SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended February 29, 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
================================================================================
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
575 Fifth Avenue, 37th floor
New York, New York 10017
================================================================================
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (800) 888-6534
Not applicable
================================================================================
Former name, former address and former fiscal year, if changed since last report
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Shares of Common Stock
================================================================================
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
(Cover page continues on next page)
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting common stock on May 15, 1996 held by
non-affiliates of the Registrant, based upon the last price reported by NASDAQ
on such date, was $12,481,360(1). The number of shares outstanding of the
Registrant's common stock at the close of business on May 15, 1996 was
2,112,964.
(1) This amount does not include the aggregate market value of 253,367 shares
of preferred stock currently convertible into 316,709 shares of common
stock, which would have an aggregate value of $1,939,841 on May 15, 1996.
Documents Incorporated By Reference
Portions of the Registration Statement of the Registrant dated March 19, 1993,
as supplemented by a supplement thereto dated March 29, 1993, are incorporated
by reference in Part I and Part III hereof.
<PAGE>
PART I
Item 1. Business.
Formation
The MicroCap Fund, Inc., formerly Commonwealth Associates Growth Fund, Inc. (the
"Fund" or the "Registrant"), is a Maryland corporation formed on January 26,
1993. The Fund is a non-diversified, closed-end management investment company,
operating as a business development company under the Investment Company Act of
1940. The Fund has registered its securities under the Securities Act of 1933.
The Fund's investment objective is to achieve long-term capital appreciation of
assets, rather than current income, by investing in debt and equity securities
of emerging and established companies that management believes offer significant
growth potential. The investment activities of the Fund are managed by the
Fund's employees. Mr. Kamal Mustafa is the President, Chief Executive Officer
and Portfolio Manager of the Fund. Mr. Joseph Lucchese is the Fund's Treasurer,
Secretary and Chief Financial Officer. Information concerning Messieurs Mustafa
and Lucchese is included in Part III hereof.
On March 19, 1993, the Fund's Registration Statement on Form N-2 (File No.
33-57696) was declared effective. On March 29, 1993, the Fund completed its
initial public offering of 2,100,000 shares of common stock at $10.00 per share.
The sole underwriter of the Fund's initial public offering was Commonwealth
Associates, a broker-dealer and investment banking firm. In April 1993, the Fund
sold an additional 94,000 shares of common stock at $10.00 per share as part of
an over-allotment option granted to the underwriter. As a result, the Fund sold
a total of 2,194,000 shares of common stock in its initial public offering,
realizing gross proceeds totaling $21,940,000. In connection with the initial
public offering of its common stock the Fund paid to Commonwealth Associates,
selling commissions totaling $1,535,800 and an unaccountable expense allowance
totaling $548,500. Additionally, the Fund incurred other offering and
organizational costs associated with its public offering totaling $589,332. Net
proceeds to the Fund from the initial public offering, after payment of the
selling commissions, offering and organizational costs and unaccountable expense
allowance totaled $19,266,368, or $8.78 per common share.
From its inception to December 10, 1995, Commonwealth Associates Asset
Management, Inc. ("CAAM"), an affiliate of Commonwealth Associates, was the
Fund's administrator, responsible for the accounting, reporting and other
administrative functions necessary for the operation of the Fund. During such
period, CAAM was paid an administrative fee at an annual rate of 1% of the
Fund's net assets. Such fee was calculated and paid quarterly. Since December
11, 1995, the Fund has been self-administered.
On March 2, 1993, prior to the Fund's initial public offering, CAAM purchased
10,000 shares of the Fund's common stock for $100,000, or $10.00 per share. As a
result, total net proceeds to the Fund from the sale of its common stock during
1993 totaled $19,366,368, or $8.79 per common share.
Portfolio Investments
The Fund primarily invests in debt and equity securities of emerging and
established companies and offers certain managerial assistance to such
companies. To a lesser extent, the Fund may invest in the marketable securities
of public companies with low market capitalizations that management believes
offer significant growth potential.
During the year ended February 29, 1996 ("fiscal 1996"), the Fund invested
$3,937,500 in two new portfolio investments. Also during fiscal 1996, the Fund
sold certain portfolio investments for $2,536,547, resulting in a net realized
loss of $51,009. Two other portfolio investments were written-off during fiscal
1996, resulting in an additional realized loss of $1,010,000. Additionally,
promissory notes due from two portfolio companies totaling $3,940,000 were
repaid to the Fund with interest. These portfolio transactions are discussed in
more detail below. On February 29, 1996, the Fund held investments in 9
portfolio companies with an aggregate cost of $4,783,156 and a fair value of
$6,939,805.
New Investments During Fiscal 1996
On March 31, 1995, the Fund invested $1,750,000 in First Colony Acquisition
Corp., a retailer of gourmet coffee beans, acquiring 96,250 shares of preferred
stock, a $1,213,327 4% convertible promissory note and a warrant to purchase
7,560 shares of First Colony common stock at $5.00 per share. On September 27,
1995, the Fund invested an additional $187,500 in First Colony. The Fund
acquired an additional 10,312 shares of preferred stock and exchanged its
$1,213,327 4% note for a $1,343,326 6% convertible promissory note due from the
company on November 1, 1997.
On May 8, 1995, the Fund invested $2,000,000 in Unigene Laboratories, Inc., a
pharmaceutical company developing treatments for osteoporosis, acquiring a
$2,000,000 13% promissory note and warrants to purchase 75,000 shares of Unigene
common stock at $1.80 per share. During fiscal 1996, in consideration for
extending the original maturity date on the promissory note due from Unigene,
the Fund received an increase in the interest rate on the promissory note to
24.5% and an additional 825,000 warrants to purchase Unigene common stock along
with a reduction in the strike price of all such warrants to $1.38 per share. In
November 1995, the Fund sold the $2,000,000 promissory note, along with accrued
interest thereon, and 225,000 warrants to purchase Unigene common stock for
$2,221,330. The sale resulted in no gain or loss to the Fund, since $221,330 was
recorded as interest income during fiscal 1996. On February 29, 1996, the Fund
held warrants to purchase 675,000 common shares of Unigene for $1.38 per share.
The Fund has committed to transfer 60,000 of its Unigene warrants to
unaffiliated consultants for the payment of certain consulting and other
transaction costs incurred during fiscal 1996.
Liquidations and Other Portfolio Transactions Completed in Fiscal 1996
On March 24, 1995, the Fund sold its $250,000 investment in SR Communications
Corp. for $200,000 and a $40,000 non-interest bearing promissory note. The Fund
realized a $14,000 loss and recorded $4,000 of interest income from this
transaction.
In May 1995, the Fund sold its 337,500 common shares of Silverado Foods, Inc.
for $822,656, realizing a gain of $672,656.
In June 1995, the Fund wrote-off its investments in Radiator King International,
Inc. and Weir-Jones Marketing, Inc. due to continued business and financial
difficulties at these companies. The Fund realized a loss of $1,010,000 in
fiscal 1996 from the write-off of these two investments.
In September 1995, the Fund sold its 55,555 common shares of YES! Entertainment
Corporation for $305,538, realizing a loss of $393,662.
In October 1995, the Fund sold 150,000 common shares of Accumed International,
Inc. (formerly Alamar Biosciences, Inc.) for $159,375, realizing a loss of
$128,081.
During March 1995, in consideration for extending the maturity date of its
demand note due from Regency Holdings (Cayman) Inc., the Fund's warrant to
purchase common shares of Regency was adjusted, increasing the number of shares
from 211,200 to 291,456. In November 1995, the Fund redeemed the 291,456 common
stock warrants for $145,728, realizing a gain of $145,728. The Fund also
received the repayment of its $1,940,000 promissory note due from the company,
along with accrued interest thereon.
In December 1995, the Fund sold its $1.2 million secured promissory note and
warrant to purchase 900,000 common shares of Bennett Environmental U.S., Inc. in
a private transaction for a cash payment of $820,000 and 450,000 common shares
of Bennett Environmental. This transaction resulted in a realized loss of
$333,650 for fiscal 1996.
During fiscal 1996, the Fund agreed to several extensions of the maturity date
of its promissory notes due from Shells Seafood Restaurants, Inc. In
consideration for such extensions, the Fund exchanged its warrant to purchase
10,000 shares of Shells preferred stock at $25.00 per share for warrants to
purchase 325,000 shares of Shells common stock at prices ranging from $3.15 to
$3.75 per share. Subsequent to the end of fiscal 1996, in April 1996, Shells
completed its initial public offering at $5.00 per share. In connection with the
offering, the Fund received the repayment of its $1,310,000 senior note, along
with accrued interest thereon.
Portfolio Transaction Summary for the Fiscal Year Ended February 29, 1996
Portfolio transactions completed during the year ended February 29, 1996,
resulted in a realized loss of $1,061,009. As shown below these transactions
returned $6,476,547 (including cash proceeds of $6,429,297) to the Fund and
reduced its net asset value for the year by $1,054,803. This reduction was
offset by a $2,115,082 increase to the carrying value of the Fund's remaining
portfolio investments during the year, primarily due to the increase in the fair
value of Shell's Seafood Restaurants, as shown below. The completed portfolio
transactions and revaluations increased the Fund's net asset value on a net
basis by $1,060,279 for the year ended February 29, 1996.
<TABLE>
Effect to
Fair Value Net Assets
Investment Return at 2/28/95 for Y/E 2/29/96
Sales and Write-Offs during Y/E 2/29/96:
<S> <C> <C> <C>
Accumed International, Inc. (stock) $ 159,375 $ 151,875 $ 7,500
Bennett Environmental Inc. 867,250 720,900 146,350
Radiator King International, Inc. 0 60,000 (60,000)
Regency Holdings (Cayman, Inc.) 2,085,728 1,940,000 145,728
Silverado Foods, Inc. 822,656 759,375 63,281
SR Communications Corp. 236,000 250,000 (14,000)
Unigene Laboratories, Inc. (note) 2,000,000 2,000,000 0
Weir-Jones Marketing, Inc. 0 950,000 (950,000)
Yes! Entertainment Corporation 305,538 699,200 (393,662)
--------------- -------------- ---------------
Sub-total from sales and write-offs $ 6,476,547 $ 7,531,350 (1,054,803)
=============== ============== ---------------
Revaluations During Y/E 2/29/96:
Accumed International, Inc. (warrants) 162,325
Optiva Corporation 450,000
Shells Seafood Restaurants, Inc. 1,158,750
Unigene Laboratories, Inc. (warrants) 343,980
---------------
Sub-total from revaluations 2,115,055
Net Change to Net Assets for Year Ended
February 29, 1996 $ 1,060,252
===============
</TABLE>
<PAGE>
Competition
The Fund encounters competition from other entities and individuals having
similar investment objectives. Primary competition for desirable investments
comes from investment companies, investment partnerships and wealthy
individuals. Some of the competing entities and individuals have investment
managers or advisors with significantly greater experience, resources and
managerial capabilities than the Fund and are therefore in a better position
than the Fund to obtain access to attractive investments. To the extent that the
Fund can compete for such investments it may only be able to do so on less
favorable terms than those obtained by larger more established investors.
