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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2004
-------------------------------------------------
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 0-24412
-----------
MACC Private Equities Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 42-1421406
- --------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
101 Second Street SE, Suite 800, Cedar Rapids, Iowa 52401
---------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(319) 363-8249
----------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Please 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
----- -----
Please indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
At January 31, 2005, the registrant had issued and outstanding 2,329,255
shares of common stock.
Page 1 of 25
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
Condensed Consolidated Balance
Sheets (Unaudited) at December 31, 2004
and September 30, 2004 ......................................... 3
Condensed Consolidated Statements of
Operations (Unaudited) for the three months
ended December 31, 2004 and December 31, 2003 .................. 4
Condensed Consolidated Statements of
Cash Flows (Unaudited) for the three months
ended December 31, 2004 and December 31, 2003................... 5
Notes to (Unaudited) Condensed Consolidated
Financial Statements............................................ 6
Schedule of Investments (Unaudited)
at December 31, 2004............................................ 10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results Of Operations................ 15
Item 3. Quantitative and Qualitative
Disclosure About Market Risk.................................... 21
Item 4. Controls and Procedures......................................... 21
Part II. OTHER INFORMATION............................................... 23
Item 1. Legal Proceedings............................................... 23
Item 5. Other Information .............................................. 23
Item 6. Exhibits........................................................ 24
Signatures...................................................... 25
Certifications...............................See Exhibits 31 and 32
Page 2 of 25
PART 1 -- FINANCIAL INFORMATION
Item 1. Financial Statements
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(Unaudited)
December 31, September 30,
2004 2004
------------ -------------
Assets
Loans and investments in portfolio securities, at fair value:
Unaffiliated companies (cost of $7,603,743 and $10,367,898) $ 6,331,206 7,352,409
Affiliated companies (cost of $18,955,014 and $19,100,024) 21,991,431 21,266,781
Controlled companies (cost of $4,536,309 and $4,536,309) 4,968,058 4,598,894
Cash and cash equivalents 5,427,926 4,774,771
Interest receivable 257,060 221,844
Other assets 645,939 729,417
------------ -------------
Total assets $ 39,621,620 38,944,116
============ =============
Liabilities and net assets
Liabilities:
Debentures payable $ 25,790,000 25,790,000
Litigation settlement payable 1,713,174 1,713,174
Note payable-related party 305,000 270,000
Deferred incentive fees payable 18,353 18,353
Accrued interest 632,320 180,138
Accounts payable and other liabilities 260,306 234,230
------------ -------------
Total liabilities 28,719,153 28,205,895
------------ -------------
Net assets:
Common stock, $.01 par value per share;
authorized 4,000,000 shares;
issued and outstanding 2,329,255 shares 23,293 23,293
Additional paid-in-capital 8,683,545 11,501,075
Unrealized appreciation (depreciation) on investments 2,195,629 (786,147)
------------ -------------
Total net assets 10,902,467 10,738,221
------------ -------------
Total liabilities and net assets $ 39,621,620 38,944,116
============ =============
Net assets per share $ 4.68 4.61
============ =============
See accompanying notes to unaudited condensed consolidated financial statements.
Page 3 of 25
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations
(Unaudited)
For the three For the three
months ended months ended
December 31, December 31,
2004 2003
------------- -------------
Investment income:
Interest
Unaffiliated companies $ 50,100 121,620
Affiliated companies 219,467 155,407
Controlled companies 208,047 69,471
Other 18,984 8,796
Dividends
Unaffiliated companies --- 78,204
Affiliated companies 194,152 55,016
Processing fees 7,700 ---
Other 1,000 3,000
------------- -------------
Total investment income 699,450 491,514
------------- -------------
Operating expenses:
Interest expenses 521,068 531,714
Management fees 244,439 260,534
Incentive fees --- 423,112
Professional fees 176,783 191,826
Other 82,622 68,085
------------- -------------
Total operating expenses before
management fees waived 1,024,912 1,475,271
Management fees waived --- (52,800)
------------- -------------
Net operating expenses 1,024,912 1,422,471
Investment expense, net (325,462) (930,957)
------------- -------------
Realized and unrealized gain on investments
and other assets:
Net realized (loss) gain on investments:
Unaffiliated companies (2,467,409) 2,238,432
Affiliated companies --- (467,514)
Controlled companies --- 539,250
Net change in unrealized appreciation/
depreciation on investments 2,981,776 (1,769,502)
Net change in unrealized (loss) gain
on other assets (24,659) 2,804
------------- -------------
Net gain on investments 489,708 543,470
------------- -------------
Net change in net assets
from operations $ 164,246 (387,487)
============= =============
See accompanying notes to unaudited condensed consolidated financial statements.
Page 4 of 25
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the three For the three
months ended months ended
December 31, December 31,
2004 2003
------------- -------------
Cash flows from operating activities:
Increase (decrease) in net assets
from operations $ 164,246 (387,487)
------------- -------------
Adjustments to reconcile increase (decrease)
in net assets from operations to net cash
provided by operating activities:
Net realized and unrealized gain on
investments (514,367) (117,554)
Net realized and unrealized loss (gain)
on other assets 24,659 (2,804)
Proceeds from disposition of and payments
on loans and investments in portfolio
securities 850,992 5,320,981
Payments of incentive fees to investment
advisor --- (423,112)
Purchases of loans and investments in
portfolio securities (385,000) (236,808)
Change in interest receivable (59,452) (85,047)
Change in other assets 58,819 650,412
Change in accrued interest, deferred
incentive fees payable, accounts payable
and other liabilities 478,258 430,695
Other --- 38,000
------------- -------------
Total adjustments 453,909 5,574,763
------------- -------------
Net cash provided by operating
activities 618,155 5,187,276
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of note payable-related
party 35,000 ---
------------- -------------
Net cash provided by financing
activities 35,000 ---
------------- -------------
Net increase in cash and cash
equivalents 653,155 5,187,276
Cash and cash equivalents at beginning of period 4,774,771 722,691
------------- -------------
Cash and cash equivalents at end of period $ 5,427,926 5,909,967
============= =============
Supplemental disclosure of cash flow
information - Cash paid during the period
for interest $ 37,853 37,853
============= =============
Supplemental disclosure of noncash investing
and financing information -
Assets received in exchange of securities $ 24,236 153,016
============= =============
See accompanying notes to unaudited condensed consolidated financial statements.
