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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 2002
--------------------------------------------------
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 (I.R.S. Employer
incorporation 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
------- --------
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, 2003, the registrant had issued and outstanding
2,329,255 shares of common stock.
Page 1 of 28
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
------- -------------------- ----
Condensed Consolidated Balance
Sheets at December 31, 2002
and September 30, 2002 ............................................ 3
Condensed Consolidated Statements of
Operations for the three months ended
December 31, 2002 and December 31, 2001............................ 4
Condensed Consolidated Statements of
Cash Flows for the three months ended
December 31, 2002 and December 31, 2001............................ 5
Notes to Condensed Consolidated
Financial Statements............................................... 6
Item 2. Management's Discussion and Analysis
------- of Financial Condition and Results Of Operations................... 8
Item 3. Quantitative and Qualitative
------- Disclosure About Market Risk....................................... 13
Item 4. Controls and Procedures............................................ 13
-------
PART II. OTHER INFORMATION........................................................... 14
Item 6. Exhibits and Reports on Form 8-K................................... 15
-------
Signatures......................................................... 16
2
PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
December 31, September 30,
2002 2002
------------ ------------
Assets
Loans and investments in portfolio securities, at market or fair value:
Unaffiliated companies (cost of $14,373,474 and $15,406,644) $ 15,648,466 16,033,745
Affiliated companies (cost of $21,284,754 and $23,341,683) 18,809,313 19,212,232
Controlled companies (cost of $4,490,501 and $5,053,002) 5,544,491 5,380,501
Cash and money market accounts 2,936,543 1,802,603
Other assets, net 1,536,075 1,584,620
------------ ------------
Total assets $ 44,474,888 44,013,701
============ ============
Liabilities and net assets
Liabilities:
Debentures payable, net of discount $ 27,935,639 27,934,004
Incentive fees payable 55,056 55,737
Accrued interest 672,147 187,070
Accounts payable and other liabilities 101,971 180,386
------------ ------------
Total liabilities 28,764,813 28,357,197
------------ ------------
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 15,833,241 18,808,062
Unrealized depreciation on investments (146,459) (3,174,851)
------------ ------------
Total net assets 15,710,075 15,656,504
------------ ------------
Total liabilities and net assets $ 44,474,888 44,013,701
============ ============
Net assets per share $ 6.74 6.72
============ ============
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
months ended months ended
December 31, December 31,
2002 2001
----------- -----------
Investment income:
Interest
Unaffiliated companies $ 106,824 188,158
Affiliated companies 267,455 243,877
Controlled companies 74,262 73,093
Other 8,238 18,709
Dividends
Unaffiliated companies 71,095 55,256
Affiliated companies 55,008 80,575
Controlled companies 7,871 0
Processing fees 7,750 29,260
Other 10,055 17,432
----------- -----------
Total investment income 608,558 706,360
----------- -----------
Operating expenses:
Interest 550,420 449,224
Management fees 275,068 268,951
Professional fees 99,457 42,409
Other 85,111 78,903
----------- -----------
Total operating expenses 1,010,056 839,487
----------- -----------
Investment expense, net (401,498) (133,127)
----------- -----------
Realized and unrealized gain (loss) on investments:
Net realized (loss) gain on investments
Unaffiliated companies (529,822) 23,953
Affiliated companies (2,043,501) (2,239,403)
Net change in unrealized appreciation/
depreciation on investments 3,028,392 1,719,687
----------- -----------
Net gain (loss) on investments 455,069 (495,763)
----------- -----------
Net change in net assets
from operations $ 53,571 (628,890)
=========== ===========
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 three For the three
months ended months ended
December 31, December 31,
2002 2001
------------- ------------
Cash flows from operating activities:
Increase (decrease) in net assets from operations $ 53,571 (628,890)
----------- -----------
Adjustments to reconcile increase (decrease) in net assets
from operations to net cash
provided by operating activities:
Net realized and unrealized (gain) loss on investments (455,069) 492,763
Change in accrued interest, incentive fees payable,
accounts payable and other liabilities 406,662 268,511
Other 64,947 98,795
----------- -----------
Total adjustments 16,540 863,069
----------- -----------
Net cash provided by operating activities 70,111 234,179
----------- -----------
Cash flows from investing activities:
Proceeds from disposition of and payments on
loans and investments in portfolio securities 1,128,829 130,466
Purchases of loans and investments in
portfolio securities --- (2,369,251)
Purchases of short-term investments --- (113,767)
----------- -----------
Net cash provided by (used in) investing activities 1,128,829 (2,352,552)
-----------
Cash flows from financing activities:
Proceeds from debt issuance, net of commitment fees --- 2,925,000
Payment of commitment fees (65,000) ---
----------- -----------
Net cash (used in) provided by financing activities (65,000) 2,925,000
----------- -----------
Net increase in cash and cash equivalents 1,133,940 806,627
Cash and cash equivalents at beginning of period 1,802,603 795,594
----------- -----------
Cash and cash equivalents at end of period $ 2,936,543 1,602,221
=========== ===========
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--
Debt issuance costs financed with debentures payable $ --- 75,000
Assets received in exchange of securities 50,233 84,709
=========== ===========
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, 2002. 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,
2002 has been derived from the audited balance sheet as of that date.