Employees
As of May 15, 1996, the Fund had four full-time employees. From the inception of
the Fund to December 10, 1995, in order to facilitate the payroll process, an
affiliate of CAAM, the Fund's former administrator, paid the salaries of the
Fund's officers and employees. The Fund then reimbursed CAAM on a quarterly
basis for allocated salary amounts. Subsequent to December 10, 1995, the Fund
has paid its employees directly through its own payroll process.
Item 2. Properties.
From its inception to December 10, 1995, the Fund did not own or lease physical
properties. Office space and the use of other equipment was provided to the Fund
by CAAM under the administrative services agreement with CAAM. The Fund rented
temporary office space from December 10, 1995 to March 3, 1996. Since March 4,
1996, the Fund has leased office space from an affiliate of the Fund's president
on a monthly basis, at the rate of $1,800 per month, and has leased or purchased
its own furniture and fixtures and other office equipment.
Item 3. 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.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of shareholders during the fourth quarter of
the fiscal year covered by this report. The 1996 Annual Meeting of Shareholders
has not been scheduled.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Fund has 10,000,000 shares of common stock authorized, of which 2,388,253
shares were issued and 2,098,026 shares were outstanding on February 29, 1996.
The Fund also has 2,000,000 shares of preferred stock authorized, of which
440,800 shares were issued and 265,317 shares were outstanding as of February
29, 1996.
On February 28, 1995, the Fund declared a stock dividend, payable on March 20,
1995 to shareholders of record on March 13, 1995 in shares of preferred stock at
the rate of .2 shares of preferred stock for each share of common stock then
outstanding. The preferred stock is convertible into shares of the Fund's common
stock at any time until February 27, 1998. Each share of preferred stock is
convertible into (i) 1.05 shares of common stock from the date of issuance
through February 28, 1996, (ii) 1.25 shares of common stock from March 1, 1996
through February 28, 1997 and (iii) 1.33 shares of common stock from March 1,
1997 through February 27, 1998. The preferred stock will automatically convert
into common stock on the earlier of (i) a sale, transfer or other distribution
of the shares of common stock upon which the dividend has been paid or (ii)
February 27, 1998. The preferred stock is non-transferable. In connection with
such dividend, the Fund issued 440,800 shares of series A convertible preferred
stock on March 20, 1995. During fiscal 1996, 175,483 shares of preferred stock
were converted into 184,253 shares of the Fund's common stock.
The Board of Directors of the Fund has authorized the repurchase of the Fund's
common stock up to an aggregate amount of $2,000,000. As of February 29, 1996,
the Fund had repurchased 290,227 shares of common stock for an aggregate cost of
$1,226,993, or an average cost of $4.23 per share.
The Fund's common stock is traded on the NASDAQ Small-Cap Market under the
symbol MCAP. The following table sets forth, for each of the periods indicated,
the high and low closing bid prices for the common stock as reported by NASDAQ.
These per share quotations represent inter-dealer prices on the over-the-counter
market, do not include retail markups, markdowns or commissions and may not
represent actual transactions.
<TABLE>
Price Per Share
High Low
Fiscal year ended February 28, 1994:
<S> <C> <C> <C> <C>
First Quarter (commencing March 19, 1993) $ 10.50 $ 9.75
Second Quarter 10.00 8.50
Third Quarter 9.25 8.25
Fourth quarter 9.00 8.50
Fiscal year ended February 28, 1995:
First quarter 8.25 7.00
Second quarter 8.00 7.50
Third quarter 8.00 6.25
Fourth quarter 6.75 6.00
Fiscal year ended February 28, 1996:
First quarter 6.50 4.00
Second quarter 5.25 4.00
Third quarter 5.38 4.38
Fourth quarter 6.00 4.50
Fiscal year ending February 28, 1997:
First quarter (through May 15, 1996) 6.38 4.25
</TABLE>
The closing bid price of the Fund's common stock on May 15, 1996 as reported by
NASDAQ was $6.125 per share. As of May 15, 1996, there were 12 holders of record
of common stock. Certain holders of record hold common shares for approximately
800 beneficial owners.
<PAGE>
Item 6. Selected Financial Data.
<TABLE>
Period From
March 19, 1993
Fiscal Fiscal (Commencement
Year Ended Year Ended of Operations) to
February 29, 1996 February 28, 1995 February 28, 1994
----------------- ----------------- --------------------
Operating Data:
Net investment income (loss) (interest and
<S> <C> <C> <C>
dividend income less operating expenses) $ (313,174) $ 220,352 $ 55,079
Net realized loss from portfolio investments $ (1,061,009) $ (161,149) $ (1,557,030)
Net change in unrealized appreciation or
depreciation of investments $ 2,121,261 $ 548,448 $ (513,060)
Net realized and unrealized gain (loss) from
portfolio investments $ 1,060,252 $ 387,299 $ (2,070,090)
Net increase (decrease) in net assets resulting
from operations $ 747,078 $ 607,651 $ (2,015,011)
Distributions from net realized gains - $ 70,150 -
Distributions from net investment income - $ 275,431 -
Distributions in excess of net investment income - $ 95,219 -
Total cash distributions - $ 440,800 -
Amounts Per Common Share*:
Net investment income (loss) $ (.13) $ .10 $ 0.03
Net realized and unrealized gain (loss) from
portfolio investments $ .44 $ .18 $ (0.94)
Net increase (decrease) in net assets resulting
from operations $ .31 $ .28 $ (0.91)
Cash distributions - $ .20 -
Amounts Per Preferred Share*:
Net investment (loss) $ (.14) - -
Net realized and unrealized gain from portfolio
investments $ .46 - -
Net increase in net assets resulting from operations $ .32 - -
As of As of As of
February 29, 1996 February 28, 1995 February 28, 1994
----------------- ----------------- --------------------
Balance Sheet Data:
Total assets $ 17,568,711 $ 18,054,440 $ 17,739,168
Net assets $ 17,235,158 $ 17,715,073 $ 17,548,222
Cash and cash equivalents $ 9,878,280 $ 9,033,750 $ 4,475,544
Portfolio investments at fair value $ 6,939,805 $ 8,371,350 $ 11,645,538
Per Share Amount:
Net assets per share of common stock $ 7.25 $ 8.04 $ 7.96
Net assets per share of preferred stock $ 7.61 - -
</TABLE>
* Based on weighted average number of shares outstanding for each respective
period.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
The Fund commenced operations on March 19, 1993 and completed its initial public
offering of common stock in two separate closings in March 1993 and April 1993.
The Fund sold a total of 2,194,000 shares of common stock at $10.00 per share in
the offering. Additionally, in March 1993, Commonwealth Associates Asset
Management, Inc. ("CAAM"), the Fund's former administrator, purchased 10,000
shares of the Fund's common stock for $100,000, or $10.00 per share. Gross
proceeds received by the Fund from the sale of its common stock totaled
$22,040,000 and net proceeds after the payment of the selling commissions,
offering and organizational expenses and unaccountable expense allowance totaled
$19,366,368.
During the fiscal year ended February 29, 1996, the Fund purchased portfolio
investments totaling $3,937,500. Also during the year, the Fund received net
cash proceeds totaling $2,393,922 from the sale of certain portfolio investments
and the debt investments of two portfolio companies totaling $3,940,000 were
repaid to the Fund with interest. Additionally, the Fund used $1,226,993 to
repurchase its own common stock. See Note 6 of Notes to Financial Statements.
As of February 29, 1996, the Fund had cash and cash equivalents of $9,878,280.
The Fund's cash balance provides the liquidity necessary to purchase additional
portfolio investments or shares of capital stock of the Fund as opportunities
for such investments arise. 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 fiscal years ended February 29, 1996 ("fiscal 1996") and February 28, 1995
("fiscal 1995") and for the period from March 19, 1993 (commencement of
operations) to February 28, 1994 (the "1994 period"), totaled $444,621, $367,122
and $306,520, respectively. Interest earned from such investments in future
periods is subject to fluctuations in short-term interest rates and changes in
the Fund's available cash balances.
In April 1996, subsequent to the end of fiscal 1996, the Fund received $1.61
million from Shells Seafood Restaurants, Inc. representing the repayment of the
Fund's $1.31 million senior note plus interest.
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 the
next annual meeting of shareholders to be held in 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 fiscal
1996 and fiscal 1995, the Fund had a net realized and unrealized gain from its
portfolio investments of $1,060,252 and $387,299, respectively. For the 1994
period, the Fund had a net realized and unrealized loss from its portfolio
investments of $2,070,090.
The $1,060,252 net realized and unrealized gain for fiscal 1996 was comprised of
a $1,061,009 net realized loss from the sale and write-off of certain portfolio
investments during the year, which was more than offset by a $2,121,261 increase
to net unrealized appreciation of portfolio investments during fiscal 1996.
The $1,061,009 net realized loss incurred during fiscal 1996 was comprised of
the following transactions:
In March 1995, the Fund sold its $250,000 investment in SR Communications
Corp. for $200,000 and a $40,000 non-interest bearing promissory note. The
Fund realized a $14,000 loss and recorded $4,000 of interest income from
this transaction.
<TABLE>
<S> <C> <C> <C>
In May 1995, the Fund sold its 337,500 common shares of Silverado Foods, Inc. in a private transaction for $822,656,
realizing a gain of $672,656.
In June 1995, the Fund wrote-off its investments in Radiator King International, Inc. and Weir-Jones Marketing, Inc. due
to continued business and financial difficulties at these companies. The Fund realized a loss of $1,010,000 in fiscal 1996
from the write-off of these two investments.
