<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-24412
MACC PRIVATE EQUITIES INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 42-1421406
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.
101 SECOND STREET, S.E., STE. 800 52401
CEDAR RAPIDS, IOWA (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER
INCLUDING AREA CODE: (319) 363-8249
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
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 IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K [ ]
THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S COMMON STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT AS OF NOVEMBER 2, 1998, WAS APPROXIMATELY
$8,116,951 BASED UPON THE AVERAGE BID AND ASKED PRICE FOR SHARES OF THE
REGISTRANT'S COMMON STOCK ON THAT DATE. AS OF NOVEMBER 2, 1998, THERE WERE
1,246,392 SHARES OF THE REGISTRANT'S COMMON STOCK OUTSTANDING, OF WHICH
APPROXIMATELY 829,848 SHARES WERE HELD BY NON-AFFILIATES.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED
SEPTEMBER 30, 1998, ARE INCORPORATED BY REFERENCE INTO PARTS II AND IV OF THIS
REPORT. PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL
MEETING OF STOCKHOLDERS TO BE HELD ON FEBRUARY 23, 1999, ARE INCORPORATED BY
REFERENCE INTO PART III OF THIS REPORT.
PAGE 1 OF 95.
EXHIBIT INDEX APPEARS ON PAGE: 11.
<PAGE> 2
PART I
ITEM 1. BUSINESS.
GENERAL
MACC Private Equities Inc. (the "Corporation") was formed as a Delaware
corporation on March 3, 1994. It is qualified as a business development company
("BDC") under the Investment Company Act of 1940, as amended (the "1940 Act").
The Corporation has one direct wholly-owned subsidiary, MorAmerica
Capital Corporation ("MorAmerica Capital"). As of September 30, 1998, MorAmerica
Capital comprised approximately 96% of the Corporation's assets. MorAmerica
Capital is an Iowa corporation incorporated in 1959 and which has been licensed
as a small business investment company since that year. It has also elected
treatment as a BDC under the 1940 Act.
THE CORPORATION'S OPERATION AS A BDC
As noted above, both the Corporation and its wholly-owned subsidiary,
MorAmerica Capital, have elected treatment as BDCs under the 1940 Act. Under the
1940 Act, a BDC may not acquire any asset other than Qualifying Assets as
defined under the 1940 Act, unless, at the time the acquisition is made,
Qualifying Assets represent at least 70 percent of the value of the BDC's total
assets. The principal categories of Qualifying Assets relevant to the business
of the Corporation are the following:
(1) Securities purchased in transactions not involving any public
offering from the issuer of such securities, which issuer is an
eligible portfolio company. An eligible portfolio company is defined in
the 1940 Act as any issuer that:
(a) is organized under the laws of, and has its principal
place of business in, the United States;
(b) is not an investment company; and
(c) does not have any class of securities with respect to
which a broker may extend margin credit.
The Corporation's investment in all of the issued and outstanding
common stock of MorAmerica Capital is also a Qualifying Asset under the
1940 Act.
(2) Cash, cash items, government securities, or high quality debt
securities maturing in one year or less from the time of investment.
In addition, a BDC must have been organized (and have its principal
place of business) in the United States for the purpose of making investments in
the types of securities described in (1)
2
<PAGE> 3
above and, in order to count the securities as Qualifying Assets for the purpose
of the 70 percent test, the BDC must make available to the issuers of the
securities significant managerial assistance. Making available significant
managerial assistance means, among other things, any arrangement whereby the
BDC, through its directors, officers or employees offers to provide, and, if
accepted, does so provide, significant guidance and counsel concerning the
management, operations or business objectives and policies of a portfolio
company.
Under the 1940 Act, once a company has elected to be regulated as a BDC,
it may not change the nature of its business so as to cease to be, or withdraw
its election as, a BDC unless authorized by vote of a majority, as defined in
the 1940 Act, of the company's shares. In order to maintain their status as
BDCs, the Corporation and MorAmerica Capital each must have at least 50% of
their total assets invested in the types of portfolio companies described by
Sections 55(a)(1) though 55(a)(3) of the 1940 Act. Accordingly, the Corporation
and MorAmerica Capital may not withdraw their BDC elections or otherwise change
their business so as to cease to qualify as BDCs without shareholder approval.
INVESTMENTS AND DIVESTITURES
For the fiscal year ended September 30, 1998, the Corporation made total
investments of $7,521,781 in seven new portfolio companies and in follow-on
investments in six existing portfolio companies. The Corporation's
investment-level objectives on a consolidated basis call for new and follow-on
investments of approximately $8,500,000 during fiscal year 1999.
During fiscal year 1998, the Corporation recorded $1,566,091 in net
realized gains.
ITEM 2. PROPERTIES.
The Corporation does not own or lease any properties or other tangible
assets. Its business premises and equipment are furnished by InvestAmerica
Investment Advisors, Inc. (the "Investment Advisor"), the investment advisor to
the Corporation.
ITEM 3. LEGAL PROCEEDINGS.
There are no items to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There are no items to report.
EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names, ages and positions of the
Corporation's Executive Officers as of December 15, 1998, as well as certain
other information with respect to such persons:
3
<PAGE> 4
<TABLE>
<CAPTION>
Positions Currently Held Principal Occupations
Name Age with the Corporation During the Past Five Years
- ---- --- ------------------------ --------------------------
<S> <C> <C> <C>
David R. Schroder 55 Director, President and Director, President and Secretary
Secretary of the Investment Advisor;
MorAmerica Capital; InvestAmerica
Venture Group, Inc.; InvestAmerica
N.D. Management, Inc.; and
InvestAmerica N.D., L.L.C.
Robert A. Comey 52 Director, Executive Vice President Director, Executive Vice President
and Treasurer and Treasurer of MorAmerica
Capital, the Investment Advisor,
InvestAmerica Venture Group, Inc.;
InvestAmerica N.D. Management, Inc.
and InvestAmerica N.D., L.L.C.
Kevin F. Mullane 43 Vice President Vice President of MorAmerica
Capital; Vice President and
Director of the Investment Advisor;
InvestAmerica N.D. Management,
Inc.; and InvestAmerica N.D., L.L.C.
</TABLE>
4
<PAGE> 5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Information in response to this Item is incorporated by reference to the
"Shareholder Information" section of the Corporation's Annual Report to
Shareholders for the fiscal year ended September 30, 1998 (the "1998 Annual
Report").
ITEM 6. SELECTED FINANCIAL DATA.
Information in response to this Item is incorporated by reference to the
"Selected Financial Data" section of the 1998 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Information in response to this Item is incorporated by reference to the
"Management's Discussion and Analysis" section of the 1998 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Information in response to this Item is incorporated by reference to the
"Quantitative and Qualitative Disclosures About Market Risk" section of the 1998
Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information in response to this Item is incorporated by reference to the
Consolidated Financial Statements, notes thereto and report therein contained in
the 1998 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
There are no items to report.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information in response to this Item is incorporated by reference to the
identification of directors and nominees contained in the "Election of
Directors" section and the subsection captioned "Section 16(a) Reporting
Compliance" of the Corporation's definitive proxy statement in connection with
its 1999 Annual Meeting of Stockholders, scheduled to be held on February
5
<PAGE> 6
23, 1999 (the "1999 Proxy Statement"). Information in response to this Item also
is included under the caption "Executive Officers of the Registrant" of this
Report.
ITEM 11. EXECUTIVE COMPENSATION.
Information in response to this Item is incorporated by reference to the
subsection captioned "Compensation of Directors and Executive Officers" of the
1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Information in response to this Item is incorporated by reference to the
subsection captioned "Stock Ownership of Certain Beneficial Owners" of the 1999
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Corporation and MorAmerica Capital each have executed an Investment
Advisory Agreement with the Investment Advisor. With respect to the Corporation,
the Investment Advisory Agreement provides for a management fee payable to the
Investment Advisor equal to 2.5% of Assets Under Management (as that term is
defined in the Investment Advisory Agreement). With respect to MorAmerica
Capital, the management fee is equal to 2.5% of Capital Under Management (as
that term is defined in the Investment Advisory Agreement), not to exceed 2.5%
of Assets Under Management. In addition, the Investment Advisor is entitled to
an incentive fee under both of the Investment Advisory Agreements equal to 13.4%
of the net capital gains, before taxes, on portfolio investments and from the
disposition of other assets or property managed by the Investment Advisor. On
December 16, 1998, the Board of Directors of MorAmerica Capital approved certain
proposed amendments to the Investment Advisory Agreements of MorAmerica Capital,
subject to approval by the shareholders of the Corporation. Additional
information with respect to the Investment Advisory Agreements is incorporated
by reference to the Section captioned "Proposal 3 - Approval of Proposed
Amendments to Investment Advisory Agreement" of the 1999 Proxy Statement.
Management fees under the Investment Advisory Agreements on a consolidated
basis amounted to $705,854 for fiscal year 1998. Incentive fees under the
Investment Advisory Agreements on a consolidated basis amounted to $131,304 for
fiscal 1998.
The Investment Advisor is owned by its three principal officers and
directors, all of whom are also officers and/or directors of the Corporation.
These individuals and their positions held with the Investment Advisor are:
6
<PAGE> 7
Name Offices
---- -------
David R. Schroder Director, President and Secretary
Robert A. Comey Director, Executive Vice President, and
Treasurer
Kevin F. Mullane Director and Vice President
On April 29, 1998, the Corporation, Zions Bancorporation ("Zions") and
Zions First National Bank (the "Bank") executed the First Amendment (the
"Amendment") to the Agreement dated May 13, 1996 (the "Agreement"), between the
Corporation and Zions. Pursuant to the Amendment, the Corporation agreed to
permit Zions and the Bank to increase their collective ownership of the
Corporation's common stock to up to 35% of the issued and outstanding shares.
Under the Agreement, Zions and the Bank were prohibited from acquiring more than
25% of the Corporation's common stock. As of October 15, 1998, Zions and the
Bank were the beneficial owners of approximately 309,859 shares of the
Corporation's Common Stock, representing approximately 24.86% of the outstanding
shares.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.
(a) Documents filed as part of this Report:
1. A. The following financial statements are incorporated by reference
to the 1998 Annual Report.
Consolidated Balance Sheet at September 30, 1998
Consolidated Statement of Operations for the year
ended September 30, 1998
Consolidated Statements of Changes in Net Assets
for the years ended September 30, 1998, and September 30, 1997
7
<PAGE> 8
Consolidated Statement of Cash Flows for the year ended
September 30, 1998
Notes to Consolidated Financial Statements
Consolidated Schedule of Investments as of September 30, 1998
Notes to the Consolidated Schedule of Investments
B. The Report of Independent Accountants with respect to the financial
statements listed in A. above is incorporated by reference to the
1998 Annual Report.
2. No financial statement schedules of the Corporation are filed
herewith because (i) such schedules are not required or (ii) the
information required has been presented in the aforementioned
financial statements and schedule of investments.
3. The following exhibits are filed herewith or incorporated by reference
as set forth below:
3.1* Certificate of Incorporation of the Corporation.
3.2 By-Laws of the Corporation.
4. See Exhibits 3.1 and 3.2.
10.1 Investment Advisory Agreement between the Corporation
and InvestAmerica Investment Advisors, Inc., dated
March 1, 1998.
10.2 Investment Advisory Agreement between MorAmerica
Capital Corporation and InvestAmerica Investment
Advisors, Inc., dated March 1, 1998.
10.3.a.** Agreement between the Corporation and Zions
Bancorporation, dated May 13, 1996.
10.3.b. First Amendment to Agreement between the Corporation,
Zions Bancorporation and Zions First National Bank,
dated April 29, 1998
13 1998 Annual Report to Stockholders.
21 Subsidiary of the Corporation and jurisdiction of
incorporation.
27 Financial Data Schedule
*Incorporated by reference to the Corporation's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1997, as filed with the Commission
on May 14, 1997.
**Incorporated by reference to the Corporation's Current Report on Form
8-K, dated May 13, 1996, filed with the Commission on May 13, 1996.
8
<PAGE> 9
(b) Reports on Form 8-K.
No Reports on Form 8-K were filed during the three months ended September
30, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on December 21, 1998.
/s/ David R. Schroder
-------------------------------
David R. Schroder
President and Secretary
9
<PAGE> 10
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Date
/s/ Paul M. Bass, Jr. December 19, 1998
- ---------------------------------- ------------------------------
Paul M. Bass, Jr.
Chairman of the Board of Directors
/s/ David R. Schroder December 21, 1998
- ---------------------------------- ------------------------------
David R. Schroder
Director, President and Secretary
/s/ Robert A. Comey December 18, 1998
- ---------------------------------- ------------------------------
Robert A. Comey
Director, Executive Vice President
and Treasurer
/s/ Henry T. Madden December 21, 1998
- ---------------------------------- ------------------------------
Henry T. Madden
Director
/s/ John D. Wolfe December 21, 1998
- ---------------------------------- ------------------------------
John D. Wolfe
Director
/s/ Michael W. Dunn December 21, 1998
- ---------------------------------- ------------------------------
Michael W. Dunn
Director
/s/ James L. Miller December 19, 1998
- ---------------------------------- ------------------------------
James L. Miller
Director
/s/ Todd J. Stevens December 21, 1998
- ---------------------------------- ------------------------------
Todd J. Stevens
Director
10
<PAGE> 11
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description Sequential Page
- ------ ----------- ---------------
<S> <C> <C>
3.2 Bylaws of the Corporation 12
10.1 Investment Advisory Agreement between the Corporation and InvestAmerica 27
Investment Advisors, Inc., dated March 1, 1998
10.2 Investment Advisory Agreement between MorAmerica Capital Corporation and 37
InvestAmerica Investment Advisors, Inc., dated March 1, 1998
10.3.b First Amendment to Agreement between the Corporation and Zions 47
Bancorporation, dated April 29, 1998
13 1998 Annual Report to Stockholders 50
21 Subsidiaries of the Corporation and Jurisdiction of Incorporation 91
27 Financial Data Schedule 93
</TABLE>
11
<PAGE> 1
AMENDED AND RESTATED BYLAWS
OF
MACC PRIVATE EQUITIES INC.
