months Ended May 31, 1996 and 1995
(Unaudited)
Statements of Changes in Net Assets for the Three Months ended May 31, 1996 and
1995 (Unaudited)
Statements of Cash Flows for the Three Months ended May 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>
May 31, 1996 February 29,
(Unaudited) 1996
ASSETS
Portfolio investments at fair value (cost $3,457,267 at
<S> <C> <C> <C> <C> <C> <C> <C>
May 31, 1996 and $4,783,156 at February 29, 1996) $ 7,894,450 $ 6,939,805
Cash and cash equivalents 11,051,745 9,878,280
Receivable from securities sold 561,917 199,375
Accrued interest receivable 89,345 349,781
Deferred organizational costs (net of accumulated amortization of
$126,100 at May 31, 1996 and $116,257 at February 29, 1996) 70,765 80,608
Other assets 160,668 120,862
---------------- ----------------
Total assets 19,828,890 17,568,711
---------------- ----------------
LIABILITIES
Payable for securities purchased 7,371 -
Accounts payable and accrued expenses 783,980 315,277
Due to Administrator 18,276 18,276
---------------- ----------------
Total liabilities 809,627 333,553
---------------- ----------------
NET ASSETS
Preferred Stock, par value $.01; 2,000,000 shares authorized; 440,800 shares
issued and 253,367 shares outstanding at May 31, 1996 and 440,800 issued and
265,317 shares outstanding at February 29, 1996
- Note 2 2,534 2,653
Common Stock, par value $.01; 10,000,000 shares authorized;
2,400,800 shares issued and 2,110,573 shares outstanding at
May 31, 1996 and 2,388,253 shares issued and 2,098,026
outstanding at February 29, 1996 - Note 2 24,008 23,883
Additional paid-in-capital 19,441,472 19,441,478
Net unrealized appreciation of portfolio investments 4,437,183 2,156,649
Accumulated net investment loss (829,414) (37,743)
Distributions in excess of net investment income (345,581) (345,581)
Accumulated net realized loss from portfolio investments (2,483,946) (2,779,188)
---------------- ----------------
Sub-total 20,246,256 18,462,151
Less: Treasury Stock at cost (290,227 shares of Common Stock) (1,226,993) (1,226,993)
---------------- ----------------
Net Assets $ 19,019,263 $ 17,235,158
================ ================
Net assets per share of common stock $ 7.84 $ 7.25
======= =======
Net assets per share of preferred stock $ 9.79 $ 7.61
======= =======
</TABLE>
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
MAY 31, 1996
<TABLE>
% of
Issuer / Position Cost Fair Value Net Assets(1)
Publicly-Held Securities:
Accumed International, Inc.(A)
Warrant to purchase 60,000 shares of Common Stock
<S> <C> <C> <C> <C> <C> <C>
at $5.00 per share, expiring 10/14/97 $ 5,017 $ 131,250 .69%
------------- --------------
Shells Seafood Restaurants, Inc.*(B)
Secured note at prime plus 2% due 10/23/97 500,000 500,000
300,000 shares of Common Stock 90,000 1,686,250
Warrant to purchase 175,000 shares of Common Stock
at $3.15 per share, expiring 12/31/99 0 315,000
Warrant to purchase 75,000 shares of Common Stock
at $3.50 per share, expiring 12/31/99 0 108,750
Warrant to purchase 75,000 shares of Common Stock
at $3.75 per share, expiring 12/31/97 0 90,000
------------- --------------
590,000 2,700,000 14.20%
------------- --------------
Unigene Laboratories, Inc.(C)
Warrant to purchase 675,000 shares of Common Stock
at $1.38, expiring 7/7/00 0 1,750,950 9.21%
------------- --------------
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.
450,000 shares of Common Stock 47,250 47,250 .25%
------------- --------------
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, expiring 1/24/00 0 0
------------- --------------
1,937,500 1,937,500 10.18%
------------- --------------
International Communication Technologies, Inc.(D)
9% Convertible Promissory Note due 6/30/96 150,000 150,000 .79%
------------- --------------
Oh-La-La! Inc.