In September 1995, the Fund sold its 55,555 common shares of YES! Entertainment Corporation for $305,538, realizing a loss
of $393,662.
In October 1995, the Fund sold 150,000 common shares of Accumed International, Inc. (formerly Alamar Biosciences, Inc.)
for $159,375, realizing a loss of $128,081.
In November 1995, the Fund received $145,728 for the redemption of its
291,456 common stock warrants of Regency Holdings (Cayman) Inc., resulting
in a realized gain of $145,728.
In December 1995, the Fund sold its $1.2 million promissory note and warrant to purchase 900,000 common shares of Bennett
Environmental U.S., Inc. in a private transaction for $820,000 and 450,000 common shares of Bennett Environmental. This
transaction resulted in a realized loss of $333,650 for fiscal 1996.
</TABLE>
The Fund's $2,121,261 net increase in net unrealized appreciation of portfolio
investments for fiscal 1996 includes a $1,850,261 net unrealized gain due to the
net upward revaluation of certain portfolio investments during the year,
primarily Shells Seafood Restaurants, Inc., which completed its initial public
offering in April 1996. Net unrealized appreciation of portfolio investments
also increased due to the net transfer of $271,000 from unrealized loss to
realized loss relating to the portfolio investments sold or written-off during
fiscal 1996, as discussed above.
For fiscal 1995, the Fund's $387,299 net realized and unrealized gain from
portfolio investments was comprised of a $161,149 net realized loss from the
sale of certain portfolio investments during fiscal 1995, which was more than
offset by a $548,448 increase in unrealized appreciation of portfolio
investments for fiscal 1995.
The $161,149 net realized loss for fiscal 1995 resulted from the sale of certain
portfolio investments. During fiscal 1995, the Fund sold 47,852 common shares of
Loronix Information Systems, Inc. in the public market for $258,400, realizing a
gain of $258,400. Such shares were received by the Fund in September 1994 as a
result of a non-cash exercise of a net issuance provision in the Fund's warrant
agreement to purchase common stock of Loronix. In May and June 1994, the Fund
sold 100,000 common shares of Accumed International in the public market for
$210,625, realizing a gain of $18,987. These gains were offset by a $438,536 net
realized loss from the liquidation of the Fund's portfolio of small-cap
marketable securities during the first half of fiscal 1995.
The $548,448 increase to net unrealized appreciation for fiscal 1995 includes a
$710,397 net unrealized gain primarily reflecting the upward revaluation of the
Fund's investment in Silverado Foods, Inc. due to that company's initial public
offering, which was completed in August 1994. The $710,397 unrealized gain was
offset by the transfer of $161,949 from net unrealized gain to realized gain
related to the portfolio investments sold during fiscal 1995, as discussed
above.
For the 1994 period, the Fund's $2,070,090 net realized and unrealized loss from
portfolio investments was comprised of a $1,557,030 net realized loss from the
sale of certain portfolio investments and a $513,060 decrease in net unrealized
appreciation of portfolio investments during the 1994 period. In February 1994,
the Fund's $1,200,000 promissory note due from Computer Integration Corporation
("CIC") was canceled in exchange for cash payments totaling $1,000,000, which
were payable over a 10 month period. This transaction resulted in a realized
loss of $248,094 from the Fund's investment in CIC. Also during the 1994 period,
the Fund wrote-off its $450,000 investment in The Complete Systems Corporation,
genesys and $960,000 of its $1,200,000 investment in Oh-La-La! Inc. due to
business and financial difficulties at these companies. These losses were offset
by a $101,064 net realized gain from the sale of certain small-cap marketable
securities during the 1994 period.
The $513,060 decrease to net unrealized appreciation for the 1994 period
primarily resulted from the downward revaluation of the Fund's investment in
Bennett Environmental U.S., Inc., a privately-held portfolio company, due to
operating and financial difficulties at the company.
Portfolio Transaction Summary for the Fiscal Year Ended February 29, 1996
Portfolio transactions completed during the year ended February 29, 1996,
resulted in a realized loss of $1,061,009. As shown below these transactions
returned $6,476,547 (including cash proceeds of $6,429,297) to the Fund and
reduced its net asset value for the year by $1,054,803. This reduction was
offset by a $2,115,082 increase to the carrying value of the Fund's remaining
portfolio investments during the year, primarily due to the increase in the fair
value of Shell's Seafood Restaurants, as shown below. The completed portfolio
transactions and revaluations increased the Fund's net asset value on a net
basis by $1,060,279 for the year ended February 29, 1996.
<TABLE>
Effect to
Fair Value Net Assets
Investment Return at 2/28/95 for Y/E 2/29/96
Sales and Write-Offs during Y/E 2/29/96:
<S> <C> <C> <C>
Accumed International, Inc. (stock) $ 159,375 $ 151,875 $ 7,500
Bennett Environmental Inc. 867,250 720,900 146,350
Radiator King International, Inc. 0 60,000 (60,000)
Regency Holdings (Cayman, Inc.) 2,085,728 1,940,000 145,728
Silverado Foods, Inc. 822,656 759,375 63,281
SR Communications Corp. 236,000 250,000 (14,000)
Unigene Laboratories, Inc. (note) 2,000,000 2,000,000 0
Weir-Jones Marketing, Inc. 0 950,000 (950,000)
Yes! Entertainment Corporation 305,538 699,200 (393,662)
--------------- -------------- ---------------
Sub-total from sales and write-offs $ 6,476,547 $ 7,531,350 (1,054,803)
=============== ============== ---------------
Revaluations During Y/E 2/29/96:
Accumed International, Inc. (warrants) 162,325
Optiva Corporation 450,000
Shells Seafood Restaurants, Inc. 1,158,750
Unigene Laboratories, Inc. (warrants) 343,980
---------------
Sub-total from revaluations 2,115,055
Net Change to Net Assets for Year Ended
February 29, 1996 $ 1,060,252
===============
</TABLE>
Investment Income and Expenses
For fiscal 1996, the Fund had a net investment loss (interest and dividend
income less operating expenses) of $313,174. For fiscal 1995 and for the 1994
period, the Fund had net investment income of $220,352 and $55,079,
respectively. The $533,526 decrease in net investment income for fiscal 1996
compared to fiscal 1995 reflects a $203,497 decrease in investment income and a
$330,029 increase in operating expenses for the respective periods. Investment
income was $850,470 and $1,053,967 for fiscal 1996 and fiscal 1995,
respectively. The $203,497 decline in investment income reflects a $280,996
decline in interest and dividends from portfolio investments partially offset by
a $77,499 increase in interest from short-term investments. The decline in
interest and dividends from portfolio investments, primarily is the result of
the reversal during fiscal 1996 of approximately $205,000 of accrued interest
relating to promissory notes due from Bennett Environmental and Weir-Jones that
were sold or written-off during fiscal 1996. The increase in interest earned
from short-term investments resulted from an increase in the amount of funds
invested in short-term investments during fiscal 1996 compared to fiscal 1995
and increased interest rates during the 1996 period. The $330,029 increase in
operating expenses for fiscal 1996 compared to fiscal 1995 primarily is due to
an increase in salary expense and legal fees during fiscal 1996. Salary expense
was $328,901 for fiscal 1996, up from $177,273 for fiscal 1995. This reflects
increases in officers' salaries and the addition of full time staff from two in
fiscal 1995 to four in fiscal 1996. Legal fees were $384,993 for fiscal 1996, up
from $180,826 for fiscal 1995. This increase primarily is due to increased
litigation proceedings involving the Fund and the continued restructuring of
certain of the Fund's portfolio investments. See Note 10 of notes to financial
statements.
The $165,273 increase in net investment income for fiscal 1995 compared to the
1994 period resulted from a $392,977 increase in investment income, partially
offset by a $227,704 increase in operating expenses for fiscal 1995. Investment
income was $1,053,967 and $660,990 for fiscal 1995 and for the 1994 period,
respectively. The increase for fiscal 1995 primarily was the result of a
$332,375 increase in interest and dividend income earned from portfolio
investments, due to an increase in the number of interest bearing debt
securities held during fiscal 1995 compared to the 1994 period. For fiscal 1995
and for the 1994 period, the Fund's operating expenses were $833,615 and
$605,911, respectively. The increase in operating expenses for fiscal 1995
includes a $132,991 increase in legal and accounting fees and a $41,378 increase
in mailing and printing expenses for fiscal 1995.
From the inception of the Fund to December 10, 1995, 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 period from
December 11, 1995 to February 29, 1996. The administration expense incurred by
the Fund for fiscal 1996, fiscal 1995 and for the 1994 period was $167,113,
$181,052 and $181,816, respectively. The administrative fee paid to CAAM during
the same periods was $133,332, $181,052 and $181,816, respectively. Under the 1%
administrative agreement with CAAM the Fund would have incurred an
administrative fee of $38,396 for the period from December 11, 1995 to February
29, 1996 compared to the actual administrative expense incurred during this
period of $33,781.
Net Assets
For fiscal 1996, the Fund had a net increase in net assets resulting from
operations of $747,078, comprised of the net realized and unrealized gain from
portfolio investments of $1,060,252 offset by the net investment loss of
$313,174. This increase was more than offset by a $1,226,993 decrease in net
assets resulting from the repurchase by the Fund of 290,227 shares of its own
common stock in the public market during fiscal 1996. As a result, the Fund's
net assets decreased $479,915 to $17,235,158 at February 29, 1996, or $7.25 per
share of common stock and $7.61 per share of preferred stock. 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 net asset value
per share of common stock and preferred stock for fiscal 1996 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 fiscal 1996, the Fund repurchased 290,227 shares of its common stock for
$1,226,993. The effect of such repurchases increased the net asset value per
share of common and preferred stock by $.30 and $.31, respectively. The increase
in net assets from operations for fiscal 1996 of $747,078 increased the Fund's
net asset value by $.31 and $.33 per share of common and preferred stock,
respectively.
For fiscal 1995, the Fund had a net increase in net assets resulting from
operations of $607,651, or $.28 per share of common stock, comprised of net
investment income totaling $220,352 and net realized and unrealized gain from
portfolio investments of $387,299. Additionally, the Fund's net assets declined
$440,800 as a result of the cash distribution of $.20 per share of common stock
paid to shareholders on December 12, 1994. As a result, the Fund's net assets
increased $166,851 to $17,715,073 at February 28, 1995, or $8.04 per share of
common stock, an increase of $.08 per share from $17,548,222, or $7.96 per share
of common stock, at February 28, 1994.
