Back to GetFilings.com
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 March 31, 2005
-------------------------------------------
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 April 30, 2005, the registrant had issued and outstanding 2,329,255
shares of common stock.
Page 1 of 34
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
Condensed Consolidated Balance
Sheets (Unaudited) at March 31, 2005
and September 30, 2004 .................................... 3
Condensed Consolidated Statements of
Operations (Unaudited)for the three months
March 31, 2005 and March 31, 2004
And the six months ended
March 31, 2005 and March 31, 2004 ......................... 4
Condensed Consolidated Statements of
Cash Flows (Unaudited) for the six months
ended March 31, 2005 and March 31, 2004 ................... 5
Notes to (Unaudited) Condensed Consolidated
Financial Statements ...................................... 6
Schedule of Investments (Unaudited)
at March 31, 2005 ........................................ 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results Of Operations ......... 14
Item 3. Quantitative and Qualitative
Disclosure About Market Risk ............................. 22
Item 4. Controls and Procedures .................................. 22
Part II. OTHER INFORMATION ........................................ 24
Item 1. Legal Proceedings ........................................ 24
Item 5. Other Information ........................................ 24
Item 6. Exhibits and Reports on Form 8-K ......................... 25
Signatures ............................................... 26
Certifications ..........................See Exhibits 31 and 32
2
PART 1 -- FINANCIAL INFORMATION
Item 1. Financial Statements
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, September 30,
2005 2004
------------- --------------
Assets
Loans and investments in portfolio securities, at fair value:
Unaffiliated companies (cost of $7,357,451 and $10,367,898) $ 5,056,628 7,352,409
Affiliated companies (cost of $19,109,571and $19,100,024) 23,688,694 21,266,781
Controlled companies (cost of $4,504,745 and $4,536,309) 4,936,495 4,598,894
Cash and cash equivalents 3,111,445 4,774,771
Interest receivable 328,158 221,844
Other assets 654,430 729,417
------------- -------------
Total assets $ 37,775,850 38,944,116
============= =============
Liabilities and net assets
Liabilities:
Debentures payable $ 25,790,000 25,790,000
Litigation settlement payable --- 1,713,174
Note payable-related party 305,000 270,000
Deferred incentive fees payable 16,557 18,353
Accrued interest 187,779 180,138
Accounts payable and other liabilities 243,370 234,230
------------- -------------
Total liabilities 26,542,706 28,205,895
------------- -------------
Net assets:
Common stock, $.01 par value per share;
authorized 10,000,000 shares;
issued and outstanding 2,329,255 shares 23,293 23,293
Additional paid-in-capital 8,499,801 11,501,075
Unrealized appreciation (depreciation) on investments 2,710,050 (786,147)
------------- -------------
Total net assets 11,233,144 10,738,221
------------- -------------
Total liabilities and net assets $ 37,775,850 38,944,116
============= =============
Net assets per share $ 4.82 4.61
============= =============
See accompanying notes to unaudited condensed consolidated financial statements.
