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 March 31, 2008
--------------------
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.)
580 2nd Street, Suite 102, Encinitas, CA 92024
----------------------------------------------
(Address of principal executive offices)
(Zip Code)
(760) 479-5075
--------------
(Registrant's telephone number, including area code)
101 Second Street SE, Suite 800, Cedar Rapids, Iowa 52401
---------------------------------------------------------
(Registrant's former address)
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 or a smaller reporting company.
See definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | | Accelerated filer | | Non-accelerated filer | |
Smaller Reporting Company | |
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
At March 31, 2008, 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 March 31, 2008 (Unaudited)
and September 30, 2007...........................................................3
Condensed Consolidated Statements of Operations (Unaudited) for
the three months and six months ended March 31, 2008 and
March 31, 2007....................................................................4
Condensed Consolidated Statements of
Cash Flows (Unaudited) for the six months
ended March 31, 2008 and March 31, 2007...........................................5
Notes to Unaudited Condensed Consolidated
Financial Statements..............................................................6
Consolidated Schedule of Investments (Unaudited)
at March 31, 2008.................................................................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 4T. Controls and Procedures...........................................................21
---------
Part II. OTHER INFORMATION.................................................................22
Item 6. Exhibits..........................................................................22
-------
Signatures........................................................................24
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
March 31, September 30,
2008 2007
(Unaudited)
----------------- ----------------
Assets
Cash and cash equivalents $ 308,257 822,295
Loans and investments in portfolio securities, at market or fair value:
Unaffiliated companies (cost of $2,288,257 and $2,301,385) 1,678,111 2,095,665
Affiliated companies (cost of $12,958,929 and $13,007,879) 11,492,348 11,595,183
Controlled companies (cost of $3,010,356 and $3,040,043) 2,521,400 3,014,106
Interest receivable 298,927 268,598
Other assets 236,545 212,940
--------------------- ----------------
Total assets $ 16,535,588 18,008,787
===================== ================
Liabilities and net assets
Liabilities:
Note payable $ 6,018,064 6,108,373
Incentive fees payable 27,617 252,130
Accounts payable and other liabilities 197,349 127,474
--------------------- ----------------
Total liabilities 6,243,030 6,487,977
--------------------- ----------------
Net assets:
Common stock, $.01 par value per share; authorized 10,000,000 shares;
issued and outstanding 2,464,621 shares 24,646 24,646
Additional paid-in-capital 12,833,595 13,140,517
Unrealized depreciation on investments (2,565,683) (1,644,353)
--------------------- ----------------
Total net assets 10,292,558 11,520,810
--------------------- ----------------
Total liabilities and net assets $ 16,535,588 18,008,787
===================== ================
Net assets per share $ 4.18 4.67
===================== ================
See accompanying notes to unaudited condensed consolidated financial statements.
3
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations
(Unaudited)
For the three For the three For the six For the six
months ended months ended months ended months ended
March 31, March 31, March 31, March 31,
2008 2007 2007 2007
---------------- ---------------- ---------------- ------------------
Investment income:
Interest
Unaffiliated companies $ 8,397 13,657 16,926 29,333
Affiliated companies 162,843 132,081 305,813 271,020
Controlled companies 9,479 29,361 30,990 59,900
Other 538 26,682 2,269 60,569
Dividends
Affiliated companies 13,035 11,138 98,298 46,448
Other income 6 --- 6 ---
------------------- ---------------- ---------------- ------------------
Total investment income 194,298 212,919 454,302 467,270
------------------- ---------------- ---------------- ------------------
Operating expenses:
Interest expenses 108,812 206,222 236,927 401,832
Management fees 63,129 87,266 130,093 172,960
Professional fees 198,976 75,038 254,696 138,252
Other 94,865 113,107 151,629 167,970
------------------- ---------------- ---------------- ------------------
Total operating expenses 465,782 481,633 773,345 881,014
------------------- ---------------- ---------------- ------------------
Investment expense, net (271,484) (268,714) (319,043) (413,744)
------------------- ---------------- ---------------- ------------------
Realized and unrealized (loss) gain on investments and other assets:
Net realized gain (loss) on investments:
Unaffiliated companies 5,493 (95,980) 5,493 (95,980)
Net change in unrealized
appreciation/depreciation
on investments (199,976) 55,333 (921,330) 479,357
Net change in unrealized gain
on other assets 6,628 25,686 6,628 25,686
------------------- ---------------- ---------------- ------------------
Net (loss) gain on investments (187,855) (14,961) (909,209) 409,063
------------------- ---------------- ---------------- ------------------
Net change in net assets from
operations $ (459,339) (283,675) (1,228,252) (4,681)
=================== ================ ================ ==================
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 six For the six
months ended months ended
March 31, March 31,
2008 2007
----------------- -------------------
Cash flows (used in) from operating activities:
Net change in net assets from operations $ (1,228,252) (4,681)
Adjustments to reconcile net change in net assets from operations to net
cash provided by operating activities:
Net realized and unrealized loss (gain) on investments 915,837 (383,467)
Net realized and unrealized gain on other assets 15,671 (25,596)
Proceeds from disposition of and payments on
loans and investments in portfolio securities 97,258 668,719
Purchases of loans and investments in portfolio securities --- (65,000)
Change in interest receivable (30,329) 213,945
Change in other assets (39,276) 222,341
Change in accrued interest, deferred incentive fees payable,
accounts payable and other liabilities (154,638) (32,179)
----------------- -------------------
Net cash (used in) provided by operating activities (423,729) 594,082
Cash flows from financing activities:
Note repayment (90,309) ---
Debt repayment --- (2,000,000)
----------------- -------------------
Net cash used in financing activities (90,309) (2,000,000)
----------------- -------------------
Net decrease in cash and cash equivalents (514,038) (1,405,918)
Cash and cash equivalents at beginning of period 822,295 2,132,350
------------------ -------------------
Cash and cash equivalents at end of period $ 308,257 726,432
================= ===================
Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ 228,793 369,075
================= ===================
See accompanying notes to unaudited condensed consolidated financial statements.