Page 5 of 25
MACC PRIVATE EQUITIES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of MACC Private Equities Inc. (MACC) and its wholly owned
subsidiary MorAmerica Capital Corporation (MorAmerica Capital) which have been
prepared in accordance with accounting principles generally accepted in the
United States of America for investment companies. All material intercompany
accounts and transactions have been eliminated in consolidation.
The financial statements included herein have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and instructions to Form 10-Q and Article 6 of
Regulation S-X. The financial statements should be read in conjunction with the
consolidated financial statements and notes thereto of MACC Private Equities
Inc. and its Subsidiary as of and for the year ended September 30, 2004. The
information reflects all adjustments consisting of normal recurring adjustments
which are, in the opinion of management, necessary for a fair presentation of
the results of operations for the interim periods. The results of the interim
period reported are not necessarily indicative of results to be expected for the
year. The balance sheet information as of September 30, 2004 has been derived
from the audited balance sheet as of that date.
Certain reclassifications have been made to prior period consolidated
financial statements to conform to the December 31, 2004 presentation.
(2) Critical Accounting Policy
Investments in securities traded on a national securities exchange (or
reported on the NASDAQ national market) are stated at the average of the bid
price on the three final trading days of the valuation period which is not
materially different from the bid price on the final day of the period.
Restricted and other securities for which quotations are not readily available
are valued at fair value as determined by the Board of Directors. Among the
factors considered in determining the fair value of investments are the cost of
the investment; developments, including recent financing transactions, since the
acquisition of the investment; financial condition and operating results of the
investee; the long-term potential of the business of the investee; market
interest rates for similar debt securities; and other factors generally
pertinent to the valuation of investments. 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.
In the valuation process, MorAmerica Capital uses financial information
received monthly, quarterly, and annually from its portfolio companies which
includes both audited and unaudited financial statements. This information is
used to determine financial condition, performance, and valuation of the
portfolio investments.
Page 6 of 25
Realization of the carrying value of investments is subject to future
developments. Investment transactions are recorded on the trade date and
identified cost is used to determine realized gains and losses. Under the
provisions of SOP 90-7, the fair value of loans and investments in portfolio
securities on February 15, 1995, the fresh-start date, is considered the cost
basis for financial statement purposes.
(3) Litigation Settlement
At December 31, 2004, MorAmerica Capital was a party to arbitration
proceedings instituted by TransCore Holdings, Inc., a company (Buyer) seeking
indemnification under the Stock Purchase Agreement (the Stock Purchase
Agreement) by which MorAmerica Capital and certain other individuals and
institutional investors (collectively, the Sellers) sold their interest in a
former portfolio company investment (Portfolio Company). Under the Stock
Purchase Agreement, the Sellers agreed to indemnify Buyer for breaches of
representations and warranties as to Portfolio Company made by the Sellers.
Buyer claims that accounting irregularities by management at Portfolio Company
resulted in a breach of the Sellers' representations and warranties.
Following the sale transaction, MorAmerica Capital owned debt securities
(cost of $508,761) and warrants (cost of $24,000) of Buyer, issued as part of
the sale transaction. During the arbitration, buyer refinanced certain of its
obligations, including the debt securities held by MorAmerica Capital, and the
principal amount of these debt securities and accrued interest, as well as an
amount representing the agreed value of the warrants, has been deposited in an
escrow account pending conclusion of the arbitration proceedings.
The arbitrator found all of the Sellers to be jointly and severally liable
to Buyer. However, MorAmerica Capital is a party to a Contribution Agreement
executed at the time of sale among the institutional investors and two
individuals.
On January 4, 2005, the Sellers reached a settlement agreement with Buyer
of approximately $20 million. MorAmerica Capital's share of the settlement is
$2,245,935. The Company recorded the effects of the settlement in its September
30, 2004 consolidated financial statements which included the recording of a
"Litigation settlement payable" in the amount of $1,713,174. This amount is
outstanding at December 31, 2004 and represents the Company's portion of the
settlement ($2,245,935) less the amount in escrow ($532,761) the Company can use
to offset its payment. The amount in escrow had been valued at $1. On January 5,
2005, the Company paid its portion of the settlement ($1,713,174) to satisfy its
obligation.
(4) Commitments and Contingencies
As an SBIC, MorAmerica Capital is required to comply with the regulations
of the SBA (the "SBA Regulations"). These regulations include the capital
impairment rules, as defined by Regulation 107.1830 of the SBA Regulations. As
of December 31, 2004, the capital of MorAmerica Capital was impaired by
approximately 54.71%, which exceeded the 50% maximum impairment percentage
permitted under the SBA Regulations. Accordingly, the SBA currently has the
discretion not to extend additional financing to MorAmerica Capital, as well as
the right to declare a default on MorAmerica Capital's outstanding
SBA-guaranteed debentures, to accelerate MorAmerica Capital's payment
obligations thereunder
Page 7 of 25
and to seek appointment of the SBA as receiver for MorAmerica Capital. If the
SBA were to exercise its right to accelerate MorAmerica Capital's payment
obligations under the outstanding SBA-guaranteed debentures, MorAmerica Capital
may be required to liquidate some or all of its portfolio investments. Because
most of its portfolio investments are not publicly traded, MorAmerica Capital
may receive less than the carrying value for its portfolio investments in
connection with such a forced sale. Therefore, the exercise by the SBA of any of
these rights could have a material adverse effect on the financial position,
results of operations, cash flow and liquidity of MACC and MorAmerica Capital
and raises substantial doubt about the Company's ability to continue as a going
concern.