9% Convertible Senior Note 140,000 140,000
9% Convertible Senior Note 100,000 100,000
------------- --------------
240,000 240,000 1.26%
------------- --------------
Optiva Corporation
150,000 shares of Common Stock 487,500 937,500 4.93%
------------- -------------- ------
Total Portfolio Investments $ 3,457,267 $ 7,894,450 41.51%
============= ============== =====
</TABLE>
<PAGE>
THE MICROCAP FUND, INC.
SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED) - continued
May 31, 1996
* 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) During the quarter, the Fund sold warrants to purchase 190,000 shares of
Accumed International, Inc. common stock for $313,329, realizing a gain of
$297,440. Also during the quarter, the Fund purchased an additional 12,500
shares of Accumed common stock, which it later sold for $49,213, realizing
a loss of $2,198. Subsequent to the end of the quarter, the Fund sold its
remaining warrants to purchase 60,000 shares of Accumed common stock for
$154,647, realizing a gain of $149,630.
(B) On April 23, 1996, Shells Seafood Restaurants, Inc. completed the initial
public offering of its common stock at $5.00 per share. In connection with
the offering, the Fund received $1.61 million, representing repayment of
its $1.31 million senior note along with accrued interest thereon.
Additionally, subsequent to the end of the quarter, the Fund sold its
investment in Shells for $2.7 million, realizing a gain of $2,110,000.
(C) As of May 31, 1996, the Fund held a warrant to purchase 675,000 common
shares of Unigene Laboratories, Inc., of which 60,000 have been reserved
for payment of consulting and portfolio transaction costs incurred in
connection with the Fund's investment in Unigene. As of May 31, 1996, the
Fund has an outstanding obligation relating to this commitment totaling
$155,640, reflecting the carrying value of such warrants as of May 31,
1996.
(D) In July 1996, 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 May 31,
<TABLE>
1996 1995
-------------- --------
INVESTMENT INCOME AND EXPENSES
Income:
<S> <C> <C>
Interest from short-term investments $ 128,473 $ 115,965
Interest and dividends from portfolio investments 56,498 69,883
-------------- ------------
Total investment income 184,971 185,848
-------------- ------------
Expenses:
Administrative fees and expenses - Note 2 52,964 42,732
Legal fees 580,544 13,490
Accounting fees 24,178 7,219
Salary expense 85,903 42,502
Amortization of deferred organizational costs 9,843 9,843
Transfer agent and custodian fees 3,457 5,690
Directors' fees and expenses 20,678 7,952
Consulting fees 125,040 -
Insurance expense 11,366 6,422
Mailing and printing 24,844 4,267
Other operating expenses 37,825 971
-------------- ------------
Total expenses 976,642 141,088
-------------- ------------
NET INVESTMENT INCOME (LOSS) (791,671) 44,760
-------------- ------------
NET REALIZED AND UNREALIZED GAIN FROM PORTFOLIO
INVESTMENTS
Net realized gain (loss) from portfolio investments 295,242 (351,344)
Change in net unrealized appreciation of investments 2,280,534 367,375
-------------- ------------
Net realized and unrealized gain from portfolio investments 2,575,776 16,031
-------------- ------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 1,784,105 $ 60,791
============== ============
</TABLE>
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
For the Three Months Ended May 31,
<TABLE>
1996 1995
---------------- ----------
Change in net assets resulting from operations:
<S> <C> <C>
Net investment income (loss) $ (791,671) $ 44,760
Net realized gain (loss) from portfolio investments 295,242 (351,344)
Change in net unrealized appreciation of portfolio
investments 2,280,534 367,375
---------------- ----------------
Net increase in net assets resulting from operations 1,784,105 60,791
---------------- ----------------
Change in net assets from capital stock transactions:
Common Stock repurchased - (725,875)
---------------- ----------------
Total increase (decrease) in net assets for the period 1,784,105 (665,084)
Net assets at beginning of period 17,235,158 17,715,073
---------------- ----------------
NET ASSETS AT END OF PERIOD $ 19,019,263 $ 17,049,989
================ ================
</TABLE>
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months Ended May 31,
<TABLE>
1996 1995
---------------- ---------
CASH FLOWS PROVIDED FROM (USED FOR) OPERATING
ACTIVITIES
<S> <C> <C>
Net investment income (loss) $ (791,671) $ 44,760
Adjustments to reconcile net investment income to cash provided from
(used for) operating activities:
Amortization of discount on accounts receivable - (1,000)
Amortization of deferred organizational costs 9,843 9,843
Depreciation expense 1,148 -
Increase (decrease) in payables and other liabilities 468,703 (56,237)
Decrease in receivables and other assets 219,482 46,084