3
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations
(Unaudited)
For the three For the three For the six For the six
months ended months ended months ended months ended
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
-------------- ------------- ------------ ------------
Investment income:
Interest
Unaffiliated companies $ 73,194 122,878 123,294 251,458
Affiliated companies 349,795 330,419 569,262 478,866
Controlled companies 86,349 68,298 294,396 137,769
Other 16,532 15,571 35,516 24,367
Dividends
Unaffiliated companies --- --- --- 78,204
Affiliated companies 72,313 287,251 266,465 342,267
Processing fees --- --- 7,700 ---
Other 1,795 500 2,795 3,500
------------- ------------- ------------ ------------
Total investment income 599,978 824,917 1,299,428 1,316,431
------------- ------------- ------------ ------------
Operating expenses:
Interest expenses 521,686 531,714 1,042,754 1,063,428
Management fees 239,955 259,264 484,394 519,798
Incentive fees --- 91,202 --- 514,314
Professional fees 145,112 262,020 321,895 453,846
Other 78,260 116,914 160,882 184,999
------------- ------------- ------------ ------------
Total operating expenses before
management fees waived 985,013 1,261,114 2,009,925 2,736,385
Management fees waived (52,225) (34,292) (52,225) (87,092)
------------- ------------- ------------ ------------
Net operating expenses 932,788 1,226,822 1,957,700 2,649,293
Investment expense, net (332,810) (401,905) (658,272) (1,332,862)
------------- ------------- ------------ ------------
Realized and unrealized gain on investments
and other assets:
Net realized gain (loss) on investments:
Unaffiliated companies 38,326 11,179 (2,429,083) 2,249,611
Affiliated companies --- 669,431 --- 201,917
Controlled companies --- --- --- 539,250
Net change in unrealized appreciation/depreciation
on investments 514,421 1,365,962 3,496,197 (403,540)
Net change in unrealized gain (loss)
on other assets 110,740 (729,132) 86,081 (726,328)
------------- ------------- ------------ ------------
Net gain on investments 663,487 1,317,440 1,153,195 1,860,910
------------- ------------- ------------ ------------
Net change in net assets
from operations $ 330,677 915,535 494,923 528,048
============= ============= ============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
4
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the six For the six
months ended months ended
March 31, March 31,
2005 2004
-------------- --------------
Cash flows from operating activities:
Increase in net assets from operations $ 494,923 528,048
-------------- --------------
Adjustments to reconcile increase
in net assets from operations to net cash
(used in) provided by operating activities:
Net realized and unrealized gain on investments (1,067,114) (2,072,924)
Net realized and unrealized (gain) loss on other assets (86,081) 726,328
Loss on litigation settlement (1,713,174) ---
Proceeds from disposition of and payments on
loans and investments in portfolio securities 1,132,825 7,102,879
Payments of incentive fees to investment advisor --- (493,050)
Purchases of loans and investments in
portfolio securities (416,883) (481,934)
Change in interest receivable (257,201) (153,703
Change in other assets 197,598 703,007
Change in accrued interest, deferred incentive fees payable,
accounts payable and other liabilities 16,781 (91,945)
-------------- --------------
Total adjustments (2,193,249) 5,238,658
-------------- --------------
Net cash (used in) provided by operating activities (1,698,326) 5,766,706
-------------- --------------
Cash flows from financing activities:
Proceeds from issuance of note payable-related party 35,000 200,000
-------------- --------------
Net cash provided by financing activities 35,000 200,000
-------------- --------------
Net (decrease) increase in cash and cash equivalents (1,663,326) 5,966,706
Cash and cash equivalents at beginning of period 4,774,771 722,691
-------------- --------------
Cash and cash equivalents at end of period $ 3,111,445 6,689,397
============== ==============
Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ 975,429 1,011,490
============== ==============
Supplemental disclosure of noncash investing and financing
information -
Assets received in exchange of securities $ 150,886 476,074
============== ==============
See accompanying notes to unaudited condensed consolidated financial statements.
5
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 March 31, 2005 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.
6
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
As discussed in Note 6 to 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 Company recorded the effects of an arbitration
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. 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 March 31, 2005, the capital of MorAmerica Capital was impaired by
approximately 56.08%, 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 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 six For the six
months ended months ended
March 31, March 31,
2005 2004
------------ ------------
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 (0.28) (0.57)
7
Net realized and unrealized gain
on investment transactions 0.49 0.80
------------ ------------
Total from investment
operations 0.21 0.23
------------ ------------
Net asset value, end of period $ 4.82 5.70
============ ============
Closing market price $ 2.55 3.00
============ ============
For the six For the six
months ended months ended
March 31, March 31,
2005 2004
------------ ------------
Total return
Net asset value basis (1) 4.61 % 4.14
Market price basis 26.09 % (19.05)
Net asset value, end of period
(in thousands) $ 11,233 13,274
Ratio to average net assets:
Investment (expense) income, net (1) (6.35) % (10.32)
Operating and income tax expense (1) 18.87 % 20.51
(1) MACC's investment advisor agreed to a voluntary, temporary reduction in
management fees from January 1, 2003 through February 29, 2004. In
addition, MACC's investment advisor agreed to voluntarily waive any
management fees payable by MorAmerica Capital for the months of March and
April, 2005, in relation to SBA's decision not to approve the investment
advisor as investment advisor of MorAmerica Capital. Due to these
agreements, the investment advisor voluntarily waived $52,225 and $87,092
of management fees for the six months ended March 31, 2005 and 2004,
respectively. Excluding the effects of the waiver for the six months ended
March 31, 2005 and 2004, total return on a net assets value basis would be
4.12% and 3.46%, respectively; the investment (expense) income, net ratio
would be (6.87)% and (11.03)%, respectively; and the operating and income
expense ratio would be 19.42% and 21.26%, 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.
