Form 10-Q for MACC Private Equities, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to____________
Commission file number 0-24412
------------------------------------------
MACC Private Equities Inc.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 42-1421406
--------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
101 Second Street SE, Suite 800, Cedar Rapids, Iowa 52401
-----------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(319) 363-8249
------------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year, if changed since last report)
Please indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Please indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
At June 30, 2005, the registrant had issued and outstanding 2,329,255
shares of common stock.
Page 1 of 38
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
Condensed Consolidated Balance
Sheets (Unaudited) at June 30, 2005
and September 30, 2004 ........................................ 3
Condensed Consolidated Statements of
Operations (Unaudited) for the three months
June 30, 2005 and June 30, 2004
And the nine months ended ended
June 30, 2005 and June 30, 2004................................ 4
Condensed Consolidated Statements of
Cash Flows (Unaudited) for the nine months
ended June 30, 2005 and June 30, 2004.......................... 5
Notes to (Unaudited) Condensed Consolidated
Financial Statements........................................... 6
Consolidated Schedule of Investments (Unaudited)
at June 30, 2005............................................... 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results Of Operations............... 14
Item 3. Quantitative and Qualitative
Disclosure About Market Risk................................... 24
Item 4. Controls and Procedures........................................ 25
Part II. OTHER INFORMATION.............................................. 26
Item 1. Legal Proceedings.............................................. 26
Item 6. Exhibits and Reports on Form 8-K............................... 26
Signatures..................................................... 27
Certifications..............................See Exhibits 31 and 32
2
PART 1 -- FINANCIAL INFORMATION
Item 1. Financial Statements
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
June 30, September 30,
2005 2004
(Unaudited)
------------- --------------
Assets
Loans and investments in portfolio securities, at fair value:
Unaffiliated companies (cost of $7,112,366 and $10,367,898) $ 4,611,543 7,352,409
Affiliated companies (cost of $17,864,956 and $19,100,024) 24,183,965 21,266,781
Controlled companies (cost of $4,473,183 and $4,536,309) 5,016,933 4,598,894
Cash and cash equivalents 4,866,059 4,774,771
Interest receivable 353,250 221,844
Other assets 501,112 729,417
------------ -----------
Total assets $ 39,532,862 38,944,116
============ ===========
Liabilities and net assets
Liabilities:
Debentures payable $ 24,790,000 25,790,000
Litigation settlement payable --- 1,713,174
Note payable-related party 305,000 270,000
Deferred incentive fees payable --- 18,353
Accrued interest 633,876 180,138
Accounts payable and other liabilities 279,537 234,230
------------ -----------
Total liabilities 26,008,413 28,205,895
------------ -----------
Net assets:
Common stock, $.01 par value per share;
authorized 10,000,000 shares;
issued and outstanding 2,329,255 shares 23,293 23,293
Additional paid-in-capital 9,139,219 11,501,075
Unrealized appreciation (depreciation) on investments 4,361,937 (786,147)
------------ ------------
Total net assets 13,524,449 10,738,221
------------ -----------
Total liabilities and net assets $ 39,532,862 38,944,116
============ ===========
Net assets per share $ 5.81 4.61
============ ===========
See accompanying notes to unaudited condensed consolidated financial statements.
3
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations
(Unaudited)
For the three For the three For the nine For the nine
months ended months ended months ended months ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------- ------------- ------------ ------------
Investment income:
Interest
Unaffiliated companies $ 75,524 154,724 198,818 377,135
Affiliated companies 444,716 184,070 1,013,978 691,983
Controlled companies 85,942 68,247 380,338 206,016
Other 17,904 12,690 53,420 37,057
Dividends
Unaffiliated companies --- --- --- 78,204
Affiliated companies 217,246 250,335 483,711 592,602
Processing fees --- --- 7,700 ---
Other 39,360 1,002 42,155 4,502
------------- ------------- ------------ ------------
Total investment income 880,692 671,068 2,180,120 1,987,499
------------- ------------- ------------ ------------
Operating expenses:
Interest expenses 523,927 536,599 1,566,681 1,600,865
Management fees 173,433 262,810 657,827 782,608
Incentive fees --- --- --- 514,314
Professional fees 122,211 93,155 444,106 547,001
Other 80,674 82,577 241,556 266,738
------------- ------------- ------------ ------------
Total operating expenses before
management fees waived 900,245 975,141 2,910,170 3,711,526
Management fees waived (51,642) --- (103,867) (87,092)
------------- ------------ ------------ ------------
Net operating expenses 848,603 975,141 2,806,303 3,624,434
Investment income (expense).
net before tax expense 32,089 (304,073) (626,183) (1,636,935)
------------- ------------- ------------ ------------
Income tax expense 50,000 --- 50,000 ---
------------- ------------- ------------ ------------
Investment expense, net after tax expense (17,911) (304,073) (676,183) (1,636,935)
------------- ------------- ------------ ------------
Realized and unrealized gain (loss) on investments
and other assets:
Net realized gain (loss) on investments:
Unaffiliated companies 16,557 26,495 (2,412,526) 2,276,106
Affiliated companies 638,657 3,380 638,657 205,297
Controlled companies --- --- --- 539,250
Net change in unrealized appreciation/depreciation
on investments 1,651,887 (80,659) 5,148,084 (484,199)
Net change in unrealized gain (loss)
on other assets 2,115 1,505 88,196 (724,823)
------------- ------------- ------------ ------------
Net gain (loss) on investments 2,309,216 (49,279) 3,462,411 1,811,631
------------- ------------- ------------ ------------
Net change in net assets
from operations $2,291,305 (353,352) 2,786,228 174,696
============= ============= ============ ============
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 nine For the nine
months ended months ended
June 30, June 30,
2005 2004
------------ ------------
Cash flows from operating activities:
Increase in net assets from operations $ 2,786,228 174,696
------------ ------------
Adjustments to reconcile increase
in net assets from operations to net cash
(used in) provided by operating activities:
Net realized and unrealized gain on investments (3,374,215) (2,075,228)
Net realized and unrealized (gain) loss on other assets (88,196) 724,823
Change in litigation settlement payable (1,713,174) ---
Proceeds from disposition of and payments on
loans and investments in portfolio securities 3,409,744 8,023,128
Payments of incentive fees to investment advisor --- (497,517)
Purchases of loans and investments in
portfolio securities (533,883) (481,934)
Change in interest receivable (282,293) (164,201)
Change in other assets 353,032 784,532
Change in accrued interest, deferred incentive fees payable,
accounts payable and other liabilities 499,045 403,640
------------ ------------
Total adjustments (1,729,940) 6,717,243
------------ ------------
Net cash provided by operating activities 1,056,288 6,891,939
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of note payable-related party 35,000 270,000
Debt repayment 1,000,000 ---
------------ ------------
Net cash (used in) provided by financing activities (965,000) 270,000
------------ ------------
Net increase in cash and cash equivalents 91,288 7,161,939
Cash and cash equivalents at beginning of period 4,774,771 722,691
------------ ------------
Cash and cash equivalents at end of period $ 4,866,059 7,884,630
============ ============
Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ 1,010,076 1,048,948
============ ============
Supplemental disclosure of noncash investing and financing
information -
Assets received in exchange of securities --- 196,687
In-kind interest income received in the form of securities $ 150,886 323,820
============ ============
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 US generally accepted accounting principals 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 US generally accepted accounting principals for interim financial
information and instructions to Form 10-Q and Article 6 of Regulation S-X. The
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto of MACC Private Equities Inc. and its
Subsidiary as of and for the year ended September 30, 2004. The information
reflects all adjustments consisting of normal recurring adjustments which are,
in the opinion of management, necessary for a fair presentation of the results
of operations for the interim periods. The results of the interim period
reported are not necessarily indicative of results to be expected for the year.
