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 December 31, 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)
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 [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
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, 2005, the registrant had issued and outstanding 2,464,621
shares of common stock.
Page 1 of 29
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
Condensed Consolidated Balance
Sheets at December 31, 2005 (Unaudited)
and September 30, 2005......................................... 3
Condensed Consolidated Statements of
Operations (Unaudited) for the three months
ended December 31, 2005 and December 31, 2004.................. 4
Condensed Consolidated Statements of
Cash Flows (Unaudited) for the three months
ended December 31, 2005 and December 31, 2004.................. 5
Notes to (Unaudited) Condensed Consolidated
Financial Statements........................................... 6
Consolidated Schedule of Investments (Unaudited)
at December 31, 2005........................................... 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results Of Operations............... 13
Item 3. Quantitative and Qualitative
Disclosure About Market Risk................................... 18
Item 4. Controls and Procedures........................................ 19
Part II. OTHER INFORMATION.............................................. 20
Item 6. Exhibits....................................................... 20
Signatures..................................................... 21
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,
2005 2005
(Unaudited)
------------ -------------
Assets
Loans and investments in portfolio securities, at market or fair value:
Unaffiliated companies (cost of $4,958,192 and $5,288,757) $ 4,731,441 5,039,691
Affiliated companies (cost of $17,452,865 and $17,406,157) 16,839,578 17,722,809
Controlled companies (cost of $3,254,151 and $3,247,063) 2,981,350 3,083,048
Cash and money market accounts 4,667,849 2,393,149
Interest receivable 243,644 172,270
Other assets 986,524 2,925,247
------------ ------------
Total assets $ 30,450,386 31,336,214
============ ============
Liabilities and net assets
Liabilities:
Debentures payable $ 16,790,000 16,790,000
Incentive fees payable 566,426 566,426
Accrued interest 405,693 100,378
Accounts payable and other liabilities 75,929 214,435
------------ ------------
Total liabilities $ 17,838,048 17,671,239
------------ ------------
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 13,700,531 13,736,758
Unrealized depreciation on investments (1,112,839) (96,429)
------------- -------------
Total net assets 12,612,338 13,664,975
------------ ------------
Total liabilities and net assets $ 30,450,386 31,336,214
============ ============
Net assets per share $ 5.12 5.54
============ ============
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,
2005 2004
-------------- -------------
Investment income:
Interest
Unaffiliated companies $ 59,538 50,100
Affiliated companies 193,886 219,467
Controlled companies 18,786 208,047
Other 33,954 18,984
Dividends
Unaffiliated companies 2,187 ---
Affiliated companies 23,333 194,152
Processing fees --- 7,700
Other --- 1,000
-------------- -------------
Total investment income 331,684 699,450
-------------- -------------
Operating expenses:
Interest expenses 319,059 521,068
Management fees 117,439 244,439
Professional fees 41,921 176,783
Other 73,304 82,622
------------- -------------
Total operating expenses 551,723 1,024,912
Investment expense, net (220,039) (325,462)
-------------- -------------
Realized and unrealized (loss) gain on investments
and other assets:
Net realized gain (loss) on investments:
Unaffiliated companies 213,333 (2,467,409)
Net change in unrealized depreciation/appreciation
on investments (1,016,410) 2,981,776
Net change in unrealized loss
on other assets (29,521) (24,659)
-------------- -------------
Net (loss) gain on investments (832,598) 489,708
-------------- -------------
Net change in net assets
from operations $(1,052,637) 164,246
============== =============
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, December31,
2005 2004
------------- -------------
Cash flows from operating activities:
(Decrease) increase in net assets from operations $ (1,052,637) 164,246
------------ -------------
Adjustments to reconcile (decrease) increase
in net assets from operations to net cash
provided by operating activities:
Net realized and unrealized loss (gain) on investments 803,077 (514,367)
Net realized and unrealized loss on other assets 29,521 24,659
Proceeds from disposition of and payments on
loans and investments in portfolio securities 593,472 850,992
Purchases of loans and investments in
portfolio securities (103,370) (385,000)
Change in interest receivable (71,374) (59,452)
Change in other assets 1,911,753 58,819
Change in accrued interest, deferred incentive fees payable,
accounts payable and other liabilities 164,258 478,258
------------ ------------
Total adjustments 3,327,337 453,909
------------ ------------
Net cash provided by operating activities 2,274,700 618,155
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of note payable-related party --- 35,000
------------ ------------
Net cash provided by financing activities --- 35,000
------------ ------------
Net increase in cash and cash equivalents 2,274,700 653,155
Cash and cash equivalents at beginning of period 2,393,149 4,774,771
------------ ------------
Cash and cash equivalents at end of period $ 4,667,849 5,427,926
============ ============
Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ --- 37,853
============ ============
Supplemental disclosure of noncash investing and financing
information -
Assets received in exchange of securities $ --- 24,236
============ ============
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. (Equities) and it's wholly
owned subsidiary MorAmerica Capital Corporation (MACC) which have been prepared
in accordance with accounting principals generally accepted in the United States
of America for investment companies. All material intercompany accounts and
transactions have been eliminated in consolidation.