---------------- ---------------
Cash flows provided from (used for) operating activities (92,495) 43,450
---------------- ---------------
CASH FLOWS PROVIDED FROM (USED FOR) INVESTING
ACTIVITIES
Cost of portfolio investments purchased (44,040) (3,750,000)
Net proceeds from the sale of portfolio investments - 1,122,656
Repayment of note 1,310,000 -
---------------- ---------------
Cash flows provided from (used for) investing activities 1,265,960 (2,627,344)
---------------- ---------------
CASH FLOWS USED FOR FINANCING ACTIVITIES
Common Stock repurchased - (156,000)
---------------- ---------------
Increase (decrease) in cash and cash equivalents 1,173,465 (2,739,894)
Cash and cash equivalents at beginning of period 9,878,280 9,033,750
---------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,051,745 $ 6,293,856
================ ===============
</TABLE>
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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.
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.
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 months ended May 31, 1996,
self-administration expenses totaled $52,964. The administrative fee for the
three months ended May 31, 1995, under the previous administrative arrangement,
was $42,732.
3. Capital Stock Transactions
<TABLE>
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> <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 12,547 125 (6) (11,950) (119)
---------- --------- ------------- --------- -------
Balance at May 31, 1996 2,400,800 $ 24,008 $ 19,441,472 253,367 $ 2,534 290,227$ 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 quarter ended May 31, 1996, 11,950 shares of
preferred stock were converted into 12,547 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
<PAGE>
THE MICROCAP FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
fraud in connection with the termination of employment and consulting agreements
between him and the Fund and 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 has been
stayed indefinitely by agreement of the parties. 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 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. and Regency Maritime Corp., 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"), an officer 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. The Fund has served an answer denying
the allegations of the 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.
<PAGE>
THE MICROCAP FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
The Fund is a defendant in an action brought by Michael S. Falk, a director of
the Fund, in the Supreme Court of New York on June 19, 1996. The complaint
alleges that Kamal Mustafa, President of the Fund and a director, and Bluestone
Capital Partners L.P., 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. Liquidation Plan
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
Board of Directors will recommend that the liquidation plan be approved at a
special meeting of shareholders to be held on July 19, 1996. Approval by the
holders of the common stock and preferred stock voting together as a single
class and by the preferred stock voting as a separate class is required to
approve the plan of liquidation. The Fund will make an initial distribution of a
portion of its available cash to shareholders as soon as possible after approval
is obtained. 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 independent trustees.
6. Classification of Portfolio Investments
As of May 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 3.12%
Common Stock 629,767 5,066,950 26.65%
Debt Securities 2,233,326 2,233,326 11.74%
---------------- --------------- ----------
Total $ 3,457,267 $ 7,894,450 41.51%
================ =============== ==========
Country/Geographic Region
Eastern United States $ 2,527,500 $ 6,388,450 33.59%
Western United States 877,500 1,327,500 6.98%
Midwestern United States 5,017 131,250 .69%
Canada 47,250 47,250 0.25%
---------------- --------------- ----------
Total $ 3,457,267 $ 7,894,450 41.51%
================ =============== ==========
Industry
Biotechnology $ 5,017 $ 1,882,200 9.90%
Communications 150,000 150,000 .79%
Consumer Products 2,425,000 2,875,000 15.11%
Environmental Services 47,250 47,250 0.25%
Food Services 830,000 2,940,000 15.46%
---------------- --------------- ----------
Total $ 3,457,267 $ 7,894,450 41.51%
================ =============== ==========
</TABLE>
* Percentage of net assets is based on fair value.
7. Reclassifications
Certain reclassifications were made to the prior period financial statements in
order to conform to the current period presentation.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
As of May 31, 1996, the Fund had cash and cash equivalents of $11,051,745
representing an increase of $1,173,465 from $9,878,280 at February 29, 1996.
