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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, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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
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(Address of principal executive offices)
(Zip Code)
(319) 363-8249
------------------------------------------
(Registrant's telephone number, including area code)
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(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
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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, 2004, the registrant had issued and outstanding
2,329,255 shares of common stock.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
Condensed Consolidated Balance
Sheets at December 31, 2003
and September 30, 2003 ................................................ 3
Condensed Consolidated Statements of
Operations for the three months ended
December 31, 2003 and December 31, 2002 ............................... 4
Condensed Consolidated Statements of
Cash Flows for the three months ended
December 31, 2003 and December 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.......................................... 13
Item 4. Controls and Procedures............................................... 14
PART II. OTHER INFORMATION............................................................. 15
Item 1. Legal Proceedings.................................................... 15
Item 6. Exhibits and Reports on Form 8-K..................................... 16
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,
2003 2003
--------------- ---------------
Assets
Loans and investments in portfolio securities, at market or fair value:
Unaffiliated companies (cost of $11,792,474 and $13,439,514) $ 9,417,862 12,803,914
Affiliated companies (cost of $19,878,966 and $20,949,721) 20,261,766 20,875,512
Controlled companies (cost of $4,536,308 and $4,490,502) 4,480,058 4,921,751
Cash and money market accounts 5,909,967 722,691
Other assets, net 1,231,673 1,909,250
--------------- ---------------
Total assets $ 41,301,326 41,233,118
=============== ===============
Liabilities and net assets
Liabilities:
Debentures payable, net of discount $ 27,940,000 27,940,000
Incentive fees payable 27,528 27,528
Accrued interest 654,643 185,664
Accounts payable and other liabilities 320,730 334,014
--------------- ---------------
Total liabilities 28,942,901 28,487,206
--------------- ---------------
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 14,383,194 13,001,179
Unrealized depreciation on investments (2,048,062) (278,560)
--------------- ---------------
Total net assets 12,358,425 12,745,912
--------------- ---------------
Total liabilities and net assets $ 41,301,326 41,233,118
=============== ===============
Net assets per share $ 5.31 5.47
=============== ===============
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,
2003 2002
--------------- ---------------
Investment income:
Interest
Unaffiliated companies $ 121,620 106,824
Affiliated companies 155,407 267,455
Controlled companies 69,471 74,262
Other 8,796 8,238
Dividends
Unaffiliated companies 78,204 71,095
Affiliated companies 55,016 55,008
Controlled companies -- 7,871
Processing fees -- 7,750
Other 5,804 10,055
--------------- ---------------
Total investment income 494,318 608,558
--------------- ---------------
Operating expenses:
Interest expenses 531,714 550,420
Management fees 260,534 275,068
Professional fees 191,826 99,457
Other 68,085 85,111
--------------- ---------------
Total operating expenses before
management fees waived 1,052,159 1,010,056
Management fees waived (52,800) --
--------------- ---------------
Net operating expenses 999,359 1,010,056
Investment expense, net (505,041) (401,498)
--------------- ---------------
Realized and unrealized gain (loss) on investments:
Net realized gain (loss) on investments (net
incentive fees of $423,112 in
2003 and $0 in 2002):
Unaffiliated companies 1,938,482 (529,822)
Affiliated companies (518,417) (2,043,501)
Controlled companies 466,991 --
Net change in unrealized appreciation/
depreciation on investments (1,769,502) 3,028,392
--------------- ---------------
Net gain on investments 117,554 455,069
--------------- ---------------
Net change in net assets
from operations $ (387,487) 53,571
=============== ===============
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,
2003 2002
----------- -----------
Cash flows from operating activities:
(Decrease) increase in net assets from operations $ (387,487) 53,571
----------- -----------
Adjustments to reconcile (decrease) increase
in net assets from operations to net cash
provided by operating activities:
Net realized and unrealized gain on investments (117,554) (455,069)
Proceeds from disposition of and payments on
loans and investments in portfolio securities 5,320,981 1,128,829
Payments of incentive fees to investment advisor (423,112) --
Purchases of loans and investments in
portfolio securities (236,808) --
Change in accrued interest, incentive fees payable,
accounts payable and other liabilities 430,695 406,662
Other 600,561 64,947
----------- -----------
Total adjustments 5,574,763 1,145,369
----------- -----------
Net cash provided by operating activities 5,187,276 1,198,940
----------- -----------
Cash flows from financing activities:
Payment of commitment fees -- (65,000)
----------- -----------
Net cash used in financing activities -- (65,000)
----------- -----------
Net increase in cash and cash equivalents 5,187,276 1,133,940
Cash and cash equivalents at beginning of period 722,691 1,802,603
----------- -----------
Cash and cash equivalents at end of period $ 5,909,967 2,936,543
=========== ===========
Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ 37,853 37,853
=========== ===========
