Item 1. Business.
General
The MicroCap Liquidating Trust (the "Trust"), a liquidating trust established under the laws of the State of New York, is the successor to The MicroCap Fund, Inc., formerly Commonwealth Associates Growth Fund, Inc. (the "Fund"). The Fund, which was a Maryland corporation formed on January 26, 1993, was a non-diversified, closed-end management investment company and operated as a business development company under the Investment Company Act of 1940. The Fund's investment objective was 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 believed offered significant growth potential.
Pursuant to its Plan of Liquidation, which was approved at a special meeting of shareholders on July 23, 1996, the Fund transferred all of its remaining assets and its remaining fixed and contingent liabilities to the Trust, effective as of the close of business on February 24, 1997, the Fund's termination date.
Also effective as of the close of business on February 24, 1997, the 2,188,085 common shares and 191,357 preferred shares of the Fund, outstanding on such date, were automatically deemed to represent 2,427,281 units of beneficial interest in the Trust ("Units"). As a result, on February 24, 1997, each shareholder of the Fund received one Unit of the Trust for each share of the Fund's common stock held on such date and 1.25 Units of the Trust for each share of the Fund's preferred stock held on such date.
The Trust was organized for the sole purpose of liquidating the Fund's assets and winding up the Fund's affairs. The Trust will terminate upon the final liquidation of its remaining assets, payment of all liabilities and satisfaction of all outstanding claims and contingencies.
Cash Distributions
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.
On July 15 1997, the Trust paid an interim liquidating distribution totaling $2,427,281, or $1.00 per Unit, to unit holders of record on June 30, 1997. On August 28, 1998, the Trust paid an additional interim liquidating distribution totaling $1,820,461, or $.75 per Unit, to unit holders of record on August 14, 1998.
On March 2, 1999, the Trust announced that an additional liquidating distribution will be paid to unit holders of record on March 16, 1999. This distribution will total $1,820,461 or $.75 per Unit, and will be paid on March 31, 1999.
Portfolio Investments On December 31, 1998, the Trust held two portfolio investments with an aggregate cost of $1,937,500 and a fair value of $484,375. During 1998, the Trust liquidated two of its remaining portfolio securities. The Trust's warrant to purchase 11,437 common shares of Yes! Entertainment Corporation expired unexercised on July 16, 1998. Additionally, in September 1998, the Trust wrote-off the remaining cost of its investment in Oh-La-La! Inc., realizing a loss of $240,000.
Competition
The Trust is operating solely to liquidate its remaining assets and will not invest in any new portfolio companies, therefore, the Trust is not competing for new investment opportunities.
Employees
The Trust has no employees. In July 1996, Raymond S. Troubh was appointed President, Chief Executive Officer, Treasurer, Secretary and Director of the Fund. All of the Fund's previous officers and all of its employees had resigned by the end of July 1996. Mr. Troubh held these offices through the Fund's date of termination and became the independent liquidating trustee of the Trust, with primary responsibility for the liquidation of its remaining assets.
Item 2.
Item 2. Properties.
None
Item 3.
Item 3. 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 former director of the Fund, and Stephen J. Warner, a former executive officer of Commonwealth Associates and the former president of the Fund. The civil action, which was filed in federal court in the Southern District of New York, 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 Commonwealth Associates agreed to make settlement payments to the Fund or the Trust totaling $1,150,000. In connection therewith, $500,000 was received in December 1996 and an additional $650,000 was received in installments during 1997. Interest of $20,415 was also paid to the Trust with the final installment payment in December 1997. Additionally, as part of the settlement, the Fund and the defendants agreed to pursue claims against former counsel to the Fund. The Trust was entitled to receive 50% of any recovery from such claims after reimbursement to Commonwealth Associates of all costs and expenses associated with pursuing the claims. See note 6 of Notes to the Financial Statements for additional information.