ARTICLE I
STOCKHOLDERS
Section 1. Annual Meeting. An annual meeting of the stockholders, for
the election of directors to succeed those whose terms expire and for the
transaction of such other business as may properly come before the meeting,
shall be held on the fourth Tuesday of February commencing with the year 1996.
Section 2. Special Meetings. Special meetings of the stockholders, for
any purpose or purposes prescribed in the notice of the meeting, may be called
by the Board of Directors or the Chairman of the Board or by vote of forty
percent (40%) of the issued and outstanding Common Stock of the Corporation. In
addition, special meetings shall be held at such place, on such date and at such
time as they or he or she shall fix.
Section 3. Notice of Meetings. Written notice of the place, date and
time of all meetings of the stockholders, and, in case of a special meeting, the
purpose or purposes for which the meeting is called, shall be given, not less
than ten (10) nor more than sixty (60) days before the date on which the meeting
is to be held, to each stockholder entitled to vote at such meeting, except as
otherwise provided herein or required by law (meaning, here and hereinafter, as
required from time to time by the Delaware General Corporation Law or the
Certificate of Incorporation of the Corporation).
When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date and time
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that if the date of any adjourned meeting is more than thirty
(30) days after the date for which the meeting was originally noticed, or if a
new record date is fixed for the adjourned meeting, written notice of the place,
date and time of the adjourned meeting shall be given in conformity herewith. At
any adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 4. Quorum. At any meeting of the stockholders, the holders of a
majority of all of the shares of the stock entitled to vote at the meeting,
present in person or by proxy, shall constitute a quorum for all purposes,
unless or except to the extent that the presence of a larger number may be
required by law. Where a separate vote by a class or classes is required, a
majority of the shares of such class or classes present in person or represented
by proxy shall constitute a quorum entitled to take action with respect to that
vote on that matter.
13
<PAGE> 2
If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares of stock entitled to vote who
are present, in person or by proxy, may adjourn the meeting to another place,
date or time. If a notice of any adjourned special meeting of stockholders is
sent to all stockholders entitled to vote thereat, stating that it will be held
with those present constituting a quorum, then except as otherwise required by
law, those present at such adjourned meeting shall constitute a quorum, and all
matters shall be determined by a majority of the votes cast at such meeting.
Section 5. Organization. The Chairman of the Board, or such other person
as the Board of Directors may have designated or, in the absence of the
Chairman and such other person, the chief executive officer of the Corporation
or, in his or her absence, such person as may be chosen by the holders of a
majority of the shares entitled to vote who are present, in person or by proxy,
shall call to order any meeting of the stockholders and act as chairman of the
meeting. In the absence of the Secretary of the Corporation, the secretary of
the meeting shall be such person as the chairman appoints.
Section 6. Conduct of Business. The chairman of any meeting of
stockholders shall determine the order of business and the procedure at the
meeting, including such regulation of the manner of voting and the conduct of
discussion as seem to him or her in order.
The date and time of the opening and the closing of the polls for each
matter upon which the shareholders will vote at a meeting shall be announced at
the meeting by the person presiding over the meeting. The Board of Directors of
the Corporation may adopt by resolution such rules and regulations for the
conduct of the meeting of shareholders as it shall deem appropriate. Except to
the extent not inconsistent with any such rules and regulations as adopted by
the Board of Directors, the chairman of any meeting of shareholders shall have
the right and authority to prescribe such rules, regulations and procedures and
to do all such acts as, in the judgment of such chairman, are appropriate for
the proper conduct of the meeting. Such rules, regulations or procedures whether
adopted by the Board of Directors or prescribed by the chairman of the meeting,
may include, without limitation, the following: (i) the establishment of an
agenda or order of business for the meeting; (ii) rules and procedures for
maintaining order at the meeting and the safety of those present; (iii)
limitations on attendance at or participation in the meeting to shareholders of
record of the Corporation, their duly authorized and constituted proxies or such
other persons as the chairman of the meeting shall determine; (iv) restrictions
on entry to the meeting after the time fixed for the commencement thereof; and
(v) limitations on the time allotted to questions or comments by participants.
Unless and to the extent determined by the Board of Directors or the chairman of
the meeting, meetings of shareholders shall not be required to be held in
accordance with the rules of parliamentary procedure.
Section 7. Proxies and Voting. At any meeting of the stockholders, every
stockholder entitled to vote may vote in person or by proxy authorized by an
instrument in writing filed in accordance with the procedure established for
the meeting.
Each stockholder shall have one (1) vote for every share of stock
entitled to vote which is registered in his or her name on the record date for
the meeting, except as otherwise provided herein or required by law.
14
<PAGE> 3
All voting, including the election of directors but excepting where
otherwise required by law, may be by a voice vote; provided, however, that upon
demand therefor by a stockholder entitled to vote or by his or her proxy, a
stock vote shall be taken. Every stock vote shall be taken by ballots, each of
which shall state the name of the stockholder or proxy voting and such other
information as may be required under the procedure established for the meeting.
Every vote taken by ballots shall be counted by an inspector or inspectors
appointed by the chairman of the meeting.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law, all other matters shall be determined by a
majority of the votes cast.
Section 8. Stock List. A complete list of stockholders entitled to vote
at any meeting of stockholders, arranged in alphabetical order for each class of
stock and showing the address of each such stockholder and the number of shares
registered in his or her name, shall be open to the examination of any such
stockholder, for any purpose germane to the meeting, during ordinary business
hours for a period of at least ten (10) days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or if not so specified, at the place
where the meeting is to be held.
The stock list shall also be kept at the place of the meeting during the
whole time thereof and shall be open to the examination of any such stockholder
who is present. This list shall presumptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of them.
Section 9. No Consent of Stockholders in Lieu of Meeting. Any action
required or permitted to be taken at any annual or special meeting of
stockholders of the Corporation must be effected at a duly called annual or
special meeting of the stockholders, and may not be effected by written consent
of the stockholders.
Section 10. Notice of Nominations and Other Business at Annual Meetings.
(a) Nominations of persons for election to the Board of
Directors of the Corporation and the proposal of business to be
considered by the stockholders may be made at an annual meeting of
stockholders (1) pursuant to the Corporation's notice of meeting, (2) by
or at the direction of the Board of Directors or (3) by any stockholder
of record at the time of giving of the notice by the stockholders
provided for in this Section, who is entitled to vote at the meeting and
who complied with the notice procedures set forth in this Section.
(b) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (3) of
paragraph (a) of this Section, the stockholder must have given timely
notice thereof in writing to the Secretary of the Corporation. To be
timely, a stockholder's notice shall be delivered to the Secretary not
less than sixty (60) days nor more than ninety (90) days prior to the
date on which the Corporation first mailed its proxy materials for the
prior year's annual meeting; provided,
15
<PAGE> 4
however, that in the event that the date of the annual meeting has
changed more than thirty (30) days from the prior year, notice by the
stockholder to be timely must be so delivered a reasonable time before
the date on which the Corporation first mails its proxy materials with
respect to the annual meeting at which such proposal is to be made. Such
stockholder's notice shall set forth (1) as to each person whom the
stockholder proposes to nominate for election or reelection as a director
all information relating to such person that is required to be disclosed
in solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") (including such
person's written consent to being named in the proxy statement as a
nominee and to serving as a director if elected); (2) as to any other
business that the stockholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the
meeting, the reasons for conducting such business at the meeting and any
material interest in such business of such stockholder and the beneficial
owner, if any, on which behalf the proposal is made; and (3) as to the
stockholder giving the notice and the beneficial owner, if any, on which
behalf the nomination or proposal is made (i) the name and address of
such stockholder, as they appear on the Corporation's books, and of such
beneficial owner and (ii) the class and number of shares of the
Corporation which are owned beneficially and of record by such
stockholder and beneficial owner.
(c) Notwithstanding anything in the second sentence of
paragraph (b) of this Section to the contrary, in the event that the
number of directors to be elected to the Board of Directors of the
Corporation is increased and there is no public announcement naming all
of the nominees for director or specifying the size of the increased
Board of Directors made by the Corporation at least seventy (70) days
prior to the first anniversary of the preceding year's annual meeting, a
stockholder's notice required by this Section shall also be considered
timely, but only with respect to nominees for any new positions created
by such increase, if it shall be delivered to the Secretary at the
principal executive offices for the Corporation not later than the close
of business on the l0th day following the day on which such public
announcement is first made by the Corporation.
(d) Only such persons who are nominated in accordance with the
procedures set forth in this Section shall be eligible to serve as
directors and only such business shall be conducted at an annual meeting
of stockholders as shall have been brought before the meeting in
accordance with the procedures set forth in this Section. The chairman of
the meeting shall have the power and duty to determine whether a
nomination or any business proposed to be brought before the meeting was
made in accordance with the procedures set forth in this Section and, if
any proposed nomination or business is not in compliance with these
Bylaws, to declare that such defective proposed business or nomination
shall be disregarded.
(e) For the purposes of this Section, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones News
Service, Associated Press or a comparable national news service in a
document publicly filed by the Corporation with the Securities and
Exchange Commission pursuant to Section 13, 14 or 15 (d) of the Exchange
Act.
16
<PAGE> 5
(f) Notwithstanding the foregoing provisions of this Section, a
stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this Section. Nothing in this Section shall be
deemed to affect any rights of stockholders to request inclusion of
proposals in the Corporation's proxy statement pursuant to Rule 14a-8
under the Exchange Act.
ARTICLE II
BOARD OF DIRECTORS
Section 1. Number and Term of Office. The number of directors of the
Corporation to constitute the Board of Directors shall be nine (9). Each
director shall hold office until such director's successor has been elected and
has qualified, or until such director's death, retirement, disqualification,
resignation or removal. The Board of Directors shall be and is divided into
three (3) classes, designated Class I, Class II and Class III. Class I directors
shall consist of three (3) directors who shall hold office until the annual
meeting of the stockholders in 1996. Class II directors shall consist of three
(3) directors who shall hold office until the annual meeting of stockholders in
1997. Class III directors shall consist of three (3) directors who shall hold
office until the annual meeting of stockholders in 1998. Upon expiration of the
terms of the office of directors as classified above, their successors shall be
elected for the term of three (3) years each. Each director shall hold office
until the annual meeting of the stockholders for year in which his term expires
and until his or her successor shall be elected and qualify, subject, however,
to prior death, resignation, retirement, disqualification or removal from
office.
Section 2. Vacancies. If the office of any director becomes vacant by
reason of death, resignation, disqualification, removal or other cause, a
majority of the directors remaining in office, although less than a quorum, may
elect a successor for the unexpired term and until his or her successor is
elected and qualified.
Section 3. Regular Meetings. Regular meetings of the Board of Directors
shall be held at such place or places, on such date or dates, and at such time
or times as shall have been established by the Board of Directors and publicized
among all directors. A notice of each regular meeting shall not be required.
Section 4. Special Meetings. Special meetings of the Board of Directors
may be called by one-third (1/3) of the directors then in office (rounded up to
the nearest whole number) or by the chairman and shall be held at such place, on
such date and at such time as they or he or she shall fix. Notice of the place,
date and time of each such special meeting shall be given each director by whom
it is not waived by mailing written notice not less than five (5) days before
the meeting or by telegraphing or telexing or by facsimile transmission of the
same not less than twenty-four (24) hours before the meeting. Unless otherwise
indicated in the notice thereof, any and all business may be transacted at a
special meeting.
17
<PAGE> 6
Section 5. Quorum. At any meeting of the Board of Directors, a majority
of the total number of the whole Board shall constitute a quorum for all
purposes. If a quorum shall fail to attend any meeting, a majority of those
present may adjourn the meeting to another place, date or time, without further
notice or waiver thereof.
Section 6. Participation in Meetings by Conference Telephone. Members of
the Board of Directors, or of any committee thereof, may participate in a
meeting of such Board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other and such participation shall constitute presence in
person at such meeting. However, this Section 6 and the means of holding Board
meetings authorized hereunder shall not apply to Board meetings required to be
held in person by the Investment Company Act of 1940, as amended.
Section 7. Conduct of Business. At any meeting of the Board of
Directors, business shall be transacted in such order and manner as the Board
may from time to time determine, and all matters shall be determined by the vote
of a majority of the directors present, except as otherwise provided herein or
required by law. Action may be taken by the Board of Directors without a meeting
if all members thereof consent thereto in writing, and the writing or writings
are filed with the minutes of proceedings of the Board of Directors. However,
the Board shall not take action by consent and without a meeting if the
provisions of the Investment Company Act of 1940, as amended, would otherwise
require the meeting to be held in person.
Section 8. Powers. The Board of Directors may, except as otherwise
required by law, exercise all such powers and do all such acts and things as may
be exercised or done by the Corporation, including, without limiting the
generality of the foregoing, the unqualified power:
(a) To declare dividends from time to time in accordance with
law;
(b) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
(c) To authorize the creation, making and issuance, in such form
as it may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary in
connection therewith;
(d) To remove any officer of the Corporation with or without
cause, and from time to time to devolve the powers and duties of any
officer upon any other person for the time being;
(e) To confer upon any officer of the Corporation the power to
appoint, remove and suspend subordinate officers, employees and agents;
(f) To adopt from time to time such stock, option, stock
purchase, bonus or other compensation plans for directors, officers,
employees and agents of the Corporation and its subsidiaries as it may
determine;
18
<PAGE> 7
(g) To adopt from time to time such insurance, retirement and
other benefit plans for directors, officers, employees and agents of the
Corporation and its subsidiaries as it may determine; and
(h) To adopt from time to time regulations, not inconsistent
with these Bylaws, for the management of the Corporation's business and
affairs.
Section 9. Compensation of Directors. Directors, as such, may receive,
pursuant to resolution of the Board of Directors, fixed fees and other
compensation for their services as directors, including, without limitation,
their services as members of committees of the Board of Directors.