5
MACC PRIVATE EQUITIES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of MACC Private Equities Inc. ("MACC") and its wholly owned
subsidiary MorAmerica Capital Corporation ("MorAmerica Capital") which have been
prepared in accordance with U.S. generally accepted accounting principles
("GAAP") for investment companies. All material intercompany accounts and
transactions have been eliminated in consolidation. Effective April 30, 2008,
MorAmerica Capital was merged with and into MACC (the "Merger").
The financial statements included herein have been prepared in accordance
with GAAP for interim financial information and instructions to Form 10-Q and
Article 6 of Regulation S-X. The financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of MACC
Private Equities Inc. and Subsidiary as of and for the year ended September 30,
2007. The information reflects all adjustments consisting of normal recurring
adjustments which are, in the opinion of management, necessary for a fair
presentation of the results of operations for the interim periods. The results
of the interim period reported are not necessarily indicative of results to be
expected for the year. The balance sheet information as of September 30, 2007
has been derived from the audited balance sheet as of that date.
(2) Critical Accounting Policy
Investments in securities that are traded in the over-the-counter market or
on a stock exchange are valued by taking the average of the close (or bid price
in the case of over-the-counter equity securities) for the valuation date and
the preceding two days. Restricted and other securities for which quotations are
not readily available are valued at fair value as determined by the Board of
Directors. Among the factors considered in determining the fair value of
investments are the cost of the investment; developments, including recent
financing transactions, since the acquisition of the investment; financial
condition and operating results of the investee; the long-term potential of the
business of the investee; market interest rates for similar debt securities;
overall market conditions and other factors generally pertinent to the valuation
of investments. 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
6
investments in portfolio securities on February 15, 1995, the fresh-start date,
is considered the cost basis for financial statement purposes.
(3) Financial Highlights (Unaudited)
For the six For the six
months ended months ended
March 31, March 31,
2008 2007
--------------- ---------------
Per Share Operating Performance (For a share of capital stock outstanding
throughout the period):
Net asset value, beginning of period $ 4.67 4.71
--------------- ---------------
Income from investment operations:
Investment expense, net (0.13) (0.17)
Net realized and unrealized gain
(loss) on investment transactions (0.36) 0.17
--------------- ---------------
Total from investment operations (0.49) 0.00
--------------- ---------------
Net asset value, end of period $ 4.18 4.71
=============== ===============
Closing bid price $ 2.20 2.08
=============== ===============
For the six For the six
months ended months ended
March 31, March 31,
2008 2007
--------------- ---------------
Total return
Net asset value basis (10.66) % (0.04)
Market price basis (10.20) % 16.85
Net asset value, end of period
(in thousands) $ 10,293 11,614
Ratio to weighted average net assets:
Investment expense, net 2.90 % 3.57
Operating and income tax expense 7.03 % 7.61
The ratios of investment expense, net to average net assets, of operating and
income tax expenses to average net assets and total return are calculated for
common stockholders as a class. Total return, which reflects the annual change
in net assets, was calculated using the weighted average 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.
(4) Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements".
This statement defines fair value, establishes a framework for measuring fair
value in GAAP, and expands disclosures about fair value measurements. The
provisions of SFAS No. 157 are
7
effective as of the beginning of the first fiscal year that begins after
November 15, 2007. MACC is evaluating the effect, if any, the adoption of SFAS
157 will have on its consolidated financial statements.