The Fund completed its initial public offering in April 1993, selling 2,194,000
shares of its common stock at $10 per share. Gross proceeds raised in the
offering totaled $21,940,000. For the 1994 period, the Fund had a net decrease
in net assets resulting from operations of $2,015,011, or $.91 per share of
common stock, comprised of a $2,070,090 net realized and unrealized loss from
portfolio investments offset by $55,079 of net investment income. Additionally,
the Fund's net assets decreased $2,476,767, or $1.13 per share, as a result of
the selling and offering expenses incurred in connection with the Fund's initial
public offering. The Fund's net assets at February 28, 1994 were $17,548,222, or
$7.96 per share of common stock, a decrease of $2.04 per share from the initial
public offering price of $10.00 per share.
Cash Distributions
During fiscal 1995, on December 12, 1994, the Fund made a cash distribution to
common shareholders totaling $440,800, or $0.20 per share of common stock. There
were no cash distributions made during fiscal 1996 or for the 1994 period.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
THE MICROCAP FUND, INC.
INDEX
Independent Auditors' Report
Statements of Assets and Liabilities as of February 29, 1996 and February 28,
1995
Schedules of Portfolio Investments as of February 29, 1996 and February 28, 1995
Statements of Operations for the years ended February 29, 1996 and February 28,
1995 and for the period from March 19, 1993 (commencement of operations) to
February 28, 1994
Statements of Changes in Net Assets for the years ended February 29, 1996 and
February 28, 1995 and for the period from March 19, 1993 (commencement of
operations) to February 28, 1994
Statements of Cash Flows for the years ended February 29, 1996 and February 28,
1995 and for the period from March 19, 1993 (commencement of operations) to
February 28, 1994
Notes to Financial Statements
Note - All schedules are omitted because of the absence of conditions under
which they are required or because the required information is included
in the financial statements or notes thereto.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The MicroCap Fund, Inc.
We have audited the accompanying statements of assets and liabilities of The
MicroCap Fund, Inc. (the "Fund"), including the schedules of portfolio
investments, as of February 29, 1996 and February 28, 1995, and the related
statements of operations, changes in net assets and cash flows for the years
ended February 29, 1996 and February 28, 1995 and for the period March 19, 1993
(commencement of operations) to February 28, 1994. These financial statements
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned at February 29, 1996 by correspondence with the
custodian; where confirmation was not possible, we satisfied ourselves by other
audit procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Fund at February 29, 1996 and February
28, 1995 and the results of its operations, changes in its net assets and its
cash flows for the years ended February 29, 1996 and February 28, 1995 and the
period March 19, 1993 (commencement of operations) to February 28, 1994 in
conformity with generally accepted accounting principles.
As explained in Note 2, the financial statements include securities valued at
$6,939,805 and $8,371,350 at February 29, 1996 and February 28, 1995,
respectively, representing 40% and 47% of net assets, respectively, whose values
have been estimated by the Board of Directors in the absence of readily
ascertainable market values. We have reviewed the procedures used by the Board
of Directors in arriving at its estimate of value of such securities and have
inspected underlying documentation, and, in the circumstances, we believe the
procedures are reasonable and the documentation appropriate. However, because of
the inherent uncertainty of valuation, those estimated values may differ
significantly from the values that would have been used had a ready market for
the securities existed, and the differences could be material.
Deloitte & Touche LLP
New York, New York
May 3, 1996, except for Note 9, as to which the date is May 9, 1996
<PAGE>
THE MICROCAP FUND, INC.
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
February 29, February 28,
1996 1995
--------------- ----------
ASSETS
Portfolio investments at fair value (cost $4,783,156 at February 29, 1996
<S> <C> <C> <C> <C> <C> <C> <C>
and $8,335,962 at February 28, 1995 - Notes 2 and 11 $ 6,939,805 $ 8,371,350
Cash and cash equivalents - Note 2 9,878,280 9,033,750
Receivable from securities sold 199,375 100,000
Accrued interest receivable 349,781 422,938
Deferred organizational costs (net of accumulated amortization of $116,257 at
February 29, 1996 and $76,885 at February 28, 1995
- Note 2 80,608 119,980
Other assets 120,862 6,422
--------------- ----------------
Total assets 17,568,711 18,054,440
--------------- ----------------
LIABILITIES
Deferred interest income - 53,350
Accounts payable and accrued expenses 315,277 141,965
Due to Administrator - Note 4 18,276 144,052
--------------- ----------------
Total liabilities 333,553 339,367
--------------- ----------------
NET ASSETS
Preferred Stock, par value $.01; 2,000,000 shares authorized; 440,800 shares
issued and 265,317 shares outstanding at February 29, 1996 and no shares
issued or outstanding at
February 28, 1995 - Note 8 2,653 -
Common Stock, par value $.01; 10,000,000 shares
authorized; 2,388,253 shares issued and 2,098,026 outstanding at
February 29, 1996 and 2,204,000 shares issued and outstanding at
February 28, 1995 - Notes 6 and 7 23,883 22,040
Additional paid-in-capital 19,441,478 19,541,193
Net unrealized appreciation of portfolio investments 2,156,649 35,388
Accumulated net investment loss (37,743) -
Distribution in excess of net investment loss and realized loss (345,581) (165,369)
Accumulated net realized loss from portfolio investments (2,779,188) (1,718,179)
--------------- ----------------
Sub-total 18,462,151 17,715,073
Less: Treasury stock at cost (290,227 shares of common stock) - Note 6 (1,226,993) -
--------------- ----------------
Net Assets $ 17,235,158 $ 17,715,073
=============== ================
Net assets per share of common stock $ 7.25 $ 8.04
======== =======
Net assets per share of preferred stock $ 7.61
========
</TABLE>
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
SCHEDULE OF PORTFOLIO INVESTMENTS
February 29, 1996
<TABLE>
% of
Issuer / Position Cost Fair Value Net Assets(1)
Publicly-Held Securities:
Accumed International, Inc.(A)
Warrant to purchase 250,000 shares of Common Stock
<S> <C> <C> <C> <C> <C> <C>
at $5.00 per share, expiring 10/14/97 $ 20,906 $ 224,825 1.30%
------------- --------------
Unigene Laboratories, Inc.(B)
Warrant to purchase 675,000 shares of Common Stock
at $1.38, expiring 7/7/00 0 343,980 2.00%
------------- --------------
YES! Entertainment Corporation(C)
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.(D)
450,000 shares of Common Stock 47,250 47,250 .27%
------------- --------------
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 11.25%
------------- --------------
International Communication Technologies, Inc.
9% Convertible Promissory Note due 6/30/96 150,000 150,000 .87%
------------- --------------
Oh-La-La! Inc.(E)
9% Convertible Senior Note 140,000 140,000
9% Convertible Senior Note 100,000 100,000
------------- --------------
240,000 240,000 1.39%
------------- --------------
Optiva Corporation
150,000 shares of Common Stock 487,500 937,500 5.44%
------------- --------------
Shells Seafood Restaurants, Inc.*(F)
9% Senior Secured Note 1,310,000 1,310,000
Secured note at prime plus 2% due 10/23/97 500,000 500,000
300,000 shares of Common Stock 90,000 1,125,000
Warrant to purchase 175,000 shares of Common Stock
at $3.15 per share, expiring 12/31/99 0 105,000
Warrant to purchase 75,000 shares of Common Stock
at $3.50 per share, expiring 12/31/99 0 18,750
Warrant to purchase 75,000 shares of Common Stock
at $3.75 per share, expiring 12/31/97 0 0
------------- --------------
1,900,000 3,058,750 17.75%
------------- -------------- -----
Total Portfolio Investments(G) $ 4,783,156 $ 6,939,805 40.27%
============= ============== =====
</TABLE>
<PAGE>
THE MICROCAP FUND, INC.
SCHEDULE OF PORTFOLIO INVESTMENTS - continued
February 29, 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) In October 1995, the Fund sold 150,000 common shares of Alamar Biosciences,
Inc. for $159,375, realizing a loss of $128,081. In January 1996, Alamar
changed its name to Accumed International, Inc.
(B) In May 1995, the Fund acquired a $2 million promissory note due in July
1995 from Unigene Laboratories, Inc. along with warrants to purchase 75,000
shares of Unigene common stock. In consideration for extending the maturity
date of the note to September 8, 1995, the Fund received an additional
750,000 common stock warrants of Unigene exercisable at $1.38 per share, a
reduced exercise price of its existing warrants to $1.38 per share and an
increase in the interest rate of its promissory note from 13% to 24.5% per
annum. In connection with a second extension of the promissory note on
September 29, 1995, the Fund received an additional 75,000 warrants to
purchase common shares of Unigene at $1.38 per share. In November 1995, the
Fund sold the $2 million promissory note due from Unigene, accrued interest
thereon, and warrants to purchase 225,000 common shares of Unigene for
$2,221,330. As of February 29, 1996, the Fund held 675,000 Unigene common
stock warrants, 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.
(C) On June 8, 1995, Yes! Entertainment Corporation completed its initial
public offering of common stock at $4.75 per share. As a result of the
automatic conversion of the preferred stock and a stock split effected in
connection with the offering, the Fund's 608,696 shares of preferred stock
and warrant to purchase 116,667 shares of preferred stock of Yes!
Entertainment were converted into 55,555 shares of common stock and a
warrant to purchase 11,438 common shares at $15.30 per share. In September
1995, the Fund sold its 55,555 common shares of YES! Entertainment for
$305,538, realizing a loss of $393,662.
(D) In December 1995, the Fund sold its $1.2 million secured promissory note
and a warrant to purchase 900,000 shares of common stock of Bennett
Environmental U.S., Inc. (BEI) back to BEI for $820,000 plus 450,000 shares
of BEI common stock. Bennett also reimbursed the Fund for certain legal
costs incurred in connection with the transaction. This transaction
resulted in a loss of $333,650 for fiscal 1996.
(E) During fiscal 1995, Oh-La-La! Inc. filed for Chapter 11 bankruptcy
protection. The assets of Oh-La-La! are being liquidated through court
proceedings. The Fund currently expects to receive cash and/or equity
securities of a public company at the conclusion of these proceedings.
