SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended November 30, 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.
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(Exact Name of Registrant as Specified in its Charter)
Maryland 13-3698251
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
Ten Rockefeller Plaza
Suite 712
New York, New York 10020
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (800) 888-6534
Not applicable
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Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares of the Registrant's common stock outstanding at the close
of business on January 10, 1997 was 2,171,853.
<PAGE>
THE MICROCAP FUND, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Statements of Assets and Liabilities as of November 30, 1996 (Unaudited) and
February 29, 1996
Schedule of Portfolio Investments as of November 30, 1996 (Unaudited)
Statements of Operations for the Three Months Ended November 30, 1996 and 1995
(Unaudited)
Statements of Operations for the Nine Months Ended November 30, 1996 and 1995
(Unaudited)
Statements of Changes in Net Assets for the Nine Months ended November 30, 1996
and 1995 (Unaudited)
Statements of Cash Flows for the Nine Months ended November 30, 1996 and 1995
(Unaudited)
Notes to Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities.
Item 3. Defaults upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
<PAGE>
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PART I - FINANCIAL INFORMATION
===============================================================================
Item 1. Financial Statements.
THE MICROCAP FUND, INC.
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
November 30, 1996 February 29,
(Unaudited) 1996
ASSETS
Portfolio investments at fair value (cost $2,712,250 at
<S> <C> <C> <C> <C> <C> <C> <C>
November 30, 1996 and $4,783,156 at February 29, 1996) $ 3,430,597 $ 6,939,805
Cash and cash equivalents 5,157,643 9,878,280
Deposit in escrow - Note 8 250,197 -
Receivable from securities sold - 199,375
Accrued interest receivable 15,350 349,781
Deferred organizational costs (net of accumulated amortization of
$145,786 at November 30, 1996 and $116,257 at February 29, 1996) 51,079 80,608
Other receivables 56,884 64,429
Other assets 52,934 56,433
--------------- ----------------
Total assets 9,014,684 17,568,711
--------------- ----------------
LIABILITIES
Accounts payable - legal fees 899,258 163,263
Accounts payable - other 122,951 170,290
--------------- ----------------
Total liabilities 1,022,209 333,553
--------------- ----------------
NET ASSETS
Preferred Stock, par value $.01; 2,000,000 shares authorized; 440,800 shares
issued and 204,343 shares outstanding at November 30, 1996 and 440,800 issued
and 265,317 shares
outstanding at February 29, 1996 - Note 3 2,043 2,653
Common Stock, par value $.01; 10,000,000 shares authorized;
2,462,080 shares issued and 2,171,853 shares outstanding at
November 30, 1996 and 2,388,253 shares issued and 2,098,026
outstanding at February 29, 1996 - Note 3 24,621 23,883
Additional paid-in-capital 11,611,398 19,441,478
Net unrealized appreciation of portfolio investments 718,347 2,156,649
Accumulated net investment loss (2,006,510) (37,743)
Distributions in excess of net investment loss (345,581) (345,581)
Accumulated net realized loss from portfolio investments (784,850) (2,779,188)
--------------- ----------------
Sub-total 9,219,468 18,462,151
Less: Treasury Stock at cost (290,227 shares of Common Stock) (1,226,993) (1,226,993)
--------------- ----------------
Net Assets $ 7,992,475 $ 17,235,158
=============== ================
Net assets per share of common stock $ 3.29 $ 7.25
====== =======
Net assets per share of preferred stock $ 4.12 $ 7.61
====== =======
</TABLE>
See notes to financial statements.
<PAGE>
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THE MICROCAP FUND, INC.
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SCHEDULE OF PORTFOLIO INVESTMENTS (UNAUDITED)
As of November 30, 1996
<TABLE>
% of
Issuer / Position Cost Fair Value Net Assets(1)
Publicly-Held Securities:
Bennett Environmental Inc.(2)
<C> <C> <C> <C>
112,500 shares of Common Stock $ 47,250 $ 106,227 1.33%
------------ -------------
Unigene Laboratories, Inc.
Warrant to purchase 615,000 shares of Common Stock
at $1.375 per share, expiring 7/7/00 0 499,995 6.26%
------------- --------------
YES! Entertainment Corporation
Warrant to purchase 11,438 shares of Common Stock
at $15.30 per share, expiring 7/16/98 0 0 0%
------------- --------------
Privately-Held Securities:
First Colony Acquisition Corp.*
106,562 shares of Preferred Stock 594,174 505,048
6% Convertible Promissory Note due 11/1/97 1,343,326 1,141,827
Warrant to purchase 7,560 shares of Common Stock
at $5.00 per share, expiring 1/24/00 0 0
------------- --------------
1,937,500 1,646,875 20.60%
------------- --------------
Oh-La-La! Inc.
9% Convertible Senior Notes 240,000 240,000 3.00%
------------- --------------
Optiva Corporation
150,000 shares of Common Stock 487,500 937,500 11.73%
------------- -------------- ------
Total Portfolio Investments $ 2,712,250 $ 3,430,597 42.92%
============= ============== ======
</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.