This increase was primarily due to the repayment of the Fund's $1.31 million
note due from Shells Seafood Restaurants, Inc. Increases in accounts payable and
reductions in accounts receivable mostly offset the $792,000 net investment loss
(interest income less operating expenses) for the quarter. 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 months ended May 31, 1996
was $128,473. 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.
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
Board of Directors will recommend that the liquidation plan be approved at a
special meeting of shareholders to be held on July 19, 1996. Approval by the
holders of the common stock and preferred stock voting together as a single
class and by the preferred stock voting as a separate class is required to
approve the plan of liquidation. The Fund will make an initial distribution of a
portion of its available cash to shareholders as soon as possible after approval
is obtained. 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 independent trustees.
Results of Operations
Realized and Unrealized Gains and Losses from Portfolio Investments
For the three months ended May 31, 1996, the Fund had a $2,575,776 net realized
and unrealized gain from portfolio investments, comprised of a $295,242 net
realized gain from portfolio investments and a $2,280,534 increase in net
unrealized appreciation of investments.
During the three months ended May 31, 1996, the Fund sold warrants to purchase
190,000 shares of Accumed International, Inc. common stock for $313,329,
realizing a gain of $297,440. Additionally during the quarter, the Fund sold
12,500 shares of Accumed common stock for $49,213, realizing a loss of $2,198.
The $2,280,534 increase in net unrealized appreciation of investments for the
quarter included a $2,438,446 net unrealized gain, primarily due to the
increased public market price of Unigene Laboratories, Inc. and Shells Seafood
Restaurants common stock at the end of the quarter. This additional unrealized
gain was offset by a $157,912 transfer from unrealized to realized gain due to
the sale of Accumed warrants, as discussed above.
For the three months ended May 31, 1995, the Fund had a $16,031 net realized and
unrealized gain from portfolio investments, comprised of a $351,344 net realized
loss from portfolio investments and a $367,375 increase in net unrealized
appreciation of investments.
In May 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) payable in March
1996. 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 of these companies.
The $367,375 increase in net unrealized appreciation of investments for the May
1995 quarter was comprised of a $976,750 net unrealized gain due to the net
upward revaluation of the Fund's remaining portfolio investments, which was
offset by a $609,375 transfer from unrealized gain to realized gain due to the
sale of Silverado Foods common stock, as discussed above. The $976,750 net
unrealized gain for the three months ended May 31, 1995 included a $1.5 million
upward revaluation of the Fund's investment in Shells Seafood Restaurants, Inc.
and downward revaluations of Yes! Entertainment Corporation, in the amount of
$492,000, and Alamar Biosciences, Inc., in the amount of $31,250.
Investment Income and Expenses
For the three months ended May 31, 1996 and 1995, the Fund had a net investment
loss of $791,671 and net investment income of $44,760, respectively. The
increase in net investment loss for the 1996 period compared to the 1995 period
was due to an $835,554 increase in operating expenses for the 1996 period. Legal
fees for the 1996 period totaled $580,544 , or 59% of total operating expenses
for the period. The rise in legal fees for the 1996 period compared to the 1995
period reflects the increased legal proceedings involving the Fund (see Note 3
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 19, 1996 special meeting of shareholders and plan of liquidation.
The remaining increase in operating expenses for the 1996 period primarily was
due to an increase in consulting fees, salary expense and other operating
expenses. Consulting fees of $125,040 incurred during the 1996 period resulted
from an increase in the carrying value of the Fund's warrants to purchase 60,000
shares of Unigene Laboratories, Inc. common stock, which has been committed for
payment of portfolio transaction fees and consulting relating to the Fund's
investment in Unigene. There were no such consulting fees incurred during the
1995 period. Salary expense increased $43,401 reflecting an increase in
officer's salaries and the addition of full-time staff from two during the 1995
period to four during the 1996 period. Other operating expenses increased
$36,854 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 months ended May 31, 1996. The
administration expense incurred by the Fund for the 1996 period compared to the
1995 period was $52,964 and $42,732, respectively. Under the 1% administrative
agreement with CAAM the Fund would have incurred an administrative fee of
$47,548 for the 1996 period compared to the actual administrative expense
incurred during this period.
