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, 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 March 31, 2007, the registrant had issued and outstanding 2,464,621
shares of common stock.
1
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
Condensed Consolidated Balance
Sheets at March 31, 2007 (Unaudited)
and September 30, 2006......................................... 3
Condensed Consolidated Statements of
Operations (Unaudited) for the three months
and six months ended March 31, 2007 and
March 31, 2006................................................. 4
Condensed Consolidated Statements of
Cash Flows (Unaudited) for the six months
ended March 31, 2007 and March 31, 2006........................ 5
Notes to Unaudited Condensed Consolidated
Financial Statements........................................... 6
Consolidated Schedule of Investments (Unaudited)
at March 31, 2007 ............................................. 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations .............. 12
Item 3. Quantitative and Qualitative
Disclosure About Market Risk................................... 20
Item 4. Controls and Procedures........................................ 21
Part II. OTHER INFORMATION.............................................. 21
Item 6. Exhibits....................................................... 23
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
March 31, September
2007 30,
(Unaudited) 2006
------------------------ ---------------------
Assets
Loans and investments in portfolio securities, at market or fair value:
Unaffiliated companies (cost of $2,796,814 and $2,920,073) $ 2,536,444 2,909,703
Affiliated companies (cost of $13,421,510 and $13,841,969) 13,205,214 13,143,159
Controlled companies (cost of $3,099,418 and $3,159,419) 3,073,481 2,886,639
Cash and cash equivalents 726,432 2,132,350
Interest receivable 144,772 358,717
Other assets 1,106,852 1,399,487
------------------------ ---------------------
Total assets $ 20,793,195 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 49,984 61,173
Accounts payable and other liabilities 231,259 252,249
------------------------ ---------------------
Total liabilities 9,179,642 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 12,091,510 12,575,548
Unrealized depreciation on investments (502,603) (981,960)
------------------------ ---------------------
Total net assets 11,613,553 11,618,234
------------------------ ---------------------
Total liabilities and net assets $ 20,793,195 22,830,055
======================== =====================
Net assets per share 4.71 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 six For the six
months ended months ended months ended months ended
March 31, March 31, March 31, March 31,
2007 2006 2007 2006
-------------- ------------- ------------ ------------
Investment income:
Interest
Unaffiliated companies $ 13,657 70,434 29,333 129,972
Affiliated companies 132,081 130,969 271,020 324,855
Controlled companies 29,361 15,090 59,900 33,876
Other 26,682 35,120 60,569 69,074
Dividends
Unaffiliated companies --- --- --- 2,187
Affiliated companies 11,138 115,459 46,448 138,792
-------------- ------------- ------------- ------------
Total investment income 212,919 367,072 467,270 698,756
-------------- ------------- ------------- ------------
Operating expenses:
Interest expenses 206,222 326,848 401,832 645,907
Management fees 87,266 113,169 172,960 230,608
Incentive fees --- 143,311 --- 143,311
Professional fees 75,038 81,439 138,252 123,360
Other 113,107 89,952 167,970 163,256
-------------- ------------- ------------- ------------
Total operating expenses 481,633 754,719 881,014 1,306,442
Investment expense, net
before tax expense
(268,714) (387,647) (413,744) (607,686)
Income tax expense --- (70,000) --- (70,000)
-------------- ------------- ------------- ------------
Investment expense, net (268,714) (457,647) (413,744) (677,686)
-------------- ------------- ------------- ------------
Realized and unrealized (loss) gain on
investments and other assets:
Net realized (loss) gain on
investments:
Unaffiliated companies (95,980) 457,403 (95,980) 670,736
Affiliated companies --- 1,987,604 --- 1,987,604
Controlled companies --- 31,000 --- 31,000
Net change in unrealized
appreciation/depreciation
on investments 55,333 (3,817,372) 479,357 (4,833,782)
Net change in unrealized gain
(loss) on other assets 25,686 1,050 25,686 (28,471)
-------------- ------------- ------------- ------------
Net (loss) gain on investments (14,961) (1,340,315) 409,063 (2,172,913)
-------------- ------------- ------------- ------------
Net change in net assets from
operations
$ (283,675) (1,797,962) (4,681) (2,850,599)
============== ============= ============= ============
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,
2007 2006
--------------- --------------
Cash flows from operating activities:
Decrease in net assets from operations $ (4,681) (2,850,599)
Adjustments to reconcile decrease in net assets from operations to
net cash provided by operating activities:
Net realized and unrealized (gain) loss on investments (479,357) 2,129,054
Net realized and unrealized gain on other assets 70,294 28,471
Proceeds from disposition of and payments on
loans and investments in portfolio securities 668,719 4,615,294
Purchases of loans and investments in portfolio securities (65,000) (103,325)
Change in interest receivable 213,945 (102,971)
Change in other assets 222,341 1,554,674
Change in accrued interest, deferred incentive fees payable,
