Form 10-Q
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 December 31, 2007
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)
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 No
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer or a smaller reporting company.
See definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | | Accelerated filer | | Non-accelerated filer|X|
| | Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (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 December 31, 2007, the
registrant had issued and outstanding 2,464,621 shares of common stock.
1
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
Condensed Consolidated Balance
Sheets at December 31, 2007 (Unaudited)
and September 30, 2007..........................................3
Condensed Consolidated Statements of
Operations (Unaudited) for the three months
ended December 31, 2007 and December 31, 2006...................4
Condensed Consolidated Statements of
Cash Flows (Unaudited) for the three months
ended December 31, 2007 and December 31, 2006...................5
Notes to Unaudited Condensed Consolidated
Financial Statements............................................6
Consolidated Schedule of Investments (Unaudited)
at December 31, 2007............................................9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations .....................12
Item 3. Quantitative and Qualitative
Disclosure About Market Risk..........................................18
Item 4. Controls and Procedures...............................................18
Item 4T. Controls and Procedures...............................................19
Part II. OTHER INFORMATION...............................................19
Item 6. Exhibits........................................................19
Signatures......................................................20
Certifications..............................See Exhibits 31 and 32
2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
December 31, September 30,
2007 2007
(Unaudited)
----------------- ----------------
Assets
Cash and cash equivalents $ 542,743 822,295
Loans and investments in portfolio securities, at market or fair value:
Unaffiliated companies (cost of $2,294,887 and $2,301,385) 1,989,167 2,095,665
Affiliated companies (cost of $12,983,403 and $13,007,879) 11,149,353 11,595,183
Controlled companies (cost of $3,010,356 and $3,040,043) 2,784,419 3,014,106
Interest receivable 245,583 268,598
Other assets 181,346 212,940
--------------------- ----------------
Total assets $ 16,892,611 18,008,787
===================== ================
Liabilities and net assets
Liabilities:
Note payable $ 6,059,845 6,108,373
Incentive fees payable 29,720 252,130
Accounts payable and other liabilities 51,149 127,474
--------------------- ----------------
Total liabilities 6,140,714 6,487,977
--------------------- ----------------
Net assets:
Common stock, $.01 par value per share; authorized 10,000,000 shares;
issued and outstanding 2,464,621 shares 24,646 24,646
Additional paid-in-capital 13,092,958 13,140,517
Unrealized depreciation on investments (2,365,707) (1,644,353)
--------------------- ----------------
Total net assets 10,751,897 11,520,810
--------------------- ----------------
Total liabilities and net assets $ 16,892,611 18,008,787
===================== ================
Net assets per share $ 4.36 4.67
===================== ================
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,
2007 2006
------------------ ----------------
Investment income:
Interest
Unaffiliated companies $ 8,529 15,676
Affiliated companies 142,970 138,939
Controlled companies 21,511 30,539
Other 1,731 33,887
Dividends
Affiliated companies 85,263 35,310
--------------------- ----------------
Total investment income 260,004 254,351
--------------------- ----------------
Operating expenses:
Interest expenses 128,115 195,610
Management fees 66,964 85,694
Professional fees 55,720 63,214
Other 56,764 54,863
--------------------- ----------------
Total operating expenses 307,563 399,381
--------------------- ----------------
Investment expense, net (47,559) (145,030)
--------------------- ----------------
Realized and unrealized (loss) gain on investments: Net realized gain on
investments:
Unaffiliated companies --- ---
Net change in unrealized appreciation/depreciation investments (721,354) 424,024
--------------------- ----------------
Net (loss) gain on investments (721,354) 424,024
--------------------- ----------------
Net change in net assets from operations $ (768,913) 278,994
===================== ================
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,
2007 2006
----------------- -------------------
Cash flows from (used in) operating activities:
Net change in net assets from operations $ (768,913) 278,994
Adjustments to reconcile net change in net assets from operations to net
cash provided by operating activities:
Net realized and unrealized loss (gain) on investments 721,354 (424,024)
Proceeds from disposition of and payments on
loans and investments in portfolio securities 60,661 553,695
Purchases of loans and investments in portfolio securities --- (65,000)
Change in interest receivable 23,015 251,005
Change in other assets 31,594 155,499
Change in accrued interest, deferred incentive fees payable,
accounts payable and other liabilities (298,735) 153,266
----------------- -------------------
Net cash provided by (used in) operating activities (231,024) 903,435
Cash flows from financing activities:
Note repayment (48,528) ---
----------------- -------------------
Net cash used in financing activities (48,528) ---
----------------- -------------------
Net (decrease) increase in cash and cash equivalents (279,552) 903,435
Cash and cash equivalents at beginning of period 822,295 2,132,350
----------------- -------------------
Cash and cash equivalents at end of period $ 542,743 3,035,785
================== ===================
Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ 124,048 ---
= =============== ===================
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 U.S. generally accepted accounting principles
("GAAP") 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 GAAP 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 Subsidiary as of and for the year ended September 30,
2007. 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, 2007
has been derived from the audited balance sheet as of that date.