The balance sheet information as of September 30, 2004 has been derived from the
audited balance sheet as of that date.
Certain reclassifications have been made to prior period consolidated
financial statements to conform to the June 30, 2005 presentation.
(2) Critical Accounting Policy
Investments in securities traded on a national securities exchange (or
reported on the NASDAQ national market) are stated at the average of the bid
price on the three final trading days of the valuation period which is not
materially different from the bid price on the final day of the period.
Restricted and other securities for which quotations are not readily available
are valued at fair value as determined by the Board of Directors. Among the
factors considered in determining the fair value of investments are the cost of
the investment; developments, including recent financing transactions, since the
acquisition of the investment; financial condition and operating results of the
investee; the long-term potential of the business of the investee; market
interest rates for similar debt securities; and other factors generally
pertinent to the valuation of investments. However, because of the inherent
uncertainty of valuation, those estimated values may differ significantly from
the values that would have been used had a ready market for the securities
existed, and the differences could be material.
In the valuation process, MorAmerica Capital uses financial information
received monthly, quarterly, and annually from its portfolio companies which
includes both audited and unaudited financial statements. This information is
used to determine financial condition, performance, and valuation of the
portfolio investments.
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
6
realized gains and losses. Under the provisions of SOP 90-7, the fair value of
loans and investments in portfolio securities on February 15, 1995, the
fresh-start date, is considered the cost basis for financial statement purposes.
(3) Commitments and Contingencies
As an SBIC, MorAmerica Capital is required to comply with the regulations
of the SBA (the "SBA Regulations"). These regulations include the capital
impairment rules, as defined by Regulation 107.1830 of the SBA Regulations. As
of June 30, 2005, the capital of MorAmerica Capital was impaired by
approximately 51.76%, (compared to 52.48% at September 30, 2004) which exceeded
the 50% maximum impairment percentage permitted under the SBA Regulations.
Accordingly, as of June 30, 2005 SBA had the discretion not to extend additional
financing to MorAmerica Capital, as well as the right to declare a default on
MorAmerica Capital's outstanding SBA-guaranteed debentures, to accelerate
MorAmerica Capital's payment obligations thereunder and to seek appointment of
the SBA as receiver for MorAmerica Capital. If the SBA were to exercise its
right to accelerate MorAmerica Capital's payment obligations under the
outstanding SBA-guaranteed debentures, MorAmerica Capital may be required to
liquidate some or all of its portfolio investments. Because most of its
portfolio investments are not publicly traded, MorAmerica Capital may receive
less than the carrying value for its portfolio investments in connection with
such a forced sale. Therefore, the exercise by the SBA of any of these rights
could have a material adverse effect on the financial position, results of
operations, cash flow and liquidity of MACC and MorAmerica Capital and raises
substantial doubt about the Company's ability to continue as a going concern. As
of June 30, 2005, the SBA had not declared a default on MorAmerica Capital's
outstanding SBA-guaranteed debentures, accelerated MorAmerica Capital's payment
obligation thereunder or sought appointment of the SBA as receiver for
MorAmerica Capital.
(4) Financial Highlights
For the nine For the nine
months ended months ended
June 30, June 30,
2005 2004
------------ ------------
Per Share Operating Performance
(For a share of capital stock outstanding
throughout the period (1):
Net asset value, beginning of period $ 4.61 5.47
-------- -------
Income from investment operations:
Investment expense, net (0.29) (0.70)
Net realized and unrealized gain
on investment transactions 1.49 0.78
-------- -------
Total from investment
operations 1.20 0.08
-------- -------
Net asset value, end of period $ 5.81 5.55
======== =======
Closing market price $ 2.20 3.55
======== =======
7
For the nine For the nine
months ended months ended
June 30, June 30,
2005 2004
------------ ------------
Total return
Net asset value basis (1) 25.95 % 1.37
Market price basis (36.24) % 40.87
Net asset value, end of period
(in thousands) $ 13,524 12,921
Ratio to average net assets:
Investment (expense) income, net (1) (5.81) % (12.55)
Operating and income tax expense (1) 26.06 % 27.79
(1) MACC's investment advisor agreed to a voluntary, temporary reduction in
management fees from January 1, 2003 through February 29, 2004. In
addition, MACC's investment advisor agreed to voluntarily waive any
management fees payable by MorAmerica Capital for the months of March and
April, 2005, in relation to SBA's decision not to approve the investment
advisor as investment advisor of MorAmerica Capital. Due to these
agreements, the investment advisor voluntarily waived $103,867 and $87,092
of management fees for the nine months ended June 30, 2005 and 2004,
respectively. Excluding the effects of the waiver for the nine months ended
June 30, 2005 and 2004, total return on a net assets value basis would be
24.98% and 0.69%, respectively; the investment (expense) income, net ratio
would be (6.81)% and (13.26)%, respectively; and the operating and income
expense ratio would be 27.15% and 28.55%, respectively.
The ratios of investment (expense) income, net to average net assets, of
operating and income tax expenses to average net assets and total return are
calculated for common stockholders as a class. Total return, which reflects the
annual change in net assets, was calculated using the change in net assets
between the beginning of the current fiscal year and end of the current year
period. An individual common stockholders' return may vary from these returns.
6
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS
JUNE 30, 2005
Manufacturing:
Percent of
Company Security Net assets Value Cost (d)
....................................................................................................................................