8
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS
MARCH 31, 2005
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 503,535 1,357
motorcycles, trucks and ------------ ----------
industrial metal products
1,560,928 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
brake dynamometers 1,267,127 740,127
------------ ----------
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 166,226 166,226
Fort Madison, Iowa 12% debt security, due November 18, 2009 343,267 343,267
Metal stamping ------------ -----------
509,493 509,493
------------ -----------
9
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED...
MARCH 31, 2005
Manufacturing Continued:
Percent of
Company Security Net assets Value Cost (d)
.................................................................................................................................
Kwik-Way Products, Inc. (a) 2% debt security, due January 31, 2008 (c) $ 267,254 267,254
Marion, Iowa 2% debt security, due January 31, 2008 (c) 281,795 281,795
Manufacturer of automobile 29,340 common shares (c) 28,714 92,910
aftermarket engine and 38,008 common shares (c) 126,651 126,651
brake repair machinery ------------ -----------
704,414 768,610
------------ -----------
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) v 484,459 1,418,718
Chaska, Minnesota Warrant to purchase 34, 223 preferred shares -- --
Pickle processor 10% debt security (c) 31,883 31,883
------------ -----------
516,342 1,450,601
------------ -----------
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 740,832 123,432
Lebanon, Missouri 1,234.19 common shares 120,909 3,309
Metal stamping ------------ -----------
861,741 126,741
------------ -----------
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 445,092 445,092
Bolton, Connecticut ------------ -----------
Producer of cleaning and wax
products under both the Simoniz
brand and private label brand names
10
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED...
MARCH 31, 2005
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 157.93% 17,740,932 14,945,876
======== ------------ -----------
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
and web communications 1,494,844 2,622,469
------------ -----------
Direct Mail Holding, LLC (a) Membership interest 4,800,000 476,366
Mt. Pleasant, Iowa ------------ -----------
Provider of turnkey services
for non-profit fund raising
FreightPro, Inc. 17.50% debt security, due February 21, 2007 (c) 131,250 262,500
Overland Park, Kansas 17.50% 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) 390,011 975,025
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
11
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED...
MARCH 31, 2005
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 68,750 68,750
10% debt security, due January 1, 2007 206,250 206,250
10% debt security, due January 1, 2007 51,562 51,562
10% debt security, due January 1, 2007 20,625 20,625
------------ -----------
1,790,938 1,847,188
------------ -----------
Organized Living, Inc. 545,204 shares Series A preferred (c) -- 543,227
Westerville, Ohio 215,593 shares Series B preferred (c) -- 247,933
Retail specialty stores for storage 174,964.5714 shares Series C preferred (c) -- 233,041
and organizational products 138,889 shares Series D preferred (c) -- 250,001
800,000 shares Series F preferred (c) 200,000 200,000
------------ -----------
200,000 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 144,375 144,375
Topeka, Kansas Warrant to purchase 346.5 common shares (c) 12 12
Provider of value priced funeral ------------- -----------
services
144,387 144,387
Total service 95.18% 10,691,698 9,113,582
======== ------------- -----------
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
12
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED...
MARCH 31, 2005
Technology and Communications Continued:
Percent of
Company Security Net assets Value Cost (d)
.................................................................................................................................
Miles Media Group, Inc. (a) 1,000 common shares (c) 440,000 440,000
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
------------- -----------
1,690,500 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 14,763 14,763
Pleasanton, California 8% debt security, due April 1, 2009 (c) 81,758 100,001
Designs and markets pivot enabling 8% debt security, due April 1, 2012 (c) 616,221 750,001
software for LCD computer monitors Warrant to purchase 39,400 common shares (c) -- --
------------- -----------
712,742 864,765
------------- -----------
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 46.73% 5,249,187 6,912,309
======== ------------ -----------
$ 33,681,817 30,971,767
============ ===========
(a) Affiliated company.