(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; 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.
6
(3) Loss Contingency
MorAmerica Capital is party to arbitration proceedings instituted by
TransCore Holdings, Inc., a company (Buyer) seeking indemnification under the
Stock Purchase Agreement (the Stock Purchase Agreement), pursuant to which
MorAmerica Capital and certain other individuals and institutional investors
(collectively, the Sellers) sold their interest in a former portfolio company
investment (Portfolio Company). The arbitration proceedings are being
administered by JAMS. 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 at
Portfolio Company resulted in a breach of the Sellers' representations and
warranties. The Sellers have retained counsel and forensic accountants to defend
the Sellers against Buyer's claim for indemnification. Based on its evaluation
of the Buyer's claim and discussions with external legal counsel, MACC believes
that it is reasonably possible that a loss may have been incurred as result of
the indemnification claim, against which no accrual for loss has been made as of
December 31, 2002, but the amount of the possible loss, and therefore its
materiality to the financial statements, cannot be estimated. MorAmerica Capital
intends to vigorously defend this arbitration.
[Remainder of page intentionally left blank]
7
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, 2002, 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, any failure to achieve annual investment level objectives,
changes in prevailing market interest rates, contractions in the markets for
corporate acquisitions and initial public offerings, and an adverse outcome on
the pending arbitration proceedings against MorAmerica Capital. 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 operating
expenses. 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, 2002 Compared to First Quarter Ended December 31, 2001
----------------------------------------------------------------------------------------
For the three months
ended December 31,
----------------------------------
2002 2001 Change
--------------------------------------- ------------
Investment income $ 608,558 706,360 (97,802)
Operating expenses (1,010,056) (839,487) (170,569)
----------- ----------- -----------
Investment expense, net (401,498) (133,127) (268,371)
----------- ----------- -----------
Net realized loss on investments (2,573,323) (2,215,450) (357,873)
Net change in unrealized appreciation/
depreciation on investments 3,028,392 1,719,687 1,308,705
----------- ----------- -----------
Net gain (loss) on investments 455,069 (495,763) 950,832
----------- ----------- -----------
Net increase (decrease) in net asset value $ 53,571 (628,890) 682,461
=========== =========== ===========
Net asset value:
Beginning of period $ 6.72 8.60
=========== ===========
End of period $ 6.74 8.33
=========== ===========
8
Investment Income
During the current year first quarter total investment income was
$608,558, a decrease of 14% from total investment income of $706,360 from the
prior year first quarter. In the current year first quarter as compared to the
prior year first quarter, interest income decreased $67,058, or 13%, dividend
income decreased $1,857, or 1%, processing fees decreased $21,510, or 74%, and
other income decreased $7,377, or 42%. The decrease in interest income is due to
three investments which were placed on non-accrual of interest status in the
current year first quarter which were accruing interest in the prior year first
quarter and also the lower interest rate earned on cash on hand held in interest
earning investments. In the current year first quarter MACC received dividends
on five existing portfolio companies, four of which are distributions from
limited liability companies, as compared to dividends received on four portfolio
companies in the prior year first quarter, two of which were distributions from
limited liability companies. Processing fees for the first quarter of this year
and the first quarter of the prior year relate to one transaction for each
period. The fees during the prior year first quarter were larger compared to the
current year first quarter due to the relative size and terms of the related
portfolio investment transactions. The decrease in other income is due to the
reimbursement of legal fees which was recorded as other income in the prior year
first quarter.
Operating Expenses
Total operating expenses for the first quarter of the current year were
$1,010,056, an increase of 20%, as compared to total operating expenses for the
prior year first quarter of $839,487. Interest expense increased $101,196, or
23%, in the current year first quarter due to $3,955,000 of additional
borrowings of SBA-guaranteed debentures since the end of the prior year first
quarter. Management fees increased $6,117, or 2%, in the current year first
quarter due to increased assets under management. Professional fees increased
$57,048, or 135%, in the current year first quarter due to increased legal fees
in connection with arbitration proceedings related to the sale of a former
portfolio company and increased legal and accounting fees to comply with new
securities and exchange corporate governance requirements. Professional fees are
expected to be higher for at least the next three months as a result of the item
identified in Note 3 to the Unaudited Condensed Consolidated Financial
Statements. Other expenses increased $6,208, or 8%, in the current year first
quarter as compared to the prior year first quarter mainly due to the change in
the other assets loss provision.