ARTICLE III
COMMITTEES
Section 1. Committees of the Board of Directors. The Board of Directors,
by a vote of a majority of the whole Board, may from time to time designate
committees of the Board, with such lawfully delegable powers and duties as it
thereby confers, to serve at the pleasure of the Board and shall, for those
committees and any others provided for herein, elect a director or directors to
serve as the member or members, designating, if it desire, other directors as
alternate members who may replace any absent or disqualified member at any
meeting of the committee. Any committee so designated may exercise the power and
authority of the Board of Directors to declare a dividend, to authorize the
issuance of stock or to adopt a certificate of ownership and merger pursuant to
Section 253 of the Delaware General Corporation Law if the resolution which
designates the committee or a supplemental resolution of the Board of Directors
shall so provide. In the absence or disqualification of any member of any
committee and any alternate member in his or her place, the member or members of
the committee present at the meeting and not disqualified from voting, whether
or not he or she or they constitute a quorum, may by unanimous vote appoint
another member of the Board of Directors to act at the meeting in the place of
the absent or disqualified member.
Section 2. Conduct of Business. Each committee may determine the
procedural rules for meeting and conducting its business and shall act in
accordance therewith, except as otherwise provided herein or required by law.
Adequate provision shall be made for notice to members of all meetings; a
majority of the members shall constitute a quorum unless the committee shall
consist of one (1) or two (2) members, in which event one (1) member shall
constitute a quorum; and all matters shall be determined by a majority vote of
the members present. Action may be taken by any committee without a meeting if
all members thereof consent thereto in writing, and the writing or writings are
filed with the minutes of the proceedings of such committee.
ARTICLE IV
OFFICERS
Section 1. Generally. The officers of the corporation shall consist of a
Chairman of the Board, a President, an Executive Vice President, one or more
Vice Presidents, a Secretary, a Treasurer and such other officers as may from
time to time be appointed by the Board of
19
<PAGE> 8
Directors. Officers shall be elected by the Board of Directors, which shall
consider that subject at its first meeting after every annual meeting of
stockholders. Each officer shall hold office until his or her successor is
elected and qualified or until his or her earlier resignation or removal. Any
number of offices may be held by the same person.
Section 2. President. The President shall be the chief executive officer
of the Corporation. Subject to the provisions of these Bylaws and to the
direction of the Board of Directors, he or she shall have the responsibility for
the general management and control of the business and affairs of the
Corporation and shall perform all duties and have all powers which are commonly
incident to the office of chief executive or which are delegated to him or her
by the Board of Directors. He or she shall have power to sign all stock
certificates, contracts and other instruments of the Corporation which are
authorized and shall have general supervision and direction of all of the other
officers, employees and agents of the Corporation.
Section 3. Vice President. Each Vice President shall have such powers
and duties as may be delegated to him or her by the Board of Directors. One (1)
Vice President shall be designated by the Board to perform the duties and
exercise the powers of the President in the event of the President's absence or
disability, provided that if there shall be only one Vice President, that Vice
President shall perform the duties and exercise the powers of the President in
the event of the President's absence or disability.
Section 4. Treasurer. The Treasurer shall have the responsibility for
maintaining the financial records of the Corporation. He or she shall make
disbursements of the funds of the Corporation as are authorized and shall render
from time to time an account of all such transactions and of the financial
condition of the Corporation. The Treasurer shall also perform such other duties
as the Board of Directors may from time to time prescribe.
Section 5. Secretary. The Secretary shall issue all authorized notices
for, and shall keep minutes of, all meetings of the stockholders and the Board
of Directors. He or she shall have charge of the corporate books and shall
perform such other duties as the Board of Directors may from time to time
prescribe.
Section 6. Designation of Authority. The Board of Directors may from
time to time delegate the powers or duties of any officer to any other officers
or agents, notwithstanding any provision hereof.
Section 7. Removal. Any officer of the Corporation may be removed at
any time, with or without cause, by the Board of Directors.
Section 8. Action with Respect to Securities of Other Corporations.
Unless otherwise directed by the Board of Directors, the President or an officer
of the Corporation authorized by the President shall have power to vote and
otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of stockholders of or with respect to any action of stockholders of any
other corporation in which this Corporation may hold securities and otherwise to
exercise any and all rights and powers which this Corporation may possess by
reason of its ownership of securities in such other corporation.
20
<PAGE> 9
ARTICLE V
STOCK
Section 1. Certificates of Stock. Each stockholder shall be entitled to
a certificate signed by, or in the name of the Corporation by, the President or
a Vice President, and by the Secretary or an Assistant Secretary, or the
Treasurer or an Assistant Treasurer, certifying the number of shares owned by
him or her. Any or all of the signatures on the certificate may be by facsimile.
Section 2. Transfers of Stock. Transfers of stock shall be made only
upon the transfer books of the Corporation kept at an office of the Corporation
or by transfer agents designated to transfer shares of the stock of the
Corporation. Except where a certificate is issued in accordance with Section 4
of Article V of these Bylaws, an outstanding certificate for the number of
shares involved shall be surrendered for cancellation before a new certificate
is issued therefor.
Section 3. Record Date. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders, or
to receive payment of any dividend or other distribution or allotment of any
rights or to exercise any rights in respect of any change, conversion or
exchange of stock or for the purpose of any other lawful action, the Board of
Directors may fix a record date, which record date shall not precede the date on
which the resolution fixing the record date is adopted and which record date
shall not be more than sixty (60) days nor less than ten (10) days before the
date of any meeting of shareholders, nor more than sixty (60) days prior to the
time for such other action as hereinbefore described; provided, however, that if
no record date is fixed by the Board of Directors, the record date for
determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given or, if notice is not waived, at the close of business
on the day next preceding the day on which the meeting is held, and, for
determining stockholders entitled to receive payment of any dividend or other
distribution or allotment of rights or to exercise any rights of change,
conversion or exchange of stock or for any other purpose, the record date shall
be at the close of business on the day on which the Board of Directors adopts a
resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Section 4. Lost, Stolen or Destroyed Certificates. In the event of the
loss, theft or destruction of any certificate of stock, another may be issued in
its place pursuant to such regulations as the Board of Directors may establish
concerning the giving of a satisfactory bond or bonds of indemnity.
Section 5. Regulations. The issue, transfer, conversion and registration
of certificates of stock shall be governed by such other regulations as the
Board of Directors may establish.
21
<PAGE> 10
ARTICLE VI
NOTICES
Section 1. Notices. Except as otherwise specifically provided herein or
required by law, all notices required to be given to any stockholder, director,
officer, employee or agent shall be in writing and may in every instance be
effectively given by hand delivery to the recipient thereof, by depositing such
notice in the mails, postage paid, or by sending such notice by pre-paid
telegram or mailgram. Any such notice shall be addressed to such stockholder,
director, officer, employee or agent at his or her last known address as the
same appears on the books of the Corporation. The time when such notice is
received, if hand delivered, or dispatched, if delivered through the mails or by
telegram or mailgram, shall be the time of the giving of the notice.
Section 2. Waivers. A written waiver of any notice, signed by a
stockholder, director, officer, employee or agent, whether before or after the
time of the event for which notice is to be given, shall be deemed equivalent to
the notice required to be given to such stockholder, director, officer, employee
or agent. Neither the business nor the purpose of any meeting need be specified
in such a waiver.
ARTICLE VII
MISCELLANEOUS
Section 1. Facsimile Signatures. In addition to the provisions for use
of facsimile signatures elsewhere specifically authorized in these Bylaws,
facsimile signatures of any officer or officers of the Corporation may be used
whenever and as authorized by the Board of Directors or a committee thereof.
Section 2. Corporate Seal. The Board of Directors may provide a suitable
seal, containing the name of the Corporation, which seal shall be in the charge
of the Secretary. If and when so directed by the Board of Directors or a
committee thereof, duplicates of the seal may be kept and used by the Treasurer
or by an Assistant Secretary or Assistant Treasurer.
Section 3. Reliance upon Books, Reports and Records. Each director, each
member or any committee designated by the Board of Directors, and each officer
of the Corporation shall, in the performance of his or her duties, be fully
protected in relying in good faith upon the books of account or other records of
the Corporation and upon such information, opinions, reports or statements
presented to the Corporation by any of its officers or employees, or committees
of the board of Directors so designated, or by any other person as to matters
which such director or committee member reasonably believes are within such
other person's professional or expert competence or who has been selected with
reasonable care by or on behalf of the Corporation.
Section 4. Fiscal Year. The fiscal year of the Corporation shall be as
fixed by the Board of Directors.
22
<PAGE> 11
Section 5. Time Periods. In applying any provision of these Bylaws which
requires that an act be done or not be done a specified number of days prior to
an event or that an act be done during a period of a specified number of days
prior to an event, calendar days shall be used, the day of the doing of the act
shall be excluded, and the day of the event shall be included.
ARTICLE VIII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1. Right to Indemnification. Each person who was or is made a
party or is threatened to be made a party to or is otherwise involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or she
is or was a director or an officer of the Corporation or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan
(hereinafter an "indemnitee") , whether the basis of such proceeding is alleged
action in an official capacity as a director, officer, employee or agent or in
any other capacity while serving as a director, officer, employee or agent,
shall be indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation broader indemnification rights than
such law permitted the Corporation to provide prior to such amendment), against
all expense, liability and loss (including attorneys' fees, judgments, fines,
ERISA excise taxes and or penalties and amounts paid in settlement) reasonably
incurred or suffered by such indemnitee in connection therewith; provided,
however, that, except as provided in Section 3 of this Article VIII with respect
to proceedings to enforce rights to indemnification, the Corporation shall
indemnify any such indemnitee in connection with a proceeding (or part thereof)
initiated by such indemnitee only if such proceeding (or part thereof) was
authorized by the Board of Directors of the Corporation. The right of
indemnification provided for in this Section 1 is subject to the limitation
provided in Section 7 and elsewhere in this Article VIII.
Section 2. Right to Advancement of Expenses. The right to indemnification
conferred in Section 1 of this Article VIII shall include the right to be paid
by the Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition (hereinafter an "advancement of expenses");
provided, however, that an advancement of expenses incurred by an indemnitee in
his or her capacity as a director or officer (and not in any other capacity in
which service was or is rendered by such indemnitee, including, without
limitation, service to an employee benefit plan) shall be made only (i) upon
delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by
or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal (hereinafter a "final adjudication") that such
indemnitee is not entitled to be indemnified for such expenses under this
section 2 or otherwise, (ii) if the Corporation shall be insured against any
such advances or (iii) if a majority of a quorum of the disinterested, non-party
directors of the Corporation, or an independent legal counsel in a written
opinion, shall determine, based on a review of readily available facts (as
opposed to a full trial-type inquiry), that there is reason to believe that the
indemnitee ultimately will be found entitled to
23
<PAGE> 12
indemnification. The rights to indemnification and to the advancement of
expenses conferred in Sections 1 and 2 of this Article VIII shall be contract
rights and such rights shall continue as to an indemnitee who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
indemnitee's heirs, executors and administrators.
Section 3. Right of Indemnitee to Bring Suit. If a claim under Section 1
or 2 of this Article VIII is not paid in full by the Corporation within sixty
(60) days after a written claim has been received by the Corporation, except in
the case of a claim for an advancement of expenses, in which case the applicable
period shall be twenty (20) days, the indemnitee may at any time thereafter
bring suit against the Corporation to recover the unpaid amount of the claim. If
successful in whole or in part in any such suit, or in a suit brought by the
Corporation to recover an advancement of expenses pursuant to the terms of the
undertaking, the indemnitee shall be entitled to be paid also the expense of
prosecuting or defending such suit. In
(a) any suit brought by the indemnitee to enforce a right to
indemnification hereunder (but not in a suit brought by the indemnitee
to enforce a right to an advancement of expenses) it shall be a defense
that, and
(b) in any suit brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the
Corporation shall be entitled to recover such expenses upon final
adjudication that,
the indemnitee has not met any applicable standard for indemnification set forth
in the Delaware General Corporation Law or Section 7 of this Article VIII.
Neither the failure of the Corporation (including its Board of Directors,
independent legal counsel or its stockholders) to have made a determination
prior to the commencement of such suit that indemnification of the indemnitee is
proper in the circumstances because the indemnitee has met the applicable
standard of conduct set forth in the Delaware General Corporation Law and
Section 7 of this Article VIII, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or brought by the Corporation to recover an advancement of expenses pursuant to
the terms of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to such advancement of expenses, under this
Article VIII or otherwise, shall be on the corporation.
Section 4. Non-Exclusivity of Rights. The rights to indemnification and
to the advancement of expenses conferred in this Article VIII shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, the Corporation's Certificate of Incorporation, Bylaws,
agreement, vote of stockholders or disinterested directors or otherwise.
Section 5. Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether
24
<PAGE> 13
or not the Corporation would have the power to indemnify such person against
such expense, liability or loss under the Delaware General Corporation Law;
provided, however, that no insurance may be obtained for the purpose of
indemnifying any disabling conduct, as defined in Section 7 of this Article
VIII.
Section 6. Indemnification of Employees and Agents of the Corporation.
The Corporation may, to the extent authorized from time to time by the Board of
Directors, grant rights to indemnification and to the advancement of expenses to
any employee or agent of the Corporation to the fullest extent of the provisions
of this Article with respect to the indemnification and advancement of expenses
of directors and officers of the Corporation.
Section 7. Limitation for Disabling Conduct. Notwithstanding any of the
foregoing, the Corporation may not indemnify any director or officer of the
Corporation against any liability to the corporation or its security holders to
which such director or officer might otherwise be subject by reason of
"disabling conduct," as hereinafter defined.
(a) In the case of a director or officer of the Corporation,
such determination shall include a determination that the liability for
which such indemnification is sought did not arise by reason of such
person's disabling conduct. Such determination may be based on:
(i) a final decision on the merits by a court or other
body before whom the action, suit or proceeding was brought that
the person to be indemnified was not liable by reason of
disabling conduct, or
(ii) in the absence of such a decision, a reasonable
determination, based on a review of the facts, that the person
to be indemnified was not liable by reason of such person's
disabling conduct by
(A) the vote of majority of a quorum of
directors who are disinterested, non-party directors,
or
(B) an independent legal counsel in a written
opinion.
In making such determination, such disinterested, non-party directors or
independent legal counsel, as the case may be, may deem the dismissal
for insufficiency of evidence of any disabling conduct of either a court
action or an administrative proceeding against a person to be
indemnified to provide reasonable assurance that such person was not
liable by reason of disabling conduct.