The financial statements included herein have been prepared in accordance
with accounting principals generally accepted in the United States of America
for interim financial information and instructions to Form 10-Q and Article 6 of
Regulation S-X. The financial statements should be read in conjunction with the
consolidated financial statements and notes thereto of MACC Private Equities
Inc. and its Subsidiary as of and for the year ended September 30, 2005. 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, 2005 has been derived
from the audited balance sheet as of that date.
(2) Critical Accounting Policy
Investments in securities traded on a national securities exchange (or
reported on the NASDAQ national market) are stated at the 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, 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.
6
(3) Financial Highlights
For the three For the three
months ended months ended
December 31, December 31,
2005 2004
------------- -------------
Per Share Operating Performance
(For a share of capital stock outstanding
throughout the period):
Net asset value, beginning of period $ 5.54 4.61
-------- -------
Income from investment operations:
Investment expense, net (0.09) (0.14)
Net realized and unrealized
(loss) gain on investments (0.33) 0.21
-------- -------
Total from investment
operations (0.42) 0.07
-------- -------
Net asset value, end of period $ 5.12 4.68
======== =======
Closing market price $ 2.56 3.15
======== =======
For the three For the three
months ended months ended
December 31, December 31,
2005 2004
------------- -------------
Total return
Net asset value basis (7.70)% 1.53
Market price basis (0.04)% (8.70)
Net asset value, end of period
(in thousands) $ 12,612 10,902
Ratio to average net assets:
Investment (expense) income, net (1.62)% (3.13)
Operating expense 4.07% 9.84
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.
7
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS
DECEMBER 31, 2005
Manufacturing:
Percent of
Company Security Net assets Value Cost (d)
.....................................................................................................................................
AAMI, Inc. (a) 12% debt security, due March 31, 2007 (c) $ 304,577 780,000
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) -- 121,457
doors, frames and enclosures 12% debt security, due March 31, 2007 (c) 191,880 191,880
312,000 common shares (c) -- 3,120
------------- -----------
717,458 1,317,458
------------- -----------
Aviation Manufacturing Group, LLC (a) 14% debt security, due October 1, 2007 616,000 616,000
Yankton, South Dakota 154,000 units preferred 115,539 154,000
Manufacturer of flight critical Membership interest -- 39
parts for aircraft 19% note, due December 31, 2008 12,320 12,320
------------- -----------
743,859 782,359
------------- -----------
Central Fiber Corporation 12% debt security, due March 31, 2009 268,705 268,705
Wellsville, Kansas 12% debt security, due March 31, 2009 69,505 69,505
Recycles and manufactures Warrant to purchase 273.28 common shares (c) -- --
cellulose fiber products ------------- -----------
338,210 338,210
------------- -----------
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 667,327 667,327
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 1,338,033 835,855
------------ ----------
Hicklin Engineering, L.C. (a) 10% debt security, due June 30, 2007 740,000 740,000
Des Moines, Iowa Membership interest 127 127
Manufacturer of auto and ------------ ----------
truck transmission and 740,127 740,127
brake dynamometers ------------ ----------
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 12% debt security, due November 18, 2009 208,728 208,728
------------ ----------
709,710 709,710
------------ ----------
8
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED...