(2) In September 1996, Bennett Environmental Inc. became a listed public
company on the Montreal Stock Exchange. In connection with the listing, the
company effected a four-for-one reverse split of its outstanding common
stock. As a result, the Fund exchanged its 450,000 common shares of Bennett
for 112,500 shares of the company's common stock.
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended November 30,
<TABLE>
1996 1995
--------------- -------
INVESTMENT INCOME AND EXPENSES
Income:
<S> <C> <C>
Interest from U.S. Treasury Bills and repurchase agreements $ 94,868 $ 108,455
Interest and dividends from portfolio investments (47,463) 47,315
---------------- -------------
Total investment income 47,405 155,770
--------------- -------------
Expenses:
Administrative expense 17,289 42,510
Legal fees 890,897 170,225
Accounting fees 40,372 35,650
Salary expense 0 58,832
Amortization of deferred organizational costs 9,843 9,843
Transfer agent and custodian fees 6,094 6,589
Directors' fees and expenses 3,191 10,000
Consulting fees 25,500 25,503
Insurance expense 7,634 6,515
Mailing and printing 5,255 (3,053)
Other operating expenses 12,702 30,237
--------------- -------------
Total expenses 1,018,777 392,851
--------------- -------------
Net investment loss (971,372) (237,081)
---------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
FROM PORTFOLIO INVESTMENTS
Net realized loss from portfolio investments 0 (376,015)
Change in net unrealized appreciation or depreciation of
portfolio investments (269,778) 305,062
---------------- -------------
Net realized and unrealized loss from portfolio investments (269,778) (70,953)
---------------- --------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ (1,241,150) $ (308,034)
================ ==============
</TABLE>
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
For the Nine Months Ended November 30,
<TABLE>
1996 1995
-------------- ----------
INVESTMENT INCOME AND EXPENSES
Income:
<S> <C> <C>
Interest from U.S. Treasury Bills and repurchase agreements $ 365,398 $ 309,403
Interest and dividends from portfolio investments 36,578 338,723
-------------- ---------------
Total investment income 401,976 648,126
-------------- ---------------
Expenses:
Administrative expense 99,286 128,533
Legal fees 1,660,502 240,719
Accounting fees 72,505 52,069
Salary expense 178,919 161,277
Amortization of deferred organizational costs 29,529 29,529
Transfer agent and custodian fees 15,373 17,967
Directors' fees and expenses 47,879 22,952
Consulting fees 110,594 25,503
Insurance expense 27,680 19,309
Mailing and printing 49,615 11,958
Other operating expenses 78,861 38,448
-------------- ---------------
Total expenses 2,370,743 748,264
-------------- ---------------
Net investment loss (1,968,767) (100,138)
--------------- ----------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
FROM PORTFOLIO INVESTMENTS
Net realized gain (loss) from portfolio investments 2,659,872 (727,359)
Change in net unrealized appreciation or depreciation of
portfolio investments (1,438,302) 1,157,456
--------------- ---------------
Net realized and unrealized gain from portfolio investments 1,221,570 430,097
-------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ (747,197) $ 329,959
=============== ===============
</TABLE>
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
For the Nine Months Ended November 30,
<TABLE>
1996 1995
---------------- ----------
Change in net assets resulting from operations:
<S> <C> <C>
Net investment loss $ (1,968,767) $ (100,138)
Net realized gain (loss) from portfolio investments 2,659,872 (727,359)
Change in net unrealized appreciation or depreciation of
portfolio investments (1,438,302) 1,157,456
----------------- ----------------
Net increase (decrease) in net assets resulting from operations (747,197) 329,959
----------------- ----------------
Change in net assets from distributions:
Distribution from net realized gains (665,534) -
Return of capital distribution (7,829,952) -
----------------- ----------------
Decrease in net assets from distributions (8,495,486) -
----------------- ----------------
Change in net assets from capital stock transactions:
Common Stock repurchased - (1,079,868)
---------------- ----------------
Total decrease in net assets for the period (9,242,683) (749,909)
Net assets at beginning of period 17,235,158 17,715,073
---------------- ----------------
NET ASSETS AT END OF PERIOD $ 7,992,475 $ 16,965,164
================ ================
</TABLE>
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended November 30,
<TABLE>
1996 1995
-------------- ---------
CASH FLOWS USED FOR OPERATING ACTIVITIES
<S> <C> <C>
Net investment loss $ (1,968,767) $ (100,138)
Adjustments to reconcile net investment income (loss) to cash
used for operating activities:
Amortization of discounted receivable - (3,000)
Amortization of deferred organizational costs 29,529 29,529
Consulting payment made in-kind 105,000 -
Increase (decrease) in payables 688,656 (121,377)
Decrease in receivables and other assets 345,475 49,332
-------------- ---------------
Cash flows used for operating activities (800,107) (145,654)
--------------- ---------------
CASH FLOWS PROVIDED FROM INVESTING ACTIVITIES
Purchase of portfolio investments (51,411) (3,937,500)
Net proceeds from the sale of portfolio investments 2,876,564 1,427,759
Deposits placed in escrow (250,197) -
Repayment of notes 2,000,000 3,940,000
-------------- ---------------
Cash flows provided from investing activities 4,574,956 1,430,259
-------------- ---------------
CASH FLOWS USED FOR FINANCING ACTIVITIES
Common stock repurchased - (1,079,868)
Cash distribution to stockholders (8,495,486) -
--------------- ---------------
Cash flows used for financing activities (8,495,486) (1,079,868)
--------------- ---------------
Increase (decrease) in cash and cash equivalents (4,720,637) 204,737
Cash and cash equivalents at beginning of period 9,878,280 9,033,750
-------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,157,643 $ 9,238,487
============== ===============
</TABLE>
See notes to financial statements.
