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 June 30, 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 [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 June 30, 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 June 30, 2007 (Unaudited)
and September 30, 2006......................................... 3
Condensed Consolidated Statements of Operations (Unaudited) for
the three months and nine months ended June 30, 2007 and
June 30, 2006.................................................. 4
Condensed Consolidated Statements of
Cash Flows (Unaudited) for the nine months
ended June 30, 2007 and June 30, 2006........................... 5
Notes to Unaudited Condensed Consolidated
Financial Statements............................................ 6
Consolidated Schedule of Investments (Unaudited)
at June 30, 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.................................... 20
Item 4. Controls and Procedures......................................... 21
Part II. OTHER INFORMATION............................................... 22
Item 6. Exhibits........................................................ 22
Signatures...................................................... 23
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
June 30, September
2007 30,
(Unaudited) 2006
----------------- ---------------
Assets
Loans and investments in portfolio securities, at market or fair value:
Unaffiliated companies (cost of $2,758,062 and $2,920,073) $ 2,302,342 2,909,703
Affiliated companies (cost of $13,415,994 and $13,841,969) 13,665,998 13,143,159
Controlled companies (cost of $3,069,731 and $3,159,419) 3,043,794 2,886,639
Cash and cash equivalents 1,801,923 2,132,350
Interest receivable 198,054 358,717
Other assets 409,402 1,399,487
--------------------- ---------------
Total assets $ 21,421,513 22,830,055
===================== ===============
Liabilities and net assets
Liabilities:
Debentures payable $ 8,790,000 10,790,000
Incentive fees payable 108,399 108,399
Accrued interest 199,936 61,173
Accounts payable and other liabilities 232,444 252,249
--------------------- ---------------
Total liabilities 9,330,779 11,211,821
--------------------- ---------------
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 12,297,741 12,575,548
Unrealized depreciation on investments (231,653) (981,960)
--------------------- ---------------
Total net assets 12,090,734 11,618,234
--------------------- ---------------
Total liabilities and net assets $ 21,421,513 22,830,055
===================== ===============
Net assets per share $ 4.91 4.71
===================== ===============
See accompanying notes to unaudited condensed consolidated financial statements.
3
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations
(Unaudited)
For the three For the three For the nine For the nine
months ended months ended months ended months ended
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
---------------- ---------------- ---------------- ------------------
Investment income:
Interest
Unaffiliated companies $ 12,394 32,295 41,727 162,267
Affiliated companies 144,720 126,507 415,740 451,362
Controlled companies 29,129 14,299 89,029 48,175
Other 13,495 59,417 74,064 128,491
Dividends
Unaffiliated companies --- --- --- 2,187
Affiliated companies 53,414 5,843 99,862 144,635
------------------- ---------------- ---------------- ------------------
Total investment income 253,152 238,361 720,422 937,117
------------------- ---------------- ---------------- ------------------
Operating expenses:
Interest expenses 158,695 275,549 560,527 921,456
Management fees 78,159 97,872 251,119 328,480
Incentive fees --- (138,300) --- 5,011
Professional fees 26,830 38,691 165,082 162,051
Other 66,908 78,630 234,878 241,886
------------------- ---------------- ---------------- ------------------
Total operating expenses 330,592 352,442 1,211,606 1,658,884
Investment expense, net
before tax expense (77,440) (114,081) (491,184) (721,767)
Income tax expense --- 40,000 --- 110,000
------------------- ---------------- ---------------- ------------------
Investment expense, net (77,440) (154,081) (491,184) (831,767)
------------------- ---------------- ---------------- ------------------
Realized and unrealized gain (loss) on
investments and other assets:
Net realized gain (loss) on
investments and other assets:
Unaffiliated companies 309,357 (705,226) 213,377 (34,490)
Affiliated companies --- --- --- 1,987,604
Controlled companies --- --- --- 31,000
Net change in unrealized
appreciation/depreciation
on investments 270,950 1,043,716 750,307 (3,790,066)
Net change in unrealized (loss)
gain on other assets (25,686) 9,111 --- (19,360)
------------------- ---------------- ---------------- ------------------
Net gain (loss) on investments 554,621 347,601 963,684 (1,825,312)
------------------- ---------------- ---------------- ------------------
Net change in net assets from
operations $ 477,181 193,520 472,500 (2,657,079)
=================== ================ ================ ==================
See accompanying notes to unaudited condensed consolidated financial statements.
