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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 March 31, 2003
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 | |
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, 2003, 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 at March 31,
2003 and September 30, 2002 ............................. 3
Condensed Consolidated Statements of Operations for
the three months ended March 31, 2003 and March 31,
2002 and the six months ended March 31, 2003 and March
31, 2002 ................................................ 4
Condensed Consolidated Statements of Cash Flows for
the six months ended March 31, 2003 and March 31, 2002 .. 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 .................................................... 15
Item 4. Controls and Procedures ................................. 15
PART II. OTHER INFORMATION ............................................. 17
Item 1. Legal Proceedings ....................................... 17
Item 4. Submission of Matters to a Vote of Security Holders ..... 17
Item 6. Exhibits and Reports on Form 8-K ........................ 18
Signatures .............................................. 19
Certifications .......................................... 20
2
PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, September 30,
2003 2002
------------- -------------
Assets
Loans and investments in portfolio securities,
at market or fair value:
Unaffiliated companies (cost
of $13,619,568 and $15,406,644) $ 14,686,117 16,033,745
Affiliated companies (cost
of $21,532,360 and $23,341,683) 18,971,241 19,212,232
Controlled companies (cost
of $4,490,501and $5,053,002) 5,263,241 5,380,501
Cash and money market accounts 2,380,928 1,802,603
Other assets, net 1,502,154 1,584,620
------------- -------------
Total assets $ 42,803,681 44,013,701
============= =============
Liabilities and net assets
Liabilities:
Debentures payable, net of discount $ 27,937,275 27,934,004
Incentive fees payable 55,056 55,737
Accrued interest 198,773 187,070
Accounts payable and other liabilities 203,458 180,386
------------- -------------
Total liabilities 28,394,562 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 15,107,656 18,808,062
Unrealized depreciation on investments (721,830) (3,174,851)
------------- -------------
Total net assets 14,409,119 15,656,504
------------- -------------
Total liabilities and net assets $ 42,803,681 44,013,701
============= =============
Net assets per share $ 6.19 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 For the six For the six
months ended months ended months ended months ended
March 31, March 31, March 31, March 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Investment income:
Interest
Unaffiliated companies $ 138,032 128,353 244,856 346,858
Affiliated companies 246,422 217,116 513,877 430,646
Controlled companies 60,238 77,112 134,500 150,205
Other 7,671 77,529 15,909 96,238
Dividends
Unaffiliated companies 93,656 63,477 164,751 118,733
Affiliated companies 2,397 58,572 57,405 139,147
Controlled companies 7,871 7,004 15,742 7,004
Processing fees 9,435 30,331 17,185 59,591
Other 75,971 33,889 86,026 51,321
------------ ------------ ------------ ------------
Total investment income 641,693 693,383 1,250,251 1,399,743
------------ ------------ ------------ ------------
Operating expenses:
Interest 550,421 464,404 1,100,841 913,628
Management fees 209,362 278,772 484,430 547,723
Professional fees 230,810 36,009 330,267 78,418
Other 142,726 129,832 227,837 208,735
------------ ------------ ------------ ------------
Total operating expenses 1,133,319 909,017 2,143,375 1,748,504
------------ ------------ ------------ ------------
Investment expense, net before tax expense (491,626) (215,634) (893,124) (348,761)
Income tax expense (15,000) -- (15,000) --
------------ ------------ ------------ ------------
Investment expense, net (506,626) (215,634) (908,124) (348,761)
------------ ------------ ------------ ------------
Realized and unrealized (loss) gain on investments:
Net realized (loss) gain on investments
Unaffiliated companies (218,959) 313,450 (748,780) 337,403
Affiliated companies -- (717,085) (2,043,502) (2,956,488)
Net change in unrealized appreciation/
depreciation on investments (575,371) (263,859) 2,453,021 1,455,828
------------ ------------ ------------ ------------
Net loss on investments (794,330) (667,494) (339,261) (1,163,257)
------------ ------------ ------------ ------------
Net change in net assets
from operations $ (1,300,956) (883,128) (1,247,385) (1,512,018)
============ ============ ============ ============
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,
2003 2002
------------ ------------
Cash flows from operating activities:
Decrease in net assets from operations $ (1,247,385) (1,512,018)
------------ ------------
Adjustments to reconcile decrease in net assets from operations to net cash
