Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2006
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
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MACC Private Equities Inc.
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 42-1421406
-------- ----------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
101 Second Street SE, Suite 800, Cedar Rapids, Iowa 52401
---------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(319) 363-8249
--------------
(Registrant's telephone number, including area code)
---------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
At December 31, 2006, the registrant had issued and outstanding 2,464,621
shares of common stock.
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
Condensed Consolidated Balance
Sheets at December 31, 2006 (Unaudited)
and September 30, 2006.................................... 1
Condensed Consolidated Statements of
Operations (Unaudited) for the three months
ended December 31, 2006 and December 31, 2005............. 2
Condensed Consolidated Statements of
Cash Flows (Unaudited) for the three months
ended December 31, 2006 and December 31, 2005............ 3
Notes to (Unaudited) Condensed Consolidated
Financial Statements..................................... 4
Consolidated Schedule of Investments (Unaudited)
at December 31, 2006 .................................... 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations ........ 10
Item 3. Quantitative and Qualitative
Disclosure About Market Risk............................. 16
Item 4. Controls and Procedures.................................. 16
Part II. OTHER INFORMATION........................................ 17
Item 6. Exhibits................................................. 17
Signatures............................................... 18
Certifications.................. See Exhibits 31 and 32
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
December 31, September
2006 30,
(Unaudited) 2006
---------------- ---------------
Assets
Loans and investments in portfolio securities, at market or fair value:
Unaffiliated companies (cost of $2,874,079 and $2,920,073) $ 2,888,709 2,909,703
Affiliated companies (cost of $13,429,581 and $13,841,969) 12,882,952 13,143,159
Controlled companies (cost of $3,129,106 and $3,159,419) 3,103,169 2,886,639
Cash and cash equivalents 3,035,785 2,132,350
Interest receivable 107,712 358,717
Other assets 1,243,988 1,399,487
--------------------- ---------------
Total assets $ 23,262,315 22,830,055
===================== ===============
Liabilities and net assets
Liabilities:
Debentures payable $ 10,790,000 10,790,000
Incentive fees payable 108,399 108,399
Accrued interest 246,789 61,173
Accounts payable and other liabilities 219,899 252,249
--------------------- ---------------
Total liabilities 11,365,087 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 12,430,518 12,575,548
Unrealized depreciation on investments (557,936) (981,960)
--------------------- ---------------
Total net assets 11,897,228 11,618,234
--------------------- ---------------
Total liabilities and net assets $ 23,262,315 22,830,055
===================== ===============
Net assets per share $ 4.83 4.71
===================== ===============
See accompanying notes to unaudited condensed consolidated financial statements.
1
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations
(Unaudited)
For the three For the three
months ended months ended
December 31, December 31,
2006 2005
------------------ ----------------
Investment income:
Interest
Unaffiliated companies $ 15,676 59,538
Affiliated companies 138,939 193,886
Controlled companies 30,539 18,786
Other 33,887 33,954
Dividends
Unaffiliated companies --- 2,187
Affiliated companies 35,310 23,333
--------------------- ----------------
Total investment income 254,351 331,684
--------------------- ----------------
Operating expenses:
Interest expenses 195,610 319,059
Management fees 85,694 117,439
Professional fees 63,214 41,921
Other 54,863 73,304
--------------------- ----------------
Total operating expenses 399,381 551,723
--------------------- ----------------
Investment expense, net (145,030) (220,039)
--------------------- ----------------
Realized and unrealized gain (loss) on investments and other assets:
Net realized gain on investments:
Unaffiliated companies --- 213,333
Net change in unrealized appreciation/depreciation investments 424,024 (1,016,410)
Net change in unrealized loss on other assets --- (29,521)
--------------------- ----------------
Net gain (loss) on investments 424,024 (832,598)
--------------------- ----------------
Net change in net assets from operations $ 278,994 (1,052,637)
===================== ================
See accompanying notes to unaudited condensed consolidated financial statements.