4
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the nine For the nine
months ended months ended
June 30, June 30, 2006
2007
----------------- -------------------
Cash flows from operating activities:
Net change in net assets from operations $ 472,500 (2,657,079)
Adjustments to reconcile net change in net assets from operations to
net cash provided by operating activities:
Net realized and unrealized (gain) loss on investments (750,307) 1,805,952
Net realized and unrealized (gain) loss on other assets (213,377) 19,360
Proceeds from disposition of and payments on
loans and investments in portfolio securities 1,052,031 5,477,447
Purchases of loans and investments in portfolio securities (65,000) (287,125)
Change in interest receivable 160,663 (158,910)
Change in other assets 894,105 1,565,938
Change in accrued interest, deferred incentive fees payable,
accounts payable and other liabilities 118,958 (229,098)
----------------- -------------------
Net cash provided by operating activities 1,669,573 8,193,564
Cash flows from financing activities:
Debt repayment (2,000,000) (2,000,000)
----------------- -------------------
Net cash used in financing activities (2,000,000) (2,000,000)
----------------- -------------------
Net (decrease) increase in cash and cash equivalents (330,427) 3,536,485
Cash and cash equivalents at beginning of period 2,132,350 2,393,149
------------------ -------------------
Cash and cash equivalents at end of period $ 1,801,923 5,929,634
================== ===================
Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ 369,075 605,612
================== ===================
Supplemental disclosure of noncash investing and
financing information -
Assets received in exchange of securities $ 84,000 390,998
================== ==================
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 its wholly
owned subsidiary MorAmerica Capital Corporation (MACC) which have been prepared
in accordance with U.S. generally accepted accounting principles 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 U.S. generally accepted accounting principles 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, 2006. 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, 2006 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 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 (Unaudited)
For the nine For the nine
months ended months ended
June 30, June 30,
2007 2006
--------------- ---------------
Per Share Operating Performance
(For a share of capital stock outstanding
throughout the period):
Net asset value, beginning of period $ 4.71 5.54
--------------- ---------------
Income from investment operations:
Investment expense, net (0.19) (0.33)
Net realized and unrealized gain
(loss) on investment transactions 0.39 (0.74)
--------------- ---------------
Total from investment operations 0.20 (1.07)
--------------- ---------------
Net asset value, end of period $ 4.91 4.47
=============== ===============
Closing market price $ 2.30 2.13
=============== ===============
For the nine For the nine
months ended months ended
June 30, June 30,
2007 2006
--------------- ---------------
Total return
Net asset value basis 4.07 % (19.44)
Market price basis 29.21 % (17.12)
Net asset value, end of period
(in thousands) $ 12,091 11,008
Ratio to weighted average net assets:
Investment expense, net 4.23 % (5.77)
Operating and income tax expense 10.42 % 13.27
The ratios of investment expense, net to weighted average net assets, of
operating expenses and income tax expenses to weighted 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 divided by the beginning of the year average net assets. An
individual common stockholders'return may vary from these returns.
(4) Recent Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"),
"Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement
No. 109." This interpretation prescribes a recognition threshold and measurement
process for recording in the financial statements uncertain tax positions taken
or expected to be taken in a tax return. Additionally, this interpretation
provides guidance on the derecognition, classification, accounting in interim
7
periods, and disclosure requirements for uncertain tax positions. The provisions
of FIN 48 will be effective at the beginning of the first fiscal year that
begins after December 15, 2006. The adoption of FIN 48 is not expected to have a
material effect on our financial statements.
In September 2006, the Securities and Exchange Commission published Staff
Accounting Bulletin ("SAB") No. 108 (Topic 1N), "Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements." SAB No. 108 requires registrants to quantify
misstatements using both the balance-sheet and income-statement approaches, with
adjustment required if either method results in a material error. The provisions
of SAB No. 108 are effective as of the beginning of the first fiscal year that
ends after November 15, 2006. The adoption of SAB No. 108 did not have a
material effect on our financial statements.
In September 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 157, Fair Value Measurements. SFAS 157 defines fair value, establishes
a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. This
statement does not require any new fair value measurements; however, for some
entities, the application of this statement will change current practice. SFAS
157 is effective for fiscal years beginning after November 15, 2007. We are
evaluating the effect, if any, of SFAS 157 on our consolidated financial
statements.