(5) Financial Highlights
For the three For the three
months ended months ended
December 31, December 31,
2004 2003
------------- -------------
Per Share Operating Performance
(For a share of capital stock outstanding
throughout the period (1):
Net asset value, beginning of period $ 4.61 5.47
-------- --------
Income from investment operations:
Investment expense, net (0.14) (0.21)
Net realized and unrealized (loss)
gain on investment transactions 0.21 0.05
Total from investment -------- --------
operations 0.07 (0.16)
-------- --------
Net asset value, end of period $ 4.68 5.31
======== ========
Closing market price $ 3.15 2.75
======== ========
For the three For the three
months ended months ended
December 31, December 31,
2004 2003
------------- -------------
Total return
Net asset value basis (1) 1.53 % (3.04)
Market price basis (8.70) % 9.13
Net asset value, end of period
(in thousands) $ 10,902 12,358
Ratio to average net assets:
Investment (expense) income, net (1) (3.13) % (7.11)
Operating and income tax expense (1) 9.84 % 10.86
Page 8 of 25
(1) MACC's investment advisor agreed to a voluntary, temporary reduction in
management fees from January 1, 2003 through February 29, 2004. Due to the
agreement, the investment advisor voluntarily waived $0 and $52,800 of
management fees for the three months ended December 31, 2004 and 2003,
respectively. Excluding the effects of the waiver for the three months
ended December 31, 2004 and 2003, total return on a net assets value basis
would be 1.53% and (3.45)%, respectively; the investment (expense) income,
net ratio would be (3.13)% and (7.53)%, respectively; and the operating and
income expense ratio would be 9.84% and 11.29%, respectively.
The ratios of investment (expense) income, net to average net assets, of
operating and income tax expenses to average net assets and total return are
calculated for common stockholders as a class. Total return, which reflects the
annual change in net assets, was calculated using the change in net assets
between the beginning and end of the year. An individual common stockholders'
return may vary from these returns.
Page 9 of 25
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS
DECEMBER 31, 2004
Manufacturing:
Percent of
Company Security Net assets Value Cost (d)
...............................................................................................................................
Architectural Art Manufacturing, Inc. (a) 12% debt security, due March 31, 2007 (c) $ 780,000 780,000
Wichita, Kansas Warrant to purchase 11,143 common shares (c) 1 1
Manufacturer of industrial and 10% debt security, due March 31, 2007 (c) 221,000 221,000
commercial boilers and shower 121,457 common shares (c) 21,457 121,457
doors, frames and enclosures ---------- ---------
1,022,458 1,122,458
---------- ---------
Aviation Manufacturing Group, LLC (a) 14% debt security, due October 1, 2007 616,000 616,000
Yankton, South Dakota 154,000 units preferred 154,000 154,000
Manufacturer of flight critical Membership interest 39 39
parts for aircraft ------------ ---------
770,039 770,039
------------ ---------
Central Fiber Corporation 12% debt security, due December 31, 2005 350,000 350,000
Wellsville, Kansas 12% debt security, due December 31, 2005 91,123 91,123
Recycles and manufactures Warrant to purchase 490.67 common shares (c) 213,333 --
cellulose fiber products ------------ ---------
654,456 441,123
------------ ---------
Detroit Tool Metal Products Co. (a) 14% debt security, due February 29, 2008 1,128,793 1,128,793
Lebanon, Missouri 19,853.94 shares Series A preferred (c) 195,231 195,231
Metal stamping ------------ ---------
1,324,024 1,324,024
------------ ---------
Handy Industries, LLC (a) 12.5% debt security, due January 8, 2007 890,222 890,222
Marshalltown, Iowa 167,171 units Class B preferred (c) 167,171 167,171
Manufacturer of lifts for Membership interest 562,212 1,357
motorcycles, trucks and ------------ ---------
industrial metal products
1,619,605 1,058,750
------------ ---------
Hicklin Engineering, L.C. (a) 10% debt security, due June 30, 2007 740,000 740,000
Des Moines, Iowa Membership interest 527,127 127
Manufacturer of auto and ------------ ---------
truck transmission and 1,267,127 740,127
brake dynamometers ------------ ---------
Humane Manufacturing, LLC (b) 12% debt security, due January 31, 2005 856,549 856,549
Baraboo, Wisconsin 12% promissory note, due December 31, 2004 236,808 236,808
Manufacturer of rubber mats for Membership interest (c) 589,200 101,200
anti-fatigue, agricultural, exercise ------------ ---------
and roofing markets 1,682,557 1,194,557
------------ ---------
Industrial Tooling & Fabrication, LLC (a) 10% debt security, due November 18, 2009 170,203 170,203
Fort Madison, Iowa 12% debt security, due November 18, 2009 343,267 343,267
Metal stamping ------------ ---------
513,470 513,470
------------ ---------
Page 10 of 25
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED...
DECEMBER 31, 2004
Manufacturing Continued:
Percent of
Company Security Net assets Value Cost (d)
...............................................................................................................................
KW Products, Inc. (a) 11% debt security, due June 15, 2005 (c) $ 267,254 267,254
Marion, Iowa 11% debt security, due June 15, 2005 (c) 281,795 281,795
Manufacturer of automobile 29,340 common shares (c) 28,714 92,910
aftermarket engine and Warrant to purchase 8,879 common shares (c) -- --
brake repair machinery ---------- ---------
577,763 641,959
---------- ---------
Linton Truss Corporation 542.8 common shares (c) -- --
Delray Beach, Florida 400 shares Series 1 preferred (c) 450,000 40,000
Manufacturer of residential roof Warrants to purchase common shares (c) 15 15
and floor truss systems ---------- ---------
450,015 40,015
---------- ---------
M.A. Gedney Company (a) 536,003 shares preferred (c) 484,458 1,418,718
Chaska, Minnesota Warrant to purchase 34,223 preferred shares (c) -- --
Pickle processor ---------- ---------
484,458 1,418,718
---------- ---------
Magnum Systems, Inc. (a) 12% debt security, due July 31, 2006 574,163 574,163
Parsons, Kansas 48,038 common shares (c) 48,038 48,038
Manufacturer of industrial 292,800 shares preferred (c) 304,512 304,512
bagging equipment Warrant to purchase 56,529 common shares (c) 210,565 565
---------- ---------
1,137,278 927,278
---------- ---------
Metal Tooling Holdings, Inc. (a) 6,652.98 common shares 123,432 123,432
Lebanon, Missouri 1,234.19 common shares 3,309 3,309
Metal stamping ---------- ---------
126,741 126,741
---------- ---------
Penn Wheeling Acquisition 13% debt security, due March 10, 2007 1,033,500 1,033,500
Company, LLC (a) 62 units Class B membership interest (c) 643,760 62,000
Glen Dale, West Virginia 35 units Class C membership interest (c) 250,240 24,000
Metal closure manufacturer ---------- ---------
1,927,500 1,119,500
---------- ---------
Pratt-Read Corporation (a) 13,889 shares Series A Preferred 750,000 750,000
Bridgeport, Connecticut 7,718 shares Series A preferred 416,667 416,667
Manufacturer of screwdriver shafts 13% debt security, due July 26, 2006 277,800 277,800
and handles and other hand tools Warrants to purchase common shares (c) -- --
---------- ---------
1,444,467 1,444,467
---------- ---------
Simoniz USA, Inc. 12% debt security, due April 1, 2008 503,592 503,592
Bolton, Connecticut ---------- ---------
Producer of cleaning and wax
products under both the Simoniz
brand and private label brand names
Page 11 of 25
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED...