2
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the three For the three
months ended months ended
December 31, December 31,
2006 2005
----------------- -------------------
Cash flows from operating activities:
Increase (decrease) in net assets from operations $ 278,994 (1,052,637)
Adjustments to reconcile increase (decrease) in net assets
from operations to net cash provided by operating activities:
Net realized and unrealized (gain) loss on investments (424,024) 803,077
Net realized and unrealized loss on other assets --- 29,521
Proceeds from disposition of and payments on
loans and investments in portfolio securities 553,695 593,472
Purchases of loans and investments in portfolio securities (65,000) (103,370)
Change in interest receivable 251,005 (71,374)
Change in other assets 155,499 1,911,753
Change in accrued interest, deferred incentive fees payable,
accounts payable and other liabilities 153,266 164,258
------------------ ------------------
Net cash provided by operating activities 903,435 2,274,700
Cash and cash equivalents at beginning of period 2,132,350 2,393,149
------------------ ------------------
Cash and cash equivalents at end of period $ 3,035,785 4,667,849
================== ==================
See accompanying notes to unaudited condensed consolidated financial statements.
3
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.
4
(3) Financial Highlights (Unaudited)
For the three For the three
months ended months ended
December 31, December 31,
2006 2005
--------------- ---------------
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 (0.06) (0.09)
Net realized and unrealized gain
(loss) on investment transactions 0.18 (0.33)
Conversion of note payable and accrued
interest to shares of common stock --- (0.00)
--------------- ---------------
Total from investment operations 0.12 (0.42)
--------------- ---------------
Net asset value, end of period $ 4.83 5.12
=============== ===============
Closing market price $ 2.03 2.56
=============== ===============
For the three For the three
months ended months ended
December 31, December 31,
2006 2005
--------------- ---------------
Total return
Net asset value basis 2.40 % (7.70)
Market price basis (20.70) % (0.04)
Net asset value, end of period
(in thousands) $ 11,897 12,612
Ratio to average net assets:
Investment expense, net 1.26 % 1.62
Operating and income tax expense 3.46 % 4.07
The ratios of investment expense, net to average net assets, of operating
expenses and income tax expenses to average net assets and total return are
calculated for common stockholders as a class. Total return, which reflects the
annual change in net assets, was calculated using the change in net assets
between the beginning of the current fiscal year and end of the current year
period 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
5
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 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. We are evaluating the effect, if any, the adoption of FIN 48 will have
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. We are evaluating the effect, if any, the adoption
of SAB No. 108 will have on our financial statements.
6
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS (UNAUDITED)
DECEMBER 31, 2006
Manufacturing:
Percent
of Net
Company Security assets Value Cost (d)
------------------------------------------------------------------------------------------------------------------------------------
AAMI, Inc. (a) 6% debt security, due April 1, 2010 (c) $ 554,577 780,000
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 doors, 121,457 common shares (c) --- 121,457
frames and enclosures 6% debt security, due April 1, 2010 (c) 256,880 256,880
312,000 common shares (c) --- 3,120
----------- -----------
1,032,458 1,382,458
----------- -----------
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 Membership interest 70,545 39
for aircraft 14% note, due October 1, 2008 89,320 89,320
Membership interest 31,676 ---
----------- -----------
961,541 859,359
----------- -----------
Central Fiber Corporation 12% debt security, due March 31, 2009 205,143 205,143
Wellsville, Kansas 12% debt security, due March 31, 2009 53,079 53,079
Recycles and manufactures ----------- -----------
cellulose fiber products 258,222 258,222
----------- -----------
Detroit Tool Metal Products Co. (a) 12% debt security, due November 18, 2009 1,371,508 1,371,508
Lebanon, Missouri 19,853.94 share Series A preferred (c) 195,231 195,231
Metal stamping 7,887.17 common shares 476,742 126,742
----------- -----------
2,043,481 1,693,481
----------- -----------
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) 840,000 40,000
Manufacturer of residential roof and 15 15
floor truss systems ----------- -----------
840,015 40,015
----------- -----------
7
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED (UNAUDITED)...