In February 2007 the Financial Accounting Standards Board ("FASB") issued
SFAS No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities -- Including an Amendment of FASB Statement No. 115." SFAS No. 159
permits many financial instruments and certain other items to be measured at
fair value at the option of the Company. SFAS No. 159 is effective for financial
statements issued for first fiscal years beginning after November 15, 2007. We
are evaluating the effect, if any, of SFAS 159 on our consolidated financial
statements.
8
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS (UNAUDITED)
JUNE 30, 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 70,545 39
for aircraft 14% note, due October 1, 2008 89,320 89,320
Membership interest 31,676 ---
----------- ------------
961,541 859,359
----------- ------------
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 ----------- ------------
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) 351,742 126,742
----------- ------------
1,918,480 1,693,480
----------- ------------
Handy Industries, LLC (a) 12.5% debt security, due October 2, 2007 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) 186,529 267,254
Marion, Iowa 2% debt security, due January 31, 2008 (c) 197,776 281,795
Manufacturer of automobile 38,008 common shares (c) ---- 126,651
aftermarket engine and brake 29,340 common shares (c) ---- 92,910
repair machinery ----------- ------------
384,305 768,610
----------- ------------
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 and Warrants to purchase common shares (c) 15 15
floor truss systems ----------- ------------
640,015 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) 280,565 565
----------- ------------
1,207,278 927,278
----------- ------------
9
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED (UNAUDITED)...
JUNE 30, 2007
Manufacturing Continued:
Percent
of Net
Company Security assets Value Cost (d)
----------------------------------------------------------------------------------------------------------------------------------
Pratt-Read Corporation (a) 13,889 shares Series A Preferred (c) $ 750,000 750,000
Bridgeport, Connecticut 7,718 shares Services A preferred (c) 300,000 416,667
Manufacturer of screwdriver shafts 13% debt security, due July 26, 2007 (c) 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 100,305 100,305
Bolton, Connecticut ----------- ------------
Producer of cleaning and wax
products under both the Simoniz
brand and private label brand names
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) 385,000 385,000
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
----------- ------------
1,510,355 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 95.60% 11,558,741 12,087,132
========== ----------- ------------
Service:
FreightPro, Inc 18% debt security, due February 21, 2007 (c) --- 262,500
Overland Park, Kansas 18% debt security, due February 15, 2007 (c) --- 87,500
Internet based outsource provider Warrant to purchase 366,177.80 common shares (c) 2 2
of freight logistics ----------- ------------
2 350,002
----------- ------------
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
10% debt security, due January 1, 2008 12,500 12,500
10% debt security, due January 1, 2008 37,500 37,500
10% debt security, due January 1, 2008 9,375 9,375
----------- ------------
1,533,439 1,559,376
----------- ------------
10
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED (UNAUDITED)...
JUNE 30, 2007
Service Continued:
Percent
of Net
Company Security assets Value Cost (d)
----------------------------------------------------------------------------------------------------------------------------------
SMWC Acquisition Co., Inc. (a) 13% debt security due May 19, 2007 $ 110,000 110,000
Kansas City, Missouri 1,320 shares common (c) 242,900 42,900
Steel warehouse distribution and Warrant to purchase 2,200 common shares (c) ---- ----
processing 176,550 shares Series A preferred 353,100 353,100
----------- ------------
706,000 506,000
----------- ------------
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 23.81% 2,878,737 2,470,093
========== ----------- ------------
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 12% debt security, due May 20, 2008 48,409 48,409
and B2B internet services 12% debt security, due August 21, 2008 41,806 41,806
Warrants to purchase 166,500 Series A preferred (c) --- ---
----------- ------------
2,091,710 2,091,710
----------- ------------
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) 1,515,000 440,000
Sarasota, Florida 100 common options (c) 123,400 ---
Tourist magazine publisher ----------- ------------
1,638,400 440,000
----------- ------------
Phonex Broadband Corporation 1,855,302 shares Series A preferred (c) 288,750 1,155,000
Midvale, Utah ----------- ------------
Power line communications
Portrait Displays, Inc. 8% debt security, due April 1, 2009 49,802 49,802
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 ----------- ------------
computer monitors 375,752 799,803
----------- ------------
Total technology and communications 37.84% 4,574,656 4,686,562
========== ----------- ------------
$ 19,012,134 19,243,787
=========== ============
(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.