accounts payable and other liabilities (32,179) (407,617)
--------------- --------------
Net cash provided by operating activities 594,082 4,862,981
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 (1,405,918) 2,862,981
Cash and cash equivalents at beginning of period 2,132,350 2,393,149
--------------- --------------
Cash and cash equivalents at end of period $ 726,432 5,256,130
=============== ==============
Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ 369,075 605,612
=============== ==============
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 (or
reported on the NASDAQ national market) are stated at the bid price on the final
day of the period. Restricted and other securities for which quotations are not
readily available are valued at fair value as determined by the Board of
Directors. Among the factors considered in determining the fair value of
investments are the cost of the investment; developments, including recent
financing transactions, since the acquisition of the investment; financial
condition and operating results of the investee; the long-term potential of the
business of the investee; market interest rates for similar debt securities; and
other factors generally pertinent to the valuation of investments. However,
because of the inherent uncertainty of valuation, those estimated values may
differ significantly from the values that would have been used had a ready
market for the securities existed, and the differences could be material.
In the valuation process, MACC uses financial information received monthly,
quarterly, and annually from its portfolio companies which includes both audited
and unaudited financial statements. This information is used to determine
financial condition, performance, and valuation of the portfolio investments.
Realization of the carrying value of investments is subject to future
developments. Investment transactions are recorded on the trade date and
identified cost is used to determine realized gains and losses. Under the
provisions of SOP 90-7, the fair value of loans and investments in portfolio
securities on February 15, 1995, the fresh-start date, is considered the cost
basis for financial statement purposes.
6
(3) Financial Highlights (Unaudited)
For the six For the six
months ended months ended
March 31, March 31,
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 (0.17) (0.27)
Net realized and unrealized gain
(loss) on investment transactions 0.17 (0.88)
--------------------- ---------------------
Total from investment operations 0.00 (1.15)
--------------------- ---------------------
Net asset value, end of period $ 4.71 4.39
===================== =====================
Closing market price $ 2.08 2.71
===================== =====================
For the six For the six
months ended months ended
March 31, March 31,
2007 2006
--------------------- ---------------------
Total return
Net asset value basis (0.04) % (20.86)
Market price basis 16.85 % (5.45)
Net asset value, end of period
(in thousands) $ 11,614 10,814
Ratio to weighted average net assets:
Investment expense, net 3.57 % (4.67)
Operating and income tax expense 7.61 % 10.04
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 is not expected to
have a material effect on our financial statements.
8
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS (UNAUDITED)
MARCH 31, 2007
Manufacturing:
Percent
of Net
Company Security assets Value Cost (d)
------------------------------------------------------------------------------------------------------------------------------------
Aviation Manufacturing Group, LLC (a) 14% debt security, due October 1, 2008 (c) $ 616,000 616,000
Yankton, South Dakota 154,000 units preferred 154,000 154,000
Manufacturer of flight critical parts for Membership interest 70,545 39
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 351,742 126,742
------------ ----------
1,918,480 1,693,480
------------ ----------
Handy Industries, LLC (a) 12.5% debt security, due January 8, 2007 667,327 667,327
Marshalltown, Iowa 167,171 units Class B preferred (c) 167,171 167,171
Manufacturer of lifts for Membership interest 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, 2007 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 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)...
MARCH 31, 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 and handles 13% debt security, due July 26, 2007 (c) 277,800 277,800
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 128,162 128,162
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 (c) 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 (c) 221,000 221,000
commercial boilers and shower 121,457 common shares (c) 24,457 121,457
doors, frames and enclosures 6% debt security, due April 1, 2010 (c) 256,880 256,880
312,000 common shares (c) 120 3,120
----------- ----------
1,282,458 1,382,458
----------- ----------
Total manufacturing 98.91% 11,486,598 12,114,989
======= ----------- ----------
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, 2007 (c) 1,099,063 1,125,000
Addison, Illinois 10% debt security, due January 1, 2007 375,000 375,000
Fastener plating and heat treating 57 common shares (c) 1 1
10% debt security, due January 1, 2007 18,750 18,750
10% debt security, due January 1, 2007 56,250 56,250
10% debt security, due January 1, 2007 14,062 14,062
----------- ----------
1,563,126 1,589,063
----------- ----------
10
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED (UNAUDITED)...