DECEMBER 31, 2006
Manufacturing Continued: Percent
of Net
Company Security assets Value Cost (d)
------------------------------------------------------------------------------------------------------------------------------------
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
----------- -----------
Pratt-Read Corporation (a) 13,889 shares Series A Preferred (c) 750,000 750,000
Bridgeport, Connecticut 7,718 shares Services A preferred (c) 300,000 416,667
Manufacturer of screwdriver shafts 13% debt security, due July 26, 2007 (c) 277,800 277,800
and handles and other hand tools Warrants to purchase common shares (c) ---- ----
----------- -----------
1,327,800 1,444,467
----------- -----------
Simoniz USA, Inc. 12% debt security, due April 1, 2008 199,306 199,306
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
----------- -----------
Total manufacturing 97.78% 11,632,743 12,186,134
========== ----------- -----------
Service:
FreightPro, Inc 18% debt security, due February 21, 2007 (c) 56,250 262,500
Overland Park, Kansas 18% debt security, due February 15, 2007 (c) 18,750 87,500
Internet based outsource provider Warrant to purchase 366,177.80 common shares (c) 2 2
of freight logistics ----------- -----------
75,002 350,002
----------- -----------
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 25,000 25,000
10% debt security, due January 1, 2007 75,000 75,000
10% debt security, due January 1, 2007 18,750 18,750
----------- -----------
1,592,814 1,618,751
----------- -----------
8
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED (UNAUDITED)...
DECEMBER 31, 2006
Service Continued: Security 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) 442,900 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
----------- -----------
906,000 506,000
----------- -----------
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 27.01% 3,213,112 2,529,468
========== ----------- -----------
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 54,049 54,049
and B2B internet services 12% debt security, due August 21, 2008 49,753 49,753
Warrants to purchase 166,500 Series A preferred (c) --- ---
----------- -----------
2,105,297 2,105,297
----------- -----------
MainStream Data, Inc. (a) 322,763 shares Series A preferred (c) 180,044 200,049
Salt Lake City, Utah ----------- -----------
Content delivery solutions
provider
Miles Media Group, Inc. (a) 1,000 common shares (c) 866,767 440,000
Sarasota, Florida 100 common options (c) --- ---
Tourist magazine publisher ----------- -----------
866,767 440,000
----------- -----------
Phonex Broadband Corporation 1,855,302 shares Series A preferred (c) 288,750 1,155,000
Midvale, Utah ----------- -----------
Power line communications
Portrait Displays, Inc. 8% debt security, due April 1, 2009 62,167 62,167
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 388,117 812,168
----------- -----------
SnapNames.com, Inc. 511,500 common shares (c) 200,000 4,650
Portland, Oregon ----------- -----------
Domain name management
Total technology and communications 33.86% 4,028,975 4,717,164
========== ----------- -----------
$ 18,874,830 19,432,766
=========== ===========
(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.
9
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.