(2) Critical Accounting Policy
Investments in securities that are traded in the over-the-counter market or
on a stock exchange are valued by taking the average of the close (or bid price
in the case of over-the-counter equity securities) for the valuation date and
the preceding two days. 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;
overall market conditions and other factors generally pertinent to the valuation
of investments. The Board of Directors has considered the current illiquid
credit market conditions, and the risks and uncertainties associated with those
conditions. These conditions have not significantly impacted the investment fair
values. 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, MACC uses financial information received monthly,
quarterly, and annually from its portfolio companies which includes both audited
and unaudited financial statements. This information is used to determine
financial condition, performance, and valuation of the portfolio investments.
6
Realization of the carrying value of investments is subject to future
developments. Investment transactions are recorded on the trade date and
identified cost is used to determine realized gains and losses. Under the
provisions of SOP 90-7, the fair value of loans and investments in portfolio
securities on February 15, 1995, the fresh-start date, is considered the cost
basis for financial statement purposes.
(3) Financial Highlights (Unaudited)
For the three For the three
months ended months ended
December 31, December 31,
2007 2006
--------------- ---------------
Per Share Operating Performance
(For a share of capital stock outstanding
throughout the period):
Net asset value, beginning of period $ 4.67 4.71
--------------- ---------------
Income from investment operations:
Investment expense, net (0.02) (0.06)
Net realized and unrealized gain
(loss) on investment transactions (0.29) 0.18
--------------- ---------------
Total from investment operations (0.31) 0.12
--------------- ---------------
Net asset value, end of period $ 4.36 4.83
=============== ===============
Closing bid price $ 2.75 2.03
=============== ===============
For the three For the three
months ended months ended
December 31, December 31,
2007 2006
--------------- ---------------
Total return
Net asset value basis (6.67) % 2.40
Market price basis 12.24 % (20.70)
Net asset value, end of period
(in thousands) $ 10,752 11,897
Ratio to weighted average net assets:
Investment expense, net 0.41 % 1.26
Operating and income tax expense 2.68 % 3.46
The ratios of investment expense, 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.
7
(4) Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements".
This statement defines fair value, establishes a framework for measuring fair
value in GAAP, and expands disclosures about fair value measurements. The
provisions of SFAS No. 157 are effective as of the beginning of the first fiscal
year that begins after November 15, 2007. MACC is evaluating the effect, if any,
the adoption of SFAS 157 will have on its consolidated financial statements.
In February 2007 the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities--Including an amendment of FASB
Statement No. 115." This statement permits entities to choose to measure many
financial instruments and certain other items to be measured at fair value. The
provisions of SFAS No. 159 are effective as of the beginning of the first fiscal
year that begins after November 15, 2007. MACC is evaluating the effect, if any,
the adoption of SFAS 159 will have on its consolidated financial statements.
In June 2007, the AICPA issued Statement of Position 07-1, "Clarification
of the Scope of the Audit and Accounting Guide Investment Companies and
Accounting by Parent Companies and Equity Method Investors for Investments in
Investment Companies." SOP 07-1 provides guidance for determining whether an
entity is within the scope of the AICPA Audit and Accounting Guide Investment
Companies. Statement of Position 07-1 is effective for financial statements
issued for fiscal years beginning on or after December 15, 2007.