MARCH 31, 2007
Services 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 25.04% 2,908,424 2,499,780
======= ---------- ----------
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 50,699 50,699
and B2B internet services 12% debt security, due August 21, 2008 45,033 45,033
Warrants to purchase 166,500 Series A preferred (c) --- ---
---------- ----------
2,097,227 2,097,227
---------- ----------
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) 1,182,000 440,000
Sarasota, Florida 100 common options (c) 90,100 ---
Tourist magazine publisher ---------- ----------
1,272,100 440,000
---------- ----------
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 56,046 56,046
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 381,996 806,047
---------- ----------
SnapNames.com, Inc. 511,500 common shares (c) 200,000 4,650
Portland, Oregon ---------- ----------
Domain name management
Total technology and communications 38.06% 4,420,117 4,702,973
======= ---------- ----------
$ 18,815,139 19,317,742
=========== ==========
(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.
Second Quarter Ended March 31, 2007 Compared to Second Quarter Ended March 31, 2006
For the three months ended
March 31,
---------------------------------------------------
2007 2006 Change
--------------------------------------------------- -------------------
Total investment income $ 212,919 367,072 (154,153)
Net operating and income tax expense (481,633) (824,719) 343,086
------------------ --------------------- -------------------
Investment expense, net (268,714) (457,647) 188,933
------------------ --------------------- -------------------
Net realized (loss) gain on investments (95,980) 2,476,007 (2,571,987)
Net change in unrealized appreciation/
depreciation on investments and other assets 55,333 (3,817,372) 3,872,705
Net change in unrealized loss on other assets 25,686 1,050 24,636
------------------ --------------------- -------------------
Net loss on investments (14,961) (1,340,315) 1,325,354
------------------ --------------------- -------------------
Net change in net assets from operations $ (283,675) (1,797,962) 1,514,287
======================= ===================== ===================
Net asset value per share:
Beginning of period $ 4.71 5.12
======================= =====================
End of period $ 4.71 4.39
======================= =====================
12
Total Investment Income
During the current fiscal year second quarter, total investment income was
$212,919, a decrease of $154,153, or 42%, from total investment income of
$367,072 for the prior year second quarter. In the current year second quarter
as compared to the prior year second quarter, interest income decreased $49,832,
or 20%, and dividend income decreased $104,321, or 90%. 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 one debt
portfolio security which has been placed on non-accrual of interest status, and
an increase in interest income on two debt portfolio securities which had been
on non-accrual of interest status during the prior year second quarter but which
are currently making interest payments. In the current year second quarter,
although MACC received dividends on two existing portfolio investments, as
compared to dividend income received in the prior year second quarter from two
existing portfolio investments, one of which was a distribution from a limited
liability company, the prior year dividends were larger.
Net Operating Expenses
Net operating expenses for the second quarter of the current year were
$481,633, a decrease of $273,086, or 36%, as compared to net operating expenses
for the prior year second quarter of $754,719. Interest expense decreased
$120,626, or 37%, in the current year second 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 $25,903, or 23%, in the current year second quarter due to the
decrease in capital under management. Incentive fees decreased $143,311, or
100%, because no incentive fees were earned in the current year second quarter.
Professional fees decreased $6,401, or 8%, in the current year second quarter.
Other expenses increased $23,155, or 26%, in the current year second quarter as
compared to the prior year second quarter. The increase in other expenses is the
net result of an increase in prepayment penalties incurred on the repayment of
the borrowings from the SBA during the current year second quarter, an increase
in administrative expenses due to timing of payments, and decreases in directors
and officers insurance and director's fees resulting from a reduction in the
size of MACC's Board of Directors.
Investment Expense, Net
For the current year second quarter, MACC recorded investment expense, net
of $268,714, as compared to investment expense, net of $457,647 during the prior
year second quarter, a decrease of $188,933, 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 second quarter, MACC recorded net realized loss on
investments of $95,980, as compared with net realized gain on investments of
$2,476,007 during the prior
13
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. 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 $55,333 during the current year second quarter, as compared to
($3,817,372) during the prior year second quarter. This net change resulted
from:
• Unrealized appreciation in the fair value of two portfolio companies
totaling $655,333 during the current year second quarter, as compared
to unrealized appreciation in the fair value of one portfolio company
totaling $120,350 during the prior year second quarter.