(b) Controlled company.
(c) Non-income producing.
(d) For all debt securities presented, the cost is equal to the principal balance.
13
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.
Second Quarter Ended March 31, 2005 Compared to Second Quarter Ended March 31, 2004
For the three months
ended March 31,
------------------------
2005 2004 Change
------------------------- --------------
Total investment income $ 599,978 824,917 (224,939)
Net operating expenses (932,788) (1,226,822) 294,034
----------- ----------- ----------
Investment expense, net (332,810) (401,905) 69,095
----------- ----------- ----------
Net realized gain on investments 38,326 680,610 (642,284)
Net change in unrealized appreciation/
depreciation on investments 514,421 1,365,962 (851,541)
Net change in unrealized gain (loss) on other assets 110,740 (729,132) 839,872
----------- ----------- ----------
Net gain on investments 663,487 1,317,440 (653,953)
----------- ----------- ----------
Net change in net assets from operations $ 330,677 915,535 (584,858)
=========== =========== ==========
Net asset value:
Beginning of period $ 4.68 5.31
=========== ===========
End of period $ 4.82 5.70
=========== ===========
14
Total Investment Income
During the current year second quarter, total investment income was
$599,978, a decrease of $224,939, or 27%, from total investment income of
$824,917 for the prior year second quarter. In the current year second quarter
as compared to the prior year second quarter, interest income decreased $11,296,
or 2%, dividend income decreased $214,938, or 75%, and other income increased
$1,295, or 259%. The decrease in interest income is the net result of decreases
in interest income on debt portfolio securities issued by two portfolio
companies which are on non-accrual of interest status and the repayment of debt
portfolio securities issued by two portfolio companies in the current year
second quarter, partially offset by increases in interest income on debt
portfolio securities issued by two portfolio companies that were previously on
non-accrual of interest status, interest received on one follow-on investment
made during the current year and the conversion of interest to stock in one
portfolio company which was on non-accrual of interest status in the prior year
second quarter. In the current year second quarter and the prior year second
quarter, MACC received dividends on five existing portfolio companies, two of
which were distributions from limited liability companies. The dividends in the
prior year second quarter were larger than in the current year second quarter.
The increase in other income is due to the receipt of more board fees from one
portfolio company in the current year second quarter.
Net Operating Expenses
Net operating expenses for the second quarter of the current year were
$932,788, a decrease of $294,034, or 24%, as compared to net operating expenses
for the prior year second quarter of $1,226,822. Interest expense decreased
$10,028, or 2%, in the current year second 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
current year second quarter and the prior year second quarter) decreased
$37,242, or 17%, in the current year second quarter due to the decrease in
assets under management and more management fees waived in the current year
second quarter. Management fees as a percentage of assets under management are
expected to be lower in future periods due to a change in the terms of the
investment advisory relationships of MACC and MorAmerica Capital. Professional
fees decreased $116,908, or 45%, in the current year second quarter primarily
due to a decrease in legal expenses from the arbitration proceedings related to
the sale of a former portfolio company. Other expenses decreased $38,654, or
33%, in the current year second quarter as compared to the prior year second
quarter, mainly due to the postponement of the 2005 Annual Shareholders Meeting.
Investment Expense, Net
For the current year second quarter, MACC recorded investment expense, net
of $332,810, as compared to investment expense, net of $401,905 during the prior
year second quarter.
Net Realized (Loss) Gain on Investments
During the current year second quarter, MACC recorded net realized gain on
investments of $38,326, as compared with net realized gain on investments of
$680,610 during the prior year second quarter. In the current year second
quarter, MACC realized a
15
gain of $38,326 from the reversal of incentive fees which were deferred fees
that will not be paid. 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 $514,421 during the current year second quarter, as compared to
$1,365,962 during the prior year second quarter. This net change in unrealized
appreciation/depreciation on investments of $514,421 is the net effect of
increases in fair value of four portfolio companies totaling $1,644,801 and
decreases in fair value of three portfolio companies totaling $1,130,380.