(F) The Fund has agreed to several extensions to the original maturity dates of
its $1.31 million senior secured note and its $500,000 secured note due
from Shells Seafood Restaurants, Inc. In consideration for such extensions,
the Fund exchanged its warrants to purchase 10,000 shares of preferred
stock at $25.00 per share for warrants to purchase 325,000 shares of common
stock at prices ranging from $3.15 per share to $3.75 per share. On April
23, 1996, Shells completed its initial public offering. 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.
(G) On March 24, 1995, the Fund sold its investment in SR Communications Corp.
for $200,000 and a $40,000 non-interest bearing promissory note (including
$4,000 of imputed interest). The maturity date of the $40,000 promissory
note, originally due from SR Communications on March 24, 1996, has been
extended to June 1, 1996. In consideration of such extension, the Fund
received prepaid interest subsequent to February 29, 1996 at a rate of 15%
per annum. The Fund realized a $14,000 loss on this transaction. In May
1995, the Fund sold its investment in Silverado Foods, Inc. for $822,656,
realizing a gain of $672,656. In November 1995, the Fund received $145,728
for the redemption of its common stock warrants of Regency Holdings
(Cayman, Inc.) and received the repayment of its $1,940,000 promissory note
due from the company along with accrued interest thereon. Additionally
during fiscal 1996, the Fund wrote-off its $60,000 investment in Radiator
King International, Inc. and its $950,000 investment in Weir-Jones
Marketing, Inc.
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
SCHEDULE OF PORTFOLIO INVESTMENTS
FEBRUARY 28, 1995
<TABLE>
% of
Issuer / Position Cost Fair Value Net Assets(1)
Publicly-Held Securities:
Alamar Biosciences, Inc.
<C> <C> <C>
150,000 shares of Common Stock $ 287,456 $ 151,875
Warrants to purchase 250,000 shares of Common Stock
at $5.00 per share, expiring 10/14/97 20,906 62,500
------------- --------------
308,362 214,375 1.21%
------------- --------------
Silverado Foods, Inc.*
337,500 shares of Common Stock 150,000 759,375 4.29%
------------- --------------
Privately-Held Securities:
Bennett Environmental Inc.
Warrants to purchase 900,000 shares of Common Stock
at $.79 per share, expiring 9/1/98 900 900
Bennett Environmental U.S., Inc.
8% Secured Promissory Note due 9/14/95 1,200,000 720,000
------------- --------------
1,200,900 720,900 4.07%
------------- --------------
International Communication Technologies, Inc.
9% Convertible Promissory Note due 6/30/96 150,000 150,000 .85%
------------- --------------
Oh-La-La! Inc.
9% Convertible Senior Note due 6/30/95 140,000 140,000
9% Convertible Senior Note due 11/30/95 100,000 100,000
------------- --------------
240,000 240,000 1.35%
------------- --------------
Optiva Corporation
150,000 shares of Common Stock 487,500 487,500 2.75%
------------- --------------
Radiator King International, Inc.
9% Promissory Notes 60,000 60,000 .34%
------------- --------------
Regency Holdings (Cayman), Inc.*
18% Promissory Note due 4/24/95 1,940,000 1,940,000
Warrant to purchase 211,200 shares of Common Stock
at $9.00 per share, expiring 7/20/98 0 0
------------- --------------
1,940,000 1,940,000 10.95%
------------- --------------
Shells Seafood Restaurants, Inc.*
9% Senior Secured Note due 10/30/95 1,310,000 1,310,000
300,000 shares of Common Stock 90,000 90,000
Secured note at prime plus 2% due 10/30/95 500,000 500,000
Warrant to purchase 10,000 shares of Preferred Stock
at $25 per share, expiring 12/31/99 0 0
------------- --------------
1,900,000 1,900,000 10.73%
------------- --------------
</TABLE>
<PAGE>
THE MICROCAP FUND, INC.
SCHEDULE OF PORTFOLIO INVESTMENTS - continued
FEBRUARY 28, 1995
<TABLE>
% of
Issuer / Position Cost Fair Value Net Assets(1)
SR Communications Corp.*
<C> <C> <C>
250,000 shares of Preferred Stock $ 247,500 $ 247,500
250,000 shares of Common Stock 2,500 2,500
------------- --------------
250,000 250,000 1.41%
------------- --------------
Weir-Jones Marketing, Inc.
9% Convertible Subordinated Note due 1/28/96 950,000 950,000 5.36%
------------- --------------
YES! Entertainment Corporation
608,696 shares of Preferred Stock 699,200 699,200
Warrant to purchase 116,667 shares of Preferred Stock
at $1.50 per share, expiring 7/16/98 0 0
------------- --------------
699,200 699,200 3.95%
------------- -------------- ------
Total Portfolio Investments $ 8,335,962 $ 8,371,350 47.26%
============= ============== =====
</TABLE>
* 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.
<PAGE>
THE MICROCAP FUND, INC.
STATEMENTS OF OPERATIONS
<TABLE>
Period From
Fiscal Fiscal March 19, 1993
Year Ended Year Ended (Commencement
February 29, February 28, of Operations) to
1996 1995 February 28, 1994
------------------ ----------------- --------------------
INVESTMENT INCOME AND EXPENSES
Income:
<S> <C> <C> <C>
Interest from short-term investments $ 444,621 $ 367,122 $ 306,520
Interest and dividends from portfolio investments 405,849 686,845 354,470
-------------- ------------- ---------------
Total investment income 850,470 1,053,967 660,990
-------------- ------------- ---------------
Expenses:
Administrative expense - Note 4 167,113 181,052 181,816
Legal fees 384,993 180,826 98,335
Accounting fees 61,169 71,000 20,500
Salary expense - Note 4 328,901 177,273 166,442
Amortization of deferred organizational costs - Note 2 39,372 39,372 37,513
Transfer agent and custodian fees 23,332 13,927 14,147
Directors' fees and expenses - Note 5 13,665 26,032 13,531
Consulting fees 56,103 28,000 6,113
Insurance expense 26,525 37,319 30,651
Mailing and printing 16,308 52,653 11,275
Other operating expenses 46,163 26,161 25,588
-------------- ------------- ---------------
Total expenses 1,163,644 833,615 605,911
-------------- ------------- ---------------
NET INVESTMENT INCOME (LOSS) (313,174) 220,352 55,079
-------------- ------------- ---------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) FROM PORTFOLIO INVESTMENTS
Net realized loss from portfolio investments (1,061,009) (161,149) (1,557,030)
Change in net unrealized appreciation or depreciation
of investments 2,121,261 548,448 (513,060)
-------------- ------------- ---------------
Net realized and unrealized gain (loss) from
portfolio investments 1,060,252 387,299 (2,070,090)
-------------- ------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 747,078 $ 607,651 $ (2,015,011)
============== ============= ===============
</TABLE>
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
Period From
Fiscal Fiscal March 19, 1993
Year Ended Year Ended (Commencement
February 29, February 28, of Operations) to
1996 1995 February 28, 1994
------------------ ----------------- --------------------
Change in net assets resulting from operations:
<S> <C> <C> <C>
Net investment income (loss) $ (313,174) $ 220,352 $ 55,079
Net realized loss from portfolio investments (1,061,009) (161,149) (1,557,030)
Change in net unrealized appreciation or depreciation
of portfolio investments 2,121,261 548,448 (513,060)
---------------- --------------- ---------------
Net increase (decrease) in net assets resulting from
operations 747,078 607,651 (2,015,011)
---------------- --------------- ---------------
Change in net assets from distributions:
Distribution from net realized gains - (70,150) -
Distribution from net investment income - (275,431) -
Distribution in excess of net investment income - (95,219) -
---------------- --------------- ---------------
Decrease in net assets from distributions - (440,800) -
---------------- --------------- ---------------
Change in net assets from capital stock transactions:
Common stock repurchased - Note 6 (1,226,993) - -
Gross proceeds from the sale of common stock - - 21,940,000
Less:
Selling commissions - - (1,535,800)
Expense allowance - - (548,500)
Offering expenses - - (392,467)
---------------- --------------- ---------------
Net increase (decrease) in net assets from capital
stock transactions (1,226,993) - 19,463,233
---------------- --------------- ---------------
Total increase (decrease) in net assets for the period (479,915) 166,851 17,448,222
Net assets at beginning of period 17,715,073 17,548,222 100,000
---------------- --------------- ---------------
NET ASSETS AT END OF PERIOD $ 17,235,158 $ 17,715,073 $ 17,548,222
================ =============== ===============
</TABLE>
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
Period From
Fiscal Fiscal March 19, 1993
Year Ended Year Ended (Commencement
February 29, February 28, of Operations) to
1996 1995 February 28, 1994
------------------ ----------------- --------------------
CASH FLOWS PROVIDED FROM (USED FOR)
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net investment income (loss) $ (313,174) $ 220,352 $ 55,079
Adjustments to reconcile net investment income (loss)
to cash provided from (used for) operating activities:
Amortization of discount on accounts receivable (4,000) - (3,006)
Amortization of deferred organizational costs 39,372 39,372 37,513
Depreciation expense 480 - -
Increase (decrease) in payables and other liabilities (5,814) 197,171 142,196
Increase in receivables and other assets (41,763) (180,538) (248,822)
---------------- -------------- ---------------
Cash flows provided from (used for) operating activities (324,899) 276,357 (17,040)
---------------- -------------- ---------------
CASH FLOWS PROVIDED FROM (USED FOR)
INVESTING ACTIVITIES
Purchase of portfolio investments (3,937,500) (4,283,773) (16,642,770)
Net proceeds from the sale of portfolio investments 2,393,922 5,131,422 2,023,986
Repayment of notes 3,940,000 3,620,000 -
Deposit released from (placed in) escrow - 255,000 (255,000)
---------------- -------------- ---------------
Cash flows provided from (used for) investing activities 2,396,422 4,722,649 (14,873,784)
---------------- -------------- ---------------
CASH FLOWS USED FOR FINANCING
ACTIVITIES
Cash distribution to shareholders - (440,800) -
Common stock repurchased (1,226,993) - -
Gross proceeds from the sale of common stock - - 21,940,000
Cost of selling common stock:
Selling commissions - - (1,535,800)
Expense allowance - - (548,500)
Offering expenses - - (392,467)
Organizational expenses - - (196,865)
---------------- -------------- ---------------
Cash flows provided from (used for) financing activities (1,226,993) (440,800) 19,266,368
---------------- -------------- ---------------
Increase in cash and cash equivalents 844,530 4,558,206 4,375,544
Cash and cash equivalents at beginning of period 9,033,750 4,475,544 100,000
---------------- -------------- ---------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 9,878,280 $ 9,033,750 $ 4,475,544
================ ============== ===============
</TABLE>
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Purpose
The MicroCap Fund, Inc. (the "Fund"), formerly known as Commonwealth Associates
Growth Fund, Inc., is a non-diversified, closed-end management investment
company operating as a business development company under the Investment Company
Act of 1940. The Fund was incorporated under the laws of the State of Maryland
on January 26, 1993. The Fund's investment objective is to achieve long-term
capital appreciation of assets by investing in securities of emerging and
established companies that management believes offer significant growth
potential.