• Unrealized depreciation in the fair value of four portfolio companies
of $600,000 during the current year second quarter, as compared to
unrealized depreciation in the fair value of three portfolio companies
of $1,672,528 during the prior year second quarter.
• No reversal of unrealized depreciation during the current year second
quarter, as compared to reversal of unrealized appreciation of
$2,265,194 in two portfolio companies during the prior year second
quarter.
The net change in unrealized gain on other assets of $25,686 during the
current year second 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 $1,050 during the prior year second quarter.
Net Change in Net Assets from Operations
MACC experienced a decrease of $283,675 in net assets at the end of the
second quarter of fiscal year 2007, and the resulting net asset value per share
was $4.71 as of March 31, 2007, as compared to $4.71 as of September 30, 2006
and $4.83 as of December 31, 2006.
The decrease in net assets recorded during the current year second quarter
was primarily the result of the investment expense, net as described above.
14
MACC has six portfolio investments valued at cost, has recorded unrealized
appreciation on nine portfolio investments, and has recorded unrealized
depreciation on nine 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.
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 second quarter and six-month period of the current fiscal year in two
ways. First, MACC's total investment income decreased in the second quarter and
six-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. Second, MACC's interest
expense and management fee expense both decreased in the second quarter and
six-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 second quarter of the current
fiscal year, the decrease in total investment income exceeded the decrease in
interest expense and management fee expense. For the six-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. 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
Six Months Ended March 31, 2007 Compared to Six Months Ended March 31, 2006
For the six months ended
March 31,
---------------------------------------------------
2007 2006 Change
--------------------------------------------------- -------------------
Total investment income $ 467,270 698,756 (231,486)
Net operating and income tax expense (881,014) (1,376,442) 495,428
------------------ --------------------- -------------------
Investment expense, net (413,744) (677,686) 263,942
------------------ --------------------- -------------------
Net realized (loss) gain on investments (95,980) 2,689,340 (2,785,320)
Net change in unrealized appreciation/
depreciation on investments and other assets 479,357 (4,833,782) 5,313,139
Net change in unrealized loss on other assets 25,686 (28,471) 54,157
------------------ --------------------- -------------------
Net gain (loss) on investments 409,063 (2,172,913) 2,581,976
------------------ --------------------- -------------------
Net change in net assets from operations $ (4,681) (2,850,599) 2,845,918
======================= ===================== ===================
Net asset value per share:
Beginning of period $ 4.71 5.54
======================= =====================
End of period $ 4.71 4.39
======================= =====================
Total Investment Income
During the current fiscal year six-month period, total investment income
was $467,270, a decrease of $231,486, or 33%, from total investment income of
$698,756 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
$136,955, or 25%, and dividend income decreased $94,531, or 67%. 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
one debt portfolio security which has been placed on non-accrual of interest
status, and an increase in interest income on two debt portfolio securities
which had been on non-accrual of interest status during the prior year six-month
period but which are currently making interest payments. In the current year
six-month period, MACC received dividends on two existing portfolio investments,
as compared to dividend income received in the prior year six-month period on
four existing portfolio investments, one of which was a distribution from a
limited liability company. However, the prior year dividends were larger.
Net Operating Expenses
Net operating expenses for the six-month period of the current year were
$881,014, a decrease of $425,428, or 33%, as compared to net operating expenses
for the prior year six-month period of $1,306,442. Interest expense decreased
$244,075, or 38%, in the current year six-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 six-month period.
Management fees decreased $57,648, or 25%, in the current year six-month period
due to the decrease in capital under management. Professional fees increased
$14,892, or 12%, in the current year six-month period due in part to the timing
of payments of legal expenses. Other
16
expenses increased $4,714, or 3%, in the current year six-month period as
compared to the prior year six-month period. The increase in other expenses is
the net result of an increase in prepayment penalties incurred on the repayment
of the borrowings from the SBA during the current year six-month period, an
increase in administrative expenses due to timing of payments, and decreases in
directors and officers insurance and director's fees resulting from a reduction
in the size of MACC's Board of Directors.
Investment Expense, Net
For the current year six-month period, MACC recorded investment expense,
net of $413,744, as compared to investment expense, net of $677,686 during the
prior year six-month period, a decrease of $263,942, or 39%. 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 loss
on investments of $95,980, as compared with net realized gain on investments of
$2,689,340 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. 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 $479,357 during the current year six-month period, as compared to
($4,833,782) during the prior year six-month period. This net change resulted
from:
• Unrealized appreciation in the fair value of six portfolio companies
totaling $1,129,357 during the current year six-month period, as
compared to unrealized appreciation in the fair value of two portfolio
companies totaling $310,350 during the prior year six-month period.