Regency Holdings (Cayman) Inc. ("Holdings") and Regency Maritime Corp. ("Maritime") (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 or fraudulent conveyances under the Bankruptcy Code. Holdings maintained that a payment 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, was 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. Holdings also maintained that such relationship had an impact on the decision to pay these amounts. Additionally, Holdings maintained that a payment of $145,728 made 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 was therefore a voidable preference without regard to whether Mustafa was an insider. Alternatively, Maritime asserted that the foregoing payments were made from its funds, without reasonably equivalent consideration, and were therefore avoidable as fraudulent conveyances. The Fund served an answer denying the allegations of the amended complaint and contested Regency's claims. Pursuant to an order filed with the Bankruptcy Court, the Trust had set aside approximately $2.4 million in an interest-bearing cash account pending resolution by the Bankruptcy Court of the adversary proceeding. A limited trial based upon written submissions to address the validity of Regency's preference claims was held in December 1997 and resulted in a judgment in favor of the Trust, dismissing the preference claims with prejudice. A mediator was appointed to attempt to facilitate a mutually beneficial settlement of the remaining fraudulent conveyance claims, and a mediation session occurred on October 5, 1998. During that session, the parties reached a tentative consensual resolution of the fraudulent conveyance claim. The settlement was finalized in March 1999 and the defendants agreed to pay a total of $535,000, of which the Trust's share is $281,425 exclusive of legal and other fees and expenses. As a result of the settlement, the $2.4 million previously set aside is now available to the Trust.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of Unit holders during the last quarter of the period covered by this report.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. There were 2,427,281 units of beneficial interest of the MicroCap Liquidating Trust (the "Units") outstanding as of March 15, 1999. Units of the Trust (CUSIP# 59501M) (symbol MCAPS) became listed securities on the OTC Bulletin Board for over-the counter securities as of April 30, 1997.
The following table sets forth, for each of the periods indicated, the high and low closing bid prices for the Units as reported by NASDAQ since April 30, 1997. These per Unit 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.
As of March 12, 1999, there were approximately 13 Unit holders of record of the Trust. Certain holders of record held Units for approximately 246 beneficial owners.
Item 6.
Item 6. Selected Financial Data.
* Based on weighted average number of Units or common equivalent shares outstanding for each respective period. ** Based on number of Units or common equivalent shares outstanding as of the period end date.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Liquidity and Capital Resources
As of December 31, 1998, the MicroCap Liquidating Trust (the "Trust") had cash and cash equivalents totaling $3,604,050, of which $2,790,218 was restricted due to certain contingencies, as discussed below. The Trust's cash balances are invested 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 year ended December 31, 1998 and for the period from February 25, 1997 to December 31, 1997 (the "1997 Period") totaled $240,737 and $270,147, respectfully. Interest earned from such investments held by The MicroCap Fund, Inc. (the "Fund"), the predecessor entity to the Trust, for the period from March 1, 1996 to February 24, 1997, the Fund's termination date ("Fiscal 1997"), totaled $450,528. Interest earned from such cash equivalent balances in future periods is subject to fluctuations in short-term interest rates and changes in cash equivalent balances held by the Trust.
The restricted cash and cash equivalents balance of approximately $2.8 million as of December 31, 1998, is comprised of $2.4 million relating to the Regency Holdings (Cayman) Inc. litigation, $250,000 relating to certain indemnification agreements with Mr. Raymond S. Troubh, the Trustee of the Trust, and certain of the Fund's former directors and officers and $120,000 relating to the potential reimbursement of out-of-pocket expenses of a shareholder group that had solicited proxies in opposition to the Fund's Plan of Liquidation. Due to a settlement reached in March 1999, the $2.4 million previously set aside for the Regency litigation became available to the Trust. See Notes to Financial Statements for additional information.
On August 28, 1998, the Trust paid an interim liquidating distribution totaling $1,820,461, or $.75 per Unit, to unit holders of record on August 14, 1998. The Trust expects to make additional cash distributions to beneficiaries as its remaining assets are liquidated, subject to maintaining an adequate reserve for all current and contingent liabilities.
On March 2, 1999, the Trust announced that an additional liquidating distribution will be paid to unit holders of record on March 16, 1999. This distribution will total $1,820,461 or $.75 per Unit, and will be paid on March 31, 1999.
Results of Operations The Trust is pursuing the orderly liquidation of its assets and subsequent distribution to unit holders of the proceeds from such liquidation, including the Trust's remaining cash balances after payment of, or provision for, all current, future and contingent liabilities. Prior to the creation of the Trust, the Fund had begun to pursue this objective with the approval of its Plan of Liquidation in July 1996.
Realized and Unrealized Gains and Losses from Portfolio Investments - For the year ended December 31, 1998 and for the 1997 Period, the Trust had a net realized and unrealized loss from its portfolio investments of $1,138,125 and $251,593, respectively. For Fiscal 1997, the Fund had a net realized and unrealized gain from its portfolio investments of $2,287,566.
1998: The $1,138,125 net realized and unrealized loss for 1998 was comprised of a $240,000 realized loss and an $898,125 unfavorable change to net unrealized depreciation of portfolio investments. The $240,000 realized loss resulted from the September 1998 write-off of the remaining cost of the Trust's investment in Oh-La-La! Inc. The unfavorable change in net unrealized depreciation for the year ended December 31, 1998 was comprised of a net downward revaluation of $593,750, relating to the Trust's investment in Unigene Laboratories, Inc., and a downward revaluation of $484,375, relating to the Trust's investment in First Colony Acquistion Corp. These downward revaluations were partially offset by the transfer of $180,000 from unrealized loss to realized loss resulting from the write-off of the remaining cost of Oh-La-La!, as discussed above. See the caption heading "Summary of Portfolio Transactions and Change in Net Assets during 1998" presented below for additional information.