<PAGE>
THE MICROCAP FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Reference is made to the Fund's February 29, 1996 annual report on Form 10-K as
filed with the Securities and Exchange Commission for the Notes to Financial
Statements that remain unchanged. The following notes are included as a result
of changes subsequent to February 29, 1996.
1. Organization and Purpose
The MicroCap Fund, Inc. (the "Fund"), formerly known as Commonwealth Associates
Growth Fund, Inc., is a non-diversified, closed-end management investment
company operating as a business development company under the Investment Company
Act of 1940. The Fund was incorporated under the laws of the State of Maryland
on January 26, 1993. The Fund's investment objective is to achieve long-term
capital appreciation of assets by investing in securities of emerging and
established companies that management believes offer significant growth
potential. The Fund's shareholders have approved a Plan of Liquidation. See Note
5 below.
2. Related Party Transactions
Commonwealth Associates Asset Management Inc. ("CAAM"), an affiliate of
Commonwealth Associates, the underwriter of the Fund's initial public offering,
was the Fund's administrator from its inception to December 10, 1995. During
such time, CAAM was responsible for the management and administrative services
necessary for the operation of the Fund and received an administrative fee at an
annual rate of 1% of the Fund's net assets. Such fee was determined and paid
quarterly. On October 11, 1995, CAAM terminated the administrative agreement
with the Fund effective December 10, 1995. From such date to present, the Fund
has been self administered. For the three and nine months ended November 30,
1996, self-administration expenses totaled $17,289 and $99,286, respectively.
The administrative fee for the three and nine months ended November 30, 1995,
under the previous administrative arrangement with CAAM, was $42,510 and
$128,533, respectively.
On July 24, 1996, the Fund entered into an agreement with Raymond S. Troubh,
whereby Mr. Troubh will provide management services to the Fund in connection
with its Plan of Liquidation. For services to be rendered under the agreement,
Mr. Troubh will receive $8,500 per month, plus 1% of the amount of each
distribution (other than the initial distribution paid on August 30, 1996),
plus, at the time any proceeds of sale or other revenues are received by the
Fund in excess of the Fund's investment in a particular asset, Mr. Troubh will
receive 5% of such excess for amounts received in 1996 or 1997, 4% of such
excess for amounts received in 1998, 2% in 1999 and 0% thereafter; provided,
however, that in no event shall the total compensation paid to Mr. Troubh be
less than $250,000.
<TABLE>
3. Capital Stock Transactions
Number of Additional Number of Number of
Common Paid-in Preferred Treasury
Shares Amount Capital Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at February 29, 1996 2,388,253 $ 23,883 $ 19,441,478 265,317 $ 2,653 290,227$ 1,226,993
Conversion of preferred stock
into common stock 73,827 738 (128) (60,974) (610) - -
Return of capital distribution (7,829,952)
Balance at November 30, 1996 2,462,080$ 24,621 $ 11,611,398 204,343 $ 2,043290,227 $ 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 nine months ended November 30, 1996, 60,974
shares of preferred stock were converted into 73,827 shares of common stock.
4. Litigation
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, alleged fraud, breach of fiduciary duties and
violations of the Investment Company Act of 1940. On December 24, 1996, the Fund
and the defendants agreed to a settlement of the complaint, whereby the
defendants will make settlement payments to the Fund totaling $1,150,000. In
connection therewith, the Fund received $500,000 in December 1996. The remaining
balance of the settlement payments will be paid in installments through December
15, 1997 and will earn interest at an annual rate of 4.50%. Additionally, as
part of the settlement, the Fund and the defendants agreed to pursue claims
against former counsel to the Fund. The Fund would be entitled to receive 50% of
any recovery from such claims, after the reimbursement to Commonwealth
Associates of all costs and expenses associated with pursuing the claims.
The Fund was 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 alleged breach of
contract and fraud in connection with the termination of employment and
consulting agreements between him and the Fund. In connection with the
settlement agreement discussed above, Mr. Warner has agreed to dismiss all
claims associated with this action.
The Fund was a defendant in an action brought by Michael S. Falk, a former
director of the Fund, in the Supreme Court of New York on June 19, 1996. The
complaint alleged that Kamal Mustafa, the former president and a former director
of the Fund, and president of Bluestone Capital Partners L.P., an investment
banking firm controlled by Mr. Mustafa, caused the Fund to defame Mr. Falk. In
connection with the settlement agreement discussed above, Mr. Falk has agreed to
dismiss all claims associated with this action.