8
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS (UNAUDITED)
DECEMBER 31, 2007
Manufacturing:
Percent
of Net
Company Security assets Value Cost (d)
------------------------------------------------------------------------------------------------------------------------------------
Aviation Manufacturing Group, LLC (a) 14% debt security, due October 1, 2008 $ 616,000 616,000
Yankton, South Dakota 154,000 units preferred 154,000 154,000
Manufacturer of flight critical parts Membership interest 278,090 39
for aircraft 14% note, due October 1, 2008 89,320 89,320
----------- ------------
1,137,410 859,359
----------- ------------
Central Fiber Corporation 12% debt security, due March 31, 2009 205,143 205,143
Wellsville, Kansas 12% debt security, due March 31, 2009 53,079 53,079
Recycles and manufactures Warrant to purchase 273.28 common shares --- ---
cellulose fiber products ----------- ------------
258,222 258,222
----------- ------------
Detroit Tool Metal Products Co. (a) 12% debt security, due November 18, 2009 1,371,507 1,371,507
Lebanon, Missouri 19,853.94 share Series A preferred (c) 195,231 195,231
Metal stamping 7,887.17 common shares (c) 126,742 126,742
----------- ------------
1,693,480 1,693,480
----------- ------------
Handy Industries, LLC (a) 12.5% debt security, due January 8, 2008 667,327 667,327
Marshalltown, Iowa 167,171 units Class B preferred (c) 167,171 167,171
Manufacturer of lifts for Membership interest 1,357 1,357
motorcycles, trucks and ----------- ------------
industrial metal products 835,855 835,855
----------- ------------
Hicklin Engineering, L.C. (a) 10% debt security, due June 30, 2008 740,000 740,000
Des Moines, Iowa Membership interest 127 127
Manufacturer of auto and truck ----------- ------------
transmission and brake dynamometers 740,127 740,127
----------- ------------
Kwik-Way Products, Inc. (a) 2% debt security, due January 31, 2008 (c) 24,317 267,254
Marion, Iowa 2% debt security, due January 31, 2008 (c) 25,683 281,795
Manufacturer of automobile 38,008 common shares (c) ----- 126,651
aftermarket engine and brake 29,340 common shares (c) ----- 92,910
repair machinery ----------- ------------
50,000 768,610
----------- ------------
Linton Truss Corporation 542.8 common shares (c) ---- ----
Delray Beach, Florida 400 shares Series 1 preferred (c) 440,000 40,000
Manufacturer of residential roof and Warrants to purchase common shares (c) 15 15
floor truss systems ----------- ------------
440,015 40,015
----------- ------------
M.A. Gedney Company (a) 648,783 shares preferred (c) 140,000 1,450,601
Chaska, Minnesota 12% debt security, due June 30, 2009 152,000 76,000
Pickle Processor Warrant to purchase 83,573 preferred shares
(c) --- ---
----------- ------------
292,000 1,526,601
----------- ------------
Magnum Systems, Inc. (a) 12% debt security, due November 1, 2008 574,163 574,163
Parsons, Kansas 48,038 common shares (c) 48,038 48,038
Manufacturer of industrial bagging 292,800 shares preferred (c) 304,512 304,512
equipment Warrant to purchase 56,529 common shares (c) 380,565 565
----------- ------------
1,307,278 927,278
----------- ------------
9
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED (UNAUDITED)...