11
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, 2006,
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.
Third Quarter Ended June 30, 2007 Compared to Third Quarter Ended June 30, 2006
For the three months ended
June 30,
--------------------------------------
2007 2006 Change
---------------------------------------------------------
Total investment income $ 253,152 238,361 14,791
Net operating and income tax expense (330,592) (392,442) 61,850
------------- ---------------- --------------
Investment expense, net (77,440) (154,081) 76,641
------------- ---------------- --------------
Net realized gain (loss) on investments 309,357 (705,226) 1,014,583
Net change in unrealized appreciation/
depreciation on investments and other assets 270,950 1,043,716 (772,766)
Net change in unrealized (loss) gain on other assets (25,686) 9,111 (34,797)
------------- ---------------- --------------
Net gain on investments 554,621 347,601 207,020
------------- ---------------- --------------
Net change in net assets from operations $ 477,181 193,520 283,661
================= ================ ==============
Net asset value per share:
Beginning of period $ 4.71 5.12
================= ================
End of period $ 4.91 4.47
================= ================
12
Total Investment Income
During the current fiscal year third quarter, total investment income was
$253,152, an increase of $14,791, or 6%, from total investment income of
$238,361 for the prior year third quarter. In the current year third quarter as
compared to the prior year third quarter, interest income decreased $32,780, or
14%, and dividend income increased $47,571, or more than 100%. The decrease in
interest income is the net result of repayments of principal on debt portfolio
securities issued by seven portfolio companies and an increase in interest
income on three debt portfolio securities which had been on non-accrual of
interest status during the prior year third quarter but which are currently
making interest payments. In the current year third quarter, MACC received
dividends on three existing portfolio investments, two of which were
distributions from limited liability companies, as compared to dividend income
received in the prior year third quarter from two existing portfolio
investments, one of which was a distribution from a limited liability company.
MACC does not anticipate that its dividend income will continue to increase in
future periods.
Net Operating Expenses
Net operating expenses for the third quarter of the current year were
$330,592, a decrease of $21,850, or 6%, as compared to net operating expenses
for the prior year third quarter of $352,442. Interest expense decreased
$116,854, or 42%, in the current year third quarter due to the repayment of
borrowings from the Small Business Administration ("SBA") of $6,000,000 in the
prior fiscal year and $2,000,000 in the current year second quarter. Management
fees decreased $19,713, or 20%, in the current year third quarter due to the
decrease in capital under management. Incentive fees changed $138,300, or 100%,
because no incentive fees were earned in the current year third quarter.
Professional fees decreased $11,861, or 31%, in the current year third quarter
as compared to the prior year third quarter. Other expenses decreased $11,722,
or 15%, in the current year third quarter as compared to the prior year third
quarter.
Investment Expense, Net
For the current year third quarter, MACC recorded investment expense, net
of $77,440, as compared to investment expense, net of $154,081 during the prior
year third quarter, a decrease of $76,641, or 50%. 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 third quarter, MACC recorded net realized gain on
investments of $309,357, as compared with net realized loss on investments of
$705,226 during the prior year third quarter. 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
13
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
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 $270,950 during the current year third quarter, as compared to
$1,043,716 during the prior year third quarter. This net change resulted from:
• Unrealized appreciation in the fair value of two portfolio companies
totaling $466,300 during the current year third quarter, as compared
to unrealized appreciation in the fair value of four portfolio
companies totaling $878,377 during the prior year third quarter.
• No unrealized depreciation during the current year third quarter, as
compared to unrealized depreciation in the fair value of four
portfolio companies of $459,685 during the prior year third quarter.
• Reversal of unrealized appreciation of $195,350 in one portfolio
company during the current year third quarter, as compared to reversal
of unrealized depreciation of $625,024 in one portfolio company during
the prior year third quarter.
The net change in unrealized gain on other assets of $25,686 during the
current year third quarter was recorded with respect to other securities which
are classified as other assets, as compared to a net change in unrealized gain
on other assets of $9,111 during the prior year third quarter.
Net Change in Net Assets from Operations
MACC experienced an increase of $477,181 in net assets for the third
quarter of fiscal year 2007, and the resulting net asset value per share was
$4.91 as of June 30, 2007, as compared to $4.71 as of September 30, 2006 and
March 31, 2007.