DECEMBER 31, 2004
Manufacturing Continued:
Percent of
Company Security Net assets Value Cost (d)
...............................................................................................................................
Spectrum Products, LLC (b) 13% debt security, due October 9, 2006 $1,077,650 1,077,650
Missoula, Montana 385,000 units Series A preferred 385,000 385,000
Manufacturer of equipment for Membership interest 351 351
the swimming pool industry ---------- ---------
1,463,001 1,463,001
---------- ---------
Total manufacturing 155.64% 16,968,551 14,849,819
======= ========== ==========
Service:
Concentrix Corporation (a) 3,758,750 shares Series A preferred (c) 1,127,625 2,255,250
Pittsford, New York 130,539 shares Series C preferred (c) 104,431 104,431
Provides marketing outsourcing 328,485 shares Series D preferred (c) 262,788 262,788
solutions including ---------- ---------
telemarketing, fulfillment 1,494,844 2,622,469
and web communications ---------- ---------
Direct Mail Holding, LLC (a) Membership interest 4,149,616 476,366
Mt. Pleasant, Iowa ---------- ---------
Provider of turnkey services
for non-profit fund raising
FreightPro, Inc. 16.50% debt security, due February 21, 2007 (c) 131,250 262,500
Overland Park, Kansas 16.50% debt security, due February 15, 2007 (c) 43,750 87,500
Internet based outsource Warrant to purchase 366,177.80 common shares (c) 2 2
provider of freight logistics ---------- ---------
175,002 350,002
---------- ---------
JHT Holdings, Inc. 1,238 shares Class A common (c) 487,513 975,025
Joplin, Missouri ---------- ---------
Provider of truck drive-away,
internet based auction and
related services to the
commercial truck industry
Lee Mathews Equipment, Inc. 12% debt security, due March 10, 2005 500,000 500,000
Kansas City, Missouri Warrant to purchase 153,654 common shares (c) 30 30
Distributor of industrial 12% debt security, due March 10, 2005 60,606 60,606
pump systems ---------- ---------
560,636 560,636
---------- ---------
Monitronics International, Inc. 73,214 common shares (c) 183,035 54,702
Dallas, Texas ---------- ---------
Provides home security
systems monitoring services
Page 12 of 25
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED...
DECEMBER 31, 2004
Service Continued:
Percent of
Company Security Net assets Value Cost (d)
...............................................................................................................................
Morgan Ohare, Inc. (b) 0% debt security, due January 1, 2007 (c) $ 1,068,750 1,125,000
Addison, Illinois 10% debt security, due January 1, 2007 375,000 375,000
Fastener plating and heat treating 57 common shares (c) 1 1
10% debt security, due January 1, 2007 75,000 75,000
10% debt security, due January 1, 2007 225,000 225,000
10% debt security, due January 1, 2007 56,250 56,250
10% debt security, due January 1, 2007 22,500 22,500
--------- ---------
1,822,501 1,878,751
--------- ---------
Organized Living, Inc. 545,204 shares Series A preferred (c) 243,227 543,227
Westerville, Ohio 215,593 shares Series B preferred (c) 247,933 247,933
Retail specialty stores for storage 174,964.5714 shares Series C preferred (c) 233,041 233,041
and organizational products 138,889 shares Series D preferred (c) 250,001 250,001
800,000 shares Series F preferred (c) 200,000 200,000
--------- ---------
1,174,202 1,474,202
--------- ---------
SMWC Acquisition Co., Inc. (a) 10% debt security, due on demand 102,605 102,605
Kansas City, Missouri 13% debt security due May 19, 2007 110,000 110,000
Steel warehouse distribution 1,320 shares common (c) 387,140 42,900
and processing Warrant to purchase 2,200 common shares (c) -- --
176,550 shares Series A preferred (c) 353,100 353,100
--------- ---------
952,845 608,605
--------- ---------
Warren Family Funeral Homes, Inc. 12% debt security, due June 29, 2006 96,250 96,250
Topeka, Kansas 12% debt security, due June 29, 2006 192,500 192,500
Provider of value priced funeral Warrant to purchase 346.5 common shares (c) 12 12
services --------- ---------
288,762 288,762
--------- ---------
Total service 103.54% 11,288,956 9,289,520
======= ========== =========
Technology and Communications:
Feed Management Systems, Inc. (a) 540,551 common shares (c) 682,337 1,327,186
Brooklyn Center, Minnesota 674,309 shares Series A preferred (c) 674,309 674,309
Batch feed software and systems 12% debt security, due May 20, 2008 74,000 74,000
and B2B internet services 12% debt security, due August 21, 2008 74,000 74,000
Warrants to purchase 166,500 Series A preferred (c) -- --
--------- ---------
1,504,646 2,149,495
--------- ---------
MainStream Data, Inc. (a) 322,763 shares Series A preferred (c) 200,049 200,049
Salt Lake City, Utah --------- ---------
Content delivery solutions provider
Page 13 of 25
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED...
DECEMBER 31, 2004
Technology and Communications Continued:
Percent of
Company Security Net assets Value Cost (d)
...............................................................................................................................