Supplemental disclosure of noncash investing and financing
information -
Assets received in exchange of securities $ 153,016 50,233
=========== ===========
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, 2003. 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,
2003 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. Following discovery,
depositions and other preliminary proceedings, in June, 2003, the formal
arbitration proceedings commenced and are being intensively contested by all
parties. Based on the current schedule for the arbitration, a decision will not
be rendered until at least May, 2004. 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 a result of the
indemnification claim, against which no accrual for loss has been made as of
December 31, 2003, because the amount of the possible loss, and therefore its
materiality to the financial statements, cannot be estimated. MorAmerica Capital
intends to continue vigorously defending this arbitration. MorAmerica Capital
received approximately $939,000 of proceeds from the sale of the Portfolio
Company. MorAmerica Capital owns debt securities of Buyer with a face value of
$508,761 and warrants with a cost of $24,000 received as part of the sale. Buyer
has defaulted on interest payments due on these debt securities. On March 31,
2003, MorAmerica Capital reduced the valuation of the debt securities by
$254,380 in light of the interest default and information regarding the related
dispute as of that date. On June 30, 2003, MorAmerica Capital further reduced
the valuation of these debt securities by $254,380 to $1 and reduced the
valuation of the warrants to zero based upon the continuing interest default and
additional information regarding the related dispute as of that date. Subsequent
to December 31, 2003, Buyer refinanced certain of its obligations, including the
debt securities held by MorAmerica Capital, and the principal amount of these
debt securities and accrued interest has been deposited in an escrow account
pending conclusion of the arbitration proceedings.
In a related development, MorAmerica Capital and another small business
investment company, NDSBIC, L.P., which co-invested in Portfolio Company, filed
suit on December 24, 2003 in the United States District Court for the Northern
District of Texas against Patton Boggs LLP and Charles P. Miller, Esq., of
Patton Boggs alleging legal malpractice and breach of fiduciary duty. Patton
Boggs and Mr. Miller represented MorAmerica Capital and NDSBIC in connection
with their investment in the Portfolio Company and the subsequent sale of the
Portfolio Company to Buyer. MorAmerica Capital and NDSBIC are seeking monetary
damages, in an amount that has not been determined.
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, 2003, important factors that could cause actual results to differ
materially from those contained in any forward-looking statement made by or on
behalf of MACC, including, without limitation, the high risk nature of MACC's
portfolio investments, the effects of general economic conditions on MACC's
portfolio companies, the effects of recent or future losses on the ability of
MorAmerica Capital to comply with applicable regulations of the Small Business
Administration and MorAmerica Capital's ability to obtain future funding, any
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 total
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, 2003 Compared to First Quarter Ended December 31, 2002
For the three months
ended December 31,
--------------------------------
2003 2002 Change
-------------------------------- -----------
Investment income $ 494,318 608,558 (114,240)
Operating expenses (999,359) (1,010,056) 10,697
----------- ----------- -----------
Investment expense, net (505,041) (401,498) (103,543)
----------- ----------- -----------
Net realized gain (loss) on investments 1,887,056 (2,573,323) 4,460,379
Net change in unrealized appreciation/
depreciation on investments (1,769,502) 3,028,392 (4,797,894)
----------- ----------- -----------
Net gain on investments 117,554 455,069 (337,515)
----------- ----------- -----------
Net change in net assets from operations $ (387,487) 53,571 (441,058)
=========== =========== ===========
Net asset value:
Beginning of period $ 5.47 6.72
=========== ===========
End of period $ 5.31 6.74
=========== ===========
8
Investment Income
During the current year first quarter, total investment income was
$494,318, a decrease of $114,240, or 19%, from total investment income of
$608,558 for the prior year first quarter. In the current year first quarter as
compared to the prior year first quarter, interest income decreased $101,485, or
22%, dividend income decreased $754, or 1%, processing fees decreased $7,750, or
100%, and other income decreased $4,251, or 42%. The decrease in interest income
is due to only one new investment made during the current year first quarter,
the placing of debt portfolio securities issued by four portfolio companies on
non-accrual of interest status in the current year first quarter which were
accruing interest in the prior year first quarter and the receipt of $171,154 in
principal payments on four debt portfolio investments. In the current year first
quarter, MACC received dividends on three existing portfolio companies, all of
which are distributions from limited liability companies, as compared to
dividend income received in the prior year first quarter from five existing
portfolio companies, four of which were distributions from limited liability
companies. Processing fees decreased due to no fees received on the follow-on
investment made in the current year first quarter, compared to one new portfolio
company investment in which MACC received a processing fee at closing in the
prior year first quarter. The decrease in other income is due to advisory fees
received from one portfolio company in the prior year first quarter.