DECEMBER 31, 2007
Manufacturing Continued: Percent
of Net
Company Security assets Value Cost (d)
------------------------------------------------------------------------------------------------------------------------------------
Pratt-Read Corporation (a) 13,889 shares Series A Preferred (c) $ 421,460 750,000
Bridgeport, Connecticut 7,718 shares Services A preferred (c) 234,097 416,667
Manufacturer of screwdriver shafts 13% debt security, due July 26, 2007 (c) 250,020 277,800
and handles and other hand tools Warrants to purchase common shares (c) ---- ----
----------- ------------
905,577 1,444,467
----------- ------------
Spectrum Products, LLC (b) 13% debt security, due January 1, 2008 (c) 1,077,649 1,077,649
Missoula, Montana 385,000 units Series A preferred (c) 185,000 385,000
Manufacturer of equipment for the Membership interest (c) 351 351
swimming pool industry 17,536.75 units Class B preferred (c) 47,355 47,355
----------- ------------
1,310,355 1,510,355
----------- ------------
Superior Holding, Inc. (a) 6% debt security, due April 1, 2010 780,000 780,000
Wichita, Kansas Warrant to purchase 11,143 common shares (c) 1 1
Manufacturer of industrial and 6% debt security, due April 1, 2010 221,000 221,000
commercial boilers and shower 121,457 common shares (c) 121,457 121,457
doors, frames and enclosures 6% debt security, due April 1, 2010 256,880 256,880
312,000 common shares (c) 3,120 3,120
----------- ------------
1,382,458 1,382,458
----------- ------------
Total manufacturing 96.29% 10,352,777 11,986,827
========== ----------- ------------
Service:
Monitronics International, Inc. 73,214 common shares (c) 439,284 54,703
----------- ------------
Dallas, Texas
Provides home security systems
monitoring services
Morgan Ohare, Inc. (b) 0% debt security, due January 1, 2008 (c) 1,099,063 1,125,000
Addison, Illinois 10% debt security, due January 1, 2008 375,000 375,000
Fastener plating and heat treating 57 common shares (c) 1 1
----------- ------------
1,474,064 1,500,001
----------- ------------
SMWC Acquisition Co., Inc. (a) 13% debt security due September 30, 2011 103,125 103,125
Kansas City, Missouri 12% debt security due September 30, 2011 500,500 500,500
Steel warehouse distribution and Warrant to purchase 2,200 common shares (c) ---- ----
processing ----------- ------------
603,625 603,625
----------- ------------
Warren Family Funeral Homes, Inc. Warrant to purchase 346.5 common shares (c) 200,012 12
Topeka, Kansas ----------- ------------
Provider of value priced funeral
services
Total Service 25.27% 2,716,985 2,158,341
========== ----------- ------------
10
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED (UNAUDITED)...
DECEMBER 31, 2007
Service Continued: Percent
of Net
Company Security assets Value Cost (d)
------------------------------------------------------------------------------------------------------------------------------------
Technology and Communications:
Feed Management Systems, Inc. (a) 540,551 common shares (c) 1,327,186 1,327,186
Brooklyn Center, Minnesota 674,309 shares Series A preferred (c) 674,309 674,309
Batch feed software and systems Warrants to purchase 166,500 Series A --- ---
and B2B internet services ----------- ------------
2,001,495 2,001,495
----------- ------------
MainStream Data, Inc. (a) 322,763 shares Series A preferred (c) 200,049 200,049
Salt Lake City, Utah ----------- ------------
Content delivery solutions
provider
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 36,933 36,933
Pleasanton, California 8% debt security, due April 1, 2012 (c) 325,950 750,001
Designs and markets pivot Warrant to purchase 39,400 common shares (c) --- ---
enabling software for LCD 362,883 786,934
computer monitors ----------- ------------
Total technology and communications 26.54% 2,853,177 4,143,478
========== ----------- ------------
$ 15,922,939 18,288,646
=========== ============
(a) Affiliated company.
(b) Controlled company.
(c) Non-income producing.
(d) For all debt securities presented, the cost is equal to the principal
balance.
11
See accompanying notes to unaudited condensed consolidated financial statements.
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, 2007,
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 and MorAmerica Capital's ability to obtain future funding, changes in
prevailing market interest rates, and contractions in the markets for corporate
acquisitions and initial public offerings. MACC further cautions that such
factors are not exhaustive or exclusive. MACC does not undertake to update any
forward-looking statement which may be made from time to time by or on behalf of
MACC.
Results of Operations
MACC's investment income includes income from interest, dividends and
fees. Investment expense, net represents total investment income minus net
operating expenses. 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.