1997 Period: The $251,593 net realized and unrealized loss for the 1997 Period was comprised of a $775,250 net realized gain from the sale of certain portfolio investments during the 1997 Period, as discussed below. These realized gains were more than offset by a $1,026,843 decrease to net unrealized appreciation of portfolio investments during the 1997 Period, as discussed below.
In June 1997, the Trust sold a covered call option for $37,500, allowing for the purchase of up to 307,500 common stock warrants of Unigene Laboratories, Inc. at a purchase price of $2.875 per warrant. In July 1997, a portion of the option was exercised for 140,000 warrants at $2.875 per warrant, or $402,500. The remaining portion of the option expired on July 30, 1997. The Trust realized a net gain of $440,000 as a result of these transactions. In November 1997, the Trust sold its remaining 112,500 common shares of Bennett Environmental, Inc. for $382,500, or $3.40 per share, resulting in a realized gain of $335,250.
During the 1997 Period, the Trust had a $1,026,843 net decrease in the net unrealized appreciation of its remaining portfolio investments. Such decrease included a $623,438 net downward revaluation of the Trust's holdings of Unigene Laboratories, Inc., and a net transfer of $403,405 from unrealized gain to realized gain relating to the portfolio investments sold during the 1997 Period, as discussed above.
Fiscal 1997: The Fund's $2,287,566 net realized and unrealized gain for Fiscal 1997 was comprised of a $3,972,372 net realized gain from the sale of certain portfolio investments during the period, as discussed below. This gain was partially offset by a $1,684,806 decrease to net unrealized appreciation of portfolio investments during Fiscal 1997, as discussed below.
The $3,972,372 net gain realized during Fiscal 1997 was comprised of the following transactions: o The Fund sold 12,500 common shares of Accumed International, Inc. and warrants to purchase 250,000 shares of Accumed common stock for $517,189, realizing a gain of $444,872. o On April 23, 1996, Shells Seafood Restaurants, Inc. completed its initial public offering of common stock at $5.00 per share. In connection with the offering, the Fund received $1,617,195, representing repayment of its $1,310,000 senior note and accrued interest thereon. Additionally, in July 1996, the Fund sold its remaining investment in Shells for $2,700,000, realizing a gain of $2,110,000. o On July 1, 1996, the Fund transferred warrants to purchase 60,000 shares of Unigene Laboratories, Inc. common stock to certain individuals for payment of consulting and portfolio transaction costs incurred in connection with the Fund's investment in Unigene. This transaction resulted in a $105,000 gain, which was equally offset by $105,000 of consulting fee expense recorded by the Fund over several prior fiscal quarters. o In July 1996, the Fund received $163,205 from International Communication Technologies, Inc., representing repayment of the $150,000 note due to the Fund along with accrued interest thereon. o In January 1997, the Fund sold its 150,000 common shares of Optiva Corp. in a private transaction for $1,800,000, realizing a gain of $1,312,500.
The Fund's $1,684,806 net decrease in net unrealized appreciation of portfolio investments for Fiscal 1997 includes a $158,439 net unrealized gain due to the net upward revaluation of certain portfolio investments during the period, primarily Unigene Laboratories, Inc. This increase to net unrealized appreciation of investments was more than offset by the net transfer of $1,526,367 from unrealized gain to realized gain relating to the portfolio investments sold during Fiscal 1997, as discussed above.
Investment Income and Expenses For the year ended December 31, 1998 and for the 1997 period, the Trust had a net investment loss (interest and other income less operating expenses) of $179,246 and $173,067, respectively. For Fiscal 1997, the Fund had a net investment loss of $1,243,927.
The significantly reduced net investment loss of $179,246 and $173,067 for 1998 and the 1997 Period, respectively, as compared to $1,243,927 for Fiscal 1997, primarily reflects the termination of the ongoing operations of the Fund, the adoption of its Plan of Liquidation and transfer of its remaining assets to the Trust, as discussed above.