In February 2007 the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities--Including an amendment of FASB
Statement No. 115." This statement permits entities to choose to measure many
financial instruments and certain other items to be measured at fair value. The
provisions of SFAS No. 159 are effective as of the beginning of the first fiscal
year that begins after November 15, 2007. MACC is evaluating the effect, if any,
the adoption of SFAS 159 will have on its consolidated financial statements.
In June 2007, the AICPA issued Statement of Position 07-1, "Clarification
of the Scope of the Audit and Accounting Guide Investment Companies and
Accounting by Parent Companies and Equity Method Investors for Investments in
Investment Companies." SOP 07-1 provides guidance for determining whether an
entity is within the scope of the AICPA Audit and Accounting Guide Investment
Companies. Statement of Position 07-1 is effective for financial statements
issued for fiscal years beginning on or after December 15, 2007.
8
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS (UNAUDITED)
MARCH 31, 2008
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 795,559 39
for aircraft 14% note, due October 1, 2008 89,320 89,320
----------- ------------
1,654,879 859,359
----------- ------------
Central Fiber Corporation 12% debt security, due March 31, 2009 205,143 205,143
Wellsville, Kansas 12% debt security, due March 31, 2009 53,079 53,079
Recycles and manufactures Warrant to purchase 273.28 common shares --- ---
cellulose fiber products ----------- -----------
258,222 258,222
----------- -----------
Detroit Tool Metal Products Co. (a) 12% debt security, due November 18, 2009 1,371,507 1,371,507
Lebanon, Missouri 19,853.94 share Series A preferred (c) 195,231 195,231
Metal stamping 7,887.17 common shares (c) 126,742 126,742
----------- -----------
1,693,480 1,693,480
----------- -----------
Handy Industries, LLC (a) 12.5% debt security, due January 8, 2008 667,327 667,327
Marshalltown, Iowa 167,171 units Class B preferred (c) 68,528 167,171
Manufacturer of lifts for Membership interest --- 1,357
motorcycles, trucks and ------------ ------------
industrial metal products 735,855 835,855
----------- -----------
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) 1 267,254
Marion, Iowa 2% debt security, due January 31, 2008 (c) --- 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 ----------- ------------
1 768,610
----------- -----------
Linton Truss Corporation 542.8 common shares (c) ---- ----
Delray Beach, Florida 400 shares Series 1 preferred (c) 340,000 40,000
Manufacturer of residential roof and Warrants to purchase common shares (c) 15 15
floor truss systems ----------- ------------
340,015 40,015
------------ ------------
M.A. Gedney Company (a) 648,783 shares preferred (c) 140,000 1,450,601
Chaska, Minnesota 12% debt security, due June 30, 2009 152,000 76,000
Pickle Processor Warrant to purchase 83,573 preferred shares
(c) --- ---
----------- -----------
292,000 1,526,601
----------- -----------
Magnum Systems, Inc. (a) 12% debt security, due November 1, 2008 574,163 574,163
Parsons, Kansas 48,038 common shares (c) 48,038 48,038
Manufacturer of industrial bagging 292,800 shares preferred (c) 304,512 304,512
equipment Warrant to purchase 56,529 common shares (c) 380,565 565
------------ ------------
1,307,278 927,278
------------ ------------
9
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED (UNAUDITED)...
MARCH 31, 2008
Manufacturing Continued: Percent
of Net
Company Security assets Value Cost (d)
----------------------------------------- -------------------------------------------------------------------------------------------
Pratt-Read Corporation (a) 13,889 shares Series A Preferred (c) $ 421,460 750,000
Bridgeport, Connecticut 7,718 shares Services A preferred (c) 234,097 416,667
Manufacturer of screwdriver shafts 13% debt security, due July 26, 2007 (c) 250,020 277,800
and handles and other hand tools Warrants to purchase common shares (c) ---- ----
----------- ------------
905,577 1,444,467
----------- ------------
Spectrum Products, LLC (b) 13% debt security, due January 1, 2008 (c) 1,077,649 1,077,649
Missoula, Montana 385,000 units Series A preferred (c) --- 385,000
Manufacturer of equipment for the Membership interest (c) --- 351
swimming pool industry 17,536.75 units Class B preferred (c) --- 47,355
----------- ------------
1,077,649 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 100.92% 10,387,541 11,986,827
========== ----------- ------------
Service:
Monitronics International, Inc. 73,214 common shares (c) 439,284 54,703
----------- ------------
Dallas, Texas
Provides home security systems
monitoring services
Morgan Ohare, Inc. (b) 0% debt security, due January 1, 2009 (c) 1,068,750 1,125,000
Addison, Illinois 10% debt security, due January 1, 2009 375,000 375,000
Fastener plating and heat treating 57 common shares (c) 1 1
----------- ------------
1,443,751 1,500,001
----------- ------------
SMWC Acquisition Co., Inc. (a) 13% debt security due September 30, 2011 96,250 96,250
Kansas City, Missouri 12% debt security due September 30, 2011 482,900 482,900
Steel warehouse distribution and Warrant to purchase 2,200 common shares (c) ---- ----
processing ----------- ------------
579,150 579,150
----------- ------------
Warren Family Funeral Homes, Inc. Warrant to purchase 346.5 common shares (c) 200,012 12
Topeka, Kansas ----------- ------------
Provider of value priced funeral
services
Total Service 25.87% 2,662,197 2,133,866
========== ----------- ------------
10
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED (UNAUDITED)...