The increase in net assets recorded during the current year third quarter
was primarily the result of the net realized gain on investments and the net
change in unrealized appreciation/depreciation on investments, as described
above.
MACC has seven portfolio investments valued at cost, has recorded
unrealized appreciation on eight portfolio investments, and has recorded
unrealized depreciation on eight 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
14
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.
Due to its previously reported agreement with the SBA, MACC is not
currently making investments in new portfolio companies, however, MACC may
periodically make follow-on investments. MACC is prudently selling portfolio
companies and is using the resulting proceeds to reduce debt by paying
SBA-guaranteed debentures. This strategy impacted MACC's results of operations
during the third quarter and nine-month period of the current fiscal year in two
ways. MACC's total investment income increased in the third quarter but
decreased in the nine-month period of the current fiscal year as compared to the
prior year periods in part because MACC is not reinvesting the proceeds from
portfolio company liquidity events in new portfolio investments. The increase in
total investment income during the third quarter of the current fiscal year was
due to a significant increase in dividend income during the period, which MACC
does not anticipate will continue in future periods. Second, MACC's interest
expense and management fee expense both decreased in the third quarter and
nine-month period of the current fiscal year as compared to the prior year
periods primarily as a result of the decreases in MACC's outstanding debentures
payable and assets under management. For the nine-month period of the current
fiscal year, the decrease in interest expense and management fee expense
exceeded the decrease in total investment income.
The economy continues to be strong. However, it is not even in all sectors
and it is uncertain whether inflation or recession could affect the performance
of portfolio companies. Portfolio companies have had to deal with high energy
costs, high raw material costs, and in some cases flat or decreased sales. It is
uncertain how the recent downturn in the housing market and the difficulties
with sub-prime lenders will affect the current portfolio companies and/or the
economy as a whole. The growth of China and India and continued competition from
imported products from Asia, Central America, and South America have made it
more difficult to increase prices as commodity prices rise. The current world
tensions and the continuing conflict in Iraq increase the uncertainty of future
performance; however, the economy continues to grow and management believes
MACC's investment portfolio may benefit from improved operating performance at a
number of portfolio companies and from a continuing robust market for corporate
acquisitions and investments. The overall activity in the market for corporate
acquisitions remains strong.
15
Nine Months Ended June 30, 2007 Compared to Nine Months Ended June 30, 2006
For the nine months ended
June 30,
--------------------------------------
2007 2006 Change
-------------------------------------- --------------
Total investment income $ 720,422 937,117 (216,695)
Net operating and income tax expense (1,211,606) (1,768,884) 557,278
------------- ---------------- --------------
Investment expense, net (491,184) (831,767) 340,583
------------- ---------------- --------------
Net realized gain on investments 213,377 1,984,114 (1,770,737)
Net change in unrealized appreciation/
depreciation on investments and other assets 750,307 (3,790,066) 4,540,373
Net change in unrealized loss on other assets --- (19,360) 19,360
------------- ---------------- --------------
Net gain (loss) on investments 963,684 (1,825,312) 2,788,996
------------- ---------------- --------------
Net change in net assets from operations $ 472,500 (2,657,079) 3,129,579
================= ================ ==============
Net asset value per share:
Beginning of period $ 4.71 5.54
================= ================
End of period $ 4.91 4.47
================= ================
Total Investment Income
During the current fiscal year nine-month period, total investment income
was $720,422, a decrease of $216,695, or 23%, from total investment income of
$937,117 for the prior year nine-month period. In the current year nine-month
period as compared to the prior year nine-month period, interest income
decreased $169,735, or 21%, and dividend income decreased $46,960, or 32%. The
decrease in interest income is the net result of repayments of principal on debt
portfolio securities issued by ten portfolio companies, a decrease in interest
income on two debt portfolio securities which have been placed on non-accrual of
interest status, and an increase in interest income on three debt portfolio
securities which had been on non-accrual of interest status during the prior
year nine-month period but which are currently making interest payments. In the
current year nine-month period, MACC received dividends on three existing
portfolio investments, two of which were distributions from limited liability
companies, as compared to dividend income received in the prior year nine-month
period on five existing portfolio investments, two of which were distributions
from limited liability companies.