Architectural Art Manufacturing, Inc. (a) 12% debt security, due March 31, 2007 (c) $ 780,000 780,000
Wichita, Kansas Warrant to purchase 11,143 common shares (c) 1 1
Manufacturer of industrial and 10% debt security, due March 31, 2007 (c) 221,000 221,000
commercial boilers and shower 121,457 common shares (c) 21,457 121,457
doors, frames and enclosures 12% debt security, due March 31, 2007 (c) 113,880 113,880
312,000 common shares (c) 3,120 3,120
----------- -----------
1,139,458 1,239,458
----------- -----------
Aviation Manufacturing Group, LLC (a) 14% debt security, due October 1, 2007 616,000 616,000
Yankton, South Dakota 154,000 units preferred 154,000 154,000
Manufacturer of flight critical Membership interest 39 39
parts of aircraft ----------- -----------
770,039 770,039
----------- -----------
Central Fiber Corporation 12% debt security, due December 31, 2005 350,000 350,000
Wellsville, Kansas 12% debt security, due December 31, 2005 91,123 91,123
Recycles and manufactures Warrant to purchase 490.67 common shares (c) 213,333 --
cellulose fiber products
654,456 441,123
----------- -----------
Detroit Tool Metal Products Co. (a) 14% debt security, due February 29, 2008 1,128,793 1,128,793
Lebanon, Missouri 19,853.94 shares Series A preferred (c) 195,231 195,231
Metal stamping ----------- -----------
1,324,024 1,324,024
----------- -----------
Handy Industries, LLC (a) 12.5% debt security, due January 8, 2007 890,222 890,222
Marshalltown, Iowa 167,171 units Class B preferred (c) 167,171 167,171
Manufacturer of lifts for Membership interest 503,535 1,357
motorcycles, trucks and ----------- -----------
industrial metal products 1,560,928 1,058,750
----------- -----------
Hicklin Engineering, L.C. (a) 10% debt security, due June 30, 2007 740,000 740,000
Des Moines, Iowa Membership interest 527,127 127
Manufacturer of auto and ----------- -----------
truck transmission and 1,267,127 740,127
brake dynamometers ----------- -----------
Humane Manufacturing, LLC (b) 12% debt security, due January 31, 2005 856,548 856,549
Baraboo, Wisconsin 12% promissory note, due December 31, 2004 236,808 236,808
Manufacturer of rubber mats for Membership interest (c) 701,200 101,200
anti-fatigue, agricultural, exercise ----------- -----------
and roofing markets 1,794,556 1,194,557
----------- -----------
Industrial Tooling & Fabrication, LLC (a) 10% debt security, due November 18, 2009 157,715 157,715
Fort Madison, Iowa 12% debt security, due November 18, 2009 343,267 343,267
Metal stamping ----------- -----------
500,982 500,982
----------- -----------
9
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED...
JUNE 30, 2005
Manufacturing Continued:
Percent of
Company Security Net assets Value Cost (d)
....................................................................................................................................
Kwik-Way Products, Inc. (a) 2% debt security, due January 31, 2008 $ 267,254 267,254
Marion, Iowa 2% debt security, due January 31, 2008 281,795 281,795
Manufacturer of automobile 29,340 common shares (c) 92,910 92,910
aftermarket engine and 38,008 common shares (c) 126,651 126,651
brake repair machinery ----------- -----------
768,610 768,610
----------- -----------
Linton Truss Corporation 542.8 common shares (c) -- --
Delray Beach, Florida 400 shares Series 1 preferred (c) 450,000 40,000
Manufacturer of residential roof Warrants to purchase common shares (c) 15 15
and floor truss systems ----------- -----------
450,015 40,015
----------- -----------
M.A. Gedney Company (a) 536,003 shares preferred (c) 484,459 1,418,718
Chaska, Minnesota Warrant to purchase 34,223 preferred shares (c) -- --
Pickle processor 10% debt security 31,883 31,883
----------- -----------
516,342 1,450,601
----------- -----------
Magnum Systems, Inc. (a) 12% debt security, due July 31, 2006 574,163 574,163
Parsons, Kansas 48,038 common shares (c) 48,038 48,038
Manufacturer of industrial 292,800 shares preferred (c) 304,512 304,512
bagging equipment Warrant to purchase 56,529 common shares (c) 210,565 565
----------- -----------
1,137,278 927,278
----------- -----------
Metal Tooling Holdings, Inc. (a) 6,652.98 common shares (c) 740,832 123,432
Lebanon, Missouri 1,234.19 common shares (c) 120,909 3,309
Metal stamping ----------- -----------
861,741 126,741
----------- -----------
Penn Wheeling Acquisition 13% debt security, due March 10, 2007 1,033,500 1,033,500
Company, LLC (a) 62 units Class B membership interest (c) 748,717 62,000
Glen Dale, West Virginia 35 units Class C membership interest (c) 291,057 24,000
Metal closure manufacturer ----------- -----------
2,073,274 1,119,500
----------- -----------
Pratt-Read Corporation (a) 13,889 shares Series A Preferred 750,000 750,000
Bridgeport, Connecticut 7,718 shares Series A preferred 416,667 416,667
Manufacturer of screwdriver shafts 13% debt security, due July 26, 2006 277,800 277,800
and handles and other hand tools Warrants to purchase common shares (c) -- --
----------- -----------
1,444,467 1,444,467
----------- -----------
Simoniz USA, Inc. 12% debt security, due April 1, 2008 445,092 445,092
Bolton, Connecticut ----------- -----------
Producer of cleaning and wax
products under both the Simoniz
brand and private label brand names
10
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED...
JUNE 30, 2005
Manufacturing Continued:
Percent of
Company Security Net assets Value Cost (d)
....................................................................................................................................
Spectrum Products, LLC (b) 13% debt security, due October 9, 2006 $ 1,077,650 1,077,650
Missoula, Montana 385,000 units Series A preferred 385,000 385,000
Manufacturer of equipment for Membership interest 351 351
the swimming pool industry ----------- -----------
1,463,001 1,463,001
----------- -----------
Total manufacturing 134.36% 18,171,390 15,054,365
======== ----------- -----------
Service:
Concentrix Corporation (a) 3,758,750 shares Series A preferred (c) 1,127,625 2,255,250
Pittsford, New York 130,539 shares Series C preferred (c) 104,431 104,431
Provides marketing outsourcing 328,485 shares Series D preferred (c) 262,788 262,788
solutions including ----------- -----------
telemarketing, fulfillment
and web communications 1,494,844 2,622,469
----------- -----------
Direct Mail Holding, LLC (a) Membership interest 5,931,249 476,366
Mt. Pleasant, Iowa ----------- -----------
Provider of turnkey services
for non-profit fund raising
FreightPro, Inc. 18% debt security, due February 21, 2007 (c) 131,250 262,500
Overland Park, Kansas 18% debt security, due February 15, 2007 (c) 43,750 87,500
Internet based outsource Warrant to purchase 366,177.80 common shares (c) 2 2
provider of freight logistics ----------- -----------
175,002 350,002
----------- -----------
JHT Holdings, Inc. 1,238 shares Class A common (c) 390,011 975,025
Joplin, Missouri ----------- -----------
Provider of truck drive-away,
internet based auction and
related services to the
commercial truck industry
Lee Mathews Equipment, Inc. 12% debt security, due March 10, 2005 486,364 486,364
Kansas City, Missouri Warrant to purchase 153,654 common shares (c) 30 30
Distributor of industrial 12% debt security, due March 10, 2005 60,606 60,606
pump systems ----------- -----------
547,000 547,000
----------- -----------
Monitronics International, Inc. 73,214 common shares (c) 183,035 54,702
Dallas, Texas ----------- -----------
Provides home security
systems monitoring services
11
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED...
JUNE 30, 2005
Service Continued:
Percent of
Company Security Net assets Value Cost (d)
....................................................................................................................................