DECEMBER 31, 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 38,008 common shares (c) -- 126,651
aftermarket engine and 29,340 common shares (c) -- 92,910
brake repair machinery ------------ ----------
549,049 768,610
------------ ----------
Linton Truss Corporation 542.8 common shares (c) -- --
Delray Beach, Florida 400 shares Series 1 preferred (c) 640,000 40,000
Manufacturer of residential roof Warrants to purchase common shares (c) 15 15
and floor truss systems ------------ ----------
640,015 40,015
------------ ----------
M.A. Gedney Company (a) 648,783 shares preferred (c) 216,342 1,450,601
Chaska, Minnesota Warrant to purchase 83,573 preferred shares (c) -- --
Pickle processor ------------ ----------
216,342 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) 7,887.17 common shares (c) 126,741 126,741
Lebanon, Missouri ------------ ----------
Metal stamping
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) 1,276,480 62,000
Glen Dale, West Virginia 35 units Class C membership interest (c) 709,520 24,000
Metal closure manufacturer ------------ ----------
3,019,500 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 300,000 416,667
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) -- --
------------ ----------
1,327,800 1,444,467
------------ ----------
Simoniz USA, Inc. 12% debt security, due April 1, 2008 327,878 327,878
Bolton, Connecticut ------------ ----------
Producer of cleaning and wax
products under both the Simoniz
brand and private label brand names
9
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED...
DECEMBER 31, 2005
Manufacturing Continued:
Percent of
Company Security Net assets Value Cost (d)
.....................................................................................................................................
Spectrum Products, LLC (b) 13% debt security, due October 9, 2006 (c) $ 1,077,650 1,077,650
Missoula, Montana 385,000 units Series A preferred (c) 192,500 385,000
Manufacturer of equipment for Membership interest (c) -- 351
the swimming pool industry Redeemable preferred (c) 23,700 47,400
------------ ----------
1,293,850 1,510,401
------------ ----------
Total manufacturing 115.36% 14,549,874 13,763,234
========= ------------ ----------
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 1,494,844 2,622,469
and web communications ------------ ----------
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) 550,000 975,026
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 459,091 459,091
Kansas City, Missouri Warrant to purchase 153,654 common shares (c) 365,224 30
Distributor of industrial 12% debt security, due March 10, 2005 60,606 60,606
pump systems ------------ ----------
884,921 519,727
------------ ----------
Monitronics International, Inc. 73,214 common shares (c) 439,285 54,702
Dallas, Texas ------------ ----------
Provides home security
systems monitoring services
10
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED...
DECEMBER 31, 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 50,000 50,000
10% debt security, due January 1, 2007 150,000 150,000
10% debt security, due January 1, 2007 37,500 37,500
10% debt security, due January 1, 2007 6,250 6,250
------------ ----------
1,687,501 1,743,751
------------ ----------
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 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) 100,012 12
Provider of value priced funeral ------------ ----------
services 244,387 144,387
------------ ----------
Total service 50.16% 6,326,180 6,916,064
======== ------------ -----------
Technology and Communications:
Feed Management Systems, Inc. (a) 540,551 common shares (c) 687,331 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 67,464 67,464
and B2B internet services 12% debt security, due August 21, 2008 68,658 68,658
Warrants to purchase 166,500 Series A preferred (c) -- --
------------ ----------
1,497,762 2,137,617
------------ ----------
MainStream Data, Inc. (a) 322,763 shares Series A preferred (c) 180,044 200,049
Salt Lake City, Utah ------------ ----------
Content delivery solutions provider
Miles Media Group, Inc. (a) 1,000 common shares (c) 866,767 440,000
Sarasota, Florida 100 common options (c) -- --
------------ ----------
Tourist magazine publisher 866,767 440,000
------------ ----------
11
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED...
DECEMBER 31, 2005
Technology and Communications Continued:
Percent of
Company Security Net assets Value Cost (d)
.....................................................................................................................................