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 gain on other assets of $110,740 during the
current year second quarter was recorded with respect to other securities which
are classified as other assets, as compared to a net change in unrealized loss
on other assets of ($729,132) during the prior year second quarter.
Net Change in Net Assets from Operations
MACC experienced an increase of $494,923 in net assets at the end of the
second quarter of fiscal year 2005, and the resulting net asset value per share
was $4.82 as of March 31, 2005, 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 eleven portfolio investments and has
recorded unrealized depreciation on eleven portfolio investments.
MACC has projected no new investments and 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 overall portfolio is showing signs of increasing strength.
The overall activity in the investment
16
banking market has improved and MACC expects to exit several investments in
2005. 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.
Six Months Ended March 31, 2005 Compared to Six Months Ended March 31, 2004
For the six months
ended March 31,
-------------------------
2005 2004 Change
------------------------- --------------
Total investment income $ 1,299,428 1,316,431 (17,003)
Net operating expenses (1,957,700) (2,649,293) 691,593
------------ ----------- ------------
Investment expense, net (658,272) (1,332,862) 674,590
------------ ----------- ------------
Net realized (loss) gain on investments (2,429,083) 2,990,778 (5,419,861)
Net change in unrealized appreciation/
depreciation on investments 3,496,197 (403,540) 3,899,737
Net change in unrealized gain (loss) on other assets 86,081 (726,328) 812,409
------------ ----------- ------------
Net gain on investments 1,153,195 1,860,910 (707,715)
------------ ----------- ------------
Net change in net assets from operations $ 494,923 528,048 (33,125)
============ =========== ============
Net asset value:
Beginning of period $ 4.61 5.47
============ ===========
End of period $ 4.82 5.70
============= ===========
Total Investment Income
During the current year six-month period, total investment income was
$1,299,428, a decrease of $17,003, or 1%, from total investment income of
$1,316,431 for the prior year six- month period. In the current year six-month
period as compared to the prior year six-month period, interest income increased
$130,008, or 15%, dividend income decreased $154,006, or 37%, processing fees
increased $7,700, or 100%, and other income decreased $705, or 20%. The increase
in interest income is the net result of increases in interest income on debt
portfolio securities issued by two portfolio companies that were previously on
non-accrual of interest status, interest received on one follow-on investment
made during the current year six month period, the conversion of interest to
stock in one portfolio company which was on non-accrual of interest status in
the prior year six-month period and on one portfolio company which was placed on
non-accrual of interest status in the prior year six-month period of which
accrued interest was reserved from the prior fiscal year period, partially
offset by decreases in interest income on debt portfolio securities issued by
two portfolio companies which are on non-accrual of interest status and the
repayment of debt portfolio securities issued by two portfolio companies in the
current year six-month period. In the current year six-month period, MACC
received dividends on six existing portfolio companies, three of which were
distributions from a limited liability companies, as compared to dividend income
received in the prior year six-month period from seven existing portfolio
companies, four 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 six-month period, compared to no new portfolio company
investments in which MACC received a processing fee at closing in the prior year
six-month period.
17
Net Operating Expenses
Net operating expenses for the six-month period of the current year were
$1,957,700, a decrease of $691,593, or 26%, as compared to net operating
expenses for the prior year six-month period of $2,649,293. Interest expense
decreased $20,674, or 2%, in the current year six-month period 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 current year six-month period and the prior year six-month period)
decreased $537, or .1%, in the current year six-month period due to the decrease
in assets under management. Management fees as a percentage of assets under
management are expected to be lower in future periods due to a change in the
terms of the investment advisory relationships of MACC and MorAmerica Capital.
Professional fees decreased $131,951, or 29%, in the current year six-month
period primarily due a decrease in legal expenses from the arbitration
proceedings related to the sale of a former portfolio company. Other expenses
decreased $24,117, or 13%, in the current year six-month period as compared to
the prior year six-month period mainly due to the postponement of the 2005
Annual Shareholders Meeting.
Investment Expense, Net
For the current year six-month period, MACC recorded investment expense,
net of $658,272, as compared to investment expense, net of $1,332,862 during the
prior year six-month period.