The $6,179 increase in net investment loss for 1998 as compared to the 1997 Period, resulted from a $154,427 increase in operating expenses partially offset by a $148,248 increase in investment income. The increase in operating expenses for 1998 compared to the 1997 Period primarily was due to the $278,200 litigation settlement reserve, relating to the Regency Holdings, (Cayman) Inc. litigation as discussed in Note 4 of Notes to Financial Statements. This settlement expense was partially offset by a $123,773 decrease in other operating expenses. The decrease in other expenses primarily was the result of a $98,575 decrease in legal and accounting fees, and a $27,830 decrease in trustee fees. The decrease in legal and accounting fees reflects the declining legal work relating to activities of the Trust during 1998 as compared to 1997 and the reduction of certain expenses that had been accrued for in prior periods.
Total investment income for 1998 was $452,804 as compared to $304,556 for the 1997 Period. The increase in investment income primarily was due to $186,298 of other income recorded during 1998 relating to litigation settlements as discussed in Note 6 of Notes to Financial Statements. The increase in other income was partially offset by a $29,410 decrease in interest income from short-term investments, due to a decrease in funds available for investment in such securities during 1998 as compared to the 1997 Period. Interest income is expected to continue to decline as the Trust continues with the liquidation of its remaining assets and completes subsequent distributions of such proceeds to Unit holders.
The $1,070,860 decrease in net investment loss for the 1997 Period as compared to Fiscal 1997, resulted from a $2,458,529 decrease in operating expenses partially offset by a $1,387,669 decrease in investment income. The decrease in operating expenses primarily was attributable to two major factors. First, significantly lower legal fees were incurred during the 1997 Period compared to Fiscal 1997. Legal fees incurred during Fiscal 1997 totaled $1,991,383, as compared to $167,602 for the 1997 Period. The Fund incurred significant legal fees during Fiscal 1997 from (i) several legal proceedings involving the Fund, (ii) continued restructuring of certain of the Fund's portfolio investments during Fiscal 1997, (iii) matters relating to the Fund's July 23, 1996 special meeting of shareholders and Plan of Liquidation and (iv) preparation and issuance of the Information Statement relating to the establishment of the Trust. Secondly, certain operating expenses of the Fund, other than legal fees, are no longer incurred by the Trust. These expenses include salary expense, amortization expense, directors fees, insurance, consulting fees and certain other expenses. Expenses, other than legal fees, incurred for the 1997 Period totaled $310,021, as compared to $944,769 for Fiscal 1997.
Total investment income for the 1997 Period was $304,556 as compared to $1,692,225 for Fiscal 1997. The decrease in investment income primarily was due to the recognition of $1,150,000 of other income during Fiscal 1997 relating to a litigation settlement, as discussed in Note 4 to Notes to Financial Statements. Additionally, interest income from short-term investments was reduced by $180,381, reflecting the shorter 1997 Period of approximately 10 months compared to the almost complete full year period for Fiscal 1997, and reduced cash equivalent balances held during the 1997 Period as compared to the amount for Fiscal 1997. The Trust had no interest or dividend income from portfolio investments for the 1997 Period, since it held no interest earning portfolio securities during the 1997 Period.
Net Assets in Liquidation For the year ended December 31, 1998, the Trust had a $1,317,371 decrease in net assets resulting from operations, comprised of the $1,138,125 net realized and unrealized loss from portfolio investments and the $179,246 net investment loss. The Trust's net assets also were reduced by the $1,820,461 cash distribution paid to unit holders on August 28, 1998. As a result, the Trust's net assets declined by $3,187,382, from $6,931,370 as of December 31, 1997 to $3,793,538 as of December 31, 1998.
On a per Unit basis, the results of operations for the year ended December 31, 1998 decreased the Trust's net assets by $.543 per Unit and the cash distribution paid to Unit holders on August 28, 1998 reduced the Trust's net assets by $.75 per Unit. As a result, the Trust's net asset value declined $1.293 per Unit from $2.856 as of December 31, 1997, to $1.563 per Unit as of December 31, 1998.
Summary of Portfolio Transactions and Change in Net Assets during 1998 As discussed above, the write-off of the Trust's investment in Oh-la-la! Inc. during 1998, resulted in a realized loss of $240,000. However, as shown below, due to prior period loss reserves totaling $180,000, this write-off decreased the net asset value of the Trust for the period by $60,000. Also, as discussed above, the Trust's net assets were further reduced by a $1,078,125 net decrease in net assets resulting from the downward revaluation of the Trust's remaining portfolio investments. The completed portfolio transactions and revaluations decreased the Trust's net asset value on a net basis by $1,138,125 for the year ended December 31, 1998.
For the 1997 Period, the Trust had a $424,660 decrease in net assets resulting from operations, comprised of the $251,593 net realized and unrealized loss from portfolio investments and the $173,067 net investment loss. The Trust's net assets also were reduced by the $2,427,281 cash distribution made to unit holders on July 15, 1997. As a result, the Trust's net assets were $6,931,370, or $2.86 per Unit, as of December 31, 1997, representing a decrease of $2,851,941, or $1.17 per Unit, from net assets of $9,783,311 as of February 24, 1997, the Fund's termination date.