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.
Resolution efforts are ongoing.
Regency Holdings (Cayman) Inc. ("Holdings") and Regency Maritime Corp.
("Maritime"), Plaintiffs v. The MicroCap Fund, Inc. f/k/a Commonwealth
Associates Growth Fund, Inc., et al. Regency Holdings (Cayman) Inc. and Regency
Maritime Corp. (collectively "Regency") along with other related entities are
debtors in a bankruptcy case pending in the United States Bankruptcy Court for
the Southern District of New York, 95 B 45197 (TLB). In that bankruptcy case,
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, the former president of the Fund, was a director of
Regency (and therefore an insider) for a portion of the time that such amounts
were due and owing. Regency also maintains that such relationship had an impact
on Regency's decision to pay these funds. Additionally, Regency maintains that a
payment of $145,728 made by Regency to the Fund to redeem certain warrants
issued with respect to the loan transaction was made within 90 days of the
filing of the bankruptcy petition and is therefore a voidable preference without
regard to whether Mustafa was an insider. In an amended complaint, Regency also
asserted that the payments to the Fund constitute a fraudulent transfer, as the
payments were in fact made by Maritime and not Holdings. Regency asserts that
Maritime had no obligation to make such payments and received no value for them.
The Fund has served an answer denying the allegations of the amended complaint
and is vigorously contesting Regency's claims. At the present time, discovery is
underway to determine the validity of the allegations asserted by Regency.
5. Plan of Liquidation
On May 9, 1996, the Fund's Board of Directors adopted a Plan of Liquidation
pursuant to which the Fund will convert its remaining assets into cash, provide
for all of its liabilities and distribute the net cash to shareholders. The Plan
of Liquidation was approved at a special meeting of shareholders on July 23,
1996. In connection with the Fund's liquidation process, each of the Fund's
directors, other than Mr. Troubh, has resigned from the Board of Directors.
6. Distribution
On August 30, 1996, the Fund made an initial liquidating cash distribution
totaling $8,495,486 to shareholders of record on August 15, 1996. Common
shareholders received $3.50 per share and preferred shareholders received $4.375
per share. The amount paid to common shareholders was comprised of $0.274 of
long-term capital gain and $3.226 of return of capital. The amount paid to
preferred shareholders was comprised of $0.343 of long-term capital gain and
$4.032 of return of capital. Additional distributions may be made from time to
time from the proceeds of asset sales, after the payment of and reserve for
liabilities. At any time prior to one year from the date of approval of the Plan
of Liquidation, any remaining assets of the Fund will be transferred to a
liquidating trust to be supervised by an independent trustee.
7. Director's Fees and Expenses
During the periods reported, each non-affiliated director of the Fund's Board of
Directors received an annual fee of $2,500 and $250 for each meeting of the
Board of Director's and each committee meeting of the Board attended. Each
non-affiliated director also received reimbursement for all out-of-pocket costs
incurred to attend such meetings.
8. Other Information
On July 15, 1996, the Fund entered into a settlement agreement with a group of
shareholders of the Fund's common stock that had solicited proxies in opposition
to the Fund's Plan of Liquidation (the "13D Group"). Under the settlement
agreement, the Fund and the 13D Group agreed that, (i) certain members of the
13D Group and affiliated persons would cease to have business dealings with or
receive compensation from the Fund, (ii) a 13D Group member would have the right
to receive notice of and attend all meetings of the Board of Directors and any
committee meeting thereof, and (iii) subject to the approval of the Securities
and Exchange Commission (the "SEC"), the Fund would reimburse the 13D Group for
its reasonable out of pocket expenses up to $120,000 in connection with the 13D
Group's efforts. An application relating to such reimbursement by the Fund to
the 13D Group was filed with the SEC on September 27, 1996.
Effective on August 1, 1996, the Fund entered into indemnification agreements
with Mr. Raymond Troubh and certain of the Fund's former directors and officers.
Pursuant to such agreements, the Fund established an escrow account that
contains approximately $250,000 in cash or cash equivalents to provide for
potential legal fees and settlement payments relating to certain actions that
may arise against such individuals relating to activity involving the Fund.
9. Classification of Portfolio Investments
As of November 30, 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 $ 505,048 6.32%
Common Stock 534,750 1,543,722 19.31%
Debt Securities 1,583,326 1,381,827 17.29%
---------------- --------------- ----------
Total $ 2,712,250 $ 3,430,597 42.92%
================ =============== ==========
Country/Geographic Region
Eastern United States $ 1,937,500 $ 2,146,870 26.86%
Western United States 727,500 1,177,500 14.73%
Canada 47,250 106,227 1.33%
---------------- --------------- ----------
Total $ 2,712,250 $ 3,430,597 42.92%
================ =============== ==========
Industry
Biotechnology $ 0 $ 499,995 6.26%
Consumer Products 2,425,000 2,584,375 32.34%
Environmental Services 47,250 106,227 1.32%
Food Services 240,000 240,000 3.00%
---------------- --------------- ----------
Total $ 2,712,250 $ 3,430,597 42.92%
================ =============== ==========
</TABLE>
* Percentage of net assets is based on fair value.