Net Realized (Loss) Gain on Investments
During the current year six-month period, MACC recorded net realized loss
on investments of $2,429,083, as compared with net realized gain on investments
of $2,990,728 during the prior year six-month period. In the current year
six-month period, MACC realized a gain of $38,326 from the reversal of incentive
fees which were deferred fees that will not be paid, 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.
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 $3,496,197 during the current year six-month period, as compared
to ($403,540) during the prior year six-month period. This net change in
unrealized appreciation/depreciation on investments of $3,496,197 is the net
effect of increases in fair value of seven portfolio companies totaling
$3,302,111, decreases in fair value of six portfolio companies totaling
$2,237,984, and the reversal of $2,432,070 of depreciation resulting from the
sale of one portfolio investment and the write-off of one portfolio investment.
18
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 gain on other assets of $86,081 during the current
year six-month period was recorded with respect to other securities which are
classified as other assets, as compared to a net change in unrealized loss on
other assets of ($726,328) during the prior year six-month period.
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 March 31, 2005, the capital of MorAmerica Capital was impaired by
approximately 56.08%, 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.
19
As of March 31, 2005, MACC's cash and cash equivalents totaled $3,111,445.
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. In connection with the settlement of arbitration
proceedings, the SBA, MorAmerica Capital and three other SBICs entered into an
agreement which obligates MorAmerica Capital and each of the other SBICs jointly
and severally, to pay up to $7,500,000 of the SBA's losses, if any, with respect
to the outstanding SBA-guaranteed debentures of such SBICs. As a result of this
agreement and MorAmerica Capital's capital impairment described above, 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 provide adequate funds for MACC's anticipated cash
requirements during the current fiscal year, including portfolio investment
activities, interest payments on outstanding debentures, and administrative
expenses. 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 March 31, 2005:
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 --- --- 5,000,000 20,790,000
Loan Agreement¹ $ 305,000 305,000 --- --- ---
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
- --------------------------------
¹ During 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 Febrary 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 March 31, 2005. The entire unpaid
amount of the loan is convertible into shares of MACC's common stock at the
option of the lender.
20
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.
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 $33,681,817 at March 31, 2005
and $33,218,084 at September 30, 2004. During the three months ended March 31,
2005, MACC invested $31,883 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 that it may 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 $31,883 invested during the current year second 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
21
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.
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 March 31, 2005, was
$27,782,000, 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 (5.89% at
March 31, 2005) 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.
------------------------------------------------------
March 31, 2005
------------------------------------------------------
Fair Value of Debentures Payable $ 27,782,000
Amount Above Cost $ 1,992,000
Additional Market Risk $ 632,000
------------------------------------------------------
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
22
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 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.
23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
As previously disclosed, MorAmerica Capital is a defendant in
litigation filed by BFS Diversified Products, LLC in the Iowa District
Court of Polk County, Iowa. There have been no material developments in
this litigation since MACC filed its Quarterly Report on Form 10-Q for the
three months ended December 31, 2004.
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
As most recently disclosed by MACC in its Current Report on Form 8-K
filed with the Commission on May 3, 2005, on April 29, 2005, the boards of
directors (the "Boards") of MACC and of MorAmerica Capital (together, the
"Companies") implemented several changes respecting the investment advisers
to the Companies, all of which were the result of recent directives of the
U.S. Small Business Administration (the "SBA"). Those changes included
accepting the resignation of Atlas Management Partners, LLC ("Atlas") as
the investment adviser to the Companies, approving new interim investment
advisory agreements between the Companies and InvestAmerica Investment
Advisors, Inc. ("InvestAmerica"), and appointing new officers for the
Companies.
As previously disclosed, the SBA informed MorAmerica Capital that it
would not approve Atlas as MorAmerica Capital's investment adviser.