(b) For the purpose of this Section:
(i) "disabling conduct" of a director or officer shall
mean such person's willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of the office;
25
<PAGE> 14
(ii) "disinterested, non-party director" shall mean a
director of the Corporation who is neither an "interested
person" of the Corporation as defined in Section 2(a)(19) of
the Investment Company Act of 1940 nor a party to the action,
suit or proceeding in connection with which indemnification is
sought;
(iii) "independent legal counsel" shall mean a lawyer
who is not, and at least two (2) years prior to his engagement
to render the opinion in question has not been, employed or
retained by the Corporation, by any investment advisor to or
the principal underwriter for the Corporation, or by any person
affiliated with any of the foregoing; and
(iv) "the Corporation" shall include any wholly-owned
subsidiary of the corporation and, in addition to the resulting
Corporation, any constituent Corporation (including any
constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors,
officers, employees or agents.
ARTICLE IX
AMENDMENTS
These Bylaws may be amended or repealed by the Board of Directors at any
meeting or by the stockholders at any meeting.
THE AMENDED AND RESTATED BY-LAWS WERE ADOPTED AS OF DECEMBER 16, 1998.
26
<PAGE> 1
MACC PRIVATE EQUITIES INC.
INVESTMENT ADVISORY AGREEMENT
This INVESTMENT ADVISORY AGREEMENT dated as of March 1, 1998 (the
"Agreement") by MACC Private Equities Inc., a company organized under the laws
of the State of Delaware ("the Company"), and InvestAmerica Investment Advisors,
Inc., a corporation organized under the laws of the State of Delaware
("InvestAmerica").
WHEREAS, the Company is a closed-end investment company that may be
operated and regulated as a business development company ("Business Development
Company") as defined in the Investment Company Act of 1940, as amended (the
"ICA");
WHEREAS, the Company is in need of certain investment advisory services
in order to carry on its business;
WHEREAS, InvestAmerica is registered as an investment advisor under the
Investment Advisers Act of 1940, as amended.
NOW THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the parties hereto agree as follows:
Section 1. Definitions.
1.1 "Affiliate" shall have the meaning given under Rule 144 of the
Securities Act of 1933, as amended.
1.2 "Assets Under Management" shall mean the total value of the
Company's assets managed by InvestAmerica under this Agreement averaged over the
prior one year period.
1.3 "Capital Losses" are those which are placed, consistent with
generally accepted accounting principles, on the books of the Company and which
occur when:
(a) An actual or realized loss is sustained owing to Portfolio
Company or investment events including, but not limited to,
liquidation, sale or bankruptcy;
(b) The Board of Directors of the Company determines that a
loss or depreciation in value from the value on the date of this
Agreement should be taken by the Company in accordance with generally
accepted accounting principles and SBA accounting regulations and is
shown on its books as a part of the periodic valuation of the Portfolio
Companies by the Board of Directors ("Unrealized Depreciation"); or
(c) Capital Losses are adjusted for reverses of depreciation
when the Board of Directors determines that a value should be adjusted
upward and the investment value remains at or below original cost.
28
<PAGE> 2
For purposes of this definition, in any case where the Board of Directors of the
Company writes down the value of any investment in the Company's portfolio (in
accordance with the standards set forth in subsection 1.3(b) above), (i) such
reduction in value shall result in a new cost basis for such investment and (ii)
the most recent cost basis for such investment shall thereafter be used in the
determination of any Realized Capital Gains or Capital Losses in the Company's
portfolio (i.e., there shall be no double-counting of losses when a security
(whose value has declined in a prior period) is ultimately sold at a price below
its historical cost.)
1.4 "The Company" shall mean MACC Private Equities Inc.
1.5 "ICA" has the meaning set forth in the first recital hereof.
1.6 "Iowa Fund" has the meaning set forth in Section 3.2 below.
1.7 "MACC" shall mean MorAmerica Capital Corporation.
1.8 "Net Capital Gains" shall mean Realized Capital Gains net of
Capital Losses determined in accordance with generally accepted accounting
principles.
1.9 "Other Venture Capital Funds" has the meaning set forth in
subsection 3.3(c).
1.10 "Portfolio Company" or "Portfolio Companies" shall mean any entity
in which a the Company may make an investment and with respect to which
InvestAmerica will be providing services pursuant hereto, which investments may
include ownership of capital stock, loans, receivables due from a Portfolio
Company or other debtor on sale of assets acquired in liquidation and assets
acquired in liquidation of any Portfolio Company.
1.11 "Realized Capital Gains" shall mean capital gains after deducting
the cost and expenses necessary to achieve the gain (e.g., broker's fees). For
purposes of this Agreement, capital gains are Realized Capital Gains upon the
cash sale of the capital stock or assets of a Portfolio Company or any other
asset or item of property managed by InvestAmerica pursuant to the terms hereof
or any Realized Capital Gain has occurred in accordance with GAAP which is not
cash as described in the following sentence. Realized Capital Gains other than
cash gains, shall be recorded and calculated in the period the gain is realized;
however in determining payment of any incentive fee, the payment shall be made
when the cash is received. The amount of the fee earned on gains other than cash
shall be recorded as incentive fees payable on the financial statements of the
Company.
1.12 "SBA" shall mean the United States Small Business Administration.
1.13 "SEC" shall mean the United States Securities and Exchange
Commission.
Section 2. Investment Advisory Engagement. The Company hereby engages
InvestAmerica as its investment advisor.
2.1 As such, InvestAmerica will:
29
<PAGE> 3
(a) Manage, render advice with respect to, and make decisions
regarding the acquisition and disposition of securities in accordance
with applicable law and the Company's investment policies as set forth
in writing by the Board of Directors, to include (without limitation)
the search and marketing for investment leads, screening and research
of investment opportunities, maintenance and expansion of a co-investor
network, review of appropriate investment legal documentation,
presentations of investments to the Company's Board of Directors (when
and as required) closing of investments, monitoring and management of
investments and exits, preparation of valuations, management of
relationships with the SEC, shareholders, outside auditors and the
provision of other services appropriate to the management of a business
development company;
(b) Make available and, if requested by Portfolio Companies or
entities in which the Company is proposing to invest, render managerial
assistance to, and exercise management rights in, such Portfolio
Companies and entities as appropriate to maximize return for the
Company and to comply with regulations;
(c) Maintain office space and facilities to the extent
required by InvestAmerica to provide adequate management services to
the Company;
(d) Maintain the books of account and other records and files
for the Company but not to include auditing services; and
(e) Report to the Company's Board of Directors, or to any
committee or officers acting pursuant to the authority of the Board, at
such reasonable times and in such reasonable detail as the Board deems
appropriate in order to enable the Company to determine that investment
policies are being observed and implemented and that InvestAmerica's
obligations hereunder are being fulfilled. Any investment program
undertaken by InvestAmerica pursuant hereto and any other activities
undertaken by InvestAmerica on behalf of the Company shall at all times
be subject to applicable law and any directives of the Company's Board
of Directors or any duly constituted committee or officer acting
pursuant to the authority of the Company's Board of Directors.
2.2 InvestAmerica will be responsible for the following expenses: its
staff salaries and fringes, office space, office equipment and furniture,
communications, travel, meals and entertainment, conventions, seminars, office
supplies, dues and subscriptions, hiring fees, moving expenses, repair and
maintenance, employment taxes, in-house accounting expenses and minor
miscellaneous expenses.
InvestAmerica will pay for its own account all expenses incurred in
rendering the services to be rendered hereunder. Without limiting the generality
of the foregoing, InvestAmerica will pay the salaries and other employee
benefits of the persons in its organization whom it may engage to render such
services, including without limitation, persons in its organization who may from
time to time act as officers of the Company.
30
<PAGE> 4
Notwithstanding the foregoing, InvestAmerica will earn incentive
compensation on a quarterly basis, which shall not be deemed part of
compensation or other employee benefits for the purpose of this paragraph.
2.3 In connection with the services provided, InvestAmerica will not be
responsible for the following expenses which shall be the sole responsibility of
the Company and will be paid promptly by the Company: auditing fees; all legal
expenses; legal fees normally paid by Portfolio Companies; National Association
of Small Business Investment Companies and other appropriate trade association
fees; brochures, advertising, marketing and publicity costs; interest on SBA or
other debt; fees to the Company and its directors and Board fees; any fees owed
or paid to the Company its Affiliates or fund managers; any and all expenses
associated with property of a Portfolio Company taken or received by the Company
or on its behalf as a result of its investment in any Portfolio Company; all
reorganization and registration expenses of the Company; the fees and
disbursements of the Company's counsel, accountants, custodian, transfer agent
and registrar; fees and expenses incurred in producing and effecting filings
with federal and state securities administrators; costs of periodic reports to
and other. communications with the Company's shareholders; fees and expenses of
members of the Company's Boards of Directors who are not InvestAmerica's
directors, officers or employees or of any entity which is an Affiliate of
InvestAmerica; premiums for the fidelity bond, if any, maintained by
InvestAmerica pursuant to ICA Section 17; premiums for directors and officers
insurance maintained by the Company; and all transaction costs incident to the
acquisition, management and protection of and disposition of securities by the
Company.
Section 3. Nonexclusive Obligations; Co-investments.
3.1 The obligations of InvestAmerica to the Company are not exclusive.
InvestAmerica and its Affiliates, may in their discretion, manage other venture
capital funds and render the same or similar services to any other person or
persons who may be making the same or similar investments. The parties
acknowledge that InvestAmerica may offer the same investment opportunities as
may be offered to the Company to other persons for whom InvestAmerica is
providing services. Neither InvestAmerica nor any of its Affiliates shall in any
manner be liable to the Company or its Affiliates by reason of the activities of
InvestAmerica or its Affiliates on behalf of other persons and funds as
described in this paragraph and any conflict of interest arising therefrom is
hereby expressly waived.
3.2 InvestAmerica Venture Group, Inc. ("Venture Group") has managed
MACC in the past. Venture Group is also currently the General Partner of
InvestAmerica Venture Group L.P. which in turn is the General Partner of the
Iowa Venture Capital Fund L.P. (the "Iowa Fund"). Because of these
relationships, Venture Group manages the affairs of the Iowa Fund.
3.3 For the benefit of the Company's investment activities,
InvestAmerica and its Affiliates intend to maintain various future co-investment
relationships involving the Company which will include the following
co-investments opportunities for as long as InvestAmerica is an investment
adviser to the Company:
31
<PAGE> 5
(a) The Company will continue to review and to invest in its
current coinvestments with the Iowa Fund.
(b) The Company will be accorded the opportunity to invest in
all investment opportunities found by the Iowa Fund or any future
successor or continuation fund of the Iowa Fund.
(c) In the future, the Company will be accorded the
opportunity to review and to invest in all investments found by other
venture capital funds managed by InvestAmerica and its Affiliates
(collectively, the "Other Venture Capital Funds").
For purposes of this Section 3.3, where the Company has an opportunity
to coinvest with the Iowa Fund or Other Venture Capital Funds, investment
opportunities shall be offered to the Company and the Iowa Fund or the Other
Venture Capital Funds, as the case may be, (a) in the same proportion as its
private capital (as defined in the SBA regulations) bears to the total private
capital of the Company and the Iowa Fund or the Other Venture Capital Funds, as
the case maybe, in the aggregate or (b) in such other manner as is otherwise
agreed upon by the Company and the Iowa Fund or the Other Venture Capital Funds,
as the case may be. Notwithstanding this Section 3.3, the terms of any
applicable exemptive order obtained by the Company will control as to the terms
of co-investments with the Iowa Fund and the Other Capital Venture Funds.
3.4 InvestAmerica will cause to be offered to the Company opportunities
to acquire or dispose of securities as provided in the co-investment guidelines
summarized in the section of the Company's SEC Registration Statement entitled
"Investment Objectives and Policies -- Co-Investment Guidelines." Except to the
extent of acquisitions and dispositions that, in accordance with such
co-investment guidelines, require the specific approval of the Company's Board
of Directors, InvestAmerica is authorized to effect acquisitions and
dispositions of securities for the Company's account in InvestAmerica's
discretion. Where such approval is required, InvestAmerica is authorized to
effect acquisitions and dispositions for the Company's account upon and to the
extent of such approval. The Company will put InvestAmerica in funds whenever
InvestAmerica requires funds for an acquisition of securities in accordance with
the foregoing, and the Company will cause to be delivered in accordance with
InvestAmerica's instructions any securities disposed of in accordance with the
foregoing.
3.5 Should InvestAmerica or any of its Affiliates agree to perform or
undertake any investment management services described in Section 3.1 for any
funds or persons in addition to the Iowa Fund, InvestAmerica will notify the
Company, in writing, not later than the commencement of such agreement or the
initial provision of such services.
3.6 Any such investment management services and all co-investments
shall at all times be provided in strict accordance with rules and regulations
under the ICA, any exemptive order obtained thereunder and the rules and
regulations of the SBA.
Section 4. Services to Portfolio Companies.
32
<PAGE> 6
4.1 It is acknowledged that as a part of the services to be provided by
InvestAmerica hereunder, certain of its employees, representatives and agents
will act as members of the board of directors of individual Portfolio Companies,
will vote the shares of the capital stock of Portfolio Companies, and make other
decisions which may effect the near-and the long-term direction of a Portfolio
Company. Unless otherwise restricted hereafter by the Company in writing, in
regard to such actions and decisions the Company hereby appoints InvestAmerica
(and such officers, Directors, employees, representatives and agents is it shall
designate) as its proxy, as a result of which InvestAmerica shall have the
authority, in its performance of this Agreement, to make decisions and to take
such actions, without specific authority from the Board of Directors of the
Company, as to all matters which are not hereby restricted.
4.2 All fees, including Director's fees that may be paid by or for the
account of an entity in which the Company has invested or in which the Company
is proposing to invest in connection with an investment transaction in which the
Company participates or provides managerial assistance, will be treated as
commitment fees or management fees and will be received by the Company, pro rata
to its participation in such transaction. InvestAmerica will be allowed to be
reimbursed by Portfolio Companies for all direct expenses associated with due
diligence and management of portfolio investments or investment opportunities
(travel, meals, lodging, etc.).