For Fiscal 1997, the Fund had a net increase in net assets resulting from operations of $1,043,639, comprised of the net realized and unrealized gain from portfolio investments of $2,287,566 offset by the net investment loss of $1,243,927. Additionally, the cash distribution paid to shareholders on August 30, 1996 also reduced the Fund's net assets by $8,495,486. As a result, the Fund's net assets were $9,783,311, or $4.03 per common equivalent share, as of February 24, 1997, representing a decrease of $17,235,158, or $7.25 per common equivalent share, as of February 29, 1996.
Year 2000 Issue - The Year 2000 ("Y2K") concern arose because many existing computer programs use only the last two digits to refer to a year. Therefore, these computer programs do not properly recognize a year that begins with "20" instead of "19". If not corrected, many computer applications could fail or create erroneous results. The impact of the Y2K concern on the operations of the Trust is currently being assessed.
Palmeri Fund Administrators, Inc. (the "Administrator") provides certain administrative and accounting services for the Trust, including maintenance of the books and records of the Trust, preparation and issuance of financial reports and tax information to beneficial holders of the Trust and other day to day administrative and accounting functions.
The Administrator is currently assessing its computer hardware and software systems, specifically as they relate to the operations of the Trust. As part of its investigation of possible Y2K problems, the Administrator has contracted with an outside computer service provider to examine all of the Administrator's computer hardware and software applications, to identify any Y2K concerns. This review and evaluation is in process and is expected to be completed by May 1999. If Y2K problems are identified, the Administrator will purchase, install and test the necessary software patches and new computer hardware to ensure that all of its computer systems are Y2K compliant. This correction phase, if required, is expected to be completed by September 1999.
Additionally, the Administrator has contacted all outside service providers used to assist the Administrator with the administration of the Trust's operations to ascertain whether these entities are addressing the Y2K issue within their own operation. There can be no guarantee that the Administrator's systems or that systems of other companies providing services to the Trust will be corrected in a timely manner.
Costs to be incurred by the Trust relating to the investigation or correction of potential Y2K problems affecting the Trust are not expected to be material.
The Y2K issue is a global concern that may affect all business entities, including the Trust's remaining portfolio companies. The Trustee is continuing to assess the impact of Y2K concerns affecting these portfolio companies. However, the extent to which any potential Y2K problems could affect the valuations of these companies is presently unknown. At the time such Y2K problems are identified, if any, the Trustee will take such issues into consideration in adjusting the fair value of the Trust's remaining portfolio investments.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Trust is subject to market risk arising from changes in the value of its portfolio investments, investments in U.S. Treasury Bills and interest-bearing cash equivalents, which may result from fluctuations in interest rates and equity prices. The Trust has calculated its market risk related to its holdings of these investments based on changes in interest rates and equity prices utilizing a sensitivity analysis. The sensitivity analysis estimates the hypothetical change in fair values, cash flows and earnings based on an assumed 10% change (increase or decrease) in interest rates and equity prices. To perform the sensitivity analysis, the assumed 10% change is applied to market rates and prices on investments held by the Trust at the end of the accounting period.
The Trust's portfolio investments had an aggregate fair value of $484,375 as of December 31, 1998. An assumed 10% decline from this December 31, 1998 fair value, would result in a reduction to the fair value of such investments and an unrealized loss of $48,438.
Market risk relating to the Trust's interest-bearing cash equivalents, investments in U.S. Treasury Bills and overnight repurchase agreements collateralized by securities issued by the U.S. Government or its agencies held as of December 31, 1998 are considered to be immaterial.
Item 8.
Item 8. Financial Statements and Supplementary Data.
MICROCAP LIQUIDATING TRUST (Successor to The MicroCap Fund, Inc.) INDEX
Independent Auditors' Report
Statements of Assets and Liabilities as of December 31, 1998 and 1997
Schedules of Portfolio Investments as of December 31, 1998 and 1997
Statements of Operations for the year ended December 31, 1998, for the period from February 25, 1997 to December 31, 1997, and for the period from March 1, 1996 to February 24, 1997 (Date of Termination) (Predecessor)
Statements of Changes in Net Assets for the year ended December 31, 1998, for the period from February 25, 1997 to December 31, 1997, and for the period from March 1, 1996 to February 24, 1997 (Date of Termination) (Predecessor)
Statements of Cash Flows for the year ended December 31, 1998, for the period from February 25, 1997 to December 31, 1997, and for the period from March 1, 1996 to February 24, 1997 (Date of Termination) (Predecessor)
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.