• Unrealized depreciation in the fair value of four portfolio companies
of $650,000 during the current year six-month period, as compared to
unrealized depreciation in
17
the fair value of eleven portfolio companies of $3,103,047 during the
prior year six-month period.
• No reversal of unrealized appreciation during the current year
six-month period and reversal of unrealized appreciation of $2,041,085
in three portfolio companies during the prior year six-month period.
The net change in unrealized gain on other assets of $25,686 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
loss on other assets of $28,471 during the prior year six-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 March 31, 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 44% at March 31, 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 March 31, 2007, MACC's cash and cash equivalents totaled $726,432.
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 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 March 31, 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 --- --- 5,835,000 2,955,000
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 $18,815,139 at March 31, 2007 and $18,939,501
at September 30, 2006. During the three months ended March 31, 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 second quarter, no co-investments were
made.
19
Critical Accounting Policy
Investments in securities traded on a national securities exchange (or
reported on the NASDAQ national market) are stated at the average of the bid
price on the three final trading days of the valuation period which is not
materially different from the bid price on the final day of the period.
Restricted and other securities for which quotations are not readily available
are valued at fair value as determined by the Board of Directors. Among the
factors considered in determining the fair value of investments are the cost of
the investment; developments, including recent financing transactions, since the
acquisition of the investment; the financial condition and operating results of
the investee; the long-term potential of the business of the investee; market
interest rates on similar debt securities; and other factors generally pertinent
to the valuation of investments. However, because of the inherent uncertainty of
valuation, those estimated values may differ significantly from the values that
would have been used had a ready market for the securities existed, and the
differences could be material.
In the valuation process, MorAmerica Capital uses financial information
received monthly, quarterly, and annually from its portfolio companies which
includes both audited and unaudited financial statements. This information is
used to determine financial condition, performance, and valuation of the
portfolio investments.
Realization of the carrying value of investments is subject to future
developments. Investment transactions are recorded on the trade date and
identified cost is used to determine realized gains and losses. Under the
provisions of SOP 90-7, the fair value of loans and investments in portfolio
securities on February 15, 1995, the fresh-start date, is considered the cost
basis for financial statement purposes.
Determination of Net Asset Value
The net asset value per share of MACC's outstanding common stock is
determined quarterly, as soon as practicable after and as of the end of each
calendar quarter, by dividing the value of total assets minus total liabilities
by the total number of shares outstanding at the date as of which the
determination is made.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
MACC is 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 March 31, 2007, was
$8,946,000, 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 March
31, 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
--------------------------------------------------------------------------------
March 31, 2007
--------------------------------------------------------------------------------
Fair Value of Debentures Payable $ 8,946,000
Amount Above Cost $ 156,000
Additional Market Risk $ 143,000
--------------------------------------------------------------------------------
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.
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.
21
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.
On February 27, 2007, MACC's 2007 Annual Meeting of Shareholders (the
"Meeting") was held in Phoenix, Arizona. A quorum of 1,919,847 shares, or
approximately 77.90% of issued and outstanding shares as of December 29, 2006,
were represented in person or by proxy at the Meeting. The shareholders
considered two proposals at the meeting.
With respect to the first proposal, the shareholders elected five nominees
to serve as directors until the 2008 Annual Meeting of Shareholders or until
their respective successors shall be elected and qualified. The five directors
elected at the Meeting, and the votes cast in favor of and withheld with respect
to each, are as follows:
For Withheld
Michael W. Dunn 1,886,583 33,264
Jasja Kotterman 1,878,320 41,527
Benjamin Jiaravanon 1,851,563 68,284
Gordon J. Roth 1,885,235 34,612
Geoffrey T. Woolley 1,886,152 33,695
With regard to the second proposal, the shareholders voted to ratify the
appointment of KPMG LLP as independent registered public accounting firm for
MACC for fiscal year 2007 by a vote of 1,865,821 in favor and 37,040 against
approval, with 16,986 shares abstaining.
Item 5. Other Information.
There are no items to report.
22
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)
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: 5/10/07 By: /s/ David R. Schroder
-------------------- ----------------------------------------
David R. Schroder, President
Date: 5/10/07 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