Morgan Ohare, Inc. (b) 0% debt security, due January 1, 2007 (c) $ 1,068,750 1,125,000
Addison, Illinois 10% debt security, due January 1, 2007 375,000 375,000
Fastener plating and heat treating 57 common shares (c) 1 1
10% debt security, due January 1, 2007 62,500 62,500
10% debt security, due January 1, 2007 187,500 187,500
10% debt security, due January 1, 2007 46,875 46,875
10% debt security, due January 1, 2007 18,750 18,750
----------- -----------
1,759,376 1,815,626
----------- -----------
Organized Living, Inc. 545,204 shares Series A preferred (c) -- 543,227
Westerville, Ohio 215,593 shares Series B preferred (c) -- 247,933
Retail specialty stores for storage 174,964.5714 shares Series C preferred (c) -- 233,041
and organizational products 138,889 shares Series D preferred (c) -- 250,001
800,000 shares Series F preferred (c) 1 200,000
----------- -----------
1 1,474,202
----------- -----------
SMWC Acquisition Co., Inc. (a) 13% debt security due May 19, 2007 110,000 110,000
Kansas City, Missouri 1,320 shares common (c) 387,140 42,900
Steel warehouse distribution Warrant to purchase 2,200 common shares (c) -- --
and processing 176,550 shares Series A preferred (c) 353,100 353,100
----------- -----------
850,240 506,000
----------- -----------
Warren Family Funeral Homes, Inc. 12% debt security, due June 29, 2006 144,375 144,375
Topeka, Kansas Warrant to purchase 346.5 common shares (c) 12 12
Provider of value priced funeral ----------- -----------
services
144,387 144,387
----------- -----------
Total service 84.85% 11,475,145 8,965,779
======= ----------- -----------
Technology and Communications:
Feed Management Systems, Inc. (a) 540,551 common shares (c) 682,337 1,327,186
Brooklyn Center, Minnesota 674,309 shares Series A preferred (c) 674,309 674,309
Batch feed software and systems 12% debt security, due May 20, 2008 74,000 74,000
and B2B internet services 12% debt security, due August 21, 2008 74,000 74,000
Warrants to purchase 166,500 Series A preferred (c) -- --
----------- -----------
1,504,646 2,149,495
----------- -----------
MainStream Data, Inc. (a) 322,763 shares Series A preferred (c) 200,049 200,049
Salt Lake City, Utah ----------- -----------
Content delivery solutions provider
12
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED...
JUNE 30, 2005
Technology and Communications Continued:
Percent of
Company Security Net assets Value Cost (d)
....................................................................................................................................
Miles Media Group, Inc. (a) 1,000 common shares (c) 838,667 440,000
Sarasota, Florida 100 common options (c) -- --
----------- -----------
Tourist magazine publisher 838,667 440,000
----------- -----------
Phonex Broadband Corporation 1,855,302 shares Series A preferred (c) 288,750 1,155,000
Midvale, Utah ----------- -----------
Power line communications
Portrait Displays, Inc. 8% debt security, due April 1, 2009 (c) 78,197 96,440
Pleasanton, California 8% debt security, due April 1, 2012 (c) 616,221 750,001
Designs and markets pivot enabling Warrant to purchase 39,400 common shares (c) -- --
software for LCD computer monitors ----------- -----------
694,418 846,441
----------- -----------
SnapNames.com, Inc. 10% debt security, due March 15, 2007 639,376 639,376
Portland, Oregon Warrant to purchase 465,000 common shares (c) -- --
Domain name management ----------- -----------
639,376 639,376
----------- -----------
Total technology and communications 30.80% 4,165,906 5,430,361
======= ----------- -----------
$ 33,812,441 29,450,505
============ ===========
(a) Affiliated company.
(b) Controlled company.
(c) Non-income producing.
(d) For all debt securities presented, the cost is equal to the principal
balance.
See accompanying notes to unaudited condensed consolidated financial statements.
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 (the "1995 Act"). Such
statements are made in good faith by MACC pursuant to the safe-harbor provisions
of the 1995 Act, and are identified as including terms such as "may," "will,"
"should," "expects," "anticipates," "estimates," "plans," or similar language.
In connection with these safe-harbor provisions, MACC has identified in its
Annual Report to Shareholders for the fiscal year ended September 30, 2004,
important factors that could cause actual results to differ materially from
those contained in any forward-looking statement made by or on behalf of MACC,
including, without limitation, the high risk nature of MACC's portfolio
investments, the effects of general economic conditions on MACC's portfolio
companies, the effects of recent or future losses on the ability of MorAmerica
Capital to comply with applicable regulations of the Small Business
Administration and MorAmerica Capital's ability to obtain future funding, any
actions taken by the SBA with respect to MorAmerica Capital's impairment, any
failure to achieve annual investment level objectives, changes in prevailing
market interest rates, and contractions in the markets for corporate
acquisitions and initial public offerings. MACC further cautions that such
factors are not exhaustive or exclusive. MACC does not undertake to update any
forward-looking statement which may be made from time to time by or on behalf of
MACC.
Historical and Recent Developments
From 1995 through 2004, MACC pursued a strategy of increasing shareholder
value by investing in new portfolio companies. This strategy included increasing
the amount of MorAmerica Capital's funds available for investment with the
proceeds from the issuance of debentures guaranteed by the Small Business
Administration (the "SBA"). In addition, MorAmerica Capital voluntarily
converted a portion of its retained earnings to paid-in capital in order to
increase the amount of leverage that MorAmerica Capital could obtain under
applicable SBA regulations. Additionally, because applicable SBA regulations
limit the amount that a small business investment company (an "SBIC"), such as
MorAmerica Capital, may invest in a single portfolio company based upon the
paid-in capital of the SBIC, management believed that increasing the paid-in
capital of MorAmerica Capital would permit the company to compete for larger
investments. This strategy was largely successful from 1995 through 2000, and
MACC realized significant increases in its net asset value over this period.
From 2001 through 2004, the operating performance and financial condition
of MorAmerica Capital were adversely affected by several factors. First, a
number of MorAmerica Capital's portfolio companies experienced negative
operating results, which negatively affected MorAmerica Capital's investment
income and resulted in unrealized depreciation and realized losses in the
investment portfolio. Second, arbitration proceedings were instituted against
MorAmerica Capital and several other SBICs in May 2002 with respect to the sale
by the SBICs of a portfolio investment, which significantly increased MorAmerica
Captial's operating expenses. The arbitration resulted in additional realized
losses on MorAmerica Capital's investment in the portfolio company that was the
subject of the arbitration proceedings. Third, MorAmerica Capital's earlier
decision to convert retained
14
earnings to paid-in capital magnified the effects that MorAmerica Capital's
operating results had on the capital impairment formula used by the SBA, and
ultimately resulted in MorAmerica Capital's capital impairment exceeding the
maximum impairment percentage permitted under SBA regulations from September 30,
2004 through June 30, 2005.
In 2003, MACC's largest shareholder sold its interest in MACC to a group of
new investors. Following this sale, MACC and MorAmerica Capital retained Atlas
Management Partners, LLC ("Atlas") to serve as primary investment advisor to
both companies, and retained InvestAmerica Investment Advisors, Inc.
("InvestAmerica") (who had previously served as the sole investment advisor to
the companies) as a subadvisor to manage the existing portfolio. At that time,
the Board of Directors of MACC had determined to pursue a strategy of increasing
shareholder value by increasing the size of MACC and MorAmerica Capital.