10. Reclassifications
Certain reclassifications were made to the prior period financial statements in
order to conform to the current period presentation.
11. Interim Financial Statements
The unaudited financial statements presented as of November 30, 1996 and for the
three and nine month periods then ended, reflect all adjustments necessary for
the fair presentation of the interim periods.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Liquidity and Capital Resources
On July 23, 1996, the Fund's shareholders approved a Plan of Liquidation
pursuant to which the Fund will convert its remaining assets into cash, provide
for all of its liabilities and distribute the net cash to shareholders. On
August 30, 1996, in connection with the Plan of Liquidation, the Fund made an
initial liquidating distribution of $8,495,486 to shareholders of record on
August 15, 1996. The Fund will continue to liquidate its remaining assets and
make additional cash distributions to shareholders after the payment of and
reserve for all current and contingent liabilities. At any time prior to July
23, 1997, any remaining assets of the Fund will be transferred to a liquidating
trust to be supervised by an independent trustee. It is expected that Mr. Troubh
will become the independent liquidating trustee responsible for liquidating the
Fund's remaining assets.
As of November 30, 1996, the Fund had cash and cash equivalents of $5,157,643.
The Fund invests its available cash in U.S. Treasury Bills or overnight
repurchase agreements collateralized by securities issued by the U.S. Government
or its agencies. Interest earned from such investments for the three and nine
months ended November 30, 1996 was $94,868 and $365,398, respectively. Interest
earned from such investments in future periods is subject to fluctuations in
short-term interest rates and changes in the Fund's available cash balances.
Effective on August 1, 1996, the Fund entered into indemnification agreements
with Mr. Troubh and certain of the Fund's former directors and officers.
Pursuant to such agreements, the Fund has established an escrow account that
contains approximately $250,000 in cash and cash equivalents to provide for
potential legal fees and settlement payments relating to certain actions that
may arise against such individuals relating to activity involving the Fund.
Results of Operations
Realized and Unrealized Gains and Losses from Portfolio Investments
For the three months ended November 30, 1996, the Fund had a $269,778 net
unrealized loss from its portfolio investments resulting from a decrease in net
unrealized appreciation of investments for the three month period. The Fund had
no realized gains or losses from its portfolio investments for the three months
ended November 30, 1996. For the nine months ended November 30, 1996, the Fund
had a net realized and unrealized gain from its portfolio investments of
$1,221,570, comprised of a $2,659,872 net realized gain from portfolio
investments and a $1,438,302 decrease in net unrealized appreciation of
investments.
The $2,659,872 net realized gain for the nine months ended November 30, 1996,
includes the July 1996 sale of the Fund's investment in Shells Seafood
Restaurants, Inc. for $2,700,000, which resulted in a realized gain of
$2,110,000. Also during the nine month period, the Fund sold its remaining
60,000 Accumed International, Inc. (formerly Alamar Biosciences, Inc.) common
stock warrants for $154,647, realizing a gain of $149,630. Additionally, during
the period, the Fund completed the transfer of 60,000 Unigene Laboratories, Inc.
common stock warrants to certain individuals, representing the payment of
consulting fees incurred in connection with the Fund's investment in Unigene.
The transaction resulted in the recognition of a $105,000 realized gain, which
has been equally offset by $105,000 of consulting fee expense recorded by the
Fund over several fiscal quarters. The Fund also had a net realized gain of
$295,242 during the period, resulting from the sale of 190,000 Accumed common
stock warrants and 12,500 shares of Accumed common stock.
For the three and nine months ended November 30, 1996, the Fund had a decrease
in net unrealized appreciation of investments of $269,778 and $1,438,302,
respectively. The $1,438,302 decrease in net unrealized appreciation for the
nine months ended November 30, 1996, is comprised of a $1,111,483 net unrealized
gain due to the upward revaluation of certain portfolio investments for the
period, primarily Shell's Seafood Restaurants, Inc., offset by a $2,549,785
reduction in net unrealized appreciation due to the transfer from unrealized
gain to realized gain relating to the portfolio sales completed during the
period, as discussed above.
For the three and nine months ended November 30, 1995, the Fund had a net
realized loss from its portfolio investments of $376,015 and $727,359,
respectively. During the three months ended November 30, 1995, the Fund sold
150,000 common shares of Accumed common stock in the public market for $159,375,
realizing a loss of $128,081. In September 1995, the Fund sold 55,555 shares of
YES! Entertainment Corporation common stock in the public market for $305,538,
realizing a loss of $393,662. Also, during the quarter ended November 30, 1995,
the Fund realized a gain of $145,728 from the redemption of its Regency Holdings
(Cayman), Inc. warrants back to the company. In May 1995, the Fund sold its
337,500 shares of Silverado Foods, Inc. common stock for $822,656, realizing a
gain of $672,656. In March 1995, the Fund sold its investment in SR
Communications Corp. ("SRC") for $200,000 in cash and a $40,000 promissory note
(including $4,000 of imputed interest) payable in March 1996. This transaction
resulted in a net realized loss of $14,000. Also, in May 1995, the Fund
wrote-off its $60,000 investment in Radiator King International, Inc. and its
$950,000 investment in Weir-Jones Marketing, Inc. due to continued operating and
financial difficulties of these companies.