MARCH 31, 2008
Service Continued: Percent
of Net
Company Security assets Value Cost (d)
----------------------------------------- ------------------------------------------------- ---------- -- ----------- -- ------------
Technology and Communications:
Feed Management Systems, Inc. (a) 540,551 common shares (c) 1,327,186 1,327,186
Brooklyn Center, Minnesota 674,309 shares Series A preferred (c) 674,309 674,309
Batch feed software and systems Warrants to purchase 166,500 Series A --- ---
and BEB internet services preferred (c)
----------- ------------
2,001,495 2,001,495
----------- ------------
MainStream Data, Inc. (a) 322,763 shares Series A preferred (c) 200,049 200,049
Salt Lake City, Utah ----------- ------------
Content delivery solutions
provider
Phonex Broadband Corporation 1,855,302 shares Series A preferred (c) 34,323 1,155,000
Midvale, Utah ----------- ------------
Power line communications
Portrait Displays, Inc. 8% debt security, due April 1, 2009 30,304 30,304
Pleasanton, California 8% debt security, due April 1, 2012 (c) 375,950 750,001
Designs and markets pivot Warrant to purchase 39,400 common shares (c) --- ---
enabling software for LCD
computer monitors ----------- ------------
406,254 780,305
----------- ------------
Total technology and communications 25.67% 2,642,121 4,136,849
========== ----------- ------------
$ 15,691,859 18,257,542
=========== ============
(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, 2007,
important factors that could cause actual results to differ materially from
those contained in any forward-looking statement made by or on behalf of MACC,
including, without limitation, the high risk nature of MACC's portfolio
investments, the effects of general economic conditions on MACC's portfolio
companies and MorAmerica Capital's ability to obtain future funding, changes in
prevailing market interest rates, and contractions in the markets for corporate
acquisitions and initial public offerings. MACC further cautions that such
factors are not exhaustive or exclusive. MACC does not undertake to update any
forward-looking statement which may be made from time to time by or on behalf of
MACC.
Results of Operations
MACC's investment income includes income from interest, dividends and fees.
Investment expense, net represents total investment income minus net operating
expenses. The main objective of portfolio company investments is to achieve
capital appreciation and realized gains in the portfolio. These gains and losses
are not included in investment expense, net.
Second Quarter Ended March 31, 2008 Compared to Second Quarter
Ended March 31, 2007
For the three months ended
March 31,
--------------------------------------
2008 2007 Change
-------------------------------------- --------------
Total investment income $ 194,298 212,919 (18,621)
Net operating and income tax expense (465,782) (481,633) 15,851
------------- ---------------- --------------
Investment expense, net (271,484) (268,714) (2,770)
------------- ---------------- --------------
Net realized gain (loss) on investments 5,493 (95,980) 101,473
Net change in unrealized appreciation/
depreciation on investments and other assets (199,976) 55,333 (255,309)
Net change in unrealized gain on other assets 6,628 25,686 (19,058)
------------- ---------------- --------------
Net loss on investments (187,855) (14,961) (172,894)
------------- ---------------- --------------
Net change in net assets from operations $ (459,339) (283,675) (175,664)
================= ================ ==============
Net asset value per share:
Beginning of period $ 4.36 4.71
================= ================
End of period $ 4.18 4.71
================= ================
12
Total Investment Income
During the current fiscal year second quarter, total investment income was
$194,298, a decrease of $18,621, or 9%, from total investment income of $212,919
for the prior year second quarter. In the current year second quarter as
compared to the prior year second quarter, interest income decreased $20,524, or
10%, and dividend income increased $1,897, or more than 17%. The decrease in
interest income is the net result of (i) repayments of principal on debt
portfolio securities issued to us by four portfolio companies, (ii) an increase
in interest income due to an additional debt investment from the restructure in
one debt portfolio security, (iii) an increase in interest income on one debt
portfolio security which had been on non-accrual of interest status during the
prior year second quarter but which is currently making interest payments, and
(iv) a decrease in interest income on one debt portfolio security which has been
placed on non-accrual of interest status. In the current year second quarter,
MACC received a dividend on one existing portfolio investment, as compared to
dividend income received in the prior year second quarter from two existing
portfolio investments, however the current year dividend was larger. MACC does
not anticipate that its dividend income will continue to increase in future
periods.