INDEPENDENT AUDITORS' REPORT
MicroCap Liquidating Trust
We have audited the accompanying statements of assets and liabilities, including the schedules of portfolio investments, of the MicroCap Liquidating Trust (the "Trust") as of December 31, 1998 and 1997, and the related statements of operations, changes in net assets and cash flows of the Trust for the year ended December 31, 1998, for the period from February 25, 1997 to December 31, 1997 and for The MicroCap Fund, Inc. (the "Fund") for the period from March 1, 1996 to February 24, 1997 (Date of Termination). These financial statements are the responsibility of the Trust's and 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 as of December 31, 1998 and 1997 by correspondence with the custodian. 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 Trust as of December 31, 1998 and 1997 and the results of the Trust's operations, changes in net assets and cash flows for the year ended December 31, 1998, for the period from February 25, 1997 to December 31, 1997 and for the Fund for the period from March 1, 1996 to February 24, 1997 (Date of Termination) in conformity with generally accepted accounting principles.
As explained in Note 2, the financial statements include securities valued at $484,375 and $1,622,500 as of December 31, 1998 and 1997, respectively, representing 13% and 23% of net assets, respectively, whose values have been estimated by the Trustee of the Trust as of December 31, 1998 and 1997 in the absence of readily ascertainable market values. We have reviewed the procedures used by the Trustee in arriving at the estimated 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 February 22, 1999 (March 2, 1999 as to Notes 4 and 7)
See notes to financial statements.
(1) Represents fair value as a percentage of net assets.
(A) The Trust's warrant to purchase 11,437 common shares of Yes! Entertainment Corporation expired unexercised on July 16, 1998. Additionally, in September 1998, the Trust wrote-off the remaining cost of its investment in Oh-La-La! Inc., realizing a loss of $240,000.
(B) All portfolio securities held as of December 31, 1998, are non-income producing. As of December 31, 998, all of the Trust's portfolio companies were located in the eastern United States. The investments, using fair value as a percentage of net assets, represented biotechnology, 12.77%, consumer products, 0%, preferred stock, 12.77%, and common stock, 0%.
See notes to financial statements.
(1) Represents fair value as a percentage of net assets.
See notes to financial statements.
See notes to financial statements.
See notes to financial statements.
See notes to financial statements.
MICROCAP LIQUIDATING TRUST (Successor to The MicroCap Fund, Inc.) NOTES TO FINANCIAL STATEMENTS
1. Organization and Purpose
The MicroCap Liquidating Trust (the "Trust"), a liquidating trust established under the laws of the State of New York, is the successor entity to The MicroCap Fund, Inc., formerly Commonwealth Associates Growth Fund, Inc. (the "Fund"). The Fund, which was a Maryland corporation formed on January 26, 1993, was a non-diversified, closed-end management investment company and operated as a business development company under the Investment Company Act of 1940. The Fund's investment objective was 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 believed offered significant growth potential.
Pursuant to its Plan of Liquidation, which was approved at a special meeting of shareholders on July 23, 1996, the Fund transferred all of its remaining assets and its remaining fixed and contingent liabilities to the Trust, effective as of the close of business on February 24, 1997, the Fund's termination date.
Also effective as of the close of business on February 24, 1997, the 2,188,085 common shares and 191,357 preferred shares of the Fund, outstanding on such date, were automatically deemed to represent 2,427,281 units of beneficial interest in the Trust ("Units"). As a result, on February 24, 1997, each shareholder of the Fund received one Unit of the Trust for each share of the Fund's common stock held on such date and 1.25 Units of the Trust for each share of the Fund's preferred stock held on such date.
2. Significant Accounting Policies
Valuation of Investments - Portfolio investments are carried at fair value as determined quarterly by the Trustee. The fair value of each publicly-held portfolio security is adjusted to the closing public market price on the last day of the calendar quarter discounted by a factor of 0% to 20% for sales restrictions, if any. Factors considered in the determination of an appropriate discount include: underwriter lock-up, affiliate status by owning greater than 10% of the outstanding shares of a portfolio security, and other liquidity factors such as the size of the Trust'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 - Realized gains and losses on investments sold are computed on a specific identification basis. The Trust records its transactions on the accrual method.
Income Taxes - The Trust is a complete pass-through entity for federal income tax purposes and, accordingly, is not subject to income tax. Instead, each beneficiary of the Trust is required to take into account, in accordance with such beneficiary's method of accounting, such beneficiary's pro rata share of the Trust's income, gain, loss, deduction or expense, regardless of the amount or timing of distributions to beneficiaries.