First Quarter Ended December 31, 2007 Compared to First Quarter Ended December
31, 2006
For the three months ended
December 31,
--------------------------------------
2007 2006 Change
----------------- --- ---------------- --------------
Total investment income $ 260,004 254,351 5,653
Net operating and income tax expense (307,563) (399,381) 91,818
------------- ---------------- --------------
Investment expense, net (47,559) (145,030) 97,471
------------- ---------------- --------------
Net change in unrealized appreciation/
depreciation on investments and other assets (721,354) 424,024 (1,145,378)
------------- ---------------- --------------
Net (loss) gain on investments (721,354) 424,024 (1,145,378)
------------- ---------------- --------------
---------------- --------------
Net change in net assets from operations $ (768,913) 278,994 (1,047,907)
================= ================ ==============
Net asset value per share:
Beginning of period $ 4.67 4.71
================= ================
End of period $ 4.36 4.83
================= ================
12
Total Investment Income
During the current fiscal year first quarter, total investment income was
$260,004, an increase of $5,653, or 2%, from total investment income of $254,351
for the prior year first quarter. In the current year first quarter as compared
to the prior year first quarter, interest income decreased $44,300, or 20%, and
dividend income increased $49,953, or more than 100%. The decrease in interest
income is the net result of repayments of principal on debt portfolio securities
issued by six portfolio companies, an increase in interest income due to an
additional debt investment from the restructure in one debt portfolio security
and an increase in interest income on one debt portfolio security which had been
on non-accrual of interest status during the prior year first quarter but which
is currently making interest payments. In both the current year first quarter
and the prior year first quarter, MACC received a dividend on one existing
portfolio investment, however the current year dividend was larger. MACC does
not anticipate that its dividend income will continue to increase in future
periods.
Net Operating Expenses
Net operating expenses for the first quarter of the current year were
$307,563, a decrease of $91,818, or 23%, as compared to net operating expenses
for the prior year first quarter of $399,381. Interest expense decreased
$67,495, or 35%, in the current year first quarter due to the repayment in the
prior fiscal year of $10,790,000 of borrowings from the Small Business
Administration ("SBA Debentures"). Management fees decreased $18,730, or 22%, in
the current year first quarter due to the decrease in capital under management.
Professional fees decreased $7,494, or 12%, in the current year first quarter as
compared to the prior year first quarter. Other expenses increased $1,901, or
3%, in the current year first quarter as compared to the prior year first
quarter.
Investment Expense, Net
For the current year first quarter, MACC recorded investment expense, net
of $47,559, as compared to investment expense, net of $145,030 during the prior
year first quarter, a decrease of $97,471, or 67%. The decrease in investment
expense, net is the result of the decrease in operating expenses described above
and the increase in investment income described above.
Net Realized Gain on Investments
During the current year first quarter and the prior year first quarter,
MACC had no net realized gain or loss on investments. 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. MACC's investment advisor
earns 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.
13
Net Change in Unrealized Appreciation/Depreciation of Investments and Other
Assets
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 based on the
valuation method described under "Critical Accounting Policy".
MACC recorded net change in unrealized appreciation/depreciation on
investments of ($721,354) during the current year first quarter, as compared to
$424,024 during the prior year first quarter. This net change resulted from:
* Unrealized appreciation in the fair value of one portfolio company
totaling $175,869 during the current year first quarter, as compared
to unrealized appreciation in the fair value of five portfolio
companies totaling $474,024 during the prior year first quarter.
* Unrealized depreciation in the fair value of five portfolio companies
totaling $897,223 during the current year first quarter, as compared
to unrealized depreciation in the fair value of one portfolio company
of $50,000 during the prior year first quarter.
Net Change in Net Assets from Operations
MACC experienced a decrease of $768,913 in net assets for the first quarter
of fiscal year 2008, and the resulting net asset value per share was $4.36 as of
December 31, 2007, as compared to $4.67 as of September 30, 2007.
The decrease in net assets recorded during the current year first quarter
was primarily the result of the net change in unrealized
appreciation/depreciation on investments, as described above.
MACC has eight portfolio investments valued at cost, has recorded
unrealized appreciation on five portfolio investments, and has recorded
unrealized depreciation on seven portfolio investments. Quarterly valuations can
be affected by a portfolio company's short term performance that results in
increases or decreases in unrealized depreciation and unrealized appreciation
for the quarter. Changes in the fair value of a portfolio security may or may
not be indicative of the long term performance of the portfolio company.