Miles Media Group, Inc. (a) 1,000 common shares (c) 224,000 440,000
Sarasota, Florida 100 common options (c) -- --
Tourist magazine publisher 12% debt security, due September 24, 2007 (c) 374,925 374,925
150 shares Series A preferred (c) 375,000 375,000
12% debt security, due September 24, 2007 (c) 124,992 124,992
50 shares Series A preferred (c) 125,000 125,000
12% debt security, due June 30, 2008 (c) 250,000 250,000
Warrants to purchase 1,423 shares common (c) 583 583
--------- ---------
1,474,500 1,690,500
--------- ---------
Phonex Broadband Corporation 1,855,302 shares Series A preferred (c) 288,750 1,155,000
Midvale, Utah --------- ---------
Power line communications
Portrait Displays, Inc. 12% debt security, due April 1, 2005 100,321 58,181
Pleasanton, California 8% debt security, due April 1, 2009 (c) 71,491 100,001
Designs and markets pivot enabling 8% debt security, due April 1, 2012 (c) 540,931 750,001
software for LCD computer monitors Warrant to purchase 39,400 common shares (c) -- --
--------- ---------
712,743 908,183
--------- ---------
SnapNames.com, Inc. 10% debt security, due March 15, 2007 852,500 852,500
Portland, Oregon Warrant to purchase 465,000 common shares (c) -- --
Domain name management --------- ---------
852,500 852,500
--------- ---------
Total technology and communications 46.17% 5,033,188 6,955,727
====== --------- ---------
$ 33,290,695 31,095,066
============ ==========
(a) Affiliated company.
(b) Controlled company.
(c) Non-income producing.
(d) For all debt securities presented, the cost is equal to the principal balance.
Page 14 of 25
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 (the "1995 Act"). Such
statements are made in good faith by MACC pursuant to the safe-harbor provisions
of the 1995 Act, and are identified as including terms such as "may," "will,"
"should," "expects," "anticipates," "estimates," "plans," or similar language.
In connection with these safe-harbor provisions, MACC has identified in its
Annual Report to Shareholders for the fiscal year ended September 30, 2004,
important factors that could cause actual results to differ materially from
those contained in any forward-looking statement made by or on behalf of MACC,
including, without limitation, the high risk nature of MACC's portfolio
investments, the effects of general economic conditions on MACC's portfolio
companies, the effects of recent or future losses on the ability of MorAmerica
Capital to comply with applicable regulations of the Small Business
Administration and MorAmerica Capital's ability to obtain future funding, any
actions taken by the SBA with respect to MorAmerica Capital's impairment, any
failure to achieve annual investment level objectives, changes in prevailing
market interest rates, and contractions in the markets for corporate
acquisitions and initial public offerings. MACC further cautions that such
factors are not exhaustive or exclusive. MACC does not undertake to update any
forward-looking statement which may be made from time to time by or on behalf of
MACC.
Results of Operations
MACC's investment income includes income from interest, dividends and fees.
Investment expense, net represents total investment income minus net operating
expenses after management fees waived. The main objective of portfolio company
investments is to achieve capital appreciation and realized gains in the
portfolio. These gains and losses are not included in investment expense, net.
However, another one of MACC's on-going goals is to achieve net investment
income and increased earnings stability. In this regard, a significant
proportion of new portfolio investments are structured so as to provide a
current yield through interest or dividends. MACC also earns interest on
short-term investments of cash.
First Quarter Ended December 31, 2004 Compared to First Quarter Ended December 31, 2003
For the three months
--------------------
ended December 31,
------------------
2004 2003 Change
Change --------------------------------------------
Total investment income $ 699,450 491,514 207,936
Net operating expenses (1,024,912) (1,422,471) (397,559)
---------- ---------- --------
Investment expense, net (325,462) (930,957) 605,495
-------- -------- -------
Net realized (loss) gain on investments (2,467,409) 2,310,168 (4,777,577)
Net change in unrealized appreciation/
depreciation on investments 2,981,776 (1,769,502) 4,751,278
Net change in unrealized (loss) gain on other assets (24,659) 2,804 (27,463)
------- ----- -------
Net gain on investments 489,708 543,470 (53,762)
------- ------- -------
Net change in net assets from operations $ 164,246 (387,487) 551,733
=========== ======== =======
Net asset value:
Beginning of period $ 4.61 5.47
End of period $ 4.68 5.31
======= ====
Page 15 of 25
Total Investment Income
During the current year first quarter, total investment income was
$699,450, an increase of $207,936, or 42%, from total investment income of
$491,514 for the prior year first quarter. In the current year first quarter as
compared to the prior year first quarter, interest income increased $141,304, or
40%, dividend income increased $60,932, or 46%, processing fees increased
$7,700, or 100%, and other income decreased $2,000, or 67%. The increase in
interest income is due to interest received in the current year first quarter on
one follow-on investment made during the current year first quarter and on debt
portfolio securities issued by two portfolio companies which were on non-accrual
of interest status in the prior year first quarter. In the current year first
quarter, MACC received dividends on three existing portfolio companies, one of
which was a distribution from a limited liability company, as compared to
dividend income received in the prior year first quarter from three existing
portfolio companies, all of which were distributions from limited liability
companies. Processing fees increased due to fees received on the follow-on
investment made in the current year first quarter, compared to no new portfolio
company investments in which MACC received a processing fee at closing in the
prior year first quarter. The decrease in other income is due to the collection
on an account charge off in the prior year first quarter.
Net Operating Expenses
Total net operating expenses for the first quarter of the current year were
$1,024,912, a decrease of $397,559, or 28%, as compared to total operating
expenses for the prior year first quarter of $1,422,471. Interest expense
decreased $10,646, or 2%, in the current year first quarter due to the repayment
in the fourth quarter of fiscal year 2004 of $2,150,000 of borrowings from the
Small Business Administration. Management fees (after management fees waived in
the prior year first quarter) increased $36,705, or 18%, in the current year
first quarter due to the termination during the second quarter of 2004 of the
agreement with MACC's investment advisor to a voluntary, temporary reduction in
management fees to reduce the expenses of MACC. Incentive fees decreased
$423,112, or 100%, in the current year first quarter due to no net capital gains
realized. Professional fees decreased $15,043, or 8%, in the current year first
quarter primarily due a decrease in legal expenses from the arbitration
proceedings related to the sale of a former portfolio company. Other expenses
increased $14,537, or 21%, in the current year first quarter as compared to the
prior year first quarter mainly due to the increase in directors and officers
insurance.
Investment Expense, Net
For the current year first quarter, MACC recorded investment expense, net
of $325,462, as compared to investment expense, net of $930,957 during the prior
year first quarter.