used in operating activities:
Net realized and unrealized loss on investments 339,261 1,163,257
Change in accrued interest, incentive fees payable,
accounts payable and other liabilities 34,775 (101,272)
Other 21,001 30,169
------------ ------------
Total adjustments 395,037 1,092,154
------------ ------------
Net cash used in operating activities (852,348) (419,864)
------------ ------------
Cash flows from investing activities:
Proceeds from disposition of and payments on
loans and investments in portfolio securities 1,619,700 2,536,364
Purchases of loans and investments in
portfolio securities (124,027) (5,835,752)
Proceeds from disposition of short-term investments -- 92,500
Purchases of short-term investments -- (116,678)
------------ ------------
Net cash provided by (used in) investing activities 1,495,673 (3,323,566)
------------ ------------
Cash flows from financing activities:
Proceeds from debt issuance, net of commitment fees -- 5,850,000
Payment of commitment fees (65,000) --
------------ ------------
Net cash (used in) provided by financing activities (65,000) 5,850,000
------------ ------------
Net increase in cash and cash equivalents 578,325 2,106,570
Cash and cash equivalents at beginning of period 1,802,603 795,594
------------ ------------
Cash and cash equivalents at end of period $ 2,380,928 2,902,164
============ ============
Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ 1,034,157 812,787
============ ============
Supplemental disclosure of noncash investing and financing
information -
Debt issuance costs financed with debentures payable $ -- 150,000
Assets received in exchange of securities 194,523 115,805
============ ============
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
March 31, 2003, because 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. MorAmerica Capital owns debt
securities of Buyer with a face value of $508,761, acquired as part of the sale
of the Portfolio Company. Buyer has defaulted on interest payments due on these
debt securities. In light of the interest default and related dispute, at March
31, 2003, MorAmerica Capital reduced the valuation of these debt securities to
$254,380.
[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.
Second Quarter Ended March 31, 2003 Compared to Second Quarter Ended March
31, 2002
For the three months
ended March 31,
------------------------
2003 2002 Change
------------ -------- --------
Investment income $ 641,693 693,383 (51,690)
Operating expenses (1,133,319) (909,017) (224,302)
Income taxes (15,000) -- (15,000)
------------ -------- --------
Investment expense, net (506,626) (215,634) (290,992)
------------ -------- --------
Net realized loss on investments (218,959) (403,635) 184,676
Net change in unrealized appreciation/
depreciation on investments (575,371) (263,859) (311,512)
------------ -------- --------
Net loss on investments (794,330) (667,494) (126,836)
------------ -------- --------
Net change in net assets from operations $ (1,300,956) (883,128) (417,828)
============ ======== ========
Net asset value:
Beginning of period $ 6.74 8.33
============ ========
End of period $ 6.19 7.96
============ ========
8
Investment Income
During the current year second quarter, total investment income was
$641,693, a decrease of $51,690, or 7%, from total investment income of $693,383
from the prior year second quarter. In the current year second quarter as
compared to the prior year second quarter, interest income decreased $47,747, or
10%, dividend income decreased $25,129, or 19%, processing fees decreased
$20,896, or 69%, and other income increased $42,082, or 124%. The decrease in
interest income is due to five investments which were on non-accrual of interest
status in the current year second quarter which were accruing interest in the
prior year second quarter and also the lower interest rate earned on cash on
hand held in interest earning investments. In the current year second quarter
and in the prior year second quarter MACC received dividends on four existing
portfolio companies, two of which are distributions from limited liability
companies, however, the distributions from limited liability companies in the
prior year second quarter were larger. Processing fees decreased due to only one
follow-on portfolio company investment in the current year second quarter in
which MACC received processing fees at the closing, compared to one new
portfolio company investment in which MACC received a processing fee at closing
and a processing fee received on the restructuring of an existing portfolio
company in the prior year second quarter. The increase in other income is due to
the receipt of advisory fees from two portfolio companies in the current year
second quarter, as compared to only one portfolio company paying advisory fees
and the increase in valuation of a receivable in the prior year second quarter.