2. Significant Accounting Policies
Valuation of Investments - Portfolio investments are carried at fair value as
determined quarterly by the Fund's Board of Directors. The fair value of the
Fund's publicly-held portfolio securities is adjusted to the closing public
market price on the last day of each fiscal quarter discounted by a factor of 0%
to 40% for sales restrictions. Factors considered in the determination of an
appropriate discount include: underwriter lock-up, sales restrictions on
securities held where the Fund may be deemed an affiliate by having a
representative on the Board of Directors or by virtue of being a greater than
10% shareholder, and other liquidity factors such as the size of the Fund's
position in a given portfolio company compared to the trading history of the
public security. Privately-held portfolio securities are carried at cost until
significant developments affecting the portfolio company provide a basis for
change in valuation, including adjustments to reflect meaningful third-party
transactions in the private market.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Transactions - Investment transactions are recorded on the trade
date, which is the date the Fund obtains an enforceable right to demand the
securities or payment therefor. Realized gains and losses on investments sold
are computed on a specific identification basis. The Fund records all other
transactions on the accrual method.
Income Taxes - The Fund qualifies and intends to remain qualified as a regulated
investment company under the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), and as such will not be subject to federal income tax on
taxable income which is distributed in accordance with the provisions of the
Code. Therefore, no provision for federal income taxes is required.
Cash and Cash Equivalents - The Fund invests its available cash in U.S. Treasury
Bills or overnight repurchase agreements collateralized by securities issued by
the U.S. Government or its agencies. Securities received as collateral subject
to repurchase agreements are deposited with the Fund's custodian and, pursuant
to the terms of the repurchase agreement, must have an aggregate market value of
no less than 102% of the purchase price plus accrued interest, at all times. The
Fund's custodian monitors the market value of the underlying securities to
ensure the existence of the proper level of collateral. Investments in U.S.
Treasury Bills and overnight repurchase agreements are considered to be cash
equivalents for the statement of cash flows.
Organizational Costs - Organizational costs of $196,865 are being amortized over
a sixty-month period beginning March 19, 1993.
<PAGE>
THE MICROCAP FUND, INC.
NOTES TO FINANCIAL STATEMENTS
Reclassifications - Certain prior year balances have been reclassified to
conform to the current period presentation.
3. Employee Profit Sharing Plan
The Fund has an employee profit sharing plan that provides for payment of a
performance fee to certain officers of the Fund. The fee is equal to 20% of
interest, dividends and realized capital gains from portfolio investments less
realized capital losses and net unrealized capital depreciation. Such fee is
calculated from the end of the fiscal year for which fees were last paid. No
performance fees have been paid from inception of the Fund to February 29, 1996.
4. 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.
On March 2, 1993, CAAM purchased 10,000 shares of the Fund's common stock for
$100,000, or $10.00 per share.
From its inception to December 10, 1995, certain officers and employees of the
Fund were also officers or employees of Commonwealth Associates, or an affiliate
thereof. The Fund reimbursed CAAM for allocated salary amounts paid directly by
CAAM through December 10, 1995 totaling $489,299.
In connection with the closing of the Fund's public offering of common stock
held in March 1993 and April 1993, the Fund paid Commonwealth Associates selling
commissions totaling $1,535,800 and an unaccountable expense allowance totaling
$548,500.
The Fund has participated in private placement transactions of certain portfolio
companies in which Commonwealth Associates acted as placement agent on behalf of
such portfolio companies. From the inception of the Fund to February 29, 1996,
Commonwealth Associates received compensation as placement agent with respect to
the Fund's participation in such transactions, as detailed below.
<TABLE>
Warrants and
Portfolio Company Cash Exercise Price Per Share
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Alamar Biosciences, Inc. $ 25,000 -
Bennett Environmental, Inc. $ 144,000 60,000 / $1.38
Computer Integration Corporation $ 134,000 -
First Colony Acquisition Corp. $ 122,500 25,920 / $5.00
Oh-La-La! Inc. $ 91,000 233,172 / $.15
Regency Holdings (Cayman), Inc. $ 60,000 -
Silverado Foods, Inc. $ 195,000 12,874 / $.97
The Complete Systems Corporation $ 58,500 -
Weir-Jones Marketing, Inc. $ 61,750 -
</TABLE>
<PAGE>
THE MICROCAP FUND, INC.
NOTES TO FINANCIAL STATEMENTS
In certain of these transactions, the portfolio company reimbursed Commonwealth
Associates for legal fees and other expenses incurred in connection with its
role as placement agent.
In connection with the initial public offering of Loronix Information Systems,
Inc. completed in September 1994, the Fund sold 47,852 common shares of Loronix
for net proceeds of $258,400. In connection with such sale, Commonwealth
Associates, underwriter of the Loronix initial public offering, received
underwriting discounts and commissions from the Fund totaling $28,711 under the
same terms and conditions as Loronix and other selling shareholders.
For the fiscal years ended February 29, 1996 and February 28, 1995 and for the
period from March 19, 1993 to February 28, 1994, Commonwealth Associates acted
as broker on behalf of the Fund with respect to certain public security
transactions and received aggregate commissions from the Fund for such services
totaling $20,870 in fiscal 1995 and $3,000 for the period from March 19, 1993
(commencement of operations) to February 28, 1994. No direct commission payments
were made to Commonwealth Associates during the fiscal year ended February 29,
1996. However, in October 1995, the Fund sold 150,000 common shares of Accumed
International, Inc. through Commonwealth Associates, who acted as the broker and
a principal in such transaction.
5. Directors' Fees
As compensation for serving on the Board of Directors, each independent director
receives an annual fee of $2,500 and $250 for each Board of Directors meeting
and each committee meeting of the Board attended, plus out-of-pocket-expenses
related to attendance of such meetings.
6. Common Stock Repurchase Program
The Board of Director's has authorized the repurchase of the Fund's common stock
up to an aggregate amount of $2 million. As of February 29, 1996, the Fund had
repurchased 290,227 shares of its common stock for an aggregate cost of
$1,226,993, or an average cost of $4.23 per share.
<PAGE>
THE MICROCAP FUND, INC.
NOTES TO FINANCIAL STATEMENTS
7. Capital Stock Transactions
<TABLE>
Number of Additional Number of Number of
Common Paid-in Preferred Treasury
Shares Amount Capital Shares Amount Shares Amount
Balance at March 19, 1993
<S> <C> <C> <C>
(commencement of operations) 10,000 $ 100 $ 99,900
Initial public offering of common
stock 2,194,000 21,940 19,441,293
---------- --------- -------------
Balance at February 28, 1994 and
February 28, 1995 2,204,000 22,040 19,541,193
Issuance of preferred stock
dividend (4,408) 40,800 $ 4,408
Conversion of preferred stock
into common stock 184,253 1,843 (88) (175,483) (1,755)
Purchase of treasury shares 290,227$ 1,226,993
Reclassification of distribution
in excess of net investment
income (95,219)
Balance at February 28, 1996 2,388,253 $ 23,883 $ 19,441,478 265,317 $ 2,653 290,227$ 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 year ended February 29, 1996, 175,483 shares of
preferred stock were converted into 184,253 shares of common stock.
8. Cash Distribution
On November 7, 1994, the Fund's Board of Directors declared a cash distribution
to shareholders totaling $440,800, or $0.20 per share of common stock. The
distribution was paid on December 12, 1994 to shareholders of record on November
30, 1994. No distributions were paid during the fiscal year ended February 29,
1996 or for the period from March 19, 1993 (commencement of operations) to
February 28, 1994.
The treatment for financial statement purposes of distributions made during the
year from net investment income or net realized gains may differ from their
ultimate treatment for federal income tax purposes. These differences are caused
primarily by differences in the timing of the recognition of certain components
of income, expense and capital gain for federal income tax purposes. Where such
differences are permanent in nature, they are reclassified in the components of
net assets based on their ultimate characterization for federal income tax
purposes. Any such reclassifications will have no effect on the Fund's net
assets, results of operations or net asset value per share.
<PAGE>
THE MICROCAP FUND, INC.
NOTES TO FINANCIAL STATEMENTS
9. Subsequent Events
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 repayment of its $1,310,000 senior note, along with
accrued interest thereon.
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 the
next annual meeting of shareholders to be held in 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.
10. 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 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
<PAGE>
THE MICROCAP FUND, INC.
NOTES TO FINANCIAL STATEMENTS
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.
11. Classification of Portfolio Investments
As of February 29, 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 3.45%
Common Stock 645,656 2,802,305 16.26%
Debt Securities 3,543,326 3,543,326 20.56%
---------------- --------------- ----------
Total $ 4,783,156 $ 6,939,805 40.27%
================ =============== ==========
Country/Geographic Region
Eastern United States $ 3,837,500 $ 5,340,230 31.00%
Western United States 877,500 1,327,500 7.70%
Midwestern United States 20,906 224,825 1.30%
Canada 47,250 47,250 0.27%
---------------- --------------- ----------
Total $ 4,783,156 $ 6,939,805 40.27%
================ =============== ==========
Industry
Biotechnology $ 20,906 $ 568,805 3.30%
Communications 150,000 150,000 0.87%
Consumer Products 2,425,000 2,875,000 16.68%
Environmental Services 47,250 47,250 0.28%
Food Services 2,140,000 3,298,750 19.14%
---------------- --------------- ----------
Total $ 4,783,156 $ 6,939,805 40.27%
================ =============== ==========
</TABLE>
* Percentage of net assets is based on fair value.