Net Realized (Loss) Gain on Investments
During the current year first quarter, MACC recorded net realized loss on
investments of $2,467,409, as compared with net realized gain on investments of
$2,310,168 during the prior year first quarter. In the current year first
quarter, MACC realized a loss of $635,251 from the sale of one portfolio company
and $1,832,158 from the write-off of one portfolio company of which $1,832,071
was previously recorded as unrealized depreciation.
Page 16 of 25
Management does not attempt to maintain a comparable level of realized gains
quarter to quarter but instead attempts to maximize total investment portfolio
appreciation through realizing gains in the disposition of securities and
investing in new portfolio investments. MACC's investment advisor is entitled to
be paid an incentive fee which is calculated as a percentage of the excess of
MACC's realized gains in a particular period, over the sum of net realized
losses and unrealized depreciation during the same period. As a result, the
timing of realized gains, realized losses and unrealized depreciation can have
an effect on the amount of the incentive fee payable to the investment advisor.
Net Change in Unrealized Appreciation/Depreciation of Investments and Other Assets
MACC recorded net change in unrealized appreciation/depreciation on
investments of $2,981,776 during the current year first quarter, as compared to
($1,769,502) during the prior year first quarter. This net change in unrealized
appreciation/depreciation on investments of $2,981,776 is the net effect of
increases in fair value of five portfolio companies totaling $1,657,310,
decreases in fair value of five portfolio companies totaling $1,107,604, the
reversal of $2,432,070 of depreciation resulting from the sale of one portfolio
investment and the write-off of the investment in one portfolio investment.
Net change in unrealized appreciation/depreciation on investments
represents the change for the period in the unrealized appreciation net of
unrealized depreciation on MACC's total investment portfolio. When MACC
increases the fair value of a portfolio investment above its cost, the
unrealized appreciation for the portfolio as a whole increases, and when MACC
decreases the fair value of a portfolio investment below its cost, unrealized
depreciation for the portfolio as a whole increases. When MACC sells an
appreciated portfolio investment for a gain, unrealized appreciation for the
portfolio as a whole decreases as the gain is realized. Similarly, when MACC
sells or writes off a depreciated portfolio investment for a loss, unrealized
depreciation for the portfolio as a whole decreases as the loss is realized.
Net change in unrealized loss on other assets had an additional loss
provision of $24,659 during the current year first quarter recorded with respect
to other securities which are classified as other assets, as compared to a net
change in unrealized gain on other assets of $2,804 during the prior year first
quarter.
Net Change in Net Assets from Operations
MACC experienced an increase of $164,246 in net assets at the end of
the first quarter of fiscal year 2005, and the resulting net asset value per
share was $4.68 as of December 31, 2004, as compared to $4.61 as of September
30, 2004. Although general economic conditions continue to have an adverse
impact on the operating results and financial condition of a number of MACC's
portfolio companies, the majority of MACC's thirty-one portfolio companies
continue to be valued at cost or above. MACC has nine portfolio investments
valued at cost, has recorded unrealized appreciation on ten portfolio
investments and has recorded unrealized depreciation on twelve portfolio
investments.
MACC has projected fewer investments and has projected no new
borrowings under the SBIC leverage program in the fiscal year 2005 budget.
Recent years have been difficult years for the venture capital industry. With
the recent improvement in the economy, MACC's
Page 17 of 25
overall portfolio is showing signs of increasing strength. However,
manufacturing and some market niches are lagging the overall improvement in the
economy. If the economy continues to improve, management believes MACC's
investment portfolio will benefit from improved operating performance at a
number of portfolio companies and from a more robust market for corporate
acquisitions and investments.
Financial Condition, Liquidity and Capital Resources
To date, MACC has relied upon several sources to fund its investment
activities, including MACC's cash and money market accounts and the Small
Business Investment Company ("SBIC") leverage program operated by the Small
Business Administration (the "SBA").
As an SBIC, MorAmerica Capital is required to comply with the
regulations of the SBA (the "SBA Regulations"). These regulations include the
capital impairment rules, as defined by Regulation 107.1830 of the SBA
Regulations. As of December 31, 2004, the capital of MorAmerica Capital was
impaired by approximately 54.71%, which exceeded the 50% maximum impairment
percentage permitted under SBA Regulations. Accordingly, the SBA currently has
the discretion not to extend additional financing to MorAmerica Capital, as well
as the right to declare a default on MorAmerica Capital's outstanding
SBA-guaranteed debentures, to accelerate MorAmerica Capital's payment
obligations thereunder and to seek appointment of the SBA as receiver for
MorAmerica Capital. The exercise by the SBA of any of these rights could have a
material adverse effect on the financial position, results of operations, cash
flow and liquidity of MACC and MorAmerica Capital. If the SBA were to exercise
its right to accelerate MorAmerica Capital's payment obligations under the
outstanding SBA-guaranteed debentures, MorAmerica Capital may be required to
liquidate some or all of its portfolio investments. Because most of its
portfolio investments are not publicly traded, MorAmerica Capital may receive
less than the carrying value for its portfolio investments in connection with
such a forced sale. Therefore, the exercise by the SBA of any of these rights
could have a material adverse effect on the financial position, results of
operations, cash flow and liquidity of MACC and MorAmerica Capital and raises
substantial doubt about the Company's ability to continue as a going concern.
MorAmerica Capital is also currently limited by the SBA Regulations in the
amount of distributions it may make to MACC. Because MACC historically has
relied in large part on distributions from MorAmerica Capital to fund its
operating expenses and other cash requirements, MACC is currently evaluating a
number of alternatives to seek to provide sufficient liquidity at the
parent-company level.
As of December 31, 2004, MACC's cash and cash equivalents totaled
$5,427,926. MACC has commitments for an additional $3,500,000 and $6,500,000 in
SBA guaranteed debentures, which expire on September 30, 2005 and September 30,
2007, respectively. Due to MorAmerica Capital's capital impairment described
above as well as an agreement entered into by MorAmerica Capital and three other
SBIC's in connection with an arbitration settlement, MACC does not believe that
MorAmerica Capital will have access to the SBIC capital program for the
foreseeable future. Nevertheless, if SBA does not accelerate MorAmerica
Capital's obligations under its outstanding SBA-guaranteed debentures and
subject to the other risks and uncertainties described in this report on Form
10-Q, MACC believes that its existing cash and cash equivalents and other
anticipated cash flows will
Page 18 of 25
provide adequate funds for MACC's anticipated cash requirements during the
current fiscal year, including portfolio investment activities, interest
payments on outstanding debentures, administrative expenses, and payment of the
arbitration settlement amounts described in note 3 to the unaudited condensed
consolidated financial statements. MACC's investment objective is to invest
$885,000 in follow-on investments during the current fiscal year, subject to
further adjustment based upon current economic and operating conditions.