In December, 2004, the SBA notified the companies that it would not approve
Atlas as the investment advisor to MorAmerica Capital and required MorAmerica
Capital to reinstate InvestAmerica as the sole investment advisor to MorAmerica
Capital. In connection with the reinstatement of InvestAmerica as sole
investment advisor to MorAmerica Capital, MorAmerica Capital and InvestAmerica
agreed that MorAmerica Capital would not pay any incentive fees to InvestAmerica
until all of its outstanding SBA-guaranteed debentures are paid in full and an
escrow fund to satisfy the contingent obligations of MorAmerica Capital and the
other SBICs to the SBA under the arbitration settlement has been fully funded.
In early 2005, MorAmerica Capital settled the arbitration proceedings
described above, which required the approval of the SBA. As a condition to its
approval, the SBA required MorAmerica Capital and the other SBICs that were
parties to the arbitration settlement to indemnify the SBA against 50% of any
losses the SBA may incur, up to $7.5 million in the aggregate, relating to the
outstanding SBA-guaranteed debentures issued by the SBICs. The agreement with
the SBA also prohibits MorAmerica Capital from renewing its outstanding
SBA-guaranteed debentures or issuing new SBA-guaranteed debentures.
Beginning in fiscal year 2004 and continuing through the nine months ended
June 30, 2005, MorAmerica Capital's investment performance has improved. As of
June 30, 2005, MACC's net asset value had increased $2,786,228, or 25.95%, since
September 30, 2004. Management attributes these favorable results to a number of
factors, including the settlement of the arbitration proceedings discussed
above, a general improvement in economic conditions which has benefited the
operating performance and financial condition of a number of MACC's portfolio
companies, and a more robust market for corporate acquisitions which has allowed
MorAmerica Capital to liquidate profitably several of its portfolio investments.
In light of the above-described factors, at the present time, MACC and
MorAmerica Capital intend to take advantage of current market conditions to
increase shareholder value by actively seeking liquidity events for MorAmerica
Capital's portfolio investments. The companies currently intend to use their
existing excess cash to prepay MorAmerica Capital's outstanding SBA-guaranteed
debentures, rather than making new investments. On June 1, 2005, MorAmerica
Capital prepaid $1,000,000 of its debentures that were scheduled to mature in
December, 2007. As of June 30, 2005, MACC had cash and cash equivalents on a
consolidated basis of $4,886,059, substantially all of which was at MorAmerica
Capital. Subsequent to June 30, 2005, MorAmerica Capital received an additional
$6,187,051 of cash proceeds from the sale of one portfolio investment.
MorAmerica Capital intends to use its
15
cash and cash equivalents to prepay $8,000,000 of its outstanding SBA-guaranteed
debentures on September 1, 2005. Finally, as a result of the receipt of this
$6,187,051, as of July 31, 2005, MorAmerica Capital no longer exceeds the
maximum impairment percentage permitted under SBA regulations.
The Boards of Directors of MACC and MorAmerica Capital continue to consider
the appropriate long-term strategy for the companies to maximize shareholder
value.
Results of Operations
MACC's investment income includes income from interest, dividends and fees.
Investment expense, net represents total investment income minus net operating
expenses after management fees waived. The main objective of portfolio company
investments is to achieve capital appreciation and realized gains in the
portfolio. These gains and losses are not included in investment expense, net.
However, another one of MACC's on-going goals is to achieve net investment
income and increased earnings stability. In this regard, a significant
proportion of new portfolio investments are structured so as to provide a
current yield through interest or dividends. MACC also earns interest on
short-term investments of cash.
Third Quarter Ended June 30, 2005 Compared to Third Quarter Ended June 30, 2004
For the three months
ended June 30,
---------------------------
2005 2004 Change
--------------------------- ------------
Total investment income $ 880,692 671,068 209,624
Net operating expense (848,603) (975,141) 126,538
Income taxes (50,000) --- (50,000)
------------ ------------ ------------
Investment expense, net (17,911) (304,073) 286,162
------------ ------------ ------------
Net realized gain on investments 655,214 29,875 625,339
Net change in unrealized appreciation/
depreciation on investments 1,651,887 (80,659) 1,732,546
Net change in unrealized gain (loss) on other assets 2,115 1,505 610
------------ ------------ ------------
Net gain on investments 2,309,216 (49,279) 2,358,495
------------ ------------ ------------
Net change in net assets from operations $ 2,291,305 (353,352) 2,644,657
============ ============ ============
Net asset value:
Beginning of period $ 4.82 5.70
============ ============
End of period $ 5.81 5.55
============ ============
Total Investment Income
During the current year third quarter, total investment income was
$880,692, an increase of $209,624, or 31%, from total investment income of
$671,068 for the prior year third quarter. In the current year third quarter as
compared to the prior year third quarter, interest income increased $204,355, or
49%, dividend income decreased $33,089, or 13%, and other income increased
$38,358, or 3828%. The increase in interest income is the net result of
increases in interest income on debt portfolio securities issued by two
portfolio companies that were previously on non-accrual of interest status and
interest received on two follow-on investments made during the current year,
partially offset by decreases in interest income on debt portfolio securities
issued by one portfolio company which has been on non-accrual of interest status
since the end of the first quarter of the current fiscal year and the repayment
of
16
debt portfolio securities issued by one portfolio company. In the current year
third quarter and the prior year third quarter, MACC received dividends on five
existing portfolio investments, one of which was a distribution from a limited
liability company. The dividends in the prior year third quarter were larger
than in the current year third quarter. The increase in other income is due to a
distribution received by MACC with respect to the insurance claim of a former
MACC subsidiary against an insurance company in liquidation.
Net Operating Expenses
Net operating expenses for the third quarter of the current year were
$848,603, a decrease of $126,538, or 13%, as compared to net operating expenses
for the prior year third quarter of $975,141. Interest expense decreased
$12,672, or 2%, in the current year third quarter due to the repayment of
borrowings from the Small Business Administration in the amount of $2,150,000
during the fourth quarter of fiscal year 2004 and $1,000,000 during the third
quarter of the current fiscal year. Management fees (after management fees
waived in the current year third quarter and the prior year third quarter)
decreased $141,019, or 54%, in the current year third quarter due to the
decrease in assets under management, more management fees waived in the current
year third quarter, and a decrease in the management fee as a percentage of
assets under management from 2.50% to 1.50%, which became effective May 1, 2005.
Management fees as a percentage of assets under management are expected to be
lower in future periods due to a change in the terms of the investment advisory
relationships of MACC and MorAmerica Capital. Professional fees increased
$29,056, or 31%, in the current year third quarter primarily due to legal fees
incurred in connection with the postponement of the 2005 Annual Shareholders
Meeting. Other expenses decreased $1,903, or 2%, in the current year third
quarter as compared to the prior year third quarter.
Investment Expense, Net
For the current year third quarter, MACC recorded investment expense, net
of $17,911, as compared to investment expense, net of $304,073 during the prior
year third quarter.