Net Operating Expenses
Net operating expenses for the second quarter of the current year were
$465,782, a decrease of 15,851, or 3%, as compared to net operating expenses for
the prior year second quarter of $481,633. Interest expense decreased $97,410,
or 47%, in the current year second quarter due to the repayment in the prior
fiscal year of $10,790,000 of borrowings (the "SBA Debentures") from the Small
Business Administration ("SBA"). Management fees decreased $24,137, or 28%, in
the current year second quarter due to the decrease in capital under management.
Professional fees increased $123,938, or 165%, in the current year second
quarter as compared to the prior year second quarter due to expenses related to
changes in the investment advisory structure, the Merger and the exploration of
capital raising options. Other expenses decreased $18,242, or 16%, in the
current year second quarter as compared to the prior year second quarter. The
decrease in other expenses is primarily the net result of a decrease in
prepayment penalties incurred on the repayment of the borrowings from the SBA
during the prior year second quarter, a decrease in administrative expenses due
to the timing of payments, and an increase in expenses associated with
compliance with the Security and Exchange Commission regulations.
Investment Expense, Net
For the current year second quarter, MACC recorded investment expense, net
of $271,484, as compared to investment expense, net of $268,714 during the prior
year second quarter, an increase of $2,770, or 1%. The increase in investment
expense, net is the result of the decrease in investment income described above
and the decrease in operating expenses described above.
13
Net Realized Gain on Investments
During the current year second quarter, MACC recorded net realized gain on
investments of $5,493, as compared with net realized loss on investments of
$95,980 during the prior year second 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. Under the Investment Advisory Agreements
(the "InvestAmerica Advisory Agreements") between MACC and its investment
adviser, InvestAmerica Investment Advisors, Inc. ("InvestAmerica"), and between
MorAmerica and InvestAmerica, both of which were in effect through and after the
second quarter of fiscal 2008, InvestAmerica earned 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 InvestAmerica under the InvestAmerica Advisory
Agreements.
As reported elsewhere, effective April 29, 2008, the InvestAmerica Advisory
Agreements were terminated and MACC entered into an Investment Advisory
Agreement (the "EAM Advisory Agreement") with Eudaimonia Asset Management, LLC
("EAM"), and MACC, EAM and InvestAmerica entered into an Investment Subadvisory
Agreement (the "Subadvisory Agreement"). Under the EAM Advisory Agreement, EAM
will earn 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. Under the terms of
the Subadvisory Agreement, a portion of such incentive fee will be payable to
InvestAmerica with respect to the portion of MACC's portfolio managed by
InvestAmerica.
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 ($199,976) during the current year second quarter, as compared to
$55,333 during the prior year second quarter. This net change resulted from:
* Unrealized appreciation in the fair value of two portfolio
companies totaling $567,469 during the current year second
quarter, as compared to unrealized appreciation in the fair value
of two portfolio companies totaling $655,333 during the prior year
second quarter.
14
* Unrealized depreciation in the fair value of six portfolio
companies totaling $767,445 during the current year second
quarter, as compared to unrealized depreciation in the fair value
of four portfolio companies of $600,000 during the prior year
second quarter.
Net Change in Net Assets from Operations
MACC experienced a decrease of $459,339 in net assets for the second
quarter of fiscal year 2008, and the resulting net asset value per share was
$4.18 as of March 31, 2008, as compared to $4.67 as of September 30, 2007.
The decrease in net assets recorded during the current year second quarter
was the result of the investment expense, net 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 five 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 appreciation
for the quarter. Changes in the fair value of a portfolio security may or may
not be indicative of the long term performance of the portfolio company.
Although MACC is not currently making investments in new portfolio
companies (but may periodically make follow-on investments), as previously
announced, both the Board of Directors and the shareholders have approved (i)
EAM to serve as investment adviser to MACC under the EAM Advisory Agreement, and
(ii) InvestAmerica to serve as subadviser to MACC under the Subadvisory
Agreement. Under the EAM Advisory Agreement, the investment strategy of MACC
going forward will be to make new equity investments in small and micro cap
companies which qualify for investment by business development companies under
the 1940 Act. Under the Subadvisory Agreement, InvestAmerica will continue to
oversee MACC's existing portfolio of investments (the "Existing Portfolio").
MACC will continue to prudently sell Existing Portfolio investments and use the
resulting proceeds to pay down the note payable, as further described below. The
ability to exit the Existing Portfolio investments is affected by company
performance and external factors unrelated to the portfolio companies. These
factors include sub prime lending, credit contraction, inflationary pressures,
high commodity prices, recessional pressures, a slowing economy and current
world tensions.