4.3 InvestAmerica's sole and exclusive compensation for its services to
be rendered hereunder will be in the form of a management fee and a separate
incentive fee as provided in Section 5. Should any officer or director of
InvestAmerica serve as a member of the Board of Directors of the Company, such
officer or director of InvestAmerica shall not receive compensation as a member
of the Board of Directors of the Company.
Section 5. Management and Incentive Fees.
5.1 During the term of this Agreement, the Company will pay
InvestAmerica monthly in arrears a management fee equal to 2.5% per annum of the
Assets Under Management. The Management fee shall be calculated on a
non-consolidated basis, excluding MACC.
5.2 During the term of this Agreement the Company shall pay to
InvestAmerica an incentive fee determined as specified in this Section 5.2. The
incentive fee shall be calculated on a nonconsolidated basis, excluding MACC.
(a) The incentive fee shall be calculated as follows:
(i) The amount of the fee shall be 13.4% of the Net
Capital Gains, before taxes, resulting from the disposition of
investments in the Company's Portfolio Companies or resulting
from the disposition of other assets or property of the
Company managed by InvestAmerica pursuant to the terms hereof.
(ii) Net Capital Gains, before taxes, shall be
calculated annually at the end of each fiscal year for the
purpose of determining the earned incentive fee, unless this
Agreement is terminated prior to the completion of any fiscal
year, then such
33
<PAGE> 7
calculation shall be made at the end of such shorter period. A
preliminary calculation shall be made on the last business day
of each of the three fiscal quarters preceding the end of each
fiscal year for the purpose of determining the incentive fee
payable under Section 5.2(c)(i) below. Capital Losses and
Realized Capital Gains shall not be cumulative (i.e., no
Capital Losses nor Realized Capital Gains are carried forward
into any subsequent fiscal year).
(iii) Notwithstanding anything herein to the
contrary, the incentive fee shall not be computed on any
assets received by the Company from the Company's predecessors
by merger, MorAmerica Financial Corporation and Morris Plan
Liquidation Company, and such assets shall not be included in
any calculation of Net Capital Gains.
(b) Upon termination of this Agreement, all earned but unpaid
incentive fees shall be immediately due and payable.
(c) Payment of incentive fees shall be made as follows:
(i) To the extent payable, incentive fees shall be
paid, in cash, in arrears on the last business day of each
fiscal quarter in the fiscal year.
(ii) The incentive fee shall be retroactively
adjusted as soon as practicable following completion of the
valuations at the end of each fiscal year in which this
Agreement is in effect to reflect the actual incentive fee due
and owing to InvestAmerica, and if such adjustment reveals
that InvestAmerica has received more incentive fee income than
it is entitled to hereunder, InvestAmerica shall promptly
reimburse the Company for the amount of the excess.
Section 6. Liability and Indemnification of InvestAmerica.
6.1 Neither InvestAmerica, nor any of its officers, directors,
shareholders, employees, agents or Affiliates, whether past, present or future
(collectively, the "Indemnified Parties"), shall be liable to the Company, or
any of its Affiliates for any error in judgment or mistake of law made by the
Indemnified Parties in connection with any investment made by or for the
Company, provided such error or mistake was made in good faith and was not made
in bad faith or as a result of gross negligence or willful misconduct of the
Indemnified Parties. The Company confirms that in performing services hereunder
InvestAmerica will be an agent of the Company for the purpose of the
indemnification provisions of the Bylaws of the Company subject, however, to the
same limitations as though InvestAmerica were a director or officer of the
Company. InvestAmerica shall not be liable to the Company, its shareholders or
its creditors, except for violations of law or for conduct which would preclude
InvestAmerica from being indemnified under such provisions. The provisions of
this Section 6.1 shall be applicable to any act or omission or occurrence
arising under the Management Agreement between the Company and InvestAmerica's
Affiliate, InvestAmerica Venture Group, Inc., dated as of May 13, 1985 and all
amendments and renewals thereto. In the addition, the provisions of this Section
6.1 shall survive termination of this Agreement.
34
<PAGE> 8
6.2 Individuals who are Affiliates of InvestAmerica and are also
officers or directors of the Company as well as other InvestAmerica officers
performing duties within the scope of this Agreement on behalf of the Companies
will be covered by any directors and officers insurance policy maintained by the
Company.
Section 7. Shareholder Approval; Term.
The Company represents that this Agreement has been approved by the
Company's Board of Directors. This Agreement shall continue in effect for two
years from the date hereof; provided, however, that this Agreement shall not
take effect if as of the date hereof, the shareholders of the Company shall not
have approved this Agreement in the manner set forth in Section 15(a) of the
ICA. Thereafter, this Agreement shall continue in effect so long as such
continuance is specifically approved at least annually by Board of Directors,
including a majority of its members who are not interested persons of
InvestAmerica, or by vote of the holders of a majority, as defined in the ICA,
of the Company's outstanding voting securities. The foregoing notwithstanding,
this Agreement may be terminated by the Company at any time, without payment of
any penalty, on 60 days' written notice to InvestAmerica if the decision to
terminate has been made by the Board of Directors or by vote of the holders of a
majority, as defined in the ICA, of the Company's outstanding voting securities.
InvestAmerica may also terminate this Agreement on 60 days' written notice to
the Company; provided, however, that InvestAmerica may not so terminate this
Agreement unless another investment advisory agreement has been approved by the
vote of a majority, as defined in the ICA, of the Company's outstanding shares
and by the Board of Directors, including a majority of members who are not
parties to such agreement or interested persons of any such party. Upon receipt
of any such notice from InvestAmerica, the Company will in good faith use its
best efforts to cause an advisory agreement to be entered into by the Company
with a suitable investment adviser.
Section 8. Assignment.
This Agreement may not be assigned by any party without the written
consent of the other and any assignment, as defined in the ICA, by InvestAmerica
shall automatically terminate this Agreement.
Section 9. Amendments.
This Agreement may be amended only by an instrument in writing executed
by all parties.
Section 10. Governing Law.
This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Iowa.
Section 11. Termination of Prior Agreement
35
<PAGE> 9
If as of the date hereof, this Agreement shall have been approved by
the shareholders of the Company as set forth in Section 7 hereof, then as of the
date hereof, the MACC Private Equities Inc. Investment Advisory Agreement, dated
as of October 1, 1994, between the Company and InvestAmerica, as previously
amended, shall be terminated and shall be of no further force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to
be effective as of the date first above written.
MACC PRIVATE EQUITIES INC.
By /s/ David R. Schroder
---------------------
Title President
---------
INVESTAMERICA INVESTMENT
ADVISORS, INC.
By /s/ Robert A. Comey
-------------------
Title Executive Vice President
------------------------
36
<PAGE> 1
MORAMERICA CAPITAL CORPORATION
INVESTMENT ADVISORY AGREEMENT
This INVESTMENT ADVISORY AGREEMENT dated as of March 1, 1998 (the
"Agreement") by MorAmerica Capital Corporation, a corporation organized under
the laws of the State of Iowa ("MACC"), and InvestAmerica Investment Advisors,
Inc., a corporation organized under the laws of the State of Delaware
("InvestAmerica").
WHEREAS, MACC is licensed as a small business investment company
("SBIC") under the Small Business Investment Act of 1958, as amended, and
operates as a business development company under the Investment Company Act of
1940, as amended (the "ICA"); and
WHEREAS, MACC is in need of certain investment advisory services in
order to carry on its business;
WHEREAS, InvestAmerica is registered as an investment advisor under the
Investment Advisers Act of 1940, as amended.
NOW THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the parties hereto agree as follows:
Section 1. Definitions.
1.1 "Affiliate" shall have the meaning given under Rule 144 of the
Securities Act of 1933, as amended.
1.2 "Assets Under Management" shall mean the total value of MACC's
assets Managed by InvestAmerica under this Agreement.
1.3 "Capital Losses" are those which are placed, consistent with
generally accepted accounting principles, on the books of MACC and which occur
when:
(a) An actual or realized loss is sustained owing to Portfolio
Company or investment events including, but not limited to,
liquidation, sale or bankruptcy;
(b) The Board of Directors of MACC determines that a loss or
depreciation in value from the value on the date of this Agreement
should be taken by MACC in accordance with generally accepted
accounting principles and SBA accounting regulations and is shown on
its books as a part of the periodic valuation of the Portfolio
Companies by the Board of Directors; or
(c) Capital Losses are adjusted for reverses of depreciation
when the Board of Directors determines that a value should be adjusted
upward and the investment value remains at or below original cost.
38
<PAGE> 2
For purposes of this definition, in any case where the Board of
Directors of MACC writes down the value of any investment in MACC's portfolio
(in accordance with the standards set forth in subsection 1.3(b) above), (i)
such reduction in value shall result in a new cost basis for such investment and
(ii) the most recent cost basis of such investment shall thereafter be used in
the determination of any Realized Capital Gains or Capital Losses in MACC's
portfolio (i.e., there shall be no double-counting of losses when a security
(whose value has declined in a prior period) is ultimately sold at a price below
its historical cost).
1.4 "Capital Under Management" shall mean MACC's (i) fiscal year end
Private Capital as defined in the SBA regulations as of the date hereof (which
regulations define Private Capital to exclude unrealized capital gains and
losses) ("Private Capital"); plus (ii) fiscal year end SBA leverage as defined
by SBA regulations as of the date hereof, including participating securities as
defined in Section 303(g) of the Small Business Investment Act of 1958, as
amended; plus (iii) fiscal year end Undistributed Realized Earnings.
1.5 "ICA" has the meaning set forth in the first recital hereof.
1.6 "Iowa Fund" has the meaning set forth in Section 3.2 below.
1.7 "MACC" shall mean MorAmerica Capital Corporation.
1.8 "Net Capital Gains" shall mean Realized Capital Gains net of
Capital Losses determined in accordance with generally accepted accounting
principles.
1.9 "Other Venture Capital Funds" has the meaning set forth in
subsection 3.3(c).
1.10 "Portfolio Company" or "Portfolio Companies" shall mean any
entity in which MACC may make an investment and with respect to which
InvestAmerica will be providing services pursuant hereto, which investments may
include ownership of capital stock, loans, receivables due from a Portfolio
Company or other debtor on sale of assets acquired in liquidation and assets
acquired in liquidation of any Portfolio Company.
1.11 "Private Capital" has the meaning set forth in the definition of
Capital Under Management in Section 1.4 above.
1.12 "Realized Capital Gains" shall mean capital gains after deducting
the cost and expenses necessary to achieve the gain (e.g., broker's fees). For
purposes of this Agreement:
(a) Capital gains are Realized Capital Gains upon the cash
sale of the capital stock or assets of a Portfolio Company or any other
asset or item of property managed by InvestAmerica pursuant to the
terms hereof or any Realized Capital Gain has occurred in accordance
with GAAP which is not cash as described in Subsection 1.12(c) below;
(b) With regard to all assets owned by MACC prior to the
mergers of MorAmerica Financial Corporation and Morris Plan Liquidation
Company into the
39
<PAGE> 3
Company, the historical cost of such assets shall be
the basis for determining any Realized Capital Gains on the disposition
thereof, and
(c) Realized Capital Gains other than cash gains shall be
recorded and calculated in the period the gain is realized; however, in
determining payment of any incentive fee, the payment shall be made
when the cash is received. The amount of the fee earned on gains other
than cash shall be recorded as incentive fees payable on the financial
statements of MACC.
1.13 "SBA" shall mean the United States Small Business Administration,
or any successor thereto, which has regulatory authority over SBICs.
1.14 "SBIC" has the meaning set forth in the first recital hereof.
1.15 "SEC" shall mean the United States Securities and Exchange
Commission.
1.16 "The Company" shall mean MACC Private Equities Inc. and "the
Companies" shall mean MACC Private Equities Inc. and MACC.
1.17 "Venture Group" has the meaning set forth in Section 3.2 below.
Section 2. Investment Advisory Engagement. MACC hereby engages
InvestAmerica as its investment advisor.
2.1 As such, InvestAmerica will:
(a) Manage, render advice with respect to, and make decisions
regarding the acquisition and disposition of securities in accordance
with applicable law and MACC's investment policies as set forth in
writing by the Board of Directors, to include (without limitation) the
search and marketing for investment leads, screening and research of
investment opportunities, maintenance and expansion of a co-investor
network, review of appropriate investment legal documentation,
presentations of investments to MACC's Board of Directors (when and as
required), closing of investments, monitoring and management of
investments and exits, preparation of valuations, management of
relationships with the SEC, shareholders, the SBA and its auditors and
outside auditors and the provision of other services appropriate to the
management of an SBIC operating as a business development company;
(b) Make available and, if requested by Portfolio Companies or
entities in which MACC is proposing to invest, render managerial
assistance to, and exercise management rights in, such Portfolio
Companies and entities as appropriate to maximize return for MACC and
to comply with regulations;
(c) Maintain office space and facilities to the extent
required by InvestAmerica to provide adequate management services to
MACC;
40
<PAGE> 4
(d) Maintain the books of account and other records and files
for MACC but not to include auditing services; and
(e) Report to MACC's Board of Directors, or to any committee
or officers acting pursuant to the authority of the Board, at such
reasonable times and in such reasonable detail as the Board deems
appropriate in order to enable MACC to determine that investment
policies are being observed and implemented and that InvestAmerica's
obligations hereunder are being fulfilled. Any investment program
undertaken by InvestAmerica pursuant hereto and any other activities
undertaken by InvestAmerica on behalf of MACC shall at all times be
subject to applicable law and any directives of MACC's Board of
Directors or any duly constituted committee or officer acting pursuant
to the authority of MACC's Board of Directors.
2.2 InvestAmerica will be responsible for the following expenses: its
staff salaries and fringes, office space, office equipment and furniture,
communications, travel, meals and entertainment, conventions, seminars, office
supplies, dues and subscriptions, hiring fees, moving expenses, repair and
maintenance, employment taxes, in-house accounting expenses and minor
miscellaneous expenses.
InvestAmerica will pay for its own account all expenses incurred in
rendering the services to be rendered hereunder. Without limiting the generality
of the foregoing, InvestAmerica will pay the salaries and other employee
benefits of the persons in its organization whom it may engage to render such
services, including without limitation, persons in its organization who may from
time to time act as officers of MACC.