Operating Expenses
Total operating expenses for the first quarter of the current year were
$999,359, a decrease of $10,697, or 1%, as compared to total operating expenses
for the prior year first quarter of $1,010,056. Interest expense decreased
$18,706, or 3%, in the current year first quarter due to a reduction in the
interest rate on $2,150,000 of SBA-guaranteed debentures to 3.125% in the
current year first quarter, from 6.12% in the prior year first quarter.
Management fees decreased $67,334, or 24%, in the current year first 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
$92,369, or 93%, in the current year first quarter primarily due to increased
legal expenses due to arbitration proceedings related to the sale of a former
portfolio company. Professional fees are expected to be high 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 decreased $17,026,
or 20%, in the current year first quarter as compared to the prior year first
quarter mainly due to the decrease in administrative expenses.
Investment Expense, Net
For the current year first quarter, MACC recorded investment expense,
net of $505,041, as compared to investment expense, net of $401,498 during the
prior year first quarter.
Net Realized Gain (Loss) on Investments
During the current year first quarter, MACC recorded net realized gain
on investments of $1,887,056, as compared with net realized loss on investments
of $2,573,323 during the prior year first quarter. In the current year first
quarter, MACC realized a gain of $328,968
9
from the sale of warrants of one portfolio company and $2,405,473 from the sale
of equity interests of two portfolio companies of which $2,840,070 was
previously recorded as unrealized appreciation. MACC also realized a loss of
$847,385 from the write-off of one portfolio company of which $847,384 was
previously recorded as unrealized depreciation. Management does not attempt to
maintain a comparable level of realized gains quarter to quarter but instead
attempts to maximize total investment portfolio appreciation through realizing
gains in the disposition of securities and investing in new portfolio
investments.
Net Change in Unrealized Appreciation/Depreciation of Investments
MACC recorded net change in unrealized appreciation/depreciation on
investments of ($1,769,502) during the current year first quarter, as compared
to $3,028,392 during the prior year first quarter. This net change in unrealized
appreciation/depreciation on investments of ($1,769,502) is the net effect of
increases in fair value of five portfolio companies totaling $572,380, decreases
in fair value of two portfolio companies totaling $349,196, the reversal of
$2,840,070 of appreciation resulting from the sale of warrants of one portfolio
investment and the sale of equity interests of two portfolio investments
referenced above, and the reversal of $847,384 of depreciation resulting from
the write-off of the investment in one portfolio investment.
Net change in unrealized appreciation/depreciation on investments
represents the change for the period in the unrealized appreciation net of
unrealized depreciation on MACC's total investment portfolio. When MACC
increases the fair value of a portfolio investment above its cost, the
unrealized appreciation for the portfolio as a whole increases, and when MACC
decreases the fair value of a portfolio investment below its cost, unrealized
depreciation for the portfolio as a whole increases. When MACC sells an
appreciated portfolio investment for a gain, unrealized appreciation for the
portfolio as a whole decreases as the gain is realized. Similarly, when MACC
sells or writes off a depreciated portfolio investment for a loss, unrealized
depreciation for the portfolio as a whole decreases as the loss is realized.