For the three and nine months ended November 30, 1995, the Fund had a net
increase in unrealized appreciation of its portfolio investments totaling
$305,062 and $1,157,456, respectively. The $1,157,456 increase for the nine
months ended November 30, 1995 consisted of a $1,366,456 net unrealized gain due
to the upward revaluation of the Fund's portfolio investments offset by a
$209,000 net transfer from unrealized gain to realized gain relating to the sale
of the Fund's investments in Silverado Foods, Regency, YES! Entertainment and
Accumed, as discussed above. The $1,366,456 net unrealized gain for the nine
months ended November 30, 1995, includes the $1,500,000 upward revaluation of
the Fund's investment in Shells Seafood Restaurants, Inc., which completed its
initial public offering in April 1996.
Investment Income and Expenses
For the three months ended November 30, 1996 and 1995, the Fund had a net
investment loss of $971,372 and $237,081, respectively. For the nine months
ended November 30, 1996 and 1995, the Fund had a net investment loss of
$1,968,767 and $100,138, respectively. The increase in net investment loss for
the nine months ended November 30, 1996 compared to the same period in 1995 was
due to a $246,150 decrease in investment income and a $1,622,479 increase in
operating expenses for the 1996 period. The Fund's reduced investment income
primarily resulted from a decline in interest earned from portfolio investments,
due to the reduced amount of interest bearing portfolio securities held by the
Fund during the 1996 period compared to the same period in 1995. The increase in
operating expenses primarily is attributable to the significant increase in
legal fees for the 1996 period, which totaled $1,660,502, as compared to
$240,719 for the 1995 period. The rise in legal fees primarily is due to
litigation costs and other legal fees relating to several legal proceedings
involving the Fund (see Note 4 of Notes to Financial Statements), and also
includes legal fees incurred in connection with the continued restructuring of
certain of the Fund's portfolio investments during the 1996 period and matters
relating to the Fund's July 23, 1996 special meeting of shareholders and Plan of
Liquidation.
The Fund had additional increases in certain other operating expenses for the
nine months ended November 30, 1996 compared to the same period in 1995.
Consulting fees of $110,594 incurred during the 1996 period, includes $74,424
relating to the July 1, 1996 transfer of 60,000 Unigene Laboratories, Inc.
common stock warrants to consultants for payment of portfolio transaction fees
and consulting services relating to the Fund's investment in Unigene. Other
operating expenses increased $40,413 for the 1996 period compared to 1995 period
primarily due to an increase in investor relations expenses relating to press
releases and other announcements made by the Fund.
From the inception of the Fund to December 10, 1995, Commonwealth Associates
Asset Management, Inc. ("CAAM") was responsible for the administrative services
necessary for the operation of the Fund. In return for such services, CAAM
received an administrative fee at the annual rate of 1% of the net assets of the
Fund. Such fee was determined and payable quarterly. Since December 11, 1995,
the Fund has been self administered. As a result, the Fund provided for and paid
its own administrative expenses for the three and nine months ended November 30,
1996. The administrative expense incurred by the Fund for the three months ended
November 30, 1996 and 1995 was $17,289 and $42,510, respectively. The
administrative expense incurred by the Fund for the nine months ended November
30, 1996 and 1995 was $99,286 and $128,533, respectively.
On July 15, 1996, the Fund entered into a settlement agreement with a group of
shareholders of the Fund's common stock that had solicited proxies in opposition
to the Fund's Plan of Liquidation (the "13D Group"). Under the settlement
agreement, the Fund and the 13D Group agreed that, (i) certain members of the
13D Group and affiliated persons would cease to have business dealings with or
receive compensation from the Fund, (ii) a 13D Group member would have the right
to receive notice of and attend all meetings of the Board of Directors and any
committee meeting thereof, and (iii) subject to the approval of the Securities
and Exchange Commission (the "SEC"), the Fund would reimburse the 13D Group for
its reasonable out of pocket expenses up to $120,000 in connection with the 13D
Group's efforts. An application relating to such reimbursement by the Fund to
the 13D Group was filed with the SEC on September 27, 1996.
On December 24, 1996, the Fund and the defendants agreed to a settlement of its
complaint against Commonwealth Associates, Michael Falk and Stephen Warner,
whereby the defendants will make settlement payments to the Fund totaling
$1,150,000. In connection therewith, the Fund received $500,000 in December
1996. The remaining balance of the settlement payments will be paid in
installments through December 15, 1997 and will earn interest at an annual rate
of 4.50%. See Note 4 of Notes to Financial Statements.