15
Six Months Ended March 31, 2008 Compared to Six Months Ended March 31, 2007
For the six months ended
March 31,
--------------------------------------
2008 2007 Change
----------------- --- ---------------- --------------
Total investment income $ 454,302 467,270 (12,968)
Net operating and income tax expense (773,345) (881,014) 107,669
------------- ---------------- --------------
Investment expense, net (319,043) (413,744) 94,701
------------- ---------------- --------------
Net realized (loss) gain on investments 5,493 (95,980) 101,473
Net change in unrealized appreciation/
depreciation on investments and other assets (921,330) 479,357 (1,400,687)
Net change in unrealized loss on other assets 6,628 25,686 (19,058)
------------- ---------------- --------------
Net gain (loss) on investments (909,209) 409,063 (1,318,272)
------------- ---------------- --------------
Net change in net assets from operations $ (1,228,252) (4,681) (1,223,571)
================= ================ ==============
Net asset value per share:
Beginning of period $ 4.67 4.71
================= ================
End of period $ 4.18 4.71
================= ================
Total Investment Income
During the current fiscal year six-month period, total investment income
was $454,302, a decrease of $12,968, or 3%, from total investment income of
$467,270 for the prior year six-month period. In the current year six-month
period as compared to the prior year six-month period, interest income decreased
$64,824, or 15%, and dividend income increased $51,850 or 112%. The decrease in
interest income is the net result of (i) repayments of principal on debt
portfolio securities issued to us by six portfolio companies, (ii) an increase
in interest income due to an additional debt investment from the restructure of
one debt portfolio security, (iii) an increase in interest income on one debt
portfolio security which had been on non-accrual of interest status during the
prior year six-month period but which is currently making interest payments, and
(iv) a decrease in interest income on one debt portfolio security which has been
placed on non-accrual of interest status. In both the current year six-month
period and the prior year six-month period, MACC received dividends on two
existing portfolio investments, however the current year dividends were larger.
Net Operating Expenses
Net operating expenses for the six-month period of the current year were
$773,345, a decrease of $107,669, or 12%, as compared to net operating expenses
for the prior year six-month period of $881,014. Interest expense decreased
$164,905, or 41%, in the current year six-month period due to the repayment in
the prior fiscal year of the SBA Debentures. Management fees decreased $42,867,
or 25%, in the current year six-month period due to the decrease in capital
under management. Professional fees increased $116,444, or 84%, in the current
year six-month period due to expense related to changes in the investment
advisory structure, the Merger and the exploration of capital raising options.
Other expenses decreased $16,341, or
16
10%, in the current year six-month period as compared to the prior year
six-month period. The decrease in other expenses is the net result of (i) an
increase in prepayment penalties incurred on the repayment of the borrowings
from the SBA during the current year six-month period, (ii) a decrease in
administrative expenses due to timing of payments, (iii) an increase in
directors and officers insurance, (iv) a decrease in director's fees resulting
from a reduction in the size of MACC's Board of Directors, and (v) an increase
in expenses associated with compliance with the 1940 Act.
Investment Expense, Net
For the current year six-month period, MACC recorded investment expense,
net of $319,043, as compared to investment expense, net of $413,744 during the
prior year six-month period, a decrease of $94,701, or 23%. 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 six-month period, MACC recorded net realized gain
on investments of $5,493, as compared with net realized loss on investments of
$95,980 during the prior year six-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. Under the InvestAmerica Advisory
Agreements, InvestAmerica earned 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 InvestAmerica under the InvestAmerica Advisory Agreements. Under the
EAM Advisory Agreement, EAM will earn 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. Under the terms of the Subadvisory Agreement, a portion of such
incentive fee will be payable to InvestAmerica with respect to the portion of
MACC's portfolio managed by InvestAmerica.
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 ($921,330) during the current year six-month period, as compared
to $479,357 during the prior year six-month period. This net change resulted
from:
17
* Unrealized appreciation in the fair value of two portfolio
companies totaling $743,338 during the current year six-month
period, as compared to unrealized appreciation in the fair value
of six portfolio companies totaling $1,129,357 during the prior
year six-month period.
* Unrealized depreciation in the fair value of eight portfolio
companies of $1,664,668 during the current year six-month period,
as compared to unrealized depreciation in the fair value of four
portfolio companies of $650,000 during the prior year six-month
period.
The net change in unrealized gain on other assets of $6,628 during the
current year six-month period 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 $25,686 during the prior year six-month period.
Financial Condition, Liquidity and Capital Resources
MACC relies upon several sources to fund its operations and investment
activities, including MACC's cash and money market accounts and a revolving
loan, as further described below.