Net Change in Net Assets from Operations
MACC experienced a decrease of $387,487 in net assets at the end of the
first quarter of fiscal year 2004, and the resulting net asset value per share
was $5.31 as of December 31, 2003, as compared to $5.47 as of September 30,
2003. Although general economic conditions continue to have an adverse impact on
the operating results and financial condition of a number of MACC's portfolio
companies, the majority of MACC's thirty-six portfolio companies continue to be
valued at cost or above. MACC has fifteen portfolio investments valued at cost,
has recorded unrealized appreciation on eight portfolio investments and has
recorded unrealized depreciation on thirteen portfolio investments.
To mitigate the effects of the current economic environment on MACC's
operating performance during fiscal year 2004, 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 projected fewer
investments and has projected no new borrowings under the SBIC leverage program
in the fiscal year 2004 budget. Recent years have been difficult years for the
venture capital industry. With the recent improvement in the economy, MACC's
overall portfolio is showing signs of increasing strength. However,
10
manufacturing and some market niches are lagging the overall improvement in the
economy. If the economy continues to improve, management believes MACC's
investment portfolio will benefit from improved operating performance at a
number of portfolio companies and from a more robust market for corporate
acquisitions and investments.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
To date, MACC has relied upon several sources to fund its investment
activities, including MACC's cash and money market accounts and the Small
Business Investment Company ("SBIC") leverage program operated by the Small
Business Administration (the "SBA").
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 four years is available through the
SBIC leverage program and MACC anticipates that capital will be available in
future periods. MACC does not currently expect to borrow any funds through the
SBIC leverage program during fiscal year 2004.
As an SBIC, MorAmerica Capital is required to comply with the
regulations of the SBA (the "SBA Regulations"). These regulations include the
capital impairment rules, as defined by Regulation 107.1830 of the SBA
Regulations. As of December 31, 2003, the capital of MorAmerica Capital was
impaired less than the maximum impairment percentage permitted under SBA
Regulations. No assurances can be given, however, that MorAmerica Capital will
continue to be less than the maximum impairment percentage in future periods if
MorAmerica Capital continues to experience negative operating results. If
MorAmerica Capital would exceed the maximum impairment percentage in future
periods, a number of events could occur which could have a material adverse
effect on the financial position, results of operations, cash flow and liquidity
of MACC and MorAmerica Capital. MorAmerica Capital is currently limited by the
SBA Regulations in the amount of distributions it may make to MACC. Because MACC
historically has relied in large part on distributions from MorAmerica Capital
to fund its operating expenses and other cash requirements, MACC is currently
evaluating a number of alternatives to seek to provide sufficient liquidity at
the parent-company level.
As of December 31, 2003, MACC's cash and money market accounts totaled
$5,909,967. 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. Subject to the risks and uncertainties described in this
report on Form 10-Q, 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 is to invest $2,500,000 in new and follow-on
investments during the current fiscal year, subject to further adjustment based
upon current economic and operating conditions.
11
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 fiscal year 2005, $1,000,000 in fiscal year
2007, $2,500,000 in fiscal year 2009, $9,000,000 in fiscal year 2010, $5,835,000
in fiscal year 2011, and $7,455,000 in fiscal year 2012. Subject to the risks
and uncertainties described in this report on Form 10-Q, it is anticipated
MorAmerica Capital will be able to roll over these debentures with new ten-year
debentures when they mature.
MACC currently anticipates that it will rely primarily on its current
cash and money market accounts and its cash flows from operations to fund its
investment activities and other cash requirements during the remainder of fiscal
year 2004. Although management believes these sources will provide sufficient
funds for MACC to meet its fiscal 2004 investment level objective and other
anticipated cash requirements, there can be no assurances that MACC's cash flows
from operations will be as projected, or that MACC's cash requirements will be
as projected. MACC's cash flow has been negatively affected by expenses
associated with the pending arbitration proceedings described in Note 3 to the
Unaudited Condensed Consolidated Financial Statements. An adverse outcome on
such arbitration proceedings could further adversely affect MACC's cash flow.
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 $34,159,686 at
December 31, 2003 and $38,601,177 at September 30, 2003. During the three months
ended December 31, 2003, MACC invested $236,808 in a follow-on investment in one
existing portfolio company. Management views investment objectives for any given
year as secondary in importance to MACC's overriding concern of investing in
only those portfolio companies which satisfy MACC's investment criteria. MACC's
investment objective for fiscal year 2004 is to invest $2,500,000 in new and
follow-on investments, subject to further adjustment based on current economic
and operating conditions.