Net Assets
At May 31, 1996, the Fund's net assets were $19,019,263, an increase of
$1,784,105 from net assets of $17,235,158 at February 28, 1996. This increase
was comprised of the $2,575,776 net realized and unrealized gain from portfolio
investments offset by the $791,671 net investment loss for the 1996 period. At
May 31, 1996, the net asset value per share of common stock and preferred stock
was $7.84 and $9.79 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. This allocation
resulted in a dilution to common shareholders of $332,289, or $.16 per share.
Additionally, the results from operations for the three months ended May 31,
1996 increased the Fund's net assets by $.74 and $.92 per share of common and
preferred stock, respectively.
At May 31, 1995, the Fund's net assets were $17,049,989, a decrease of $665,084
from net assets of $17,715,073 at February 28, 1995. Net assets resulting from
operations for the period increased $60,791 which was comprised of $44,760 of
net investment income and $16,031 net realized and unrealized gain from
portfolio investments. This increase was more than offset by a $725,875 decrease
in net assets due to the repurchase of 182,500 shares of the Fund's common stock
in the public market during the period.
At May 31, 1995, the net asset value per share of common stock and preferred
stock was $6.86 and $7.21 per share, respectively. At February 28, 1995, the net
asset value per share of common stock was $8.04. There was no preferred stock
was outstanding on February 28, 1995. The changes in the net asset value per
share of common stock and preferred stock for the three months ended May 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 three months ended May 31, 1995, the Fund repurchased 182,500 shares
of common stock for $725,875. The effect of such repurchases increased the net
asset value per share of common stock and preferred stock by $.20 and $.21,
respectively. The increase in net assets from operations for the three months
ended May 31, 1995 of $60,791 increased the net asset value by $.02 and $.03 per
share of common stock and preferred stock, respectively.
<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 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 has been stayed indefinitely by agreement of the parties. 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 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. and Regency Maritime Corp., 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"), an officer 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. The Fund has served an answer denying
the allegations of the 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 director of
the Fund, in the Supreme Court of New York on June 19, 1996. The complaint
alleges that Kamal Mustafa, President of the Fund and a director, and Bluestone
Capital Partners L.P., 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.
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 shareholders is scheduled for July 19, 1996.
Item 5. Other Information.
During the quarter, the Fund purchased 12,500 shares of Accumed International,
Inc. for $51,411.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(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.
THE MICROCAP FUND, INC.
/s/ Kamal Mustafa
Kamal Mustafa
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Joseph Lucchese
Joseph Lucchese
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
Date: July 15, 1996
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MICROCAP
FUND, INC.'S QUARTERLY REPORT ON FORM 10-K FOR THE PERIOD ENDED MAY 31, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-29-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> MAY-31-1996
<INVESTMENTS-AT-COST> 3,457,267
<INVESTMENTS-AT-VALUE> 7,894,450
<RECEIVABLES> 651,262
<ASSETS-OTHER> 160,668
<OTHER-ITEMS-ASSETS> 11,122,510
<TOTAL-ASSETS> 19,828,890
<PAYABLE-FOR-SECURITIES> 7,371
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 802,256
<TOTAL-LIABILITIES> 809,627
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 19,441,472
<SHARES-COMMON-STOCK> 2,110,573
<SHARES-COMMON-PRIOR> 2,098,026
<ACCUMULATED-NII-CURRENT> (829,414)
<OVERDISTRIBUTION-NII> (345,581)
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<NET-ASSETS> 19,019,263
<DIVIDEND-INCOME> 0
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<EXPENSES-NET> 976,642
<NET-INVESTMENT-INCOME> (791,671)
<REALIZED-GAINS-CURRENT> 295,242
<APPREC-INCREASE-CURRENT> 2,280,534
<NET-CHANGE-FROM-OPS> 1,784,105
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
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<GROSS-EXPENSE> 976,642
<AVERAGE-NET-ASSETS> 18,127,211
<PER-SHARE-NAV-BEGIN> 7.25
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<PER-SHARE-GAIN-APPREC> 1.06
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