Net Assets
For the nine months ended November 30, 1996, the Fund had a $747,197 decrease in
net assets resulting from operations, comprised of the $1,968,767 net investment
loss, partially offset by the $1,221,570 net realized and unrealized gain from
portfolio investments. The Fund's net assets also were reduced by the $8,495,486
cash distribution made to shareholders on August 30, 1996. As a result, the
Fund's net assets were $7,992,475 at November 30, 1996, representing a decrease
of $9,242,683 from net assets of $17,235,158 at February 29, 1996. At November
30, 1996, the net asset value per share of common stock and preferred stock was
$3.29 and $4.12 per share, respectively, compared to $7.25 and $7.61 per share,
respectively, at February 29, 1996.
On March 1, 1996, the conversion ratio of the Fund's preferred stock into common
stock increased from 1.05 per share to 1.25 per share. The change in such
conversion ratio resulted in an additional allocation of net assets to preferred
shareholders of approximately $319,525, or $1.26 per share of preferred stock
and the dilution to common shareholders of $319,525, or $.15 per share of common
stock. Additionally, the results of operations for the nine months ended
November 30, 1996 reduced the Fund's net assets by $.31 and $.37 per share of
common and preferred stock, respectively. The distribution paid to shareholders
on August 30, 1996 also reduced the Fund's net assets by $3.50 per share of
common stock and $4.375 per share of preferred stock.
At November 30, 1995, the Fund's net assets were $16,965,164, a decrease of
$749,909 from net assets of $17,715,073 at February 28, 1995. Net assets
resulting from operations for the nine month period increased $329,959,
comprised of $100,138 of net investment loss and $430,097 of net realized and
unrealized gain from portfolio investments. This increase was more than offset
by a $1,079,868 decrease in net assets resulting from the repurchase by the Fund
of 262,727 shares of its common stock in the public market during the period.
At November 30, 1995, the net asset value per share of common stock and
preferred stock was $7.06 and $7.41, respectively. At February 28, 1995, the net
asset value per share of common stock was $8.04. There was no preferred stock
outstanding on February 28, 1995. The changes in net asset value per share of
common stock and preferred stock for the nine months ended November 30, 1995 are
discussed below.
On March 20, 1995, the Fund issued a 20% preferred stock dividend to the Fund's
common shareholders of record on March 13, 1995. Based on the Fund's net assets
of $17,715,073 at February 28, 1995, such dividend resulted in an initial
allocation of net assets to preferred shareholders of approximately $3.1
million, or $6.97 per share of preferred stock. The allocation of net assets to
preferred shareholders, therefore, resulted in a dilution to common shareholders
of approximately $3.1 million, or $1.40 per share of common stock. Furthermore,
during the nine months ended November 30, 1995, the Fund repurchased 262,727
shares of its common stock for $1,079,868. The effect of such repurchases
increased the net asset value per share of common stock and preferred stock by
$.28 and $.29, respectively. The increase in net assets from operations for the
nine months ended November 30, 1995 of $329,959 increased the net asset value
per share of common and preferred stock by $.14 and $.15, respectively.
Summary of Changes to Net Assets for the Nine Months Ended November 30, 1996
Portfolio transactions completed during the nine months ended November 30, 1996,
resulted in a realized gain of $2,659,872. As shown below, these transactions
returned $4,632,189 to the Fund and increased its net asset value for the nine
month period by $1,266,627. This increase, however, was offset by a $45,057
downward revaluation of the Fund's remaining portfolio investments. The
completed portfolio transactions and revaluations increased the Fund's net asset
value on a net basis by $1,221,570 for the nine months ended November 30, 1996.
The increase in net assets from portfolio transactions for the period was more
than offset by the $1,968,767 net investment loss for the nine month period.
<PAGE>
<TABLE>
Fair Value Effect on
Investment Return at 2/29/96 Net Assets
Sales and Write-Offs for nine months ended 11/30/96:
<S> <C> <C> <C>
Shell's Seafood Restaurants, Inc. $ 4,010,000 $ 3,058,750 $ 951,250
Accumed International, Inc. warrants 467,976 224,825 243,151
Accumed International, Inc. stock (1) 49,213 51,411 (2,198)
Unigene Laboratories, Inc. warrants (2) 105,000 30,576 74,424
--------------- -------------- ---------------
Sub-total from sales and write-offs $ 4,632,189 $ 3,365,562 1,266,627
=============== ============== ===============
Revaluations for nine months ended 11/30/96:
Unigene Laboratories, Inc. (warrants) 186,591
First Colony Acquisition Corp. (290,625)
Bennett Environmental Inc. 58,977
---------------
Sub-total from revaluations (45,057)
----------------
Sub-total from portfolio transactions 1,221,570
Net investment loss for nine months ended 11/30/96 (1,968,767)
-----------------------
Net Change to Net Assets for Nine Months Ended
November 30, 1996 $ (747,197)
================
</TABLE>
(1) The 12,500 shares of Accumed common stock sold during the period, was
acquired by the Fund during the same period for $51,411. (2) The return shown
from the Unigene warrants is a non-cash item resulting from the transfer of
60,000 warrants to cover consulting costs.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
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, alleged fraud, breach of fiduciary duties and
violations of the Investment Company Act of 1940. On December 24, 1996, the Fund
and the defendants agreed to a settlement of the complaint, whereby the
defendants will make settlement payments to the Fund totaling $1,150,000. In
connection therewith, the Fund received $500,000 in December 1996. The remaining
balance of the settlement payments will be paid in installments through December
15, 1997 and will earn interest at an annual rate of 4.50%. Additionally, as
part of the settlement, the Fund and the defendants agreed to pursue claims
against former counsel to the Fund. The Fund would be entitled to receive 50% of
any recovery from such claims, after the reimbursement to Commonwealth
Associates of all costs and expenses associated with pursuing the claims.