Although MACC is not currently making investments in new portfolio
companies (but may periodically make follow-on investments), as previously
announced, the Board of Directors has approved Eudaimonia Asset Management, LLC
("Eudaimonia") to serve as investment advisor to MACC under the terms of a new
Investment Advisory Agreement (the "New Investment Advisory Agreement"). The New
Investment Advisory Agreement is subject to shareholder approval at the next
Annual Shareholders' Meeting. Under the New Investment Advisory Agreement, the
investment strategy of MACC going forward will be to make new equity investments
in small and micro cap companies that are qualified for investment by
14
business development companies such as MACC. The Board of Directors has also
approved InvestAmerica Investment Advisors, Inc. ("InvestAmerica") to serve as
investment sub-advisor under the terms of an Investment Subadvisory Agreement
with Eudaimonia and MACC (the "Subadvisory Agreement"). Under the Subadvisory
Agreement, which is also subject to shareholder approval at the next Annual
Shareholders' Meeting, InvestAmerica will continue to oversee MACC's existing
portfolio of investments. MACC will continue to prudently sell existing
portfolio company investments and use the resulting proceeds to pay down the
note payable, as further described below.
The increase in total investment income during the first quarter of the
current fiscal year was due to an increase in dividend income during the period,
which MACC does not anticipate will continue in future periods. MACC's interest
expense and management fee expense both decreased in the first quarter of the
current fiscal year as compared to the prior year first quarter primarily as a
result of the repayment of MACC's outstanding SBA Debentures and a decrease in
assets under management. For the first quarter of the current fiscal year, the
decrease in interest expense and management fee expense exceeded the decrease in
total investment income.
The current world tensions and the continuing conflict in Iraq increase the
uncertainty of future performance. Many factors such as the sub prime lending
practices, interest rate declines, economic downturns and recessionary
pressures, inflation and high commodity prices all could have major impacts on
the portfolio operating performance and the ability to exit portfolio
investments.
Financial Condition, Liquidity and Capital Resources
MACC relies upon several sources to fund its operations and investment
activities, including MACC's cash and money market accounts and a revolving
loan, as further described below.
As of December 31, 2007, MACC's cash and money market accounts totaled
$542,743. MorAmerica Capital has entered into a term loan, which has a current
balance of $6,059,845, and a revolving loan permitting MorAmerica Capital to
borrow up to $500,000, with Cedar Rapids Bank & Trust Company. As of December
31, 2007, MACC believes that its existing cash and money market accounts, the
revolving loan, and other anticipated cash flows will provide adequate funds for
MACC's anticipated cash requirements during fiscal year 2008, including
investment activities in existing portfolio companies, interest payments on the
note payable with respect to the term loan referenced above (the "Note Payable")
and administrative expenses. At the present time MACC is not making new
investments, is prudently selling portfolio companies and is using the resulting
proceeds to pay down the Note Payable.
As previously reported, in December, 2007 the SBA accepted the voluntary
surrender of MorAmerica Capital's license to operate as a Small Business
Investment Company ("SBIC"). Because MorAmerica Capital is no longer an SBIC,
the Board of Directors has determined that there is no longer any need to
operate MorAmerica Capital as a separate company. Prior to the voluntary
surrender of its SBIC license, MorAmerica Capital existed as a wholly owned
subsidiary of MACC primarily in order to comply with SBA regulations that
prohibited
15
MorAmerica Capital from holding certain assets that were held by MACC. Further,
in addition to limits respecting MACC's investments imposed by the Investment
Company Act of 1940, as amended (the "1940 Act"), MACC and MorAmerica Capital
have been subject to an order (the "Order") issued by the Securities and
Exchange Commission in 1995, which modifies the application of the 1940 Act to
MACC and MorAmerica Capital and imposed certain restrictions on the assets MACC
could own as a condition to its grant of exemptive relief under the Securities
Exchange Act of 1934 to MorAmerica Capital. Because the reasons MACC originally
separated its assets from MorAmerica Capital's are no longer present, and in an
effort to operate going forward without the restrictions imposed by the Order,
the Board of Directors, at its meeting on January 16, 2008, authorized the
merger of MorAmerica Capital with and into MACC, with the merger anticipated to
be effective immediately following the 2008 Annual Shareholders' Meeting.