MACC frequently co-invests with other funds managed by MACC's
investment advisor. When it makes any co-investment with these related funds,
MACC follows certain procedures consistent with orders of the Securities and
Exchange Commission for related party co-investments to reduce or eliminate
conflict of interest issues. Of the $236,808 invested during the current year
first quarter, $236,808 represented co-investments with funds managed by MACC's
investment advisor.
CRITICAL ACCOUNTING POLICY
Investments in securities traded on a national securities exchange (or
reported on the NASDAQ national market) are stated at the average of the bid
price on the three final trading days of the valuation period which is not
materially different from the bid price on the final day of the period.
Restricted and other securities for which quotations are not readily available
are valued at fair value as determined by the Board of Directors. Among the
factors
12
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MACC is exposed to market risk from changes in the market price of
publicly traded equity securities held from time to time in the MACC
consolidated investment portfolio. At December 31, 2003, MACC held only one
publicly traded equity security in its consolidated investment portfolio, and
the fair value of that portfolio investment was not material. Therefore, a
hypothetical 10% adverse change in quoted market price of that portfolio
investment would not be material.
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,
2003, was $30,477,000, 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.
13
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December 31, 2003
------------------------------------------------------
Fair Value of Debentures Payable $30,477,000
Amount Above Cost $2,537,000
Additional Market Risk $775,000
------------------------------------------------------
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 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.
14
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. Following discovery, depositions and other
preliminary proceedings, in June, 2003, the formal arbitration
proceedings commenced and are being intensively contested by all
parties. Based on the current schedule for the arbitration, a decision
will not be rendered until at least May, 2004. 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 a result of the indemnification claim, against which no
accrual for loss has been made as of December 31, 2003, because the
amount of the possible loss, and therefore its materiality to the
financial statements, cannot be estimated. MorAmerica Capital intends
to continue vigorously defending this arbitration. MorAmerica Capital
received approximately $939,000 of proceeds from the sale of the
Portfolio Company. MorAmerica Capital owns debt securities of Buyer
with a face value of $508,761 and warrants with a cost of $24,000
received as part of the sale. Buyer has defaulted on interest payments
due on these debt securities. On March 31, 2003, MorAmerica Capital
reduced the valuation of these debt securities by $254,380 in light of
the interest default and information regarding the related dispute as
of that date. On June 30, 2003, MorAmerica Capital further reduced the
valuation of these debt securities by $254,380 to $1 and reduced the
valuation of the warrants to zero based upon the continuing interest
default and additional information regarding the related dispute as of
that date. Subsequent to December 31, 2003, Buyer refinanced certain of
its obligations, including the debt securities held by MorAmerica
Capital, and the principal amount of these debt securities and accrued
interest has been deposited in an escrow account pending conclusion of
the arbitration proceedings.
In a related development, MorAmerica Capital and another small
business investment company, NDSBIC, L.P., which co-invested in
Portfolio Company, filed suit on December 24, 2003 in the United States
District Court for the Northern District of Texas against Patton Boggs
LLP and Charles P. Miller, Esq., of Patton Boggs alleging legal
malpractice and breach of fiduciary duty. Patton Boggs and Mr. Miller
represented MorAmerica Capital and NDSBIC in connection with their
investment in the Portfolio Company and the subsequent sale of the
Portfolio Company to Buyer. MorAmerica Capital and NDSBIC are seeking
monetary damages, in an amount that has not been determined.
15
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.
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:
31.1 Section 302 Certification of David R. Schroder (CEO)
31.2 Section 302 Certification of Robert A. Comey (CFO)
32.1 Section 906 Certification of David R. Schroder (CEO)
32.2 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, 2003.
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: 2/12/04 By: /s/David Schroder
----------------- ---------------------------------
David Schroder, President
Date: 2/12/04 By: /s/Robert A. Comey
----------------- ---------------------------------
Robert A. Comey, Treasurer
16
EXHIBIT INDEX
Exhibit Description
- ------- ------------
31.1 Section 302 Certification of David R. Schroder (CEO)
31.2 Section 302 Certification of Robert A. Comey (CFO)
32.1 Section 906 Certification of David R. Schroder (CEO)
32.2 Section 906 Certification of Robert A. Comey (CFO)
17