Net Realized (Loss) Gain on Investments
During the current year third quarter, MACC recorded net realized gain on
investments of $655,214, as compared with net realized gain on investments of
$29,875 during the prior year third quarter. In the current year third quarter,
MACC realized a gain of $638,657 from the partial sale of one portfolio company
and a gain of $16,557 from the reversal of incentive fees which were deferred
fees that will not be paid. Management does not attempt to maintain a comparable
level of realized gains quarter to quarter but instead attempts to maximize
total investment portfolio appreciation through realizing gains in the
disposition of securities and investing in new portfolio investments. Subject to
the terms of the agreement between MorAmerica Capital and InvestAmerica
described above under "Historical and Recent Developments," MACC's investment
advisor is entitled to be paid an incentive fee which is calculated as a
percentage of the excess of MACC's realized gains in a particular period, over
the sum of net realized losses and unrealized depreciation during the same
period. As a result, the timing of realized gains, realized losses and
unrealized depreciation can have an effect on the amount of the incentive fee
payable to the investment advisor.
17
Net Change in Unrealized Appreciation/Depreciation of Investments and Other
Assets
MACC recorded net change in unrealized appreciation/depreciation on
investments of $1,651,887 during the current year third quarter, as compared to
($80,659) during the prior year third quarter. This net change in unrealized
appreciation/depreciation on investments of $1,651,887 is the net effect of
increases in fair value of five portfolio companies totaling $1,851,886 and a
decrease in fair value of one portfolio company of $199,999.
Net change in unrealized appreciation/depreciation on investments
represents the change for the period in the unrealized appreciation net of
unrealized depreciation on MACC's total investment portfolio. When MACC
increases the fair value of a portfolio investment above its cost, the
unrealized appreciation for the portfolio as a whole increases, and when MACC
decreases the fair value of a portfolio investment below its cost, unrealized
depreciation for the portfolio as a whole increases. When MACC sells an
appreciated portfolio investment for a gain, unrealized appreciation for the
portfolio as a whole decreases as the gain is realized. Similarly, when MACC
sells or writes off a depreciated portfolio investment for a loss, unrealized
depreciation for the portfolio as a whole decreases as the loss is realized.
Net change in unrealized gain on other assets of $2,115 during the current
year third quarter was recorded with respect to other publicly traded securities
which are classified as other assets due to an increase in the market price of
these securities, as compared to a net change in unrealized gain on other assets
of $1,505 during the prior year third quarter.
Net Change in Net Assets from Operations
MACC experienced an increase of $2,786,228 in net assets at the end of the
third quarter of fiscal year 2005, and the resulting net asset value per share
was $5.81 as of June 30, 2005, as compared to $4.61 as of September 30, 2004.
With the economy improving in most sectors, the majority of MACC's
thirty-one portfolio companies have improved results. High steel prices and
energy prices have had some negative effect on the portfolio. MACC has nine
portfolio investments valued at cost, has recorded unrealized appreciation on
twelve portfolio investments, and has recorded unrealized depreciation on ten
portfolio investments.
The overall activity in the investment banking market has improved and MACC
expects to exit several investments in 2005. If the economy continues to
improve, management believes MACC's investment portfolio will benefit from
improved operating performance at a number of portfolio companies and from a
more robust market for corporate acquisitions and investments.
18
Nine Months Ended June 30, 2005 Compared to Nine Months Ended June 30, 2004
For the nine months
ended June 30,
---------------------------
2005 2004 Change
--------------------------- ------------
Total investment income $ 2,180,120 1,987,499 192,621
Net operating expense (2,806,303) (3,624,434) 818,131
Income taxes (50,000) --- (50,000)
------------ ------------ ------------
Investment expense, net (676,183) (1,636,935) 960,752
------------ ------------ ------------
Net realized (loss) gain on investments (1,773,869) 3,020,653 (4,794,522)
Net change in unrealized appreciation/
depreciation on investments 5,148,084 (484,199) 5,632,283
Net change in unrealized gain (loss) on other assets 88,196 (724,823) 813,019
------------ ------------ ------------
Net gain on investments 3,462,411 1,811,631 1,650,780
------------ ------------ ------------
Net change in net assets from operations $ 2,786,228 174,696 2,611,532
============ ============ ============
Net asset value:
Beginning of period $ 4.61 5.47
============ ============
End of period $ 5.81 5.55
============ ============
Total Investment Income
During the current year nine-month period, total investment income was
$2,180,120, an increase of $192,621, or 10%, from total investment income of
$1,987,499 for the prior year nine-month period. In the current year nine-month
period as compared to the prior year nine-month period, interest income
increased $334,363, or 25%, dividend income decreased $187,095, or 28%,
processing fees increased $7,700, or 100%, and other income increased $37,653,
or 836%. The increase in interest income is the net result of increases in
interest income on debt portfolio securities issued by three portfolio companies
that were previously on non-accrual of interest status, interest received on two
follow-on investments made during the current year nine-month period, and the
conversion of interest to stock in one portfolio company which was on
non-accrual of interest status in the prior year nine-month period, partially
offset by decreases in interest income on debt portfolio securities issued by
one portfolio company which has been on non-accrual of interest status since the
end of the first quarter of the current fiscal year and the repayment of debt
portfolio securities issued by two portfolio companies in the current year
nine-month period. In the current year nine-month period, MACC received
dividends on seven existing portfolio investments, three of which were
distributions from limited liability companies, as compared to dividend income
received in the prior year nine-month period from eight existing portfolio
companies, five of which were distributions from limited liability companies.
Processing fees increased due to fees received on one follow-on investment made
in the current year nine-month period, compared to no new portfolio company
investments in which MACC received a processing fee at closing in the prior year
nine-month period. Other income increased due to a distribution received by MACC
with respect to the insurance claim of a former MACC subsidiary against an
insurance company in liquidation.
Net Operating Expenses
Net operating expenses for the nine-month period of the current year were
$2,806,303, a decrease of $818,131, or 23%, as compared to net operating
expenses for the prior year nine-month period of $3,624,434. Interest expense
decreased $34,184, or 2%, in the current year
19
nine-month period due to the repayment of borrowings from the Small Business
Administration in the amounts of $2,150,000 during the fourth quarter of fiscal
year 2004 and $1,000,000 during the third quarter of the current fiscal year.
Management fees (after management fees waived in the current year nine-month
period and the prior year nine-month period) decreased $141,556, or 20%, in the
current year nine-month period due to the decrease in assets under management,
more management fees waived in the current year nine-month period, and a
decrease in the management fee as a percentage of assets under management from
2.50% to 1.50%, which became effective May 1, 2005. Management fees as a
percentage of assets under management are expected to be lower in future periods
due to the change in the terms of the investment advisory relationships of MACC
and MorAmerica Capital. Professional fees decreased $102,895, or 19%, in the
current year nine-month period primarily due a decrease in legal expenses from
the arbitration proceedings related to the sale of a former portfolio company.
Other expenses decreased $25,182, or 9%, in the current year nine-month period
as compared to the prior year nine-month period due to the net result of
decreases in other expenses from the postponement of the 2005 Annual
Shareholders Meeting and decreases in directors fees, partially offset by an
increase in insurance premiums, which became effective in the second quarter of
the current fiscal year.
Investment Expense, Net
For the current year nine-month period, MACC recorded investment expense,
net of $676,183, as compared to investment expense, net of $1,636,935 during the
prior year nine-month period.