First Quarter Ended December 31, 2006 Compared to First Quarter Ended December
31, 2005
For the three months ended
December 31,
--------------------------------------
2006 2005 Change
----------------- -------------------- --------------
Total investment income $ 254,351 331,684 (77,333)
Net operating expense (399,381) (551,723) 152,342
------------- ---------------- --------------
Investment expense, net (145,030) (220,039) 75,009
------------- ---------------- --------------
Net realized gain on investments --- 213,333 (213,333)
Net change in unrealized appreciation/
depreciation on investments and other assets 424,024 (1,016,410) 1,440,434
Net change in unrealized loss on other assets --- (29,521) 29,521
------------- ---------------- --------------
Net gain (loss) on investments 424,024 (832,598) 1,256,622
------------- ---------------- --------------
Net change in net assets from operations $ 278,994 (1,052,637) 1,331,631
================= ================ ==============
Net asset value per share:
Beginning of period $ 4.71 5.54
================= ================
End of period $ 4.83 5.12
================= ================
10
Total Investment Income
During the current fiscal year first quarter, total investment income
was $254,351, a decrease of $77,333, or 23%, from total investment income of
$331,684 for the prior year first quarter. In the current year first quarter as
compared to the prior year first quarter, interest income decreased $87,123, or
28% and dividend income increased $9,790, or 38%. The decrease in interest
income is the net result of repayments of principal on debt portfolio securities
issued by nine portfolio companies, a decrease in interest income on three debt
portfolio securities which have been placed on non-accrual of interest status,
and an increase in interest income on one debt portfolio security which had been
on non-accrual of interest status during the prior year first quarter and is
currently making interest payments. In the current year first quarter, although
MACC received a dividend on one existing portfolio investment, as compared to
dividend income received in the prior year first quarter from two existing
portfolio companies, the current year dividend was larger.
Net Operating Expenses
Net operating expenses for the first quarter of the current year were
$399,381, a decrease of $152,342, or 28%, as compared to net operating expenses
for the prior year first quarter of $551,723. Interest expense decreased
$123,449, or 39%, in the current year first quarter due to the repayment of
borrowings from the Small Business Administration ("SBA") of $6,000,000 in the
prior fiscal year. Management fees decreased $31,745, or 27%, in the current
year first quarter due to the decrease in capital under management. Professional
fees increased $21,293, or 51%, in the current year first quarter due in part to
the timing of legal expenses associated with the 2006 Annual Shareholders
Meeting in the prior year first quarter. Other expenses decreased $18,441, or
25%, in the current year first quarter as compared to the prior year first
quarter. The decrease in other expenses is due to the decrease in directors and
officers insurance, director's fees and board travel expense resulting from a
reduction in the size of MACC's Board of Directors, and the timing of
administrative expenses.
Investment Expense, Net
For the current year first quarter, MACC recorded investment expense,
net of $145,030, as compared to investment expense, net of $220,039 during the
prior year first quarter. 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 first quarter, MACC had no net realized gain or
loss on investments, as compared with net realized gain on investments of
$213,333 during the prior year first 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
11
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 $424,024 during the current year first quarter, as compared to
($1,016,410) during the prior year first quarter. This net change resulted from:
o Unrealized appreciation in the fair value of five portfolio
companies totaling $474,024 during the current year first
quarter, as compared to unrealized appreciation in the fair value
of three portfolio companies totaling $627,442 during the prior
year first quarter.
o Unrealized depreciation in the fair value of one portfolio
company of $50,000 during the current year first quarter, as
compared to unrealized depreciation in the fair value of eight
portfolio companies of $1,430,519 during the prior year first
quarter.
o Reversal of unrealized appreciation of $213,333 in one portfolio
company during the prior year first quarter.
There was no net change in unrealized gain on other assets during the
current year first quarter, as compared to a net change in unrealized loss on
other assets of $29,521 during the prior year first quarter.
Net Change in Net Assets from Operations
MACC experienced an increase of $278,994 in net assets at the end of
the first quarter of fiscal year 2006, and the resulting net asset value per
share was $4.83 as of December 31, 2006, as compared to $4.71 as of September
30, 2006 and $5.12 as of December 31, 2005.
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. The increase in net
assets recorded during the current year first quarter was primarily the result
of increases in the fair value of five 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.
12
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. MACC recorded significant reductions in its interest
expense and management fees in the first quarter of the current fiscal year as a
result of reducing debt by paying SBA debentures.
While the economy continues to be strong, it is not even in all
sectors. Portfolio companies have had to deal with high energy costs, high raw
material costs, and in some cases flat or decreased sales. The 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 an anticipated robust market for corporate acquisitions and
investments. The overall activity in the market for corporate acquisitions is
strong.