Notwithstanding the foregoing, InvestAmerica will earn incentive
compensation on a quarterly basis, which shall not be deemed part of
compensation or other employee benefits for the purpose of this paragraph.
2.3 In connection with the services provided, InvestAmerica will not be
responsible for the following expenses which shall be the sole responsibility of
MACC and will be paid promptly by MACC: auditing fees; all legal expenses; legal
fees normally paid by Portfolio Companies; National Association of Small
Business Investment Companies and other appropriate trade association fees;
brochures, advertising, marketing and publicity costs; interest on SBA or other
debt; fees to MACC directors and board fees; any fees owed or paid to MACC, its
Affiliates or fund managers; any and all expenses associated with property of a
Portfolio Company taken or received by MACC or on its behalf as a result of its
investment in any Portfolio company; all reorganization and registration
expenses of MACC; the fees and disbursements of MACC's counsel, accountants,
custodian, transfer agent and registrar; fees and expenses incurred in producing
and effecting filings with federal and state securities administrators; costs of
periodic reports to and other communications with the Company's shareholders;
fees and expenses of members of MACC's Boards of Directors who are not
InvestAmerica's directors, officers or employees or of any entity which is an
Affiliate of InvestAmerica; premiums for the fidelity bond, if any, maintained
by InvestAmerica pursuant to ICA Section 17; premiums for directors and officers
insurance maintained by MACC; and all
41
<PAGE> 5
transaction costs incident to the acquisition, management, protection and
disposition of securities by MACC.
Section 3. Nonexclusive Obligations; Co-investments.
3.1 The obligations of InvestAmerica to MACC are not exclusive.
InvestAmerica and its Affiliates may, in their discretion, manage other venture
capital funds and render the same or similar services to any other person or
persons who may be making the same or similar investments. The parties
acknowledge that InvestAmerica may offer the same investment opportunities as
may be offered to MACC to other persons for whom InvestAmerica is providing
services. Neither InvestAmerica nor any of its Affiliates shall in any manner be
liable to MACC or its Affiliates by reason of the activities of InvestAmerica or
its Affiliates on behalf of other persons and funds as described in this
paragraph and any conflict of interest arising therefrom is hereby expressly
waived.
3.2 InvestAmerica Venture Group, Inc. ("Venture Group") has managed
MACC in the past. Venture Group is also currently the General Partner of
InvestAmerica Venture Group L.P. which in turn is the General Partner of the
Iowa Venture Capital Fund L.P. (the "Iowa Fund"). Because of these
relationships, Venture Group manages the affairs of the Iowa Fund.
3.3 For the benefit of MACC's investment activities, InvestAmerica and
its Affiliates intend to maintain various future co-investment relationships
involving the Company which will include the following co-investments
opportunities for as long as InvestAmerica is an investment adviser to MACC:
(a) MACC will continue to review and to invest in its current
coinvestments with the Iowa Fund.
(b) MACC will be accorded the opportunity to invest in all
investment opportunities found by the Iowa Fund or any future successor
or continuation fund of the Iowa Fund.
(c) In the future, MACC will be accorded the opportunity to
review and to invest in all investments found by other venture capital
funds managed by InvestAmerica and its Affiliates (collectively, the
"Other Venture Capital Funds").
For purposes of this Section 3.3, where the Companies have an
opportunity to co-invest with the Iowa Fund or Other Venture Capital Funds,
investment opportunities shall be offered to the Companies and the Iowa Fund or
the Other Venture Capital Funds, as the case may be, (a) in the same proportion
as its Private Capital bears to the total Private Capital of the Companies and
the Iowa Fund or the Other Venture Capital Funds, as the case may be, in the
aggregate, or (b) in such other manner as is otherwise agreed upon by the
Companies and the Iowa Fund or the Other Venture Capital Funds, as the case may
be. Notwithstanding this Section 3.3, the terms of any applicable exemptive
order obtained by the Companies will control as to the terms of co-investments
with the Iowa Fund and the Other Capital Venture Funds.
42
<PAGE> 6
3.4 InvestAmerica will cause to be offered to MACC opportunities to
acquire or dispose of securities as provided in the co-investment guidelines
summarized in the section of the Company's SEC Registration Statement entitled
"Investment Objectives and Policies - Co-Investment Guidelines." Except to the
extent of acquisitions and dispositions that, in accordance with such
co-investment guidelines, require the specific approval of MACC's Board of
Directors, InvestAmerica is authorized to effect acquisitions and dispositions
of securities for MACC's account in InvestAmerica's discretion. Where such
approval is required, InvestAmerica is authorized to effect acquisitions and
dispositions for MACC's account upon and to the extent of such approval. MACC
will put InvestAmerica in funds whenever InvestAmerica requires funds for an
acquisition of securities in accordance with the foregoing, and MACC will cause
to be delivered in accordance with InvestAmerica's instructions any securities
disposed of in accordance with the foregoing.
3.5 Should InvestAmerica or any of its Affiliates agree to perform or
undertake any investment management services described in paragraph 3.1 for any
funds or persons in addition to the Iowa Fund, InvestAmerica will notify MACC,
in writing, not later than the commencement of such agreement or the initial
provision of such services.
3.6 Any such investment management services and all co-investments
shall at all times be provided in strict accordance with rules and regulations
under the ICA, any exemptive order obtained thereunder and the rules and
regulations of the SBA.
Section 4. Services to Portfolio Companies.
4.1 It is acknowledged that as a part of the services to be provided by
InvestAmerica hereunder, certain of its employees, representatives and agents
will act as members of the board of directors of individual Portfolio Companies,
will vote the shares of the capital stock of Portfolio Companies, and make other
decisions which may effect the near- and the long-term direction of a Portfolio
Company. Unless otherwise restricted hereafter by MACC in writing, in regard to
such actions and decisions MACC hereby appoints InvestAmerica (and such
officers, Directors, employees, representatives and agents is it shall
designate) as its proxy, as a result of which InvestAmerica shall have the
authority, in its performance of this Agreement, to make decisions and to take,
without specific authority from the Board of Directors of MACC, as to all
matters which are not hereby restricted.
4.2 All fees, including director's fees that may be paid by or for the
account of an entity in which MACC has invested or in which MACC is proposing to
invest in connection with an investment transaction in which MACC participates
or provides managerial assistance, will be treated as commitment fees or
management fees and will be received by MACC, pro rata to its participation in
such transaction. InvestAmerica will be allowed to be reimbursed by Portfolio
Companies for all direct expenses associated with due diligence and management
of portfolio investments or investment opportunities (travel, meals, lodging,
etc.).
4.3 InvestAmerica's sole and exclusive compensation for its services to
be rendered hereunder will be in the form of a management fee and a separate
incentive fee as provided in Section 5. Should any officer or director of
InvestAmerica serve as a member of the Board of
43
<PAGE> 7
Directors of MACC, such officer or director of InvestAmerica shall not receive
compensation as a member of the Board of Directors of MACC.
Section 5. Management and Incentive Fees.
5.1 During the term of this Agreement, MACC will pay InvestAmerica
monthly in arrears a management fee equal to 2.5% per annum of the Capital Under
Management, but in no event more than 2.5% per annum. of the Assets Under
Management.
5.2 During the term of this Agreement MACC shall pay to InvestAmerica
an incentive fee determined as specified in this Section 5.2.
(a) The incentive fee shall be calculated as follows:
(i) The amount of the fee shall be 13.4% of the Net
Capital Gains, before taxes, resulting from the disposition of
investments in MACC's Portfolio Companies or resulting from the
disposition of other assets or property of MACC managed by
InvestAmerica pursuant to the terms hereof.
(ii) Net Capital Gains, before taxes, shall be
calculated annually at the end of each fiscal year for the
purpose of determining the earned incentive fee, unless this
Agreement is terminated prior to the completion of any fiscal
year, then such calculation shall be made at the end of such
shorter period. A preliminary calculation shall be made on the
last business day of each of the three fiscal quarters
preceding the end of each fiscal year for the purpose of
determining the incentive fee payable under Section 5.2(c)(i)
below. Capital Losses and Realized Capital Gains shall not be
cumulative (i.e., no Capital Losses nor Realized Capital Gains
are carried forward into any subsequent fiscal year).
(iii) Notwithstanding anything herein to the contrary,
the assets on which the incentive fee shall be calculated shall
include all assets owned by MACC prior to the time of the
mergers of MorAmerica Financial Corporation and Morris Plan
Liquidation Company into the Company.
(b) Upon termination of this Agreement, all earned but unpaid
incentive fees shall be immediately due and payable.
(c) Payment of incentive fees shall be made as follows:
(i) To the extent payable, the incentive fee shall be
paid, in cash, in arrears by the last business day of each
fiscal quarter in the fiscal year. The incentive fee shall be
retroactively adjusted as soon as practicable following
completion of valuations at the end of each fiscal year in
which this Agreement is in effect to reflect the actual
incentive fee due and owing to InvestAmerica, and if such
adjustment reveals that InvestAmerica has received more
incentive fee income
44
<PAGE> 8
than it is entitled to hereunder, InvestAmerica shall promptly
reimburse MACC for the amount of such excess.
(ii) In the event MACC earns any incentive fees, the
payment of which would cause MACC's Private Capital to be 25%
or more impaired, the portion of such fees which causes the
impairment shall be paid by MACC into a trust or escrow account
established by MACC for the benefit of InvestAmerica. Fees from
such account shall be released to InvestAmerica at such time
as, and to the extent that, MACC's Private Capital is no longer
so impaired.
Section 6. Liability and Indemnification of InvestAmerica.
6.1 Neither InvestAmerica, nor any of its officers, directors,
shareholders, employees, agents or Affiliates, whether past, present or future
(collectively, the "Indemnified Parties"), shall be liable to MACC, or any of
MACC's Affiliates for any error in judgment or mistake of law made by the
Indemnified Parties in connection with any investment made by or for MACC,
provided such error or mistake was made in good faith and was not made in bad
faith or as a result of gross negligence or willful misconduct of the
Indemnified Parties. MACC confirms that in performing services hereunder
InvestAmerica will be an agent of MACC for the purpose of the indemnification
provisions of the Bylaws of MACC subject, however, to the same limitations as
though InvestAmerica were a director or officer of MACC. InvestAmerica shall not
be liable to MACC, its shareholders or its creditors, except for violations of
law or for conduct which would preclude InvestAmerica from being indemnified
under such provisions. The provisions of this Section 6.1 shall be applicable to
any act or omission or occurrence arising under the Management Agreement between
MACC and InvestAmerica's Affiliate, InvestAmerica Venture Group, Inc., dated as
of May 13, 1985 and all amendments and renewals thereto. In addition, the
provisions of this Section 6.1 shall survive termination of this Agreement.
6.2 Individuals who are Affiliates of InvestAmerica and are also
officers or directors of MACC as well as other InvestAmerica officers performing
duties within the scope of this Agreement on behalf of MACC will be covered by
any directors and officers insurance policy maintained by MACC.
Section 7. Shareholder Approval; Term.
MACC represents that this Agreement has been approved by MACC's Board
of Directors. This Agreement shall continue in effect for two years from the
date hereof, provided, however, that this Agreement shall not take effect if as
of the date hereof the shareholders of MACC Private Equities Inc. and the sole
shareholder of MACC shall not have approved this Agreement in the manner set
forth in Section 15(a) of the ICA. Thereafter, this Agreement shall continue in
effect so long as such continuance is specifically approved at least annually by
MACC's Board of Directors, including a majority of its members who are not
interested persons of InvestAmerica, or by vote of the holders of a majority, as
defined in the ICA, of MACC's outstanding voting securities. The foregoing
notwithstanding, this Agreement may be terminated by MACC at any time, without
payment of any penalty, on 60 days' written notice to
45
<PAGE> 9
InvestAmerica if the decision to terminate has been made by the Board of
Directors or by vote of the holders of a majority, as defined in the ICA, of
MACC's outstanding voting securities. InvestAmerica may also terminate this
Agreement on 60 days' written notice to MACC; provided, however, that
InvestAmerica may not so terminate this Agreement unless another investment
advisory agreement has been approved by the vote of a majority, as defined in
the ICA, of MACC's outstanding shares and by the Board of Directors, including a
majority of members who are not parties to such agreement or interested persons
of any such party.
Section 8. Assignment.
This Agreement may not be assigned by any party without the written
consent of the other and any assignment, as defined in the ICA, by InvestAmerica
shall automatically terminate this Agreement.
Section 9. Amendments.
This Agreement may be amended only by an instrument in writing
executed by all parties.
Section 10. Governing Law.
This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Iowa.
Section 11. Termination of Prior Agreement.
If as of the date hereof, this Agreement shall have been approved by
the Shareholders of MACC Private Equities, Inc. and the sole shareholder of
MACC, as set forth in Section 7 hereof, then as of the date hereof, the
MorAmerica Capital Corporation Investment Advisory Agreement dated as of October
1, 1994, between MACC and InvestAmerica, as previously amended, shall be
terminated and shall be of no further force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to
be effective as of the date first above written,
MORAMERICA CAPITAL CORPORATION
By /s/ David R. Schroder
---------------------
Title President
---------
INVESTAMERICA INVESTMENT
ADVISORS, INC.
By /s/ Robert A. Comey
-------------------
Title Executive Vice President
------------------------
46
<PAGE> 1
FIRST AMENDMENT TO AGREEMENT
This First Amendment to Agreement (this "First Amendment") is made this
29th day of April, 1998, among and between Zions Bancorporation, a Utah
corporation ("Bancorporation"), Zions First National Bank, a national banking
association ("Bank" or "Investor"), and MACC Private Equities Inc., a Delaware
corporation ("Parent"). Capitalized terms used but not defined herein shall have
their respective meanings set forth in that certain Agreement (the "Agreement"),
dated May 13, 1996, between Bancorporation and Parent.