As of March 31, 2008, MACC's cash and money market accounts totaled
$308,257. As reported elsewhere, MorAmerica Capital had entered into (i) a term
loan to refinance the SBA Debentures, which was subsumed by MACC on April 30,
2008, as a result of the Merger, and which has a current balance of $6,018,064
(the "Note Payable"), and (ii) a revolving loan permitting MorAmerica Capital
(now MACC) to borrow up to $500,000, with Cedar Rapids Bank & Trust Company. As
of March 31, 2008, MACC believes that its existing cash and money market
accounts, the revolving loan, and other anticipated cash flows will provide
adequate funds for MACC's anticipated cash requirements during fiscal year 2008,
including follow on investments respecting the Existing Portfolio, interest
payments on the Note Payable and administrative expenses. With respect to the
Existing Portfolio, MACC is not making new investments, is prudently disposing
of Existing Portfolio assets and is using the resulting proceeds to pay down the
Note Payable. MACC anticipates commencing its new investment strategy under the
EAM Advisory Agreement when it raises additional capital.
18
The following table shows MACC's significant contractual obligations for
the repayment of the Note Payable and other contractual obligations as of March
31, 2008:
Payments due by period
Contractual Obligations
Less
than 1 3-5 More than
Total Year 1-3 Years Years 5 Years
-------------- --------- --------------- -------- ------------
Note Payable $ 6,018,064 --- 6,018,064 --- ---
Incentive Fees Payable $ 27,617 27,617 --- --- ---
MACC currently anticipates that it will rely primarily on its current cash
and money market accounts and its cash flows from operations to fund its
investment activities in the Existing Portfolio and other cash requirements
during fiscal year 2008. With respect to MACC's investment strategy following
the effectiveness of the EAM Advisory Agreement, the Board of Directors sought
and received approval by the shareholders for a proposal to issue rights to
acquire shares of MACC's Common Stock as a means by which MACC may raise
additional equity capital. Although management believes these sources will
provide sufficient funds for MACC to meet its fiscal year 2008 investment level
objective and other anticipated cash requirements, there can be no assurances
that MACC's cash flows from operations or cash requirements will be as
projected.
Portfolio Activity
With respect to the Existing Portfolio, MACC has invested in and lended to
businesses through investments in subordinated debt (generally with detachable
equity warrants), preferred stock and common stock. MACC, however, is not
currently making new investments. The total portfolio value of investments in
publicly and non-publicly traded securities was $15,691,859 at March 31, 2008
and $16,704,954 at September 30, 2007. During the three months ended March 31,
2008, MACC made no follow-on investments in portfolio companies. As noted above,
MACC intends to pursue an investment strategy consisting of new equity
investments in very small public companies, and may continue to make follow-on
investments in its Existing Portfolio.
With respect to the Existing Portfolio, MACC frequently co-invests with
other funds managed by InvestAmerica. When it makes any co-investment with these
related funds, MACC follows certain procedures consistent with orders of the
Securities and Exchange Commission ("SEC") for related party co-investments to
reduce or eliminate conflict of interest issues. During the current year first
quarter, no co-investments with another fund managed by InvestAmerica were made.
Critical Accounting Policy
Investments in securities that are traded in the over-the-counter market or
on a stock exchange are valued by taking the average of the close (or bid price
in the case of over-the-
19
counter equity securities) for the valuation date and the preceding two days.
Restricted and other securities for which quotations are not readily available
are valued at fair value as determined by the Board of Directors. Among the
factors considered in determining the fair value of investments are the cost of
the investment; developments, including recent financing transactions, since the
acquisition of the investment; the financial condition and operating results of
the investee; the long-term potential of the business of the investee; market
interest rates on similar debt securities; overall market conditions and other
factors generally pertinent to the valuation of investments. However, because of
the inherent uncertainty of valuation, those estimated values may differ
significantly from the values that would have been used had a ready market for
the securities existed, and the differences could be material.
In the valuation process, MACC uses financial information received monthly,
quarterly, and annually from its portfolio companies which includes both audited
and unaudited financial statements. This information is used to determine
financial condition, performance, and valuation of the portfolio investments.
Realization of the carrying value of investments is subject to future
developments. Investment transactions are recorded on the trade date and
identified cost is used to determine realized gains and losses. Under the
provisions of SOP 90-7, the fair value of loans and investments in portfolio
securities on February 15, 1995, the fresh-start date, is considered the cost
basis for financial statement purposes.
Determination of Net Asset Value
The net asset value per share of MACC's outstanding common stock is
determined quarterly, as soon as practicable after and as of the end of each
calendar quarter, by dividing the value of total assets minus total liabilities
by the total number of shares outstanding at the date as of which the
determination is made.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
MACC is subject to market risk from changes in market prices of publicly
traded equity securities held from time to time in the MACC consolidated
investment portfolio. At March 31, 2008, MACC had no publicly traded equity
securities in the MACC consolidated investment portfolio.
MACC is also subject to financial market risks from changes in market
interest rates. The Note Payable is subject to a variable interest rate that is
based on an independent index. Although this independent index is subject to
change, the maximum increase or decrease in the interest rate at any one time
may not exceed 1.000 percentage points. General interest rate fluctuations may
therefore have a material adverse effect on MACC's net investment income.