Debentures payable are composed of $25,790,000 in principal amount of
SBA-guaranteed debentures issued by MACC's subsidiary, MorAmerica Capital, which
mature as follows: $1,000,000 in fiscal year 2007, $2,500,000 in fiscal year
2009, $9,000,000 in fiscal year 2010, $5,835,000 in fiscal year 2011, and
$7,455,000 in fiscal year 2012. As noted above, due to MorAmerica Capital's
capital impairment, SBA currently has the ability to accelerate MorAmerica
Capital's obligations under the SBA-guaranteed debentures. MACC anticipates that
MorAmerica Capital will not be able to refinance these debentures through the
SBIC capital program when they mature. The following table shows our significant
contractual obligations for the repayment of debt and other contractual
obligations as of December 31, 2004:
Payments due by period
-------------------------------------------
Contractual Obligations
Less Than More than
Total 1 Year 1-3 Years 3-5 Years 5 Years
----- ------ --------- --------- -------
SBA Debentures $ 25,790,000 --- --- 3,500,000 22,290,000
Loan Agreement¹ $ 305,000 228,750 76,250 --- ----
Settlement Agreement² $ 1,713,174 1,713,174 --- --- ----
MACC currently anticipates that it will rely primarily on its current
cash and cash equivalents and its cash flows from operations to fund its
investment activities and other cash requirements during fiscal year 2005.
Although management believes these sources will provide sufficient funds for
MACC to meet its fiscal 2005 investment level objective and other anticipated
cash requirements, there can be no assurances that MACC's cash flows from
operations will be as projected, or that MACC's cash requirements will be as
projected. MACC's cash flow will be negatively affected in fiscal year 2005 by
the payment of the arbitration settlement amount described in note 3 to the
unaudited condensed consolidated financial statements.
- ----------------------------
¹During the second quarter of fiscal year 2004, MACC entered into a loan
agreement with one of its directors, Geoffrey T. Woolley, providing for advances
of up to $400,000 on a revolving credit basis through February 28, 2005. The
outstanding principal amount of the loan as of March 1, 2005 will be due and
payable in four equal installments on the first day of June, September,
December, and March, commencing June 1, 2005 and concluding March 1, 2006. The
payment obligations in the table set forth above are based on the amount
outstanding under the loan agreement as of December 31, 2004. The entire unpaid
amount of the loan is convertible into shares of MACC's common stock at the
option of the lender.
²As discussed in note 3 to the unaudited condensed consolidated financial
statements, MorAmerica Capital's portion of the arbitration settlement was
$2,245,935, of which $532,761 represents MorAmerica Capital's interest in an
escrow balance which was used to partially offset its payment obligation. The
remaining $1,713,174 was paid on January 5, 2005.
Page 19 of 25
Portfolio Activity
MACC's primary business is investing in and lending to businesses
through investments in subordinated debt (generally with detachable equity
warrants), preferred stock and common stock. The total portfolio value of
investments in publicly and non-publicly traded securities was $33,290,695 at
December 31, 2004 and $33,218,084 at September 30, 2004. During the three months
ended December 31, 2004, MACC invested $385,000 in a follow-on investment in one
existing portfolio company. Management views investment objectives for any given
year as secondary in importance to MACC's overriding concern of investing in
only those portfolio companies which satisfy MACC's investment criteria. MACC's
investment objective for fiscal year 2005 is to invest $885,000 in follow-on
investments, subject to further adjustment based on current economic and
operating conditions.
MACC frequently co-invests with other funds managed by MACC's
investment advisor. When it makes any co-investment with these related funds,
MACC follows certain procedures consistent with orders of the Securities and
Exchange Commission for related party co-investments to reduce or eliminate
conflict of interest issues. Of the $385,000 invested during the current year
first quarter, no funds represented co-investments with funds managed by MACC's
investment advisor.
Critical Accounting Policy
Investments in securities traded on a national securities exchange (or
reported on the NASDAQ national market) are stated at the average of the bid
price on the three final trading days of the valuation period which is not
materially different from the bid price on the final day of the period.
Restricted and other securities for which quotations are not readily available
are valued at fair value as determined by the Board of Directors. Among the
factors considered in determining the fair value of investments are the cost of
the investment; developments, including recent financing transactions, since the
acquisition of the investment; the financial condition and operating results of
the investee; the long-term potential of the business of the investee; market
interest rates on similar debt securities; and other factors generally pertinent
to the valuation of investments. 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.
In the valuation process, MorAmerica Capital uses financial information
received monthly, quarterly, and annually from its portfolio companies which
includes both audited and unaudited financial statements. This information is
used to determine financial condition, performance, and valuation of the
portfolio investments.
Realization of the carrying value of investments is subject to future
developments. Investment transactions are recorded on the trade date and
identified cost is used to determine realized gains and losses. Under the
provisions of SOP 90-7, the fair value of loans and investments in portfolio
securities on February 15, 1995, the fresh-start date, is considered the cost
basis for financial statement purposes.
Page 20 of 25
Determination of Net Asset Value
The net asset value per share of MACC's outstanding common stock is
determined quarterly, as soon as practicable after and as of the end of each
calendar quarter, by dividing the value of total assets minus total liabilities
by the total number of shares outstanding at the date as of which the
determination is made.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
MACC is exposed to market risk from changes in market interest rates
that affect the fair value of MorAmerica Capital's debentures payable determined
in accordance with Statement of Financial Accounting Standards No. 107,
Disclosures About Fair Value of Financial Instruments. The estimated fair value
of MorAmerica Capital's outstanding debentures payable at December 31, 2004, was
$28,324,000, with a cost of $25,790,000. Fair value of MorAmerica Capital's
outstanding debentures payable is calculated by discounting cash flows through
estimated maturity using a SBA borrowing rate currently available (5.54% at
December 31, 2004) for debt of similar original maturity. None of MorAmerica
Capital's outstanding debentures payable are publicly traded. Market risk is
estimated as the potential increase in fair value resulting from a hypothetical
0.5% decrease in interest rates. Actual results may differ.