WHEREAS, pursuant to the Agreement, Parent contributed certain assets
to MorAmerica Capital Corporation, a wholly-owned subsidiary of the Parent which
is incorporated under the laws of the State of Iowa and is licensed to operate
as a small business investment company (the "SBIC"), and Bancorporation
purchased 20,000 shares of Common Stock from Parent;
WHEREAS, Section 10 of the Agreement provides that, without the prior
approval of Parent's Board of Directors, Investor shall not make any purchase of
Common Stock if after giving effect to such purchase Investor would own in
excess of 25% of the outstanding shares of the Common Stock;
WHEREAS, on June 14, 1996, all of the shares of Common Stock
beneficially owned by Investor were transferred to the Bank pursuant to Section
14 of the Agreement and Bank was substituted for Bancorporation as Investor
under the Agreement;
WHEREAS, as of January 15, 1998, Investor beneficially owned
approximately 222,888 shares of the Common Stock, representing approximately
21.43% of the issued and outstanding shares; and
WHEREAS, Investor, Bancorporation and Parent wish to amend the
Agreement by making Bancorporation a party thereto and by amending Section 10 of
the Agreement, on the terms set forth in this First Amendment.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Amendment of Section 10. From and after the date of this First
Amendment, the first sentence of Section 10 of the Agreement shall be removed in
its entirety and replaced with the following:
Investor agrees that, without the prior approval of Parent's
Board of Directors, it will not, directly or indirectly, purchase or
otherwise acquire any Common Stock if: (i) after giving effect to such
purchase or other acquisition, Investor would own in excess of 35% of
Parent's outstanding Common Stock; or (ii) Parent shall provide written
notice to Investor that such purchase or other acquisition by Investor
would cause the Common Stock not to satisfy any applicable condition
for continued inclusion on any stock market
48
<PAGE> 2
or inter-dealer quotation system on which shares of the Common Stock
are then listed for trading or are traded, including, without
limitation, The Nasdaq Stock Market National Market System. Parent and
Investor hereby acknowledge and agree that, for purposes of monitoring
compliance with clause (ii) of the preceding sentence, Parent shall
rely on copies of Amendments to Schedule 13D, Forms 4, and Forms 5
provided by Investor to Parent pursuant to applicable federal
securities laws.
2. Substitution of Bank. The parties hereby acknowledge and agree that
from and after June 14, 1996, the Bank has been and shall continue to be
substituted for Investor in the Agreement; provided, however, that with respect
to the first sentence of Section 10 as amended herein, "Investor" shall mean
Bancorporation and Bank in the aggregate, and Bancorporation shall be a party to
the Agreement.
3. Effect on Agreement. Except as otherwise amended in this First
Amendment, all terms and conditions of the Agreement shall continue in full
force and effect.
4. Execution in Counterparts. This First Amendment may be executed in
counterparts, each of which shall be an original, with the same effect as if the
signatures had been on the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed
by their respective officers thereunto duly authorized, all as of the date first
above written.
ZIONS BANCORPORATION
By /s/ Dale M. Gibbons
-------------------
Title CFO
---
ZIONS FIRST NATIONAL BANK
By /s/ W. David Hemingway
----------------------
Title Executive Vice President
------------------------
MACC PRIVATE EQUITIES INC.
By /s/ David R. Schroder
---------------------
Title President
---------
49
<PAGE> 1
EXHIBIT 13
FINANCIAL HIGHLIGHTS
FISCAL 1998 WAS AN EXCEPTIONAL YEAR WITH SUCCESS IN OPERATING RESULTS AND
INCREASED MARKET VALUE, LIQUIDITY AND PORTFOLIO GROWTH.
<TABLE>
<CAPTION>
$ IN THOUSANDS, EXCEPT PER SHARE DATA
--------------------
Total Assets
--------------------
AT YEAR END SEPTEMBER 30 1998 1997 % CHANGE
<S> <C> <C> <C>
Total Assets $31,295 25,995 20%
Total Stockholder Equity 19,528 15,380 27% [GRAPH]
Net Assets Per Share 15.67 12.33(1) 27%
FOR THE YEAR --------------------
Net Assets Per Share
--------------------
Total Income $ 2,682 1,798 49%
Net Investment Income/(Expense) 622 (253) NA
Net Realized Gain on Investments 1,566 952 64% [GRAPH]
Net Change in Unrealized Appreciation/ 2,554 (2,200) NA
(Depreciation) on Investments
Net Change in Net Assets 4,157 (1,501) NA
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
STOCK PRICES(1),(2) $ Per Share
- --------------------------------------------------------------------------------
1998 1997
QUARTER HIGH LOW HIGH LOW
------- ----- ---- ----- ----
<S> <C> <C> <C> <C>
First 8.59 7.40 7.77 7.20 [GRAPH]
Second 7.92 6.67 8.33 7.77
Third 9.50 8.88 8.96 8.33
Fourth 11.00 9.00 8.33 7.50
</TABLE>
(1) Restated to reflect a 20% stock split effected in the form of a stock
dividend on March 31, 1998.
(2) Closing bid price per share.
NA/Non-applicable due to 1997 negative number.
MACC PRIVATE EQUITIES INC. 1
<PAGE> 2
TO OUR SHAREHOLDERS
FISCAL 1998 SAW MACC SURPASS ITS OWN EXPECTATIONS. As we proposed at our
February 1998 annual meeting, management's primary goals were to enhance
shareholder value and to execute MACC's long-term strategic plan to optimize the
value of both the fund and its national portfolio of promising small businesses.
We are pleased to report that we exceeded our projected year-end Net Asset Value
Per Share and also exceeded our fiscal 1998 investment level objective. In all,
fiscal 1998 was an exceptional year with success in operating results, increased
market value, liquidity and portfolio growth.
SHARPLY HIGHER OPERATING RESULTS WERE ACHIEVED as Net Investment Income grew by
$865,195 to $621,928 in fiscal 1998 compared with a ($253,367) expense in fiscal
1997. Benefitting from valuation increases within our maturing portfolio and
favorable market conditions characterized by increased availability of senior
debt, buyout and equity funding, MACC earned the majority of its fiscal 1998
gains from three portfolio companies and significant appreciation from a fourth
portfolio company. As a result, our Net Change in Assets from Operations rose
significantly to $4,157,490 in fiscal 1998, as compared to ($1,501,298) in
fiscal 1997. On a per share basis, Net Asset Value Per Share rose by 27% to
$15.67 at September 30, 1998 from $12.33 at September 30, 1997, after giving
effect to a 20% stock split effected in the form of a stock dividend paid in
March 1998.
MACC INCREASED MARKET VALUE when its Market Bid Price Per Share increased from
$8.02 at fiscal 1997 year-end (after giving effect to a 20% stock split effected
in the form of a stock dividend paid in March 1998) to $10.75 at fiscal 1998
year-end. At fiscal 1998 year-end, MACC's market capitalization totaled
$13,554,513 based on the average of the closing bid and asked prices on
September 30, 1998, an increase of $3,402,650, or 34%, over fiscal 1997 year-end
total market capitalization.
OUR LIQUIDITY WAS ENHANCED in fiscal 1998 when we secured a portion of our
future investment needs, including capital to rollover existing leverage, thanks
to $18,290,000 in five-year leverage commitments from the SBA. Overall, as you
know, our ability to invest is influenced by our cash position, cash earnings
and availability of SBIC leverage.
WE EXCEEDED OUR FISCAL 1998 INVESTMENT GOAL OF $7,000,000 by 7.5% despite
increased competition from an expanding venture capital industry. We are proud
to report that since 1995 we have invested $26,539,000, an amount that exceeds
the total volume of portfolio investments during the prior ten-year period. We
are pleased with this investment performance because it is the engine that will
drive future earnings growth. In 1998, we invested capital in seven new
companies increasing the portfolio to thirty-two companies at the end of fiscal
1998.
LOOKING AHEAD, our liquidity is sound, deal flow and strategy are strong and we
are guided by an experienced management team and Board. Barring a severe
economic downturn or unexpected portfolio events, the natural maturity and
planned growth of our portfolio should support MACC's prospects for continued
growth and profitability in fiscal 1999 and beyond.
Your management and board
are indebted to the support of our
shareholders and portfolio companies.
/s/ DAVID SCHRODER
------------------------------
David Schroder,
President
/s/ PAUL M. BASS
----------------------------
Paul M. Bass, Jr.,
Chairman
MACC PRIVATE EQUITIES INC. 2
<PAGE> 3
CORPORATE PROFILE
[GRAPHIC]
MACC'S MISSION IS TO BUILD SUBSTANTIAL SHAREHOLDER VALUE BY ACHIEVING...
CONSISTENT LATER STAGE VENTURE CAPITAL RETURNS with REDUCED RISK DUE TO THE
GEOGRAPHIC AND INDUSTRY MAKEUP OF THE PORTFOLIO AND OUR EXPERIENCED MANAGEMENT
TEAM, and LONG TERM CORPORATE GROWTH SUPPORTED BY RETAINED EARNINGS AND SBIC
LEVERAGE IN ORDER TO CONTINUE TO MAINTAIN A STRONG POSITION IN MACC'S
TRADITIONAL NATIONAL MID-MARKET NICHE.
MACC PRIVATE EQUITIES INC.
MACC Private Equities Inc. (Nasdaq NMS: MACC) is a Delaware corporation and the
parent of MorAmerica Capital Corporation. Additionally, MACC is a business
development company (BDC). MACC's wholly owned subsidiary, MorAmerica Capital
Corporation, conducts all of its venture investing. MACC's primary goal is to
create long term appreciation of shareholder value based upon successful
management of venture capital activities.
MORAMERICA CAPITAL CORPORATION
Founded in 1959, MorAmerica Capital is also one of the nation's oldest and most
well known small business investment companies (SBIC), federally licensed under
the Small Business Investment Act of 1958. Celebrating its 40th Anniversary,
MorAmerica Capital generally invests from $1,000,000 to $2,000,000 in growth and
later stage manufacturing, service and distribution businesses with annual sales
typically from $5,000,000 to $40,000,000. These growth and buyout investments
are in the form of Subordinated Debt or Preferred Stock with Warrants or Common
Stock. Since 1980, MorAmerica Capital has provided equity financing of over
$57,000,000 to more than ninety companies and plays a significant role in the
syndication of equity financing for middle market growth and later stage
ventures. [LOGO]
INVESTAMERICA INVESTMENT ADVISORS, INC.
MACC and MorAmerica Capital are managed by InvestAmerica, an investment advisor
organized in 1985 with more than $40,000,000 in assets under management.
Collectively, the three InvestAmerica principals have over sixty years of
venture capital investment experience.
MACC PRIVATE EQUITIES INC. 3
<PAGE> 4
SUCCESS IN PROVIDING EQUITY FOR AMERICA'S FUTURE
IN FISCAL 1998, MACC PRIVATE EQUITIES INC., ACHIEVED STRONG LEVELS OF GROWTH IN
ITS NET INVESTMENT INCOME, TOTAL ASSETS AND NET ASSETS PER SHARE.
<TABLE>
<CAPTION>
- ------------------------------- ------------------------------- -----------------------------------------
TOTAL ASSETS NET ASSET VALUE PER SHARE(1) MARKET BID PRICE PER SHARE(1)
- ------------------------------- ------------------------------- -----------------------------------------
<S> <C> <C>
[GRAPH] [GRAPH] [GRAPH]
Total Assets grew by $5,299,102 Net asset growth resulted MACC's 1998 year end Market Bid
for an increase of 20.4%. in a 27.1% one-year growth in Price Per Share continued its third
Net Asset Value Per Share. consecutive annual rise with a fiscal
1998 increase of 34.0%.
</TABLE>
<TABLE>
- -------------------------------- ------------------------------- -----------------------------------------
STOCK PRICE AS A PERCENTAGE ANNUAL INVESTMENT
OF NET ASSET VALUE PER SHARE(1) CAPITAL INVESTED INCOME/(EXPENSE), NET
- -------------------------------- ------------------------------- -----------------------------------------
<S> <C> <C>
[GRAPH] [GRAPH] [GRAPH]
At fiscal year end 1998, MACC was The fiscal year 1998 capital Net Investment Income improved
able to sustain a continued annual invested of $7,521,781 exceeded significantly from an expense of ($253,367)
reduction in the gap between Market MACC's goal by 7.5%. in fiscal 1997 to an income of $621,928
Bid Price and Net Asset Value Per Share. in fiscal 1998.
</TABLE>
(1)Restated to reflect stock splits effected in the form of stock dividends paid
in March of 1998 and 1997.
4 MACC PRIVATE EQUITIES INC.
<PAGE> 5
THE FOLLOWING GRAPH COMPARES THE SEMI-ANNUAL PERCENTAGE change in cumulative
stockholder return on MACC's Common Stock since March 3, 1995 (the day on which
shares of MACC's Common Stock commenced public trading), with the cumulative
total return over the same period of (i) the Nasdaq Stock Market Total Return
Index (U.S. Companies); (ii) the Nasdaq Financial Stocks Total Return Index; and
(iii) a peer group selected in good faith by MACC composed of the following nine
business development companies or other funds known by MACC to have similar
investment objectives to MACC: Allied Capital Corporation (ALLC), American
Capital Strategies (ACAS), Brantley Capital Corporation (BBDC), Capital
Southwest Corporation (CSWC), Harris & Harris Group, Inc. (HHGP), Rand Capital
Corporation (RAND), Sirrom Capital Corporation (SIR), Waterside Capital
Corporation (WSCC) and Winfield Capital Corporation (WCAP) (the "Peer Group").
In the graph, the comparison assumes $100 was invested on March 3, 1995, in
shares of MACC's Common Stock and in each of the indices. The comparison is
based upon the closing market bid price for shares of MACC's Common Stock, and
assumes the reinvestment of all dividends, if any. The returns of each of the
companies in the Peer Group are weighted according to the respective company's
stock market capitalization at the beginning of each period for which a return
is indicated.
COMPARISON OF CUMULATIVE TOTAL RETURN OF MACC,
PEER GROUP AND BROAD MARKET
$ dollars
<TABLE>
<CAPTION>
_______________FISCAL YEAR ENDING________________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMPANY/INDEX/MARKET 3/03/95 3/31/95 9/30/95 3/31/96 9/30/96 3/31/97 9/30/97 3//31/98 9/30/98
MACC Private Equities Inc. 100.00 169.23 226.92 269.23 319.23 355.42 327.92 360.64 438.10
Peer Group Index 100.00 100.44 127.81 158.89 100.19 200.89 245.72 302.13 155.10
NASDAQ Market Index 100.00 104.74 127.68 132.50 146.24 145.34 200.47 220.14 203.53
NASDAQ Financial Stocks 100.00 100.95 124.61 139.06 154.26 178.77 242.92 277.24 224.57
</TABLE>
MACC PRIVATE EQUITIES INC. 5
<PAGE> 6
INVESTING IN AMERICA'S FUTURE
MIDWESTERN ELECTRONICS, INC.