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 December 31, 2006, the capital of MorAmerica Capital was
impaired less than the 55% maximum impairment percentage permitted under SBA
Regulations. MorAmerica Capital's impairment percentage was 43% at December 31,
2006. 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 December 31, 2006, MACC's cash and cash equivalents totaled
$3,035,785. 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
13
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 resumption of new
investment funding or seeking shareholder approval to make liquidating
distributions.
Debentures payable are composed of $10,790,000 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 $4,955,000 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 December 31, 2006:
Payments due by period
Contractual Obligations
Less
than 1 1-3 More than
Total Year Years 3-5 Years 5 Years
-------------- -------- -------- ------------ ------------
SBA Debentures $ 10,790,000 --- --- 5,835,000 4,955,000
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 $18,874,830 at December 31, 2006 and
$18,939,501 at September 30, 2006. During the three months ended December 31,
2006, MACC invested $65,000 in a follow-on investment in one existing portfolio
company. As noted above, MACC does not expect to make any investments in new
portfolio companies during fiscal year 2007, but may invest up to $100,000 in
follow-on investments in existing
14
portfolio companies, subject to further adjustment based on current economic and
operating conditions.
MACC frequently co-invests with other funds managed by MACC's
investment advisor. When it makes any co-investment with these related funds,
MACC follows certain procedures consistent with orders of the Securities and
Exchange Commission for related party co-investments to reduce or eliminate
conflict of interest issues. All of the $65,000 invested during the current year
first quarter represented a co-investment with funds managed by MACC's
investment advisor.
Critical Accounting Policy
Investments in securities traded on a national securities exchange (or
reported on the NASDAQ national market) are stated at the 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.
15
Item 3. Quantitative and Qualitative Disclosure About Market Risk
MACC is subject to market risk from changes in market interest rates
that affect the fair value of MorAmerica Capital's debentures payable determined
in accordance with Statement of Financial Accounting Standards No. 107,
Disclosures About Fair Value of Financial Instruments. The estimated fair value
of MorAmerica Capital's outstanding debentures payable at December 31, 2006, was
$10,981,000, with a cost of $10,790,000. 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 (6.4% at
December 31, 2006) 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.
-----------------------------------------------------------------------------------------
December 31, 2006
-----------------------------------------------------------------------------------------
Fair Value of Debentures Payable $ 10,981,000
Amount Above Cost $ 191,000
Additional Market Risk $ 196,000
------------------------------------------------------------------- ---- ----------------
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.
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There are no items to report.
Item 1A. Risk Factors.
There are no material changes to report from the risk factors disclosed
in MACC's Annual Report on Form 10-K for the year ended September 30, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There are no items to report.
Item 3. Defaults Upon Senior Securities.
There are no items to report.
Item 4. Submission of Matters to a Vote of Security Holders.
There are no items to report.
Item 5. Other Information.
There are no items to report.
Item 6. Exhibits.
The following exhibits are filed with this Quarterly Report on Form
10-Q:
31.1 Section 302 Certification of David R. Schroder (CEO)
31.2 Section 302 Certification of Robert A. Comey (CFO)
32.1 Section 1350 Certification of David R. Schroder (CEO)
32.2 Section 1350 Certification of Robert A. Comey (CFO)
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MACC PRIVATE EQUITIES INC.
Date: 2/8/07 By: /s/David R. Schroder
--------------------------------- ---------------------------------------------
David R. Schroder, President
Date: 2/8/07 By: /s/Robert A. Comey
--------------------------------- ---------------------------------------------
Robert A. Comey, Chief Financial Officer
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EXHIBIT INDEX
Exhibit Description Page
------- ----------- ----
31.1 Section 302 Certification of David R. Schroder (CEO) 20
31.2 Section 302 Certification of Robert A. Comey (CFO) 22
32.1 Section 1350 Certification of David R. Schroder (CEO) 24
32.2 Section 1350 Certification of Robert A. Comey (CFO) 25
19