Net Realized (Loss) Gain on Investments
During the current year nine-month period, MACC recorded net realized loss
on investments of $1,773,869, as compared with net realized gain on investments
of $3,020,653 during the prior year nine-month period. In the current year
nine-month period, MACC realized a gain of $638,657 from the partial sale of one
portfolio company, a gain of $54,883 from the reversal of incentive fees which
were deferred fees that will not be paid, a loss of $635,251 from the sale of
one portfolio company and a loss of $1,832,158 from the write-off of one
portfolio company of which $1,832,071 was previously recorded as unrealized
depreciation. Management does not attempt to maintain a comparable level of
realized gains quarter to quarter but instead attempts to maximize total
investment portfolio appreciation through realizing gains in the disposition of
securities and investing in new portfolio investments. MACC's investment advisor
is entitled to be paid an incentive fee which is calculated as a percentage of
the excess of MACC's realized gains in a particular period, over the sum of net
realized losses and unrealized depreciation during the same period. As a result,
the timing of realized gains, realized losses and unrealized depreciation can
have an effect on the amount of the incentive fee payable to the investment
advisor.
Net Change in Unrealized Appreciation/Depreciation of Investments and Other
Assets
MACC recorded net change in unrealized appreciation/depreciation on
investments of $5,148,084 during the current year nine-month period, as compared
to ($484,199) during the prior year nine-month period. This net change in
unrealized appreciation/depreciation on investments of $5,148,084 is the net
effect of increases in fair value of nine portfolio companies totaling
$5,127,416, decreases in fair value of five portfolio companies totaling
20
$2,411,403, and the reversal of $2,432,071 of depreciation resulting from the
sale of one portfolio investment and the write-off of one portfolio investment.
Net change in unrealized appreciation/depreciation on investments
represents the change for the period in the unrealized appreciation net of
unrealized depreciation on MACC's total investment portfolio. When MACC
increases the fair value of a portfolio investment above its cost, the
unrealized appreciation for the portfolio as a whole increases, and when MACC
decreases the fair value of a portfolio investment below its cost, unrealized
depreciation for the portfolio as a whole increases. When MACC sells an
appreciated portfolio investment for a gain, unrealized appreciation for the
portfolio as a whole decreases as the gain is realized. Similarly, when MACC
sells or writes off a depreciated portfolio investment for a loss, unrealized
depreciation for the portfolio as a whole decreases as the loss is realized.
Net change in unrealized gain on other assets of $88,196 during the current
year nine-month period was recorded with respect to other securities which are
classified as other assets, as compared to a net change in unrealized loss on
other assets of $724,823 during the prior year nine-month period.
Financial Condition, Liquidity and Capital Resources
To date, MACC has relied upon several sources to fund its investment
activities, including MACC's cash and money market accounts and the Small
Business Investment Company ("SBIC") leverage program operated by the Small
Business Administration (the "SBA").
As an SBIC, MorAmerica Capital is required to comply with the regulations
of the SBA (the "SBA Regulations"). These regulations include the capital
impairment rules, as defined by Regulation 107.1830 of the SBA Regulations. As
of June 30, 2005, the capital of MorAmerica Capital was impaired by
approximately 51.76%, which exceeded the 50% maximum impairment percentage
permitted under SBA Regulations. Accordingly, at June 30, 2005 the SBA had the
discretion not to extend additional financing to MorAmerica Capital, as well as
the right to declare a default on MorAmerica Capital's outstanding
SBA-guaranteed debentures, to accelerate MorAmerica Capital's payment
obligations thereunder and to seek appointment of the SBA as receiver for
MorAmerica Capital. The exercise by the SBA of any of these rights could have a
material adverse effect on the financial position, results of operations, cash
flow and liquidity of MACC and MorAmerica Capital. If the SBA were to exercise
its right to accelerate MorAmerica Capital's payment obligations under the
outstanding SBA-guaranteed debentures, MorAmerica Capital may be required to
liquidate some or all of its portfolio investments. Because most of its
portfolio investments are not publicly traded, MorAmerica Capital may receive
less than the carrying value for its portfolio investments in connection with
such a forced sale. Therefore, the exercise by the SBA of any of these rights
could have a material adverse effect on the financial position, results of
operations, cash flow and liquidity of MACC and MorAmerica Capital and raises
substantial doubt about the Company's ability to continue as a going concern.
MorAmerica Capital is also currently limited by the SBA Regulations in the
amount of distributions it may make to MACC.
21
As of June 30, 2005, the SBA had not declared a default on MorAmerica
Capital's outstanding SBA-guaranteed debentures, accelerated MorAmerica
Capital's payment obligations thereunder as sought appointment of the SBA as
receiver for MorAmerica Capital. As described above under "Historical and Recent
Developments," after June 30, 2005, MorAmerica Capital received cash proceeds of
$6,187,051 from the sale of one portfolio investment. As a result of the sale of
this portfolio investment, MorAmerica Capital's capital impairment as of July
31, 2005 ceased to exceed the maximum impairment percentage permitted under SBA
Regulations and the rights of the SBA relating to an impairment condition were
no longer available as of such date.
As of June 30, 2005, MACC's cash and cash equivalents totaled $4,866,059.
MACC has commitments for an additional $3,500,000 and $6,500,000 in SBA
guaranteed debentures, which expire on September 30, 2005 and September 30,
2007, respectively. In connection with the settlement of arbitration
proceedings, the SBA, MorAmerica Capital and three other SBICs entered into an
agreement which obligates MorAmerica Capital and each of the other SBICs jointly
and severally, to pay up to $7,500,000 of the SBA's losses, if any, with respect
to the outstanding SBA-guaranteed debentures of such SBICs. As a result of this
agreement and MorAmerica Capital's capital impairment described above, MACC does
not believe that MorAmerica Capital will have access to the SBIC capital program
for the foreseeable future. Nevertheless, if SBA does not accelerate MorAmerica
Capital's obligations under its outstanding SBA-guaranteed debentures and
subject to the other risks and uncertainties described in this report on Form
10-Q, MACC believes that its existing cash and cash equivalents and other
anticipated cash flows will provide adequate funds for MACC's anticipated cash
requirements during the current fiscal year, including principal and interest
payments on outstanding debentures, administrative expenses, and limited
follow-on investments in its portfolio companies. MACC's investment objective is
to invest $885,000 in follow-on investments during the current fiscal year,
subject to further adjustment based upon current economic and operating
conditions.
Debentures payable are composed of $24,790,000 in principal amount of
SBA-guaranteed debentures issued by MACC's subsidiary, MorAmerica Capital, which
mature as follows: $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.
MorAmerica Capital repaid $1,000,000 in principal amount of SBA-guaranteed
debentures during the current year third quarter. As described above under
"Historical and Recent Developments," MorAmerica Capital intends to prepay
$8,000,000 of its outstanding SBA-guaranteed debentures on September 1, 2005. As
noted above, due to MorAmerica Capital's capital impairment as of June 30, 2005,
SBA had the ability to accelerate MorAmerica Capital's obligations under the
SBA-guaranteed debentures. MACC anticipates that MorAmerica Capital will not be
able to refinance these debentures through the SBIC capital program when they
mature. The following table shows our significant contractual obligations for
the repayment of debt and other contractual obligations as of June 30, 2005:
22
Payments due by period
-------------------------------------------------------
Contractual Obligations
Less than More than
Total 1 Year 1-3 Years 3-5 Years 5 Years
------------ ---------- --------- --------- ----------
SBA Debentures $ 24,790,000 --- --- 4,000,000 20,790,000
Loan Agreement(1) $ 305,000 305,000 --- --- ---
MACC currently anticipates that it will rely primarily on its current cash
and cash equivalents and its cash flows from operations to fund its cash
requirements during fiscal year 2005. Although management believes these sources
will provide sufficient funds for MACC to meet its anticipated cash
requirements, there can be no assurances that MACC's cash flows from operations
will be as projected, or that MACC's cash requirements will be as projected.