Cash and Cash Equivalents - The Trust invests its available cash in U.S. Treasury Bills and overnight repurchase agreements collateralized by securities issued by the U.S. Government or its agencies. Such investments are considered to be cash equivalents for the statement of cash flows.
MICROCAP LIQUIDATING TRUST (Successor to The MicroCap Fund, Inc.) NOTES TO FINANCIAL STATEMENTS - continued
The cash and cash equivalents of the Trust include restricted cash of approximately $2.8 million, comprised of $2.4 million relating to the Regency Holdings (Cayman) Inc. litigation, $250,000 relating to certain indemnification agreements with Mr. Raymond S. Troubh, the Trustee of the Trust, and certain of the Fund's former directors and officers and $120,000 relating to the potential reimbursement of out-of-pocket expenses of a shareholder group that had solicited proxies in opposition to the Fund's Plan of Liquidation. See Notes 4 and 5 below.
3. Related Party Transactions
In July 1996, the Fund entered into an agreement with Raymond S. Troubh, whereby Mr. Troubh provided management services to the Fund in connection with its Plan of Liquidation and has continued to provide such services to the Trust during its liquidation. For services rendered under the agreement, Mr. Troubh receives $8,500 per month, plus 1% of the amount of each distribution (other than the initial distribution paid by the Fund on August 30, 1996), plus a percentage of any proceeds of sale or other revenues received by the Fund or the Trust in excess of the investment in the particular asset. Mr. Troubh was paid 5% of such excess for amounts received in 1996 and 1997, 4% in 1998, and will be paid 2% in 1999 and 0% thereafter.
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 former director of the Fund, and Stephen J. Warner, a former executive officer of Commonwealth Associates and the former president of the Fund. The civil action, which was filed in federal court in the Southern District of New York, 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 Commonwealth Associates agreed to make settlement payments to the Fund or the Trust totaling $1,150,000. In connection therewith, $500,000 was received in December 1996 and an additional $650,000 was received in installments during 1997. Interest of $20,415 was also paid to the Trust with the final installment payment in December 1997. Additionally, as part of the settlement, the Fund and the defendants agreed to pursue claims against former counsel to the Fund. The Trust was entitled to receive 50% of any recovery from such claims after reimbursement to Commonwealth Associates of all costs and expenses associated with pursuing the claims. See note 6 of Notes to the Financial Statements for additional information.
Regency Holdings (Cayman) Inc. ("Holdings") and Regency Maritime Corp. ("Maritime") (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 or fraudulent conveyances under the Bankruptcy Code. Holdings maintained that a payment 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, was 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. Holdings also maintained that such relationship had an impact on the decision to pay these amounts. Additionally, Holdings maintained that a payment of $145,728 made 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
MICROCAP LIQUIDATING TRUST (Successor to The MicroCap Fund, Inc.) NOTES TO FINANCIAL STATEMENTS - continued
was therefore a voidable preference without regard to whether Mustafa was an insider. Alternatively, Maritime asserted that the foregoing payments were made from its funds, without reasonably equivalent consideration, and were therefore avoidable as fraudulent conveyances. The Fund served an answer denying the allegations of the amended complaint and contested Regency's claims. Pursuant to an order filed with the Bankruptcy Court, the Trust had set aside approximately $2.4 million in an interest-bearing cash account pending resolution by the Bankruptcy Court of the adversary proceeding. Substantial discovery has been undertaken. A limited trial based upon written submissions to address the validity of Regency's preference claims was held in December 1997 and resulted in a judgment in favor of the Trust, dismissing the preference claims with prejudice. A mediator was appointed to attempt to facilitate a mutually beneficial settlement of the remaining fraudulent conveyance claims, and a mediation session occurred on October 5, 1998. During that session, the parties reached a tentative consensual resolution of the fraudulent conveyance claim. The proposed settlement was finalized in March 1999 and the defendants agreed to pay a total of $535,000, of which the Trust's share is $281,425, exclusive of legal and other fees and expenses. As a result of the settlement, the $2.4 million previously set aside is now available to the Trust.
5. 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 Trust 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 Trust 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.
The Trust is a creditor of PSSS, Inc., formerly known as Oh-La-La! Inc. ("PSSS"). PSSS confirmed its reorganization plan on May 15, 1998. Pursuant to the confirmed plan, the Trust may receive a payment on account of its claim against PSSS if funds become available for distribution. Currently, it is uncertain whether there will ever be any funds to distribute, or the timing of any distribution if funds ever become available. As a result, the Trust wrote-off the remaining $240,000 of cost of its investment in Oh-La-La during the quarter ended September 30, 1998.