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 62,340 85,468
Pleasanton, California 8% debt security, due April 1, 2012 (c) 562,877 750,001
Designs and markets pivot enabling Warrant to purchase 39,400 common shares (c) -- --
software for LCD computer monitors ------------ ----------
625,217 835,469
------------ ----------
SnapNames.com, Inc. 10% debt security, due March 15, 2007 213,125 213,125
Portland, Oregon 465,000 common shares (c) 4,650 4,650
Domain name management ------------ ----------
217,775 217,775
------------ ----------
Total technology and communications 29.15% 3,676,315 4,985,910
========== ------------ ----------
$ 24,552,369 25,665,208
============ ===========
(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.
12
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, 2005,
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,
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. However, another one of MACC's
on-going goals is to reduce net investment expense. MACC is currently seeking to
achieve this goal by reducing its operating expenses. MACC also earns interest
on short-term investments of cash.
First Quarter Ended December 31, 2005 Compared to First Quarter Ended
December 31, 2004
For the three months
ended December 31,
------------------------------
2005 2004 Change
------------------------------ --------
Total investment income $ 331,684 699,450 (367,766)
Net operating expense (551,723) (1,024,912) 473,189
------------- ----------- -----------
Investment expense, net (220,039) (325,462) 105,423
------------- ----------- -----------
Net realized gain (loss) on investments 213,333 (2,467,409) 2,680,742
Net change in unrealized depreciation/
appreciation on investments (1,016,410) 2,981,776 (3,998,186)
Net change in unrealized loss on other assets (29,521) (24,659) (4,862)
------------- ----------- -----------
Net (loss) gain on investments (832,598) 489,708 (1,322,306)
------------- ----------- -----------
Net change in net assets from operations $ (1,052,637) 164,246 (1,216,883)
============= =========== ===========
Net asset value:
Beginning of period $ 5.54 4.61
============= ===========
End of period $ 5.12 4.68
============= ============
13
Total Investment Income
During the current year first quarter, total investment income was
$331,684, a decrease of $367,766, or 53%, from total investment income of
$699,450 for the prior year first quarter. In the current year first quarter as
compared to the prior year first quarter, interest income decreased $190,434, or
38%, dividend income decreased $168,632, or 87%, processing fees decreased
$7,700, or 100%, and other income decreased $1,000, or 100%. The decrease in
interest income is the net result of repayments of principal on debt portfolio
securities issued by seven portfolio companies, a decrease in interest income on
debt portfolio securities issued by two portfolio companies which were placed on
non-accrual of interest status after the end of the prior year first quarter,
and a lump sum interest payment by one portfolio company in the prior year first
quarter. In the current year first quarter, MACC received dividends on two
existing portfolio investments, as compared to dividend income received in the
prior year first quarter from three existing portfolio companies, one of which
was a distribution from a limited liability company. The dividends in the prior
year first quarter were also larger than in the current year first quarter.
Processing fees decreased due to no fees received in the current year first
quarter compared to fees received on one follow-on investment made in the prior
year first quarter.
Net Operating Expenses
Net operating expenses for the first quarter of the current year were
$551,723, a decrease of $473,189, or 46%, as compared to net operating expenses
for the prior year first quarter of $1,024,912. Interest expense decreased
$202,009, or 39%, in the current year first quarter due to the repayment of
borrowings from the Small Business Administration in the amount of $9,000,000 in
the prior fiscal year. Management fees decreased $127,000, or 52%, in the
current year first quarter due to the decrease in capital under management and a
decrease in the management fee as a percentage of capital under management from
2.50% to 1.50%, which became effective April 30, 2005. Professional fees
decreased $134,862, or 76%, in the current year first quarter primarily due to
the legal expenses incurred in the prior year first quarter from the arbitration
proceedings related to the sale of a former portfolio company which has been
settled and legal expenses incurred in pursuing a rights offering. Other
expenses decreased $9,318, or 11%, in the current year first quarter as compared
to the prior year first quarter. The decrease in other expenses is the net
result of decreases in director's fees and board travel expense offset by the
increase in administrative expenses mainly due to the timing of expenses in the
prior year first quarter due to the postponement of the 2005 Annual Shareholders
Meeting.