Investment Expense, Net
For the current year first quarter, MACC recorded a net investment
expense of $401,498, as compared to net investment expense of $133,127 during
the prior year first quarter.
Realized Gain (Loss) on Disposition of Investments
During the current year first quarter, MACC recorded net realized loss
on investments of $2,573,323, as compared with net realized loss on investments
of $2,215,450 during the prior year first quarter. In the current year first
quarter, MACC realized a loss of $2,573,323 from the write-off of two portfolio
companies of which $2,572,770 was previously recorded as
9
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.
Changes in Unrealized Appreciation/Depreciation of Investments
MACC recorded net change in unrealized appreciation/depreciation on
investments of $3,028,392 during the current year first quarter, as compared to
$1,719,687 during the prior year first quarter. This net change in unrealized
appreciation/depreciation on investments of $3,028,392 is the net effect of
increases in fair value of eight portfolio companies totaling $1,142,737,
decreases in fair value of eight portfolio companies totaling $687,115, and the
reversal of $2,572,770 of depreciation resulting from the write-off of the
investment in two portfolio companies referenced above.
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 portfolio investment. 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 Net Assets from Operations
MACC experienced an increase of $53,571 in net assets at the end of the
first quarter of fiscal year 2003, and the resulting net asset value per share
was $6.74 as of December 31, 2002, as compared to $6.72 as of September 30,
2002. 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 forty-three portfolio companies continue to be
valued at cost or above. MACC has recognized unrealized appreciation on thirteen
portfolio investments and has unrealized depreciation on ten portfolio
investments.
To mitigate the affects of the current economic environment on MACC's
operating performance during fiscal 2003, MACC's investment advisor voluntarily
agreed to reduce the amount of management fees payable by MorAmerica Capital
from January 1, 2003 through February 29, 2004. In addition, MACC has reduced
its projected investment rate and projected borrowing rate in the revised fiscal
2003 budget. Recent years have been difficult years for the venture capital
industry, with few comparisons to past business cycles. The declines in the
stock market, increased regulations, world tensions, terrorism and a potential
war in Iraq, all contribute to increased risk and uncertainty to future
performance of MACC's investment portfolio. If the economy continues to improve
over the next nine months, management believes MACC's portfolio is positioned to
be able to realize some gains and improve future net asset value.
10
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").
MACC, through its wholly-owned subsidiary, MorAmerica Capital, from
time to time may seek to procure additional capital through the SBIC leverage
program to provide a portion of its investment capital requirements. At present,
capital with a commitment period of up to five years is available through the
SBIC leverage program and MACC anticipates that capital will be available in
future periods.
As of December 31, 2002, MACC's cash and money market accounts totaled
$2,936,543. 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. MACC believes that its existing cash and money market
accounts, the $10,000,000 SBA commitments, and other anticipated cash flows,
will provide adequate funds for MACC's anticipated cash requirements during the
current fiscal year, including portfolio investment activities, principal and
interest payments on outstanding debentures payable and administrative expenses.
MACC's investment objective has been revised to invest $5,000,000 in new and
follow-on investments during the current fiscal year subject to further
adjustment based upon current economic and operating conditions.
Liquidity for the current year will be impacted by principal payments
on MACC's debentures payable. Debentures payable are composed of $27,940,000 in
principal amount of SBA-guaranteed debentures issued by MACC's subsidiary,
MorAmerica Capital, which mature as follows: $2,150,000 in 2003, $1,000,000 in
2007, $2,500,000 in 2009, $9,000,000 in 2010, $5,835,000 in 2011, and $7,455,000
in 2012. It is anticipated MorAmerica Capital will be able to roll over these
debentures with new ten-year debentures when they mature.
MACC anticipates that it will rely primarily on its current cash and
money market accounts, the SBIC capital program and its cash flows from
operations to fund its investment activities and other cash requirements during
fiscal year 2003. Although management believes these sources will provide
sufficient funds for MACC to meet its fiscal 2003 investment level objective and
other anticipated cash requirements, there can be no assurances that the SBIC
capital program will continue to be available to MACC or that MACC's cash flows
from operations will be as projected. MACC's cash flow could also be reduced by
the loss contingency discussed in Note 3 to the Unaudited Consolidated Financial
Statements.