<PAGE>
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers.
Set forth below are names, ages, positions and certain other information
concerning the current directors and executive officers of the Fund as of May
15, 1996.
<TABLE>
Name Age Position
<S> <C> <C>
Kamal Mustafa* 48 President, Chief Executive Officer, Portfolio Manager
and Director
Joseph Lucchese 29 Chief Financial Officer, Treasurer and Secretary
Robert W. Naismith 51 Chairman of the Board of Directors
James E. Brands 58 Director
Leonard J. De Roma 42 Director
Michael S. Falk* 34 Director
Richard L. Hubbell 59 Director
Jeffrey Lewis 57 Director
</TABLE>
* Indicates directors who are "interested persons" of the Fund within the
meaning of the Investment Company Act of 1940.
Kamal Mustafa has been President, Chief Executive Officer, Portfolio Manager and
a Director of the Fund since April 1994 and was Managing Director of the Fund
from its inception to August 1993. He also has been Chief Executive Officer and
Managing Director of Hamilton Capital Partners, a private investment consulting
firm, since its formation in October 1991. Since March 1996, Mr. Mustafa has
been the Chairman of Bluestone Capital Partners, an investment banking firm.
From March 1988 to October 1991, Mr. Mustafa was a Managing Director and
Executive Vice President of KSP, a leverage buyout fund and also a Managing
Director of Kluge and Company, responsible for the origination and financing of
acquisitions. From 1986 to March 1988, Mr. Mustafa was a Managing Director of
Mergers and Acquisitions and a Managing Director of Merchant Banking at Paine
Webber, Inc. Mr. Mustafa is currently a member of the Board of Directors of
Shells Seafood Restaurants, Inc. and First Colony Coffee & Tea Company, which
are portfolio companies of the Fund.
Joseph Lucchese has been an employee of the Fund since May 1994 and has been the
Fund's Chief Financial Officer, Treasurer and Secretary since March 1996. From
August 1991 to May 1994, Mr. Lucchese was a senior analyst in the Merchant
Banking Group of Chase Manhattan Bank, was an operations manager of Prudential
Securities from February 1990 to August 1991 and was a senior analyst of Society
Bank, N.A. from February 1988 to February 1989.
Michael S. Falk served as Chairman of the Board of Directors of the Fund from
its inception to January 3, 1996. Since June 1988, Mr. Falk has been President
and since January 1994, Mr. Falk has also been Chief Executive Officer and
Chairman of the Board of Commonwealth Associates, an investment banking firm and
registered broker-dealer, which is an affiliate of Commonwealth Associates Asset
Management, Inc., the Fund's administrator from its inception to December 10,
1995. In addition, since June 1988, Mr. Falk has been President and Chairman of
the Board of Commonwealth Associates Management Company, Inc.(formerly JMJ
Management Company Inc.), the general partner of Commonwealth Associates.
James E. Brands has been a director of the Fund since October 1993. Since 1982,
Mr. Brands has been a principal of Brands & Co., a financial consulting
business. From 1983 to 1995, Mr. Brands was an executive Vice President of RPS
Investments, Inc., a private investment company. From 1982 to 1995, Mr. Brands
was Vice Chairman and Chief Financial Officer of Scherer Healthcare, Inc., a
public company engaged in the provision of medical services. Mr. Brands was
Chairman of the Board of Directors from April 1993, and Chief Executive Officer
of Marquest Medical Products, Inc. from April 1994 until February 1995, a public
company engaged in the manufacture and distribution of disposable medical
products.
Leonard J. DeRoma has been a director of the Fund since October 1994. Mr. DeRoma
has been Managing Director of Barclays de Zoete Wedd Securities, Inc. since June
1988. From June 1987 to June 1988, Mr. DeRoma was Senior Vice President of Dean
Witter Reynolds, Inc.
Jeffrey Lewis has been a director of the Fund since August 1993. Since 1968, Mr.
Lewis has been President and Chief Executive Officer of J.B. Lewis Associates,
Inc., a development and real estate company. Mr. Lewis also serves as Chairman
of the Board and Chief Executive Officer of Food Integrated Technology, Inc. Mr.
Lewis' son is a full-time employee of the Fund.
Robert W. Naismith, Ph.D. has been a director of the Fund since January 1996 and
has been Chairman of the Board of Directors of the Fund since April 1996. Dr.
Naismith is a Senior Visiting Fellow at the Molecular Biology Institute of the
University of Scranton. He is also President of William Naismith Associates, a
strategic business consulting firm. He co-founded and served as President, Chief
Executive Officer, and Director of Biofor, Inc. a biopharmaceutical research and
discovery company, and was also a Vice President of Scherer Healthcare, Inc.
Previously, he was co-founder and Executive Vice President of Pharmakon Research
International, Inc., a preclinical contract research organization. Dr. Naismith
has served as a member of the Board of Directors of Penn Security Bank & Trust
Company since 1988, a member of the Board of Directors and Chairman of Derma
Services since 1994, Marion Nichols Corporation since 1991 and the Community
Medical Center from 1980 to 1992. He holds an adjunct associate professorship in
the school of Medicine at Case Western Reserve University and an adjunct
professorship in the Department of Biology at Pennsylvania State University.
Richard L. Hubbell has been a Director of the Fund since January 1996. He has
also been President of Hub Associates, a high technology consulting firm since
1978, where is responsible for managing several turn arounds, providing
strategic business planning to telecommunications and information processing
companies, and has helped raise capital for many high technology start-ups.
Prior to Hub Associates, Mr. Hubbell spent 20 years in the electronics field as
an operating manager.
Messieurs Mustafa and Lewis will serve as directors until the next annual
meeting of stockholders and until their successors are elected and qualified.
Messieurs Falk and Hubbell will serve as directors until the meeting of
stockholders to be held in 1997 and until their successors are elected and
qualified. Messieurs Naismith, Brands and DeRoma will serve as directors until
the meeting of stockholders to be held in 1998 and until their successors are
elected and qualified. The officers of the Fund will hold office until the next
annual meeting of the Board of Directors of the Fund and until their successors
are elected and qualified.
Item 11. Executive Compensation.
As of May 15, 1996, the Fund had four full-time employees. Kamal Mustafa,
President, Chief Executive Officer and Portfolio Manager, received compensation
of $100,000 during the fiscal year ended February 29, 1996. Joseph Lucchese,
Treasurer, received compensation of $128,750 during fiscal 1996. No other
individual executive officer or employee of the Fund received salary amounts
from the Fund in excess of $100,000. In addition, the Fund has implemented an
employee profit sharing plan (the "Plan") which provides for payment of a
performance fee in an amount equal to 20% of investment income plus realized
capital gains in each fiscal year, computed from the end of the last fiscal year
in respect of which performance fees were paid, net of all realized capital
losses, and net unrealized capital depreciation. No performance fees have been
paid from the Fund's inception to February 29, 1996.
There is no Compensation Committee of the Fund's Board of Directors or other
committee of the Board performing equivalent functions. For the year ended
February 29, 1996, the compensation of the Fund's president was determined by
the Board of Directors. The Fund's president determined the compensation of the
Fund's other executive officers and employees. There is no formal compensation
policy for the Fund's executive officers, other than the existing employment
agreement with Kamal Mustafa, as discussed below.
Total compensation for executive officers consists of a combination of salaries
and Plan performance fees. The salary of the Fund's president and chief
executive officer is fixed annually by the terms of his employment agreement
with the Fund. No Plan performance fees were paid during the year ended February
29, 1996. The Fund does not have a stock option plan.
The Fund and Kamal Mustafa entered into an employment agreement, effective April
1, 1994, pursuant to which Mr. Mustafa serves as the Fund's President, Chief
Executive Officer and Portfolio Manager for a five-year period for an annual
salary of $50,000, subject to a mandatory cost of living increase, and further
increases at the discretion of the Fund's Board of Directors. The employment
agreement was amended in November 1994 to increase Mr. Mustafa's annual salary
to $100,000 as of November 1, 1994. In addition, during the term of the
employment agreement, Mr. Mustafa is entitled to receive a performance fee equal
to the sum of (i) 10% of all amounts eligible to be distributed under the Fund's
employment profit sharing plan (the "Plan") which are attributable to
investments made by the Fund prior to April 1, 1994 (excluding (x) such
investments which result in losses during a given year and (y) the Fund's
investments set forth in paragraph (iii) of this sentence), but not less than
zero, plus (ii) 30% of all amounts eligible to be distributed under the Plan
which are attributable to investments made by the Fund during the employment
period (including additional investments in a company) plus (iii) 30% of all
amounts eligible to be distributed under the Plan which are attributable to
investments made by the Fund prior to April 1, 1994 which are renegotiated or
restructured by Mr. Mustafa; provided, however, that Mr. Mustafa shall not
receive an amount greater than 30% of all amounts eligible to be distributed
under the Plan. In the event Mr. Mustafa's employment under the employment
agreement terminates for any reason, including, without limitation, termination
of the period of the employment agreement, but excluding the termination of Mr.
Mustafa's employment for cause, the Fund shall pay to Mr. Mustafa or his legal
representative the foregoing amounts whether Plan Income as to which such
amounts relate were earned during the period of the employment agreement or
thereafter; provided, however, that the amount so payable to Mr. Mustafa in any
given year shall not exceed 30% of all amounts eligible to be distributed under
the Plan. Any amount payable to Mr. Mustafa pursuant to the foregoing provisions
for any given year but not so paid in such year shall be paid to Mr. Mustafa in
the next subsequent year in which such amount is eligible to be paid pursuant to
the provisions of the 1940 Act.
Non-management directors receive an annual fee of $2,500 and $250 for each Board
of Directors meeting and each committee meeting of the Board attended, plus
out-of-pocket costs related to attendance at such meetings. For the fiscal years
ended February 29, 1996 and February 28, 1995 and for the period from March 19,
1993 (commencement of operations) to February 28, 1994, the independent
directors of the Fund received compensation plus out-of-pocket expenses totaling
$13,665, $26,032 and $13,531, respectively.