Accordingly, MorAmerica Capital's board of directors, on April 29, 2005,
approved a new interim investment advisory agreement between MorAmerica
Capital and InvestAmerica, which contains terms consistent with the SBA's
directives, and approved the termination of MorAmerica Capital's investment
advisory agreement with Atlas. While the SBA did not formally approve such
interim investment advisory agreement in time for the April 29, 2005 board
meeting, the interim agreement does address the issues raised by the SBA to
date. Additionally, as substantially all of the Companies' consolidated
assets are in MorAmerica Capital, MACC's board of directors also agreed to
terminate MACC's investment advisory agreement with Atlas and approved an
interim investment advisory agreement between MACC and InvestAmerica, which
has terms similar to the MorAmerica Capital interim investment advisory
agreement. InvestAmerica had served as sole investment advisor to the
Companies from 1995 through February 28, 2004, and has been subadvisor to
the Companies since March 1,
24
2004. Also in connection with the SBA's decision not to approve Atlas as an
investment advisor for MorAmerica Capital, Atlas agreed to waive any
management fees payable by MorAmerica Capital for the months of March and
April 2005.
The Boards have approved the interim investment advisory agreements
between the Companies and InvestAmerica pursuant to applicable rules under
the Investment Company Act of 1940 permitting interim agreements following
termination of an investment advisor. The interim agreements automatically
expire and will be replaced with new investment advisory agreements upon
shareholder approval at the 2005 Annual Shareholders Meeting, scheduled to
be held on July 19, 2005.
Both the interim investment advisory agreements and their intended
replacements upon shareholder approval contain terms which reduce the
advisory fees payable to InvestAmerica, as compared to the fees paid to
Atlas under the prior agreements. MACC paid Atlas a management fee of 2.5%
of assets under management and an incentive fee of 20% of net capital
gains; MACC will pay InvestAmerica 1.5% of assets under management and an
incentive fee of 13.4% of net capital gains under the new agreements with
InvestAmerica. MorAmerica Capital paid Atlas a management fee of 2.5% of
assets under management and an incentive fee of 20% of net capital gains;
MorAmerica Capital will pay InvestAmerica a management fee of the lesser of
1.5% of combined capital or of assets under management, and an incentive
fee of 13.4% of net capital gains under the new agreements. Further, the
payment by MorAmerica Capital to InvestAmerica of any incentive fees will
be subordinated to MorAmerica Capital's repayment of all of its obligations
to the SBA. Finally, all such agreements were approved subject to further
comment by both the SBA or the Securities and Exchange Commission.
Also at the April 29, 2005 meeting of the Boards, the Boards appointed
the following persons to serve as officers of the Companies, all of whom
are affiliated with InvestAmerica: David R. Schroder was appointed
President and Secretary, Robert A. Comey was appointed Executive Vice
President, Chief Financial Officer, Chief Compliance Officer, Treasurer and
Assistant Secretary, Kevin F. Mullane was appointed Senior Vice President,
Michael H. Reynoldson was appointed Vice President, and Marilyn M. Benge
was appointed Assistant Secretary.
Item 6. Exhibits
(a) Exhibits
The following exhibits are filed with this quarterly report on Form
1O-Q:
31.1 Section 302 Certification of David R. Schroder (CEO)
31.2 Section 302 Certification of Robert A. Comey (CFO)
32.1 Section 1350 Certification of David R. Schroder (CEO)
32.2 Section 1350 Certification of Robert A. Comey (CFO)
25
(b) Reports on Form 8-K
MACC filed the following Current Reports on Form 8-K during the quarter
ended March 31, 2005:
MACC filed a Current Report on Form 8-K on January 7, 2005, with regard to
items 8.01 and 9.01 thereof.
MACC filed a Current Report on Form 8-K on January 24, 2005, with regard to
items 8.01 and 9.01 thereof.
MACC filed a Current Report on Form 8-K on February 22, 2005, with regard
to items 8.01 and 9.01 thereof.
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: 5/12/05 By: /s/ David R. Schroder
------------------------ -----------------------------------------
David R. Schroder, President
Date: 5/12/05 By: /s/ Robert A. Comey
------------------------ -----------------------------------------
Robert A. Comey, Chief Financial Officer
EXHIBIT INDEX
Exhibit Description Page
------- ----------- --------
31.1 Section 302 Certification of David R. Schroder (CEO) 27
31.2 Section 302 Certification of Robert A. Comey (CFO) 29
32.1 Section 1350 Certification of David R. Schroder (CEO) 31
32.2 Section 1350 Certification of Robert A. Comey (CFO) 33
26