Operating Expenses
Total operating expenses for the second quarter of the current year were
$1,133,319, an increase of $224,302, or 25%, as compared to total operating
expenses for the prior year second quarter of $909,017. Interest expense
increased $86,017, or 19%, in the current year second quarter due to $3,000,000
of additional borrowings of SBA-guaranteed debentures during the latter part of
the prior year second quarter and $955,000 of additional borrowings of
SBA-guaranteed debentures since the end of the prior year second quarter.
Management fees decreased $69,410, or 25%, in the current year second quarter
due to MACC's investment advisor agreeing to a voluntary, temporary reduction in
management fees to reduce the expenses of MACC. Professional fees increased
$194,801, or 541%, in the current year second 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 $12,894, or 10%, in the current year second
quarter as compared to the prior year second quarter mainly due to the change in
the other assets loss provision.
Investment Expense, Net
As a result of the factors discussed above, for the current year second
quarter, MACC recorded a net investment expense of $491,626, as compared to net
investment expense of $215,634 during the prior year second quarter.
9
Realized (Loss) Gain on Disposition of Investments
During the current year second quarter, MACC recorded net realized loss on
investments of $218,959, as compared with net realized loss on investments of
$403,635 during the prior year second quarter. In the current year second
quarter, MACC realized a loss of $236,785 from the sale of one portfolio company
of which $270,004 was previously recorded as unrealized depreciation. MACC also
recovered $17,826 from one portfolio company investment which was written off in
a prior period. 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 $575,371 during the current year second quarter, as compared to
$263,859 during the prior year second quarter. This net change in unrealized
appreciation/depreciation on investments of $575,371 is the net effect of
increases in fair value of five portfolio companies totaling $870,703, decreases
in fair value of eight portfolio companies totaling $1,716,078, and the reversal
of $270,004 of depreciation resulting from the sale of one portfolio company
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 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 Net Assets from Operations
MACC experienced a decrease of $1,300,956 in net assets at the end of the
second quarter of fiscal year 2003, and the resulting net asset value per share
was $6.19 as of March 31, 2003, 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-two portfolio companies continue to be
valued at cost or above. MACC has seventeen portfolio investments valued at cost
and has recorded unrealized appreciation on thirteen portfolio investments and
has recorded unrealized depreciation on twelve portfolio investments.
To mitigate the effects 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 MACC from January 1,
2003 through February 29, 2004. In addition, MACC has reduced its projected
investment rate and
10
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 the war in Iraq, all contribute to increased risk
and uncertainty to future performance of MACC's investment portfolio. If the
economy improves over the next six months, management believes MACC's investment
portfolio will benefit from improved operating performance at a number of
portfolio companies and a more robust market for corporate acquisitions.