Investment Expense, Net
For the current year first quarter, MACC recorded investment expense, net
of $220,039, as compared to investment expense, net of $325,462 during the prior
year first quarter. The decrease in investment expense, net is the result of the
decrease in operating expenses described above.
Net Realized (Loss) Gain on Investments
During the current year first quarter, MACC recorded net realized gain on
investments of $213,333, as compared with net realized loss on investments of
$2,467,409 during the prior
14
year first quarter. In the current year first quarter, MACC realized a gain of
$213,333 from the sale of warrant shares in one portfolio company. 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.
Net Change in Unrealized Appreciation/Depreciation of Investments and Other
Assets
MACC recorded net change in unrealized appreciation/depreciation on
investments of ($1,016,410) during the current year first quarter, as compared
to $2,981,776 during the prior year first quarter. This net change in unrealized
appreciation/depreciation on investments of ($1,016,410) is the net effect of
increases in fair value of three portfolio companies totaling $627,442,
decreases in fair value of eight portfolio companies of $1,430,519 and the
reversal of appreciation of $213,333 in one portfolio investment from the sale
of warrant shares resulting in a realized gain.
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 loss on other assets of $29,521 during the current
year first quarter 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 $24,659 during the prior year first quarter.
Net Change in Net Assets from Operations
MACC experienced a decrease of $1,052,637 in net assets at the end of the
first quarter of fiscal year 2006, and the resulting net asset value per share
was $5.12 as of December 31, 2005, as compared to $5.54 as of September 30,
2005.
MACC has five portfolio investments valued at cost, has recorded unrealized
appreciation on nine portfolio investments, and has recorded unrealized
depreciation on fourteen portfolio investments. The decrease in net assets
recorded during the current year first quarter was primarily the result of
decreases in the fair value of eight portfolio investments. Valuations from
quarter to quarter are affected by a portfolio company's short term performance
that changes unrealized depreciation and unrealized appreciation in the
15
quarter. This may or may not be indicative of the long term performance of the
portfolio company.
MACC is not currently making investments in new portfolio companies, and is
instead using any excess cash generated from portfolio investment liquidity
events to prepay MorAmerica Capital's outstanding SBA guaranteed debentures when
appropriate. MACC recorded significant reductions in its interest expense and
management fees in the first quarter of the current fiscal year as a result of
these prepayments. These reductions contributed to a significant improvement in
MACC's investment expense, net for the current year first quarter, as compared
to the prior year first quarter.
While the economy continues to perform well, it is not even in all sectors.
Portfolio companies have had to deal with high energy costs, high raw material
costs, and in some cases flat or decreased sales. The recent hurricanes, gas
prices, world tensions, terrorism, and the continuing conflict in Iraq increase
the uncertainty of future performance. Management believes MACC's investment
portfolio may benefit from an anticipated robust market for corporate
acquisitions and investments. The overall activity in the market for corporate
acquisitions is strong and MACC expects to exit several investments in 2006.
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 December 31, 2005, the capital of MorAmerica Capital was impaired less that
the 55% maximum impairment percentage permitted under SBA Regulations.
MorAmerica Captial's impairment percentage was 43% at December 31, 2005.
MorAmerica Capital is also currently limited by the SBA Regulations in the
amount of distributions it may make to MACC.
As of December 31, 2005, MACC's cash and cash equivalents totaled
$4,667,849. MACC has a commitment for an additional $6,500,000 in SBA guaranteed
debentures, which expires on September 30, 2007. MorAmerica Capital and three
other SBICs have entered into an agreement with the SBA in connection with an
arbitration settlement. As a result of the terms of this agreement, MACC does
not believe that MorAmerica Capital will have access to the SBIC capital program
in fiscal year 2006. Subject to the other risks and uncertainties described in
this quarterly report, MACC believes that its existing cash and money market
accounts and other anticipated cash flows will provide adequate funds for MACC's
anticipated cash requirements during fiscal year 2006, including follow-on
portfolio investment activities, interest payments on outstanding debentures
payable, and administrative expenses. In light of the agreement with SBA, at the
present time MACC is not making new investments, is prudently selling portfolio
companies and is using the resulting proceeds to reduce debt by prepaying SBA
guaranteed debentures when appropriate.