In addition, in the future, MACC may from time to time opt to draw on its
revolving line of credit to fund cash requirements. These future borrowings will
have a variable interest rate based on an independent index that is subject to
change; however, the maximum increase or decrease in the interest rate at any
one time will not exceed 1.000 percentage points.
20
Item 4T. 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
SEC'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, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There are no items to report.
Item 3. Defaults Upon Senior Securities.
There are no items to report.
Item 4. Submission of Matters to a Vote of Security Holders.
There are no items to report.
Item 5. Other Information.
There are no items to report.
Item 6. Exhibits.
The following exhibits are filed with this Quarterly Report on Form 10-Q:
10.1 Investment Advisory Agreement dated April 29, 2008 between MACC
Private Equities Inc. and Eudaimonia Asset Management, LLC
(incorporated by reference to Exhibit 10.1 of Report on Form 8-K
filed May 1, 2008).
10.2 Investment Subadvisory Agreement dated April 29, 2008 among MACC
Private Equities Inc., Eudaimonia Asset Management, LLC and
InvestAmerica Investment Advisors, Inc. (incorporated by
reference to Exhibit 10.2 of Report on Form 8-K filed May 1,
2008).
10.3 Business Loan Agreement dated August 30, 2007 between MorAmerica
Capital Corporation and Cedar Rapids Bank and Trust (incorporated
by reference to Exhibit 10(i).1 to Report on Form 8-K filed
September 6, 2007).
10.4 Omnibus Amendment Consent and Waiver dated as of April 29, 2008
among MACC Private Equities Inc., MorAmerica Capital Corporation
and Cedar Rapids Bank and Trust (incorporated by reference to
Exhibit 10.3 to Report on Form 8-K filed May 1, 2008).
10.5 Promissory Note dated August 30, 2007 made by MorAmerica Capital
Corporation in favor of Cedar Rapids Bank and Trust (incorporated
by reference to Exhibit 10(i).5 to Report on Form 8-K filed
September 30, 2007).
22
10.6 Promissory Note dated August 30, 2007 made by MorAmerica Capital
Corporation in favor of Cedar Rapids Bank and Trust (incorporated
by reference to Exhibit 10(i).6 to Report on Form 8-K filed
September 30, 2007).
31.1 Section 302 Certification of Travis Prentice (CEO)
31.2 Section 302 Certification of Derek Gaertner (CFO)
32.1 Section 1350 Certification of Travis Prentice (CEO)
32.2 Section 1350 Certification of Derek Gaertner (CFO)
23
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: 5/8/08 By: /s/Travis Prentice
--------------------------------- ----------------------------------------------
Travis Prentice, President and CEO
Date: 5/8/08 By: /s/Derek Gaertner
--------------------------------- ----------------------------------------------
Derek Gaertner, Chief Financial Officer
24
EXHIBIT INDEX
Exhibit Description
------- -----------
10.1 Investment Advisory Agreement dated April 29, 2008 between MACC
Private Equities Inc. and Eudaimonia Asset Management, LLC
(incorporated by reference to Exhibit 10.1 of Report on Form 8-K
filed May 1, 2008).
10.2 Investment Subadvisory Agreement dated April 29, 2008 among MACC
Private Equities Inc., Eudaimonia Asset Management, LLC and
InvestAmerica Investment Advisors, Inc. (incorporated by
reference to Exhibit 10.2 of Report on Form 8-K filed May 1,
2008).
10.3 Business Loan Agreement dated August 30, 2007 between MorAmerica
Capital Corporation and Cedar Rapids Bank and Trust (incorporated
by reference to Exhibit 10(i).1 to Report on Form 8-K filed
September 6, 2007).
10.4 Omnibus Amendment Consent and Waiver dated as of April 29, 2008
among MACC Private Equities Inc., MorAmerica Capital Corporation
and Cedar Rapids Bank and Trust (incorporated by reference to
Exhibit 10.3 to Report on Form 8-K filed May 1, 2008).
10.5 Promissory Note dated August 30, 2007 made by MorAmerica Capital
Corporation in favor of Cedar Rapids Bank and Trust (incorporated
by reference to Exhibit 10(i).5 to Report on Form 8-K filed
September 30, 2007).
10.6 Promissory Note dated August 30, 2007 made by MorAmerica Capital
Corporation in favor of Cedar Rapids Bank and Trust (incorporated
by reference to Exhibit 10(i).6 to Report on Form 8-K filed
September 30, 2007).
31.1 Section 302 Certification of Travis Prentice (CEO)
31.2 Section 302 Certification of Derek Gaertner (CFO)
32.1 Section 1350 Certification of Travis Prentice (CEO)
32.2 Section 1350 Certification of Derek Gaertner (CFO)
25