6. Other income
This includes income received as a result of the settlement of certain claims against former counsel by the Fund, Commonwealth Associates, Falk and Warner. Pursuant to the terms of this settlement agreement, a final payment of $50,000 was received by the Trust on February 1, 1999.
MICROCAP LIQUIDATING TRUST (Successor to The MicroCap Fund, Inc.) NOTES TO FINANCIAL STATEMENTS - continued
7. Cash Distributions
On August 28, 1998, the Trust paid an interim liquidating distribution totaling $1,820,461, or $.75 per Unit. Such distribution was paid to unit holders of record on August 14, 1998.
On March 2, 1999, the Trust announced that an additional liquidation distribution will be paid to unit holders of record on March 16, 1999. This distribution will total $1,820,461 or $.75 per Unit, and will be paid on March 31, 1999.
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
PART III
Item 10.
Item 10. Directors and Executive Officers.
The following table sets forth certain information with respect to the Trustee of the Trust.
Year First Elected a Director Position with Name Age or Officer the Trust Raymond S. Troubh 72 1996 Trustee
Raymond S. Troubh served as President, Chief Executive Officer, Treasurer, Secretary and Director of the Fund since July 1996, and has been the independent Trustee of the Trust since its formation on February 25, 1997. Mr. Troubh is a financial consultant in New York City and a former governor of the American Stock Exchange. He is a graduate of Bowdoin College and Yale Law School and was a general partner of Lazard Freres & Co., an investment banking firm. Mr. Troubh is a director of ARIAD Pharmaceuticals, Inc., a pharmaceutical company; Becton, Dickinson and Company, a healthcare products manufacturer; Diamond Offshore Drilling, Inc., an offshore drilling company; Foundation Health Systems, Inc., a healthcare company; General American Investors Company, an investment advisory company; Olsten Corporation, a temporary personnel and healthcare services company; Starwood Hotels & Resorts, a hotel and gaming company; WHX Corporation, a holding company; and Triarc Companies, Inc., a diversified holding company. He is also a Trustee of Petrie Stores Liquidating Trust, a liquidating trust holding the assets of a former women's apparel retailer.
Item 11.
Item 11. Executive Compensation.
On July 24, 1996, following approval by the Board of Directors of the Fund, Mr. Troubh entered into a consulting agreement with the Fund and by extension, the Trust, pursuant to which he is compensated for his management services to the Trust in the amount of $8,500 per month, plus 1% of the amount of each distribution (other than the initial distribution paid on August 30, 1996), plus, a percentage of any proceeds of sale or other revenues received by the Trust in excess of the Trust's investment in a particular asset. Mr. Troubh was paid 5% of such excess for amounts received in 1996 and 1997, 4% in 1998, and will be paid 2% in 1999, and 0% thereafter. For the year ended December 31, 1998, the Trust paid fees to Mr. Troubh totaling $120,205.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Security Ownership
As of March 16, 1999, Mr. Troubh, the sole Trustee of the Trust, held no units of beneficial interest in the Trust.
Item 13.
Item 13. Certain Relationships and Related Transactions.
Not applicable.
PART IV
Item 14.
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 December 31, 1998 and 1997
Schedules of Portfolio Investments as of December 31, 1998 and 1997
Statements of Operations for the year ended December 31, 1998, for the period from February 25, 1997 to December 31, 1997, and for the period from March 1, 1996 to February 24, 1997 (Date of Termination) (Predecessor)
Statements of Changes in Net Assets for the year ended December 31, 1998, for the period from February 25, 1997 to December 31, 1997, and for the period from March 1, 1996 to February 24, 1997 (Date of Termination) (Predecessor)
Statements of Cash Flows for the year ended December 31, 1998, for the period from February 25, 1997 to December 31, 1997, and for the period from March 1, 1996 to February 24, 1997 (Date of Termination) (Predecessor)
Notes to Financial Statements
2. Exhibits.
(2) Agreement and Declaration of Trust, dated as of January 28, 1997, between the Fund and Raymond S. Troubh as Trustee (1)
(3) (i) Certificate of Incorporation of the Fund (2)
(ii) (a) Bylaws of the Fund (2)
(b) Amendments to Bylaws of the Fund (3)
(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 10-K for the period from March 1, 1996 to February 24, 1997, filed on May 15, 1997.
(2) Incorporated by reference to the Fund's Form N-2, as amended, filed on January 29, 1993.
(3) Incorporated by reference to the Fund's Form 10-K for the fiscal year ended February 29, 1996, filed on June 13, 1996.
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.
MICROCAP LIQUIDATING TRUST
/s/ Raymond S. Troubh Raymond S. Troubh Trustee
Date: March 31, 1999