Six Months Ended March 31, 2003, Compared to Six Months Ended March 31,
2002
For the six months
ended March 31,
----------------------------
2003 2002 Change
------------ ------------ --------
Investment income $ 1,250,251 1,399,743 (149,492)
Operating expense (2,143,375) (1,748,504) (394,871)
Income taxes (15,000) -- (15,000)
------------ ------------ --------
Investment expense, net (908,124) (348,761) (559,363)
------------ ------------ --------
Net realized (loss) gain on investments (2,792,282) (2,619,085) (173,197)
Net increase (decrease) in unrealized appreciation/
depreciation on investments 2,453,021 1,455,828 997,193
------------ ------------ --------
Net loss on investments (339,261) (1,163,257) 823,996
------------ ------------ --------
Net change in net assets from operations $ (1,247,385) (1,512,018) 264,633
============ ============ ========
Net asset value:
Beginning of period $ 6.72 8.60
============ ============
End of period $ 6.19 7.96
============ ============
Investment Income
During the current year six-month period, total income of $1,250,251 was a
decrease of $149,492, or 11%, from total income of $1,399,743 in the prior year
six-month period. For the current year six-month period as compared to the prior
year six-month period, interest income decreased 11% to $909,142 from
$1,023,947, dividend income decreased 10% to $237,898 from $264,884, processing
fee income decreased 71% to $17,185 from $59,591 and other income increased 68%
to $86,026 from $51,321. The decrease in interest income is due to the reasons
stated above for the current year second quarter. In the current year six-month
period, MACC received dividends on seven existing portfolio companies, four of
which are distributions from limited liability companies, as compared to
dividend income received on five portfolio companies in the prior year six-month
period, three of which were distributions from limited liability companies,
however the dividends received in the prior year six-month period were larger.
Processing fees decreased due to only one follow-on investment and one existing
portfolio company investment in which MACC received processing fees at the
closing, compared to one new portfolio company investment made in the prior year
period, a restructuring of an existing portfolio company investment and a
follow-on investment in which MACC received processing fees at closing. Other
income increased due to the receipt of advisory fees from two portfolio
companies in the current year six-month period, as compared to only one
portfolio company paying advisory fees and the increase in valuation of a
receivable in the prior year six-month period.
11
Operating Expenses
Total operating expenses for the current year six-month period were
$2,143,375 an increase of $394,871, or 23%, as compared to total operating
expenses for the prior year six-month period of $1,748,504. Interest expense
increased 20% to $1,100,841 in the current year six-month period as compared to
$913,628 in the prior year six-month period due to $3,000,000 of additional
borrowings of SBA-guaranteed debentures during the latter part of the prior year
six-month period and $955,000 of additional borrowings of SBA-guaranteed
debentures since the end of the prior year six-month period. Management fees
decreased 12% to $484,430 in the current year six-month period as compared to
$547,723 in the prior year six-month period due to MACC's investment advisor
agreeing to a voluntary, temporary reduction in management fees from January 1,
2003 through February 29, 2004 to reduce the expenses of MACC. Professional fees
increased 321% to $330,267 in the current year six-month period from $78,418 in
the prior year six-month period. 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 9% to $227,837 from $208,735 in the current year six-month period as
compared to the prior year six-month period mainly due to the change in the
other assets loss provision.
Investment Expense, Net
For the current year six-month period, MACC recorded a net investment
expense of $893,124, as compared to $348,761 during the prior year six-month
period.
Realized (Loss) Gain on Disposition of Investments
During the current year six-month period, MACC recorded net realized loss
on investments of $2,792,282, as compared with net realized loss on investments
of $2,619,085 during the prior year six-month period. In the current year
six-month period, MACC realized losses of $236,785 from the sale of one
portfolio company and $2,573,323 from the write-off of two portfolio companies,
of which $2,842,774 was previously recorded as unrealized depreciation. MACC
also recovered $17,826 from one portfolio company investment which was written
off in a prior period. Management does not attempt to maintain a comparable
level of realized gains from year to year 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 $2,453,021 during the current year six-month period, as compared
to $1,455,828 during the prior year period. This net change in unrealized
appreciation/depreciation on investments of $2,453,021 is the net effect of
increases in fair value of nine portfolio companies totaling $1,625,697,
decreases in fair value of eleven portfolio companies totaling $2,080,448, the
reversal of $335,002 of depreciation from the sale of one portfolio company
investment, and the reversal of $2,572,770 of depreciation resulting from the
write-off of the investment in two portfolio companies referenced above.