_____________________________________________________
December 31, 2004
______________________________________________________
Fair Value of Debentures Payable $ 28,324,000
Amount Above Cost $ 2,534,000
Additional Market Risk $ 672,000
_____________________________________________________
Item 4. Controls and Procedures
As of the end of the period covered by this report, in accordance with
Item 307 of Regulation S-K promulgated under the Securities Act of 1933, as
amended, the Chief Executive Officer and Chief Financial Officer of MACC (the
"Certifying Officers") have conducted evaluations of MACC's disclosure controls
and procedures. As defined under Sections 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the term
"disclosure controls and procedures" means controls and other procedures of an
issuer that are designed to ensure that information required to be disclosed by
the issuer in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by an issuer in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the issuer's
management, including its principal executive officer or officers and principal
financial officer or officers, or persons performing similar functions, as
appropriate to allow
Page 21 of 25
timely decisions regarding required disclosure. The Certifying Officers have
reviewed MACC's disclosure controls and procedures and have concluded that those
disclosure controls and procedures are effective as of the date of this
Quarterly Report on Form 10-Q. In compliance with Section 302 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350), each of the Certifying Officers
executed an Officer's Certification included in this Quarterly Report on Form
10-Q.
As of the date of this Quarterly Report on Form 10-Q, there have not
been any significant changes in MACC's internal controls or other factors that
could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Page 22 of 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
BFS Diversified Products, LLC ("BFS") was a supplier to Water
Creations, Inc. ("Water Creations"), a former portfolio company of MorAmerica
Capital. Water Creations went out of business in December, 2002, at which time
BFS was owed approximately $900,000 for products sold to Water Creations. On
March 26, 2004, BFS filed suit in the Iowa District Court of Polk County, Iowa
against board members of and investors in Water Creations, including MorAmerica
Capital, David Schroder (Chief Financial Officer of the Corporation), and
InvestAmerica Venture Group, Inc., an affiliate of InvestAmerica Investment
Advisors, Inc., the subadviser to the Corporation. BFS has sued the defendants
for fraud, fraudulent transfer, breach of fiduciary duty, civil conspiracy,
breach of contract, conversion, and alter ego/piercing corporate veil. The
central allegation of the case is that the defendants knew that Water Creations
was insolvent and owed a duty to BFS to protect it from selling to Water
Creations under these circumstances. The defendants have hired counsel and
intend to vigorously defend this litigation.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There are no items to report.
Item 3. Defaults Upon Senior Securities
There are no items to report.
Item 4. Submission of Matters to a Vote
of Security Holders
There are no items to report.
Item 5. Other Information
In anticipation of changes to the Board of Directors of the MACC and
MorAmerica Capital and a change in investment advisors, starting in July, 2003,
Atlas Management Partners, LLC (Atlas), MACC's investment advisor since March 1,
2004, periodically notified the SBA of the proposed changes and, as required by
the SBA regulations, submitted the Atlas/MorAmerica Capital Investment Advisory
Agreement to the SBA for approval on January 29, 2004. At the same time, MACC,
MorAmerica Capital and Atlas entered into the Investment Advisory Support
Services Agreement (Subadvisory Agreement) with InvestAmerica Investment
Advisors, Inc. (InvestAmerica). Prior to March 1, 2004, InvestAmerica was the
sole investment advisor to MACC and MorAmerica Capital. Under the Subadvisory
Agreement, InvestAmerica is retained to monitor and manage portfolio company
investments in existence as of the date of the Subadvisory Agreement, including
exits, preparation of valuations, follow-on investment analysis and
recommendations and other portfolio management matters. InvestAmerica also
currently provides certain accounting and financial services for the
Corporation. These two agreements and an additional
Page 23 of 25
investment advisory agreement with Atlas for MACC were approved by MACC's
shareholders in February, 2004.
As previously disclosed, most recently in MACC's Form 10-K filed on
January 13, 2005, while SBA has previously notified MorAmerica Capital in
writing that four of the five principals of Atlas have SBA's approval as
managers of MorAmerica Capital, SBA notified MorAmerica Capital in late December
that SBA will not grant approval of Atlas as investment advisor of MorAmerica
Capital. Atlas and MorAmerica Capital have subsequently met with SBA and SBA has
indicated it would approve the reinstatement of InvestAmerica as the sole
investment advisor to MorAmerica Capital. MorAmerica Capital has submitted the
form of investment advisory agreement previously in place for Atlas to SBA for
approval, with InvestAmerica as the advisor. If SBA approves this form, the new
MorAmerica Capital agreement will be submitted to MACC's shareholders for
approval at the upcoming annual meeting. MACC anticipates holding the annual
meeting as soon as practical following SBA's approval of the new contract.
Item 6. Exhibits
(a) Exhibits
The following exhibits are filed with this quarterly report on Form 1O-Q:
31.1 Section 302 Certification of Kent I. Madsen (CEO)
31.2 Section 302 Certification of David R. Schroder (CFO)
32.1 Section 1350 Certification of Kent I. Madsen (CEO)
32.2 Section 1350 Certification of David R. Schroder (CFO)
(b) Reports on Form 8-K
MACC filed a current report on Form 8-K on December 3, 2003 with
regard to items 8.01 and 9.01 thereof during the quarter ended
December 31, 2004.
Page 24 of 25
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.
MACC PRIVATE EQUITIES INC.
Date: 2/10/05 By: /s/Kent I. Madsen
-------------------------------- ----------------------------------
Kent I. Madsen, President
Date: 2/10/05 By: /s/David R. Schroder
-------------------------------- ----------------------------------
David R. Schroder, Chief Financial
Officer
EXHIBIT INDEX
Exhibit Description Page
- ------- ----------- ----
31.1 Section 302 Certification of Kent I. Madsen (CEO) 26
31.2 Section 302 Certification of David R. Schroder (CFO) 28
32.1 Section 1350 Certification of Kent I. Madsen (CEO) 30
32.2 Section 1350 Certification of David R. Schroder (CFO) 32
Page 25 of 25