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 $40,002,270 and
$40,626,478 at December 31, 2002 and September 30, 2002, respectively. During
the three months ended December 31, 2002, MACC made no new or follow-on
investments. Management views investment objectives for any given year as
11
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 2003 has been revised for total new and follow-on
investments of $5,000,000.
MACC frequently co-invests with other funds managed by MACC's
investment advisor and with funds affiliated with MACC's largest shareholder,
Zions First National Bank. 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. MACC did not co-invest with any other fund during
the three months ended December 31, 2002.
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; 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.
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.
12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MACC is exposed to market risk from changes in market prices of
publicly traded equity securities held in the MACC consolidated investment
portfolio. At December 31, 2002, publicly traded equity securities in the MACC
consolidated investment portfolio were recorded at a fair value of $2,582,576.
In accordance with MACC's valuation policies and SBA regulations, the fair value
of publicly traded equity securities is determined based upon the average of the
closing prices (or bid price in the case of over-the-counter equity securities)
for the valuation date and the preceding two days. The publicly traded equity
securities in the MACC consolidated investment portfolio thus have exposure to
price risk, which is estimated as the potential loss in fair value due to a
hypothetical 10% adverse change in quoted market prices, and would amount to a
decrease in the recorded value of such publicly traded equity securities of
approximately $258,258. Actual results may differ.
MACC is also 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,
2002, was $31,195,000, with a cost of $27,940,000. Fair value of MorAmerica
Capital's outstanding debentures payable is calculated by discounting cash flows
through estimated maturity using the borrowing rate currently available to
MorAmerica Capital 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.
-----------------------------------------------------
2002
------------------------------------------------------
Fair Value of Debentures Payable $31,195,000
Amount Above Cost $ 3,255,000
Additional Market Risk $ 885,000
------------------------------------------------------
ITEM 4. CONTROLS AND PROCEDURES
In accordance with Item 307 of Regulation S-K promulgated
under the Securities Act of 1933, as amended, and within 90 days of the date of
this Quarterly Report on Form 10-Q, 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-14(c) and 15d-14(c) 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
13
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
MorAmerica Capital is party to arbitration proceedings
instituted by TransCore Holdings, Inc., a company (Buyer) seeking
indemnification under the Stock Purchase Agreement (the Stock Purchase
Agreement), pursuant to which MorAmerica Capital and certain other
individuals and institutional investors (collectively, the Sellers)
sold their interest in a former portfolio company investment (Portfolio
Company). The arbitration proceedings are being administered by JAMS.
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 at Portfolio Company resulted in a breach of the
Sellers' representations and warranties. The Sellers have retained
counsel and forensic accountants to defend the Sellers against Buyer's
claim for indemnification. Based on its evaluation of the Buyer's claim
and discussions with external legal counsel, MACC believes that it is
reasonably possible that a loss may have been incurred as result of the
indemnification claim, against which no accrual for loss has been made
as of December 31, 2002, but the amount of the possible loss, and
therefore its materiality to the financial statements, cannot be
estimated. MorAmerica Capital intends to vigorously defend this
arbitration.
ITEM 2. CHANGES IN SECURITIES
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.
14
ITEM 5. OTHER INFORMATION
There are no items to report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The following exhibits are filed with this quarterly report on Form
1O-Q:
10.1 Material Contract--Letter dated January 15, 2003
relating to MorAmerica Capital Corporation Investment
Advisory Agreement
99.1 Section 906 Certification of David R. Schroder (CEO)
99.2 Section 906 Certification of Robert A. Comey (CFO)
(b) Reports on Form 8-K
MACC filed no current reports on Form 8-K during the quarter ended
December 31, 2002.
15
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: 2/12/03 By: /s/David Schroder
----------------------------------- -------------------------------
David Schroder, President
Date: 2/12/03 By: /s/Robert A. Comey
---------------------------------- -------------------------------
Robert A. Comey, Treasurer
16
CERTIFICATION
I, David R. Schroder, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MACC Private
Equities Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of the date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent
17
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 12, 2003
/s/ David R. Schroder
-----------------------------------
David R. Schroder
President and Secretary
(principal executive officer)
18
CERTIFICATION
I, Robert A. Comey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MACC Private
Equities Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to sate a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of the date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent
19
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 12, 2003
/s/ Robert A. Comey
-----------------------------------
Robert A. Comey
Executive Vice President and
Treasurer
(principal financial officer)
20
EXHIBIT INDEX
Exhibit Description Page
- ------- ----------- ----
10.1 Material Contract--Letter dated January 15, 2003,
relating to MorAmerica Capital Corporation
Investment Advisory Agreement 22
99.1 Section 906 Certification of David R. Schroder (CEO) 25
99.2 Section 906 Certification of Robert A. Comey (CFO) 27
21