Net Operating Expenses
Net operating expenses for the nine-month period of the current year were
$1,211,606, a decrease of $447,278, or 27%, as compared to net operating
expenses for the prior year nine-month period of $1,658,884. Interest expense
decreased $360,929, or 39%, in the current year nine-month period due to the
repayment of borrowings from the Small Business Administration ("SBA") of
$6,000,000 in the prior fiscal year and $2,000,000 in the current year
nine-month period. Management fees decreased $77,361, or 24%, in the current
year nine-month period due to the decrease in capital under management.
Professional fees increased $3,031, or 2%, in the current year nine-month period
due in part to the timing of payments of legal expenses. Other
16
expenses decreased $7,008, or 3%, in the current year nine-month period as
compared to the prior year nine-month period.
Investment Expense, Net
For the current year nine-month period, MACC recorded investment expense,
net of $491,184, as compared to investment expense, net of $831,767 during the
prior year nine-month period, a decrease of $340,583, or 41%. The decrease in
investment expense, net is the result of the decrease in operating expenses
described above, partially offset by the decrease in investment income described
above.
Net Realized Gain on Investments
During the current year nine-month period, MACC recorded net realized gain
on investments of $213,377, as compared with net realized gain on investments of
$1,984,114, during the prior year nine-month period. Management does not attempt
to maintain a comparable level of realized gains quarter to quarter but instead
attempts to maximize total investment portfolio appreciation through realizing
gains in the disposition of securities. 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
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 $750,307 during the current year nine-month period, as compared
to ($3,790,066) during the prior year nine-month period. This net change
resulted from:
• Unrealized appreciation in the fair value of five portfolio companies
totaling $1,520,657 during the current year nine-month period, as
compared to unrealized appreciation in the fair value of three
portfolio companies totaling $1,150,205 during the prior year
nine-month period.
• Unrealized depreciation in the fair value of five portfolio companies
of $770,350 during the current year nine-month period, as compared to
unrealized depreciation in the fair value of eleven portfolio
companies of $3,324,210 during the prior year nine-month period.
17
• No reversal of unrealized appreciation during the current year
nine-month period, as compared to reversal of unrealized appreciation
of $2,041,085 in three portfolio companies and reversal of unrealized
depreciation of $425,024 in one portfolio company during the prior
year nine-month period. The disposition of securities results in
realizing gains and losses and reversing any previously recognized
unrealized gains and losses.
There was no change in unrealized gain on other assets during the current
year nine-month period with respect to other securities which are classified as
other assets, as compared to a net change in unrealized loss on other assets of
$19,360 during the prior year nine-month period.
Financial Condition, Liquidity and Capital Resources
To date, MACC has relied upon several sources to fund its investment
activities, including MACC's cash and money market accounts and the Small
Business Investment Company ("SBIC") leverage program operated by the SBA.
As an SBIC, MorAmerica Capital is required to comply with the regulations
of the SBA (the "SBA Regulations"). These regulations include the capital
impairment rules, as defined by Regulation 107.1830 of the SBA Regulations. As
of June 30, 2007, the capital of MorAmerica Capital was impaired less than the
55% maximum impairment percentage permitted under SBA Regulations. MorAmerica
Capital's impairment percentage was 40% at June 30, 2007. If MorAmerica Capital
experiences negative operating results, no assurances can be given that
MorAmerica Capital's impairment percentage will continue to be less than the
maximum impairment percentage in future periods. If MorAmerica Capital would
exceed the maximum impairment percentage in future periods, a number of events
could occur which would have a material adverse affect on the financial
condition, results of operations, cash flow and liquidity of MACC and MorAmerica
Capital. MorAmerica Capital is also currently limited by the SBA Regulations in
the amount of distributions it may make to MACC.
As of June 30, 2007, MACC's cash and cash equivalents totaled $1,801,923.
MACC has commitments for an additional $6,500,000 in SBA-guaranteed debentures,
which expire 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 2007. Subject to the other risks and uncertainties described in this
quarterly report, MACC believes that its existing cash and cash equivalents and
other anticipated cash flows will provide adequate funds for MACC's anticipated
cash requirements during fiscal year 2007, including follow-on portfolio
investment activities, if any, interest payments on outstanding debentures
payable, payments of principal 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 paying SBA-guaranteed
debentures. Once all outstanding SBA debt is repaid, MACC will evaluate
alternatives to maximize shareholder value which may include a
18
resumption of new investment funding or seeking shareholder approval to make
liquidating distributions.