The following table shows MACC's significant contractual obligations for
the repayment of the Note Payable and other contractual obligations as of
December 31, 2007:
Payments due by period
Contractual Obligations
Less
than 1 3-5 More than
Total Year 1-3 Years Years 5 Years
-------------- --------- --------------- -------- ------------
Note Payable $ 6,059,845 --- 6,059,845 --- ---
Incentive Fees Payable $ 29,720 29,720 --- --- ---
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 in existing portfolio companies and other cash
requirements during fiscal year 2008. To the extent that additional funds are
required to further MACC's investment strategy following the effectiveness of
the New Investment Advisory Agreement and Subadvisory Agreement, the Board of
Directors examined and approved a proposal to issue rights to acquire shares of
MACC's Common Stock as a means by which MACC may raise additional equity
capital. The Board of Directors has determined to recommend this proposal to the
shareholders for their approval at the 2008 Annual Shareholders' Meeting.
Although management believes these sources will provide sufficient funds for
MACC to meet its fiscal year 2008 investment level objective and other
anticipated cash requirements, there can be no assurances that MACC's cash flows
from operations or 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. MACC, however, is not currently making new
investments. The total portfolio value of investments in publicly and
non-publicly traded securities was $15,922,939 at December 31, 2007 and
$16,704,954 at September 30, 2007. During the three months ended December 31,
2007, MACC made no follow-on investments in portfolio companies. As noted above,
16
MACC intends to pursue an investment strategy consisting of new equity
investments in very small public companies, subject to shareholder approval of
the New Investment Advisory Agreement and Subadvisory Agreement at the next
Annual Shareholders' Meeting, and may continue to make follow-on investments in
existing portfolio companies.
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. During the current year first quarter, no co-investments with
another fund managed by MACC's investment advisor were made.
Critical Accounting Policy
Investments in securities that are traded in the over-the-counter market or
on a stock exchange are valued by taking the average of the close (or bid price
in the case of over-the-counter equity securities) for the valuation date and
the preceding two days. 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;
overall market conditions 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, MACC 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.
17
Item 3. Quantitative and Qualitative Disclosure About Market Risk
MACC is subject to market risk from changes in market prices of publicly
traded equity securities held from time to time in the MACC consolidated
investment portfolio. At December 31, 2007, MACC had no publicly traded equity
securities in the MACC consolidated investment portfolio.
MACC is also subject to financial market risks from changes in market
interest rates. The Note Payable is subject to a variable interest rate that is
based on an independent index. Although this independent index is subject to
changes, the maximum increase or decrease in the interest rate at any one time
will not exceed 1.000 percentage points. General interest rate fluctuations may
therefore have a material adverse effect on MACC's net investment income.
In addition, in the future, MACC may from time to time opt to draw on its
revolving line of credit to fund cash requirements. These future borrowings will
have a variable interest rate based on an independent index that is subject to
changes; however, the maximum increase or decrease in the interest rate at any
one time will not exceed 1.000 percentage points.
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.
18
Item 4T. Controls and Procedures
There are no items to report.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There are no items to report.
Item 1A. Risk Factors.
There are no material changes to report from the risk factors disclosed in
MACC's Annual Report on Form 10-K for the year ended September 30, 2007.
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:
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)
19
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: 2/14/08 By: /s/David R. Schroder
---------------------------------- --------------------------------------------
David R. Schroder, President
Date: 2/14/08 By: /s/Robert A. Comey
---------------------------------- --------------------------------------------
Robert A. Comey, Chief Financial Officer
20
EXHIBIT INDEX
Exhibit Description Page
------- ----------- ----
31.1 Section 302 Certification of David R. Schroder (CEO) 23
31.2 Section 302 Certification of Robert A. Comey (CFO) 25
32.1 Section 1350 Certification of David R. Schroder (CEO) 27
32.2 Section 1350 Certification of Robert A. Comey (CFO) 28