16
Debentures payable are composed of $16,790,000 in principal amount of
SBA-guaranteed debentures issued by MACC's subsidiary, MorAmerica Capital, which
mature as follows: $3,500,000 in fiscal year 2010, $5,835,000 in fiscal year
2011, and $7,455,000 in fiscal year 2012. 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
December 31, 2005:
Payments due by period
-----------------------------------------------------------------------------
Contractual Obligations
Less than More than
Total 1 Year 1-3 Years 3-5 Years 5 Years
--------------- ---------- --------- --------- ----------
SBA Debentures $16,790,000 --- --- 3,500,000 13,290,000
Incentive Fees Payable(1)$ 566,426 --- --- --- 566,426
(1) Accrued incentive fees payable to the investment advisor are subordinated to
all amounts payable by MorAmerica Capital to the SBA, including outstanding
SBA-guaranteed debentures, and any losses the SBA may incur in connection with
the settlement of arbitration proceedings occurring in late 2004.
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 2006. Although management believes these sources
will provide sufficient funds for MACC to meet its fiscal year 2006 investment
level objective and other anticipated cash requirements, there can be no
assurances that MACC's cash flows from operations will be as projected, or that
MACC's cash requirements will be as projected.
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 $24,552,369 at December 31, 2005 and
$25,845,548 at September 30, 2005. During the three months ended December 31,
2005, MACC invested $103,370 in follow-on investments in four existing portfolio
companies. Management views investment objectives for any given year as
secondary in importance to MACC's overriding concern of investing in only those
portfolio companies which satisfy MACC's investment criteria. As noted above,
MACC does not expect to make any investments in new portfolio companies during
fiscal year 2006, but may invest up to $500,000 in follow-on investments in
existing portfolio companies, subject to further adjustment based on current
economic and operating conditions.
MACC frequently co-invests with other funds managed by MACC's investment
advisor. When it makes any co-investment with these related funds, MACC follows
certain procedures consistent with orders of the Securities and Exchange
Commission for related
17
party co-investments to reduce or eliminate conflict of interest issues. All of
the $103,370 invested during the current year first quarter represented
co-investments with funds managed by MACC's investment advisor.
Critical Accounting Policy
Investments in securities traded on a national securities exchange (or
reported on the NASDAQ national market) are stated at the 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 MACC's 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 subject to market risk from changes in market interest rates that
affect the fair value of MorAmerica Capital's debentures payable determined in
accordance with Statement of Financial Accounting Standards No. 107, Disclosures
About Fair Value of Financial Instruments. The estimated fair value of
MorAmerica Capital's outstanding debentures payable at December 31, 2005, was
$18,037,000, with a cost of $16,790,000. 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 (5.8% at
December 31, 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
18
increase in fair value resulting from a hypothetical 0.5% decrease in interest
rates. Actual results may differ.
------------------------------------------------------
December 31, 2005
------------------------------------------------------
Fair Value of Debentures Payable $ 18,037,000
Amount Above Cost $ 1,247,000
Additional Market Risk $ 391,000
------------------------------------------------------
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.
19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There are no items to report.
Item 1A. Risk Factors.
There are no changes to report from the risk factors disclosed in MACC's
Annual Report on Form 10-K for the year ended September 30, 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:
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)
20
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: 2/9/06 By: /s/ David R. Schroder
---------------------- --------------------------------------
David R. Schroder, President
Date: 2/9/06 By: /s/ Robert A. Comey
---------------------- --------------------------------------
Robert A. Comey, Chief Financial
Officer
EXHIBIT INDEX
Exhibit Description Page
------- ------------ ----
31.1 Section 302 Certification of David R. Schroder (CEO) 22
31.2 Section 302 Certification of Robert A. Comey (CFO) 24
32.1 Section 1350 Certification of David R. Schroder (CEO) 26
32.2 Section 1350 Certification of Robert A. Comey (CFO) 28
21