12
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 March 31, 2003, MACC's cash and money market accounts totaled
$2,380,928. 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 Condensed 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 $38,920,599 and $40,626,478 at
March 31, 2003 and September 30, 2002, respectively. During the three months
ended March 31, 2003, MACC invested
13
$124,027 in follow-on investments in two existing portfolio companies.
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 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 six
months ended March 31, 2003.
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.
14
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
March 31, 2003, publicly traded equity securities in the MACC consolidated
investment portfolio were recorded at a fair value of $2,846,198. 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
$284,620. 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 March 31, 2003, was
$31,178,000, 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.
2003
-----------
Fair Value of Debentures Payable $31,178,000
Amount Above Cost $ 3,238,000
Additional Market Risk $ 860,000
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 limitation, controls and
15
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.
16
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 March 31, 2003, because 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. MorAmerica Capital owns debt securities of Buyer with a face
value of $508,761, acquired as part of the sale of the Portfolio Company.
Buyer has defaulted on interest payments due on these debt securities. In
light of the interest default and related dispute, at March 31, 2003,
MorAmerica Capital reduced the valuation of these debt securities to
$254,380.
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
On February 25, 2003, MACC's 2003 Annual Meeting of Shareholders
(the "Meeting") was held in Cedar Rapids, Iowa. A quorum of 1,728,171
shares, or approximately 74.19% of issued and outstanding shares as of
December 31, 2002, were represented in person or by proxy at the Meeting.
The shareholders considered two proposals at the Meeting.
With respect to the first proposal, the shareholders elected three
directors to serve until 2004 Annual Meeting of Shareholders or until
their respective successors shall be elected and qualified. These
directors and the votes cast in favor of and withheld with respect to each
are as follows:
17
Director For Withheld
--------------- --------- --------
Henry T. Madden 1,708,877 19,294
Todd J. Stevens 1,713,099 15,072
John D. Wolfe 1,710,061 18,110
The term of office of each of the following directors of MACC
continued beyond the date of the Meeting: Paul M. Bass, Jr.; Robert A.
Comey; Michael W. Dunn; Gordon J. Roth; and David R. Schroder.
With regard to the second proposal, the shareholders voted to ratify
the appointment of KPMG LLP as independent auditors for MACC for Fiscal
year 2003 by a vote of 1,702,800 in favor of ratification and 7,547
against ratification, with 17,824 shares abstaining.
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.d. Fourth Amendment to Investment Advisory Agreement
between the Corporation and InvestAmerica Investment
Advisors, Inc., dated February 25, 2003.
10.2.c. Third Amendment to Investment Advisory Agreement between
MorAmerica Capital Corporation and InvestAmerica
Investment Advisors, Inc., dated February 25, 2003.
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 March
31, 2003.
18
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: 5/12/03 By: /s/ David Schroder
----------------------------------------
David Schroder, President
Date: 5/12/03 By: /s/ Robert A. Comey
----------------------------------------
Robert A. Comey, Treasurer
19
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
20
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 12, 2003
/s/ David R. Schroder
-----------------------------
David R. Schroder
President and Secretary
(principal executive officer)
21
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
22
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 12, 2003
/s/ Robert A. Comey
-----------------------------
Robert A. Comey
Executive Vice President and
Treasurer
(principal financial officer)
23
EXHIBIT INDEX
Exhibit Description Page
- ------- ----------- ----
10.1.d Fourth Amendment to Investment Advisory Agreement between 25
MACC Private Equities Inc. and InvestAmerica Investment
Advisors, Inc.
10.2.c. Third Amendment to Investment Advisory Agreement between 28
MorAmerica Capital Corporation and InvestAmerica Investment
Advisors, Inc.
99.1 Section 906 Certification of David R. Schroder (CEO) 31
99.2 Section 906 Certification of Robert A. Comey (CFO) 33
24