Portfolio Activity
MACC's primary business is investing in and lending to businesses through
investments in subordinated debt (generally with detachable equity warrants),
preferred stock and common stock. The total portfolio value of investments in
publicly and non-publicly traded securities was $33,812,441 at June 30, 2005 and
$33,218,084 at September 30, 2004. During the three months ended June 30, 2005,
MACC invested $117,000 in a follow-on investment in one existing portfolio
company. Management views investment objectives for any given year as secondary
in importance to MACC's overriding concern of investing in only those portfolio
companies which satisfy MACC's investment criteria. MACC does not expect to make
any investments in new portfolio companies during fiscal year 2005, but may
invest up to $885,000 in follow-on investments in existing portfolio companies,
subject to further adjustment based on current economic and operating
conditions. As of June 30, 2005, MACC has invested $533,883 in follow-on
investments fiscal year to date.
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 $117,000 invested during the current year third quarter,
no funds represented co-investments with funds managed by MACC's investment
advisor.
-------------------------
(1) During the second quarter of fiscal year 2004, MACC entered into a loan
agreement with one of its directors, Geoffrey T. Woolley, providing for advances
of up to $400,000 on a revolving credit basis through February 28, 2005. The
outstanding principal amount of the loan as of March 1, 2005 will be due and
payable in four equal installments on the first day of June, September,
December, and March, commencing June 1, 2005 and concluding March 1, 2006. The
payment obligations in the table set forth above are based on the amount
outstanding under the loan agreement as of June 30, 2005. The entire unpaid
amount of the loan is convertible into shares of MACC's common stock at the
option of the lender. Effective July 20, 2005, following approval of the MACC
Board of Directors on July 19, 2005, certain terms of the loan agreement were
amended. On July 25, 2005, (i) Mr. Woolley elected to convert the entire
outstanding principal balance of $305,000 plus accrued interest of $33,415.90
into 135,366 shares of MACC common stock, and (ii) the loan agreement was
terminated.
23
Critical Accounting Policy
Investments in securities traded on a national securities exchange (or
reported on the NASDAQ national market) are stated at the average of the bid
price on the three final trading days of the valuation period which is not
materially different from the bid price on the final day of the period.
Restricted and other securities for which quotations are not readily available
are valued at fair value as determined by the Board of Directors. Among the
factors considered in determining the fair value of investments are the cost of
the investment; developments, including recent financing transactions, since the
acquisition of the investment; the financial condition and operating results of
the investee; the long-term potential of the business of the investee; market
interest rates on similar debt securities; and other factors generally pertinent
to the valuation of investments. However, because of the inherent uncertainty of
valuation, those estimated values may differ significantly from the values that
would have been used had a ready market for the securities existed, and the
differences could be material.
In the valuation process, MorAmerica Capital uses financial information
received monthly, quarterly, and annually from its portfolio companies which
includes both audited and unaudited financial statements. This information is
used to determine financial condition, performance, and valuation of the
portfolio investments.
Realization of the carrying value of investments is subject to future
developments. Investment transactions are recorded on the trade date and
identified cost is used to determine realized gains and losses. Under the
provisions of SOP 90-7, the fair value of loans and investments in portfolio
securities on February 15, 1995, the fresh-start date, is considered the cost
basis for financial statement purposes.
Determination of Net Asset Value
The net asset value per share of MACC's outstanding common stock is
determined quarterly, as soon as practicable after and as of the end of each
calendar quarter, by dividing the value of total assets minus total liabilities
by the total number of shares outstanding at the date as of which the
determination is made.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
MACC is exposed to market risk from changes in market interest rates that
affect the fair value of MorAmerica Capital's debentures payable determined in
accordance with Statement of Financial Accounting Standards No. 107, Disclosures
About Fair Value of Financial Instruments. The estimated fair value of
MorAmerica Capital's outstanding debentures payable at June 30, 2005, was
$26,665,000, with a cost of $24,790,000. Fair value of MorAmerica Capital's
outstanding debentures payable is calculated by discounting cash flows through
estimated maturity using a SBA borrowing rate currently available (5.89% at June
30, 2005) for debt of similar original maturity. None of MorAmerica Capital's
outstanding debentures payable are publicly traded. Market risk is estimated as
the potential increase in fair value resulting from a hypothetical 0.5% decrease
in interest rates. Actual results may differ.
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June 30, 2005
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Fair Value of Debentures Payable $ 26,665,000
Amount Above Cost $ 1,875,000
Additional Market Risk $ 595,000
------------------------------------------------------
Item 4. Controls and Procedures
As of the end of the period covered by this report, in accordance with Item
307 of Regulation S-K promulgated under the Securities Act of 1933, as amended,
the Chief Executive Officer and Chief Financial Officer of MACC (the "Certifying
Officers") have conducted evaluations of MACC's disclosure controls and
procedures. As defined under Sections 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the term "disclosure
controls and procedures" means controls and other procedures of an issuer that
are designed to ensure that information required to be disclosed by the issuer
in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by an issuer in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the issuer's
management, including its principal executive officer or officers and principal
financial officer or officers, or persons performing similar functions, as
appropriate to allow 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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
As previously disclosed, MorAmerica Capital is a defendant in
litigation filed by BFS Diversified Products, LLC in the Iowa District
Court of Polk County, Iowa. There have been no material developments
in this litigation since MACC filed its Quarterly Report on Form 10-Q
for the three months ended March 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There are no items to report.
Item 3. Defaults Upon Senior Securities
There are no items to report.
Item 4. Submission of Matters to a Vote
of Security Holders
There are no items to report.
Item 5. Other Information
There are no items to report.
Item 6. Exhibits
The following exhibits are filed with this quarterly report on Form
10-Q:
3(i).1(1) Certificate of Incorporation of MACC Private Equities Inc.
3(i).2(1) Articles of Amendment to the Certificate of Incorporation of
MACC Private Equities Inc., dated March 11, 1997.
3(i).3 Articles of Amendment to the Certificate of Incorporation
of MACC Private Equities Inc., as filed with the Delaware
Secretary of State on August 3, 2004.
31.1 Section 302 Certification of David R. Schroder (CEO)
31.2 Section 302 Certification of Robert A. Comey (CFO)
32.1 Section 1350 Certification of David R. Schroder (CEO)
32.2 Section 1350 Certification of Robert A. Comey (CFO)
(1) Incorporated by reference to the Corporation's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1997, as filed with the Commission on
May 14, 1997.
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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: 8/11/05 By: /s/ David R. Schroder
---------------------------- --------------------------------------
David R. Schroder, President
Date: 8/11/05 By: /s/ Robert A. Comey
---------------------------- --------------------------------------
Robert A. Comey, Chief Financial
Officer
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