The Fund was 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 alleged breach of
contract and fraud in connection with the termination of employment and
consulting agreements between him and the Fund. In connection with the
settlement agreement discussed above, Mr. Warner has agreed to dismiss all
claims associated with this action.
The Fund was a defendant in an action brought by Michael S. Falk, a former
director of the Fund, in the Supreme Court of New York on June 19, 1996. The
complaint alleged that Kamal Mustafa, the former president and a former director
of the Fund, and president of Bluestone Capital Partners L.P., an investment
banking firm controlled by Mr. Mustafa, caused the Fund to defame Mr. Falk. In
connection with the settlement agreement discussed above, Mr. Falk has agreed to
dismiss all claims associated with this action.
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.
Resolution efforts are ongoing.
Regency Holdings (Cayman) Inc. ("Holdings") and Regency Maritime Corp.
("Maritime"), Plaintiffs v. The MicroCap Fund, Inc. f/k/a Commonwealth
Associates Growth Fund, Inc., et al. Regency Holdings (Cayman) Inc. and Regency
Maritime Corp. (collectively "Regency") along with other related entities are
debtors in a bankruptcy case pending in the United States Bankruptcy Court for
the Southern District of New York, 95 B 45197 (TLB). In that bankruptcy case,
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, the former president of the Fund, was a director of
Regency (and therefore an insider) for a portion of the time that such amounts
were due and owing. Regency also maintains that such relationship had an impact
on Regency's decision to pay these funds. Additionally, Regency maintains that a
payment of $145,728 made by Regency to the Fund to redeem certain warrants
issued with respect to the loan transaction was made within 90 days of the
filing of the bankruptcy petition and is therefore a voidable preference without
regard to whether Mustafa was an insider. In an amended complaint, Regency also
asserted that the payments to the Fund constitute a fraudulent transfer, as the
payments were in fact made by Maritime and not Holdings. Regency asserts that
Maritime had no obligation to make such payments and received no value for them.
The Fund has served an answer denying the allegations of the amended complaint
and is vigorously contesting Regency's claims. At the present time, discovery is
underway to determine the validity of the allegations asserted by Regency.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized and in the capacity indicated.
THE MICROCAP FUND, INC.
/s/ Raymond S. Troubh
Raymond S. Troubh
President, Chief Executive Officer, Treasurer, Secretary and
Director
(Principal Executive and Principal Financial and Accounting
Officer)
Date: January 14, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MICROCAP
FUND, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED November 30,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-1-1996
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 2,712,250
<INVESTMENTS-AT-VALUE> 3,430,597
<RECEIVABLES> 72,234
<ASSETS-OTHER> 104,013
<OTHER-ITEMS-ASSETS> 5,407,840
<TOTAL-ASSETS> 9,014,684
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,022,209
<TOTAL-LIABILITIES> 1,022,209
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,611,398
<SHARES-COMMON-STOCK> 2,171,853
<SHARES-COMMON-PRIOR> 2,098,026
<ACCUMULATED-NII-CURRENT> (2,006,510)
<OVERDISTRIBUTION-NII> (345,581)
<ACCUMULATED-NET-GAINS> (784,850)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 718,347
<NET-ASSETS> 7,992,475
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 401,976
<OTHER-INCOME> 0
<EXPENSES-NET> 2,370,743
<NET-INVESTMENT-INCOME> (1,968,767)
<REALIZED-GAINS-CURRENT> 2,659,872
<APPREC-INCREASE-CURRENT> (1,438,302)
<NET-CHANGE-FROM-OPS> (747,197)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 665,534
<DISTRIBUTIONS-OTHER> 7,829,952
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (9,242,683)
<ACCUMULATED-NII-PRIOR> (37,743)
<ACCUMULATED-GAINS-PRIOR> (2,779,188)
<OVERDISTRIB-NII-PRIOR> (345,581)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 7.25
<PER-SHARE-NII> (0.81)
<PER-SHARE-GAIN-APPREC> 0.50
<PER-SHARE-DIVIDEND> (0.15)
<PER-SHARE-DISTRIBUTIONS> (0.27)
<RETURNS-OF-CAPITAL> (3.23)
<PER-SHARE-NAV-END> 3.29
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