The following data compares, from March 19, 1993 (the date of the Fund's
commencement of operations) through February 29, 1996, the cumulative total
return among the Fund, companies comprising the NASDAQ total return Index for
U.S. companies and a Peer Group Index, based on an investment of $100 on March
19, 1993. The calculation assumes the reinvestment of all dividends, if any, on
such securities. The Peer Group Index consists of certain business development
companies listed on NASDAQ, which include Allied Capital Corp., Allied Capital
Corp. II, Capital Southwest Corp., PMC Capital, Inc. and Prism Group, Inc.
Value of $100 invested on March 19, 1993:
<TABLE>
March 19, 1993 February 28, 1994 February 28, 1995 February 29, 1996
-------------- ----------------- ----------------- -----------------
NASDAQ CRSP Index
<S> <C> <C> <C> <C>
(U.S. Companies) $ 100.00 $ 114.96 $ 116.61 $ 162.45
Peer Group Index $ 100.00 $ 89.91 $ 78.79 $ 105.03
The MicroCap Fund, Inc. $ 100.00 $ 71.88 $ 56.39 $ 61.35
</TABLE>
A performance line graph of such data has been filed with the Securities and
Exchange Commission on Form SE.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Security Ownership
The following table sets forth information as of May 15, 1996, based on
information obtained by the Fund or from the persons named below, with respect
to the beneficial ownership of common stock by (i) each person known by the Fund
to be the owner of more than 5% of the outstanding shares of common stock, (ii)
each of the directors, (iii) the Chief Executive Officer and (iv) all officers
and directors of the Fund as a group.
<TABLE>
Amount and Nature
Name of of Beneficial Percentage of
Beneficial Owner (1) Ownership Outstanding Shares
<S> <C> <C> <C>
Kamal Mustafa 29,400 1.39%
Joseph Lucchese 6,400 *
Michael S. Falk(3) 23,500 1.11%
Leonard DeRoma 5,000 *
James E. Brands 5,000 *
Jeffrey Lewis 3,500 *
Robert W. Naismith 0 *
Richard L. Hubbell 0 *
All officers and directors as a group (5 persons) 72,800 3.45%
13D Group(2) 312,100 14.79%
Robert L. Priddy(3) 132,600 6.28%
</TABLE>
* Less than 1%
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days upon the exercise of warrants or
options. Each beneficial owner's percentage ownership is determined by
assuming that options or warrants that are held by such person (but not
those held by any other person) and which are exercisable within 60 days
have been exercised.
(2) On April 9, 1996, a group of holders of the Fund's common stock (the "13D
Group") filed a form 13D with the Securities and Exchange Commission (the
"SEC"), disclosing the Group's intention to nominate individuals to the
Fund's Board of Directors who will support the Group's plan to increase
shareholder value and reduce the discount between the market price of the
Fund's common stock and its net asset value per share of common stock.
Actions supported by the Group include, a change in the Fund's dividend
policy, conversion to an open-end fund, liquidation of a material amount
of the Fund's assets and a merger, reorganization or liquidation of the
Fund. On May 3, 1996 and on May 20, 1996, the 13D Group filed with the
SEC Amendments No. 1 and No. 2, respectively, to the 13D filed on April
9, 1996. The Amendments disclose the 13D Group's request for a special
meeting of shareholders for the purpose of modifying certain bylaws of
the Fund and replacing the existing members of the Fund's Board of
Directors with new Directors who will support the 13D Group's action
plan. There are nine members of the 13D Group that hold an aggregate of
312,100 shares of the Fund's common stock as follows:
Number of
13D Group Member Common Shares
Robert M. Pergament 23,000
Gerald B. Cramer 66,000
Ingleside Company 40,000
Edward J. Rosenthal 12,000
Goodness Gardens, Inc. 5,000
Robert L. Priddy 132,600
Michael S. Falk 23,500
Commonwealth Associates
Asset Management Inc. 10,000
The filing submitted by the 13D Group states that the Group also owns
preferred shares of the Fund that are convertible into an additional
26,625 shares of the Fund's common stock.
(3) Member of 13D Group.
Item 13. Certain Relationships and Related Transactions.
Commonwealth Associates was the sole underwriter of the Fund's initial public
offering of common stock completed in April 1993. In connection with its initial
public offering, the Fund paid to Commonwealth Associates selling commissions
totaling $1,535,800 and an unaccountable expense allowance of $548,500.
The description of the administrative fee set forth under the caption "the
Administration Agreement" on page 20 of the Registration Statement is
incorporated herein by reference. From its inception to December 10, 1995,
Commonwealth Associates Asset Management, Inc. ("CAAM"), an affiliate of
Commonwealth Associates, was the Fund's administrator, responsible for the
accounting, reporting and other administrative functions necessary for the
operation of the Fund. In accordance with the Administration Agreement, CAAM was
paid an administrative fee at an annual rate of 1% of the Fund's net assets.
Such fee was calculated and paid quarterly. Since December 11, 1995, the Fund
has been self-administered. On March 2, 1993, prior to the Fund's initial public
offering, CAAM purchased 10,000 shares of the Fund's common stock for $100,000,
or $10.00 per share.
During the period from its inception to February 29, 1996, the Fund completed
certain investments in portfolio companies in which Commonwealth Associates
acted as placement agent on behalf of such portfolio companies. During such
period, Commonwealth Associates received cash and warrants for payment as
placement agent to several of the Fund's portfolio companies. See Note 4 of
Notes to Financial Statements.
With respect to certain public security transactions, Commonwealth Associates
has acted as the broker on behalf of the Fund and received a commission for such
services. For the fiscal year ended February 28, 1995 and for the period from
March 19, 1993 (commencement of operations) to February 28, 1994, the Fund paid
Commonwealth Associates commissions totaling $20,870 and $3,000, respectively,
for such services. No direct commission payments were made to Commonwealth
Associates by the Fund during fiscal 1996. However, in October 1995, the Fund
sold 150,000 common shares of Accumed International, Inc. through Commonwealth
Associates, who acted as the broker and a principal in such transaction.
From its inception to December 10, 1995, certain of the Fund's officers and
employees were also officers or employees of Commonwealth Associates, and/or an
affiliate of Commonwealth Associates. Michael S. Falk, a current Director of the
Fund and the former Chairman of the Board of Directors of the Fund, is the
general partner of Commonwealth Associates, President of Commonwealth
Associates, President of Commonwealth Associates Asset Management, Inc., the
Fund's former administrator, and President of Commonwealth Associates Management
Company, Inc.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
(a) 1. Financial Statements
Independent Auditors' Report
Statements of Assets and Liabilities as of February 29, 1996 and
February 28, 1995
Schedules of Portfolio Investments as of February 29, 1996 and
February 28, 1995
Statements of Operations for the years ended February 29, 1996 and
February 28, 1995 and for the period from March 19, 1993
(commencement of operations) to February 28, 1994
Statements of Changes in Net Assets for the years ended February
29, 1996 and February 28, 1995 and for the period from March 19,
1993 (commencement of operations) to February 29, 1994
Statements of Cash Flows for the years ended February 29, 1996 and
February 28, 1995 and for the period from March 19, 1993
(commencement of operations) to February 29, 1994
Notes to Financial Statements
2. Exhibits.
(3) (i) Certificate of Incorporation of the Fund (1)
(ii) (a) Bylaws of the Fund (1)
(b) Amendments to Bylaws of the Fund
(10) (a) Administrative Agreement (1)
(b) Profit Sharing Plan (1)
(27) Financial Data Schedule
(b) No reports on Form 8-K have been filed during the last quarter of the period
for which this report is filed.
- -----------------------
(1) Incorporated by reference to the Fund's Form N-2, as amended, filed January
29, 1993.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MICROCAP FUND, INC.
/s/ 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)
/s/ Robert W. Naismith
Robert W. Naismith
Chairman of the Board of Directors
/s/ James E. Brands
James E. Brands
Director
/s/ Leonard J. DeRoma
Leonard J. DeRoma
Director
Michael S. Falk
Director
/s/ Richard L. Hubbell
Richard L. Hubbell
Director
/s/ Jeffrey Lewis
Jeffrey Lewis
Director
Date: June 13, 1996
Exhibit 3(ii)(b)
Amendments of Bylaws of The MicroCap Fund, Inc.
Approved by the Board of Directors on April 10, 1996
RESOLVED, that Article V of the By-laws of the Company is hereby
amended by deleting the words " and any action by the Board of Directors,
provided that no rights of third persons shall be affected by any such revision
or alteration" appearing at the end thereof; and further
RESOLVED, that the first sentence of the first paragraph of Article VII
of the By-laws of the Company is hereby amended by deleting the words "Chairman
of the Board"; and further
RESOLVED, that Article VII of the By-laws of the Company is hereby
amended by deleting the second and third sentences thereof; and further
RESOLVED, that Article X of the By-laws of the Company is hereby
amended by deleting the entire text thereof and by replacing such text with the
words "The Managing Director, if one be elected, shall perform such duties and
have such powers as the President may from time to time prescribe."
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MICROCAP
FUND, INC.'S ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED FEBRUARY 29, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1995
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 4,783,156
<INVESTMENTS-AT-VALUE> 6,939,805
<RECEIVABLES> 549,156
<ASSETS-OTHER> 120,862
<OTHER-ITEMS-ASSETS> 9,958,888
<TOTAL-ASSETS> 17,568,711
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 333,553
<TOTAL-LIABILITIES> 333,553
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 19,441,478
<SHARES-COMMON-STOCK> 2,098,026
<SHARES-COMMON-PRIOR> 2,204,000
<ACCUMULATED-NII-CURRENT> (37,743)
<OVERDISTRIBUTION-NII> (345,581)
<ACCUMULATED-NET-GAINS> (2,779,188)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,156,649
<NET-ASSETS> 17,235,158
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 850,470
<OTHER-INCOME> 0
<EXPENSES-NET> 1,163,644
<NET-INVESTMENT-INCOME> (313,174)
<REALIZED-GAINS-CURRENT> (1,061,009)
<APPREC-INCREASE-CURRENT> 2,121,261
<NET-CHANGE-FROM-OPS> 747,078
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (485,729)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (165,369)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,163,644
<AVERAGE-NET-ASSETS> 17,475,116
<PER-SHARE-NAV-BEGIN> 8.04
<PER-SHARE-NII> (.13)
<PER-SHARE-GAIN-APPREC> .31
<PER-SHARE-DIVIDEND> (1.40)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.25
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