Debentures payable are composed of $8,790,000 in principal amount of
SBA-guaranteed debentures issued by MACC's subsidiary, MorAmerica Capital, which
mature as follows: $5,835,000 in fiscal year 2011, and $2,955,000 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 MACC's significant contractual obligations for the
repayment of debt and other contractual obligations as of June 30, 2007:
Payments due by period
Contractual Obligations
Less
than 1 1-3 More than
Total Year Years 3-5 Years 5 Years
-------------- -------- -------- ------------ ------------
SBA Debentures $ 8,790,000 --- --- 7,835,000 955,000
Incentive Fees Payable(1) $ 108,399 --- --- --- 108,399
(1) Under the terms of the Subordination Agreement previously disclosed, 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 other cash
requirements during fiscal year 2007. Although management believes these sources
will provide sufficient funds for MACC to meet its anticipated cash
requirements, there can be no assurances that MACC's cash flows from operations
will be as projected, or that MACC's cash requirements will be as projected.
Portfolio Activity
MACC's primary business is investing in and lending to businesses through
investments in subordinated debt (generally with detachable equity warrants),
preferred stock and common stock. MACC, however, is not currently making new
investments. The total portfolio value of investments in publicly and
non-publicly traded securities was $19,012,134 at June 30, 2007 and $18,939,501
at September 30, 2006. During the three months ended June 30, 2007, MACC made no
follow-on investments in portfolio companies. As noted above, MACC does not
expect to make any investments in new portfolio companies during fiscal year
2007, but may invest in 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 third quarter, no co-investments were
made.
19
Critical Accounting Policy
Investments in securities traded on a national securities exchange are
stated at the average of the bid price on the three final trading days of the
valuation period which is not materially different from the bid price on the
final day of the period. Restricted and other securities for which quotations
are not readily available are valued at fair value as determined by the Board of
Directors. Among the factors considered in determining the fair value of
investments are the cost of the investment; developments, including recent
financing transactions, since the acquisition of the investment; the financial
condition and operating results of the investee; the long-term potential of the
business of the investee; market interest rates on similar debt securities; and
other factors generally pertinent to the valuation of investments. However,
because of the inherent uncertainty of valuation, those estimated values may
differ significantly from the values that would have been used had a ready
market for the securities existed, and the differences could be material.
In the valuation process, MorAmerica Capital uses financial information
received monthly, quarterly, and annually from its portfolio companies which
includes both audited and unaudited financial statements. This information is
used to determine financial condition, performance, and valuation of the
portfolio investments.
Realization of the carrying value of investments is subject to future
developments. Investment transactions are recorded on the trade date and
identified cost is used to determine realized gains and losses. Under the
provisions of SOP 90-7, the fair value of loans and investments in portfolio
securities on February 15, 1995, the fresh-start date, is considered the cost
basis for financial statement purposes.
Determination of Net Asset Value
The net asset value per share of MACC's outstanding common stock is
determined quarterly, as soon as practicable after and as of the end of each
calendar quarter, by dividing the value of total assets minus total liabilities
by the total number of shares outstanding at the date as of which the
determination is made.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
MACC is 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 June 30, 2007, was
$8,936,000, with a cost of $8,790,000. 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 (6.2% at June
30, 2007) for debt of similar original maturity. None of MorAmerica Capital's
outstanding debentures payable are publicly traded. Market risk is estimated as
the potential increase in fair value resulting from a hypothetical 0.5% decrease
in interest rates. Actual results may differ.
20
--------------------------------------------------------------------------------
June 30, 2007
--------------------------------------------------------------------------------
Fair Value of Debentures Payable $ 8,936,000
Amount Above Cost $ 146,000
Additional Market Risk $ 134,000
--------------------------------------------------------------------------------
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.
21
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, 2006.
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)
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MACC PRIVATE EQUITIES INC.
Date: 8/13/07 By: /s/David R. Schroder
---------------------- --------------------------------------
David R. Schroder, President
Date: 8/13/07 By: /s/Robert A. Comey
---------------------- --------------------------------------
Robert A. Comey, Chief Financial
Officer
23
EXHIBIT INDEX
Exhibit Description
31.1 Section 302 Certification of David R. Schroder (CEO)
31.2 Section 302 Certification of Robert A. Comey (CFO)
32.1 Section 1350 Certification of David R. Schroder (CEO)
32.2 Section 1350 Certification of Robert A. Comey (CFO)
24