[GRAPHIC]
Since purchasing Midwestern Electronics, Inc., in 1991, CEO David Anderson has
grown revenues for this Olathe, Kansas, full service provider of electronic
manufacturing services (EMS), from $800,000 in revenues to nearly $30 million. -
Anderson recognized that Midwestern's ability to maintain its competitive edge
required an equity partner to help the company manage its growth both internally
and through acquisition. In mid-1998, he turned to MorAmerica Capital as one of
his equity partners to achieve his corporate vision for Mid-western. -
MorAmerica Capital has been instrumental, together with two venture
co-investors, in raising $3,500,000 in equity financing needed to support
Midwestern's acquisition strategy as well as long-term internal growth. -
MorAmerica Capital is working to provide Midwestern with equity partners
experienced in middle market manufacturing, with a reputation for offering
value-added management support and the proven ability to raise long-term capital
to fund growth.
MILES MEDIA GROUP, INC.
[GRAPHIC]
In early 1990, MorAmerica Capital helped capitalize Miles Media Group, Inc., a
company formed to acquire the assets of a visitor magazine publisher based in
Sarasota, Florida, and use economies of scale and technology to consolidate the
visitor magazine industry. - The first challenge, however, for the newly formed
company occurred in 1992. Significant progress had been made, but a flat tourism
economy and additional time needed to implement some of its programs resulted in
a need for additional capital. The company had a negative net worth, was still
losing money, and its original bank had pulled out. MorAmerica Capital worked
with management to recapitalize the company and provided expertise at a time
when its survival was in question. Specifically, MorAmerica Capital found senior
lender sources, restructured its own investment and recommended a consultant
with industry expertise who has since become an investor and board member. -
Miles Media Group, Inc. today publishes 23 "SEE Visitor Magazines" (21 in
Florida), Florida's official annual Vacation Guide, Florida's largest tourism
website (FLAUSA.com) and 20 other Florida visitor magazines. With its compliment
of visitor magazines now including Massachusetts and New York, both in print and
on the Web, the company has generated an average annual compound revenue growth
of about 20%. MorAmerica Capital continues to be represented on its Board of
Directors and is active in the strategic planning of the company. [GRAPHIC]
6 MACC PRIVATE EQUITIES INC.
<PAGE> 7
MACC PRIVATE EQUITIES INC.
Q & A
Q: Could you explain the interactions between MACC Private Equities Inc.,
MorAmerica Capital Corporation and InvestAmerica Investment Advisors, Inc.?
A: MACC Private Equities Inc. owns MorAmerica Capital Corporation.
InvestAmerica Investment Advisors, Inc. manages MACC Private Equities Inc.
and its subsidiary MorAmerica Capital.
Q: How would you describe MACC's management team and Board of Directors?
A: InvestAmerica principals have over sixty years of SBIC management
experience, which brings a level of deal flow, co-investor relationships,
and portfolio management capabilities usually only found in larger funds.
Our Board compliments InvestAmerica with broad and strategic support. MACC
has been fortunate to attract Board persons experienced in investment
banking, manufacturing, retailing, early stage venture capital and
commercial banking. This breadth and depth of operating and strategic
experience helps to keep MACC competitive in such key areas as access to
capital, deal flow and exit execution. Board members own approximately 8.7%
of the company. Of the board members, the two InvestAmerica principals are
the two largest shareholders. It is important to note that all management
and Board shares were purchased on the open market.
Q: What is your industry and where does MACC fit in it?
A: MACC is a venture capital investor. The venture capital industry is broadly
described nationally as including approximately 800 private venture capital
partnerships and about 320 Small Business Investment Companies (SBICs).
MACC invests through its wholly owned subsidiary, MorAmerica Capital which
is an SBIC. Chronologically, MorAmerica Capital is the fifth oldest active
SBIC.
Q: What differentiates you from your competition?
A: Even though MACC has been publicly traded for only a few years, it is not a
new fund. MorAmerica Capital has been investing since 1959. We have a
40-year history of being a licensed SBIC and are well known and respected
within the industry. That's a real strength. MorAmerica Capital is a
corporation not a limited partnership and has the staying power of being a
corporation. Finally, MACC is one of a small group of publicly traded
venture funds.
Q: Where do you receive most of your investment capital?
A: MorAmerica Capital is an SBIC. Under its SBIC license, MorAmerica Capital
is able to borrow at attractive terms and leverage its equity capital. We
plan to borrow up to two times our equity base. We are about one-to-one
right now, so we have available leverage borrowing capacity. Our second
capital source has been retained earnings. We reinvest our retained
earnings in new investments. Third, we also may be able to raise additional
capital from equity markets.
Q: What are SBA's criteria for approving SBIC leverage?
A: Based upon SBA Regulatory criteria, MorAmerica Capital can borrow up to
three times its Paid-In-Capital. We currently have Paid-In-Capital of about
$11 million. Under SBA Regulations, MorAmerica Capital could borrow another
$20 million and still be within the three-to-one ratio. However, our
management objective is not to exceed a leverage ratio of two-to-one.
Q: What is meant by the term BDC?
A. MACC and MorAmerica Capital are both business development companies
(BDC's). A BDC is a particular type of closed end nondiversified investment
company. Investment companies are frequently referred to as mutual funds
and are in the business of investing and reinvesting in securities. A
nondiversified fund generally is permitted to invest more than 5% of its
assets in the securities of any one issuer and purchase more than 10% of
the outstanding voting securities of any issuer. Like other closed end
mutual funds, BDC shares are traded on a stock exchange rather than
purchased from and sold back to the mutual fund as is the case with
open-end investment companies.
[CONTINUED ON PAGE 8.]
MACC PRIVATE EQUITIES INC. 7
<PAGE> 8
Q & A
[CONTINUED FROM PAGE 8.]
BDCs, however, differ from other investment companies. BDCs are formed to
specifically invest in smaller, growing or financially distressed companies. In
addition, BDCs provide most of their portfolio companies with both capital and
significant managerial expertise and guidance. Most mutual funds are passive
investors. Although venture capital investing generally involves higher risk
than other investment strategies, it also offers the potential for higher
returns.
Q: How do you select your portfolio investments?
A: MorAmerica Capital does not concentrate on any one industry. We focus on
manufacturing, distribution and service-oriented companies. MorAmerica
Capital generally invests in companies with $5 million to $40 million in
sales. We look for companies with strong management and proven track
records. However, we will look at turnaround situations if strong
management is in place. We invest nationally through our extensive network
of co-investors, staying in deals for about five years.
Q: What is your exit strategy for portfolio companies?
A: We really have three possible exit strategies. One, if a company goes
public, we exit through the public market. Two, we may sell a company to an
outside buyer. Three, we may sell our investment position back to the
company.
Q: Beyond the numbers, what are your thoughts about last year regarding your
performance?
A: Earnings were well within the range of what we consider acceptable
performance. We met our investment goal to invest approximately $7 million.
If you examine our portfolio, you would find that most of our portfolio
companies are doing better than budget. Consequently, we feel that our
current portfolio is well-positioned to earn future gains.
Q: What are your investment goals over the next five-year period?
A: We have a five-year plan. We plan to focus on continuing to increase our
investments on an annual basis. We have set a goal of investing
approximately 25 percent of our total available assets every year. As we
continue to grow our total assets, annually we should be able to invest
larger amounts and increase our average investment size over time.
Q: What is MACC's investment appeal?
A: MACC is a publicly traded venture capital fund. It represents one of the
few opportunities available to investors who, while they would like to add
venture capital opportunities to their investment portfolios, are unwilling
or unable to make the substantial investment generally required by private
venture capital funds. Also, because MorAmerica Capital is an SBIC, banks
and other depository institutions may receive certain regulatory benefits
from investing in MACC shares.
Keep in mind, that while venture capital investing may offer the potential
for higher returns, it may also involve higher risks based upon both the
nature of MACC's investments and the use of leverage. As with all of your
investment decisions, consult with your investment professional or other
financial advisor to determine whether investing in MACC is appropriate for
your investment needs.
[LOGO]
<PAGE> 9
FINANCIAL REPORT
[ ] CONTENTS
10 SELECTED
FINANCIAL DATA
11 MANAGEMENT'S
DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
18 AUDITOR'S REPORT
35 SHAREHOLDER
INFORMATION
36 OFFICERS
& DIRECTORS
MACC PRIVATE EQUITIES INC. 9
<PAGE> 10
[ ]SELECTED FINANCIAL DATA
FOR THE FISCAL YEARS ENDING SEPTEMBER 30
<TABLE>
<CAPTION>
MACC Private Equities Inc.(1)
- ------------------------------------------------------------------------------------------------------------------------------
Seven and One- Four and One-
Half Months Half Months
Ended Sept. 30, Ended Feb. 15,
1998 1997 1996 1995 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment income (expense) $ 621,928 (253,367) (89,576) 103,653 (17,776)(2) (1,613,419)(2)
net of tax
Net realized gain (loss) 981,091 952,102 514,172 1,102,697 4,514,338 (448,784)
on investments, net of tax
Net change in unrealized
appreciation/depreciation
on investments 2,554,471 (2,200,033) (641,851) 586,458 (948,191) 2,292,753
----------- ---------- --------- ---------- ---------- ----------
Net increase (decrease)
in net assets or (increase) $ 4,157,490 (1,501,298) (217,255) 1,792,808 3,548,371 230,550
decease in net deficit =========== ========== ========= ========== ========== ==========
from operations
Extraordinary item - gain -- -- -- -- -- 11,622,270
on extinguishment of debt ----------- ---------- --------- --------- ---------- ----------
Net increase (decrease) in net
assets or (increase) decrease
in net deficit from operations $ 4,157,490 (1,501,298) (217,255) 1,792,808 3,548,371 11,852,820
=========== ========== ========= ========== ========== ==========
Net increase (decrease) in net
assets or (increase) decrease
in net deficit from operations
per common share before $ 3.34(5) (1.20)(4) (0.17)(3) 1.37(3) 2.70(3) 119.52
extraordinary item =========== ========== ========= ========== ========== ==========
Extraordinary item per -- -- -- -- -- 6,025.02
common share ----------- ---------- --------- ---------- ---------- ----------
Net increase (decrease) in net
assets or net (increase)
decrease in net deficit from $ 3.34(5) (1.20)(4) (0.17)(3) 1.37(3) 2.70(3) 6,144.54
operations per common share =========== ========== ========== ========== ========== ==========
Total assets $31,294,524 25,995,422 27,906,798 28,006,385 25,775,717 22,781,482
=========== ========== ========== ========== ========== ==========
Total long term debt $11,253,421 10,244,478 10,236,250 10,228,647 10,224,152 54,772,521
=========== ========== ========== ========== ========== ==========
(1) Four and one-half months ended February 15, 1995 and fiscal year ended September 30, 1994, represent selected
financial data of MorAmerica Financial Corporation, the predecessor to MACC. As of February 15, 1995, MACC adopted
fresh-start reporting in accordance with American Institute of Certified Public Accountants Statement of
Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code.
(2) Including $253,908 and $624,527 of reorganization expenses in the four and one-half months ended February 15,1995,
and fiscal year 1994, respectively.
(3) Per share data have been restated to reflect a 10% stock split effected in the form of a stock dividend on March 31, 1997
and a 20% stock split effected in the form of a stock dividend on March 31, 1998.
(4) Per share data have been restated to reflect a 20% stock split effected in the form of a stock dividend on March 31, 1998.
(5) Computed using 1,246,392 shares outstanding at September 30, 1998.
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
10 MACC PRIVATE EQUITIES INC.
<PAGE> 11
[ ] MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Annual Report 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 herein 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, any failure to achieve annual investment level objectives,
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
Fiscal 1998 Compared to Fiscal 1997
MACC's investment income includes income from interest, dividends and
fees. Net investment income represents total investment income minus
operating and interest expenses, net of applicable income taxes. The
main objective of portfolio company investments is to achieve capital
appreciation and realized gains in the portfolio. These are not included
in net investment income. However, another one of MACC's long-term goals
is to achieve net investment income and increased earnings stability in
future years. In this regard, a significant proportion of new portfolio
investments are structured so as to provide a current yield through
interest or dividends. MACC also earns interest on short term
investments of cash.
For fiscal year ended September 30, 1998, total investment income
was $2,682,385, total operating expenses were $2,053,457, income tax
expense was $7,000 and net investment income was $621,928.
During the fiscal year ended September 30, 1998, investment income
increased to $2,682,385, a 49% increase over fiscal 1997 investment
income of $1,797,789. The increase during the current year was the
result of increases in interest income, dividend income and other income
of 26%, 217%, and 89% respectively. MACC attributes the increase in
interest income primarily to the significant percentage of new and
follow-on investments made during the three fiscal years ended September
30, 1998, that were structured as subordinated debentures and the
receipt of a prepayment penalty with respect to one portfolio company.
The increase in dividend income represents dividends received on five
existing portfolio companies, two of which had not previously paid cash
dividends. The increase in other income is due to the revaluation on two
other assets held by MACC. The timing and amount of some sources of
investment income, such as interest income from prepayment penalties,
certain dividend income, and other income resulting from revaluation of
other assets is difficult to predict, and there can be no assurances
that MACC will be able to achieve similar levels of investment income in
fiscal 1999 or future years.
Operating expenses of MACC increased only slightly by .01% in fiscal
year 1998 to $2,053,457 from $2,051,156 in fiscal year 1997. The
increase in interest expense due to additional borrowings from the Small
Business Administration during fiscal 1998 was largely offset by the
reduction of professional fees during the current fiscal year.
The net investment income in fiscal year 1998 increased to $621,928
from a net investment expense of $253,367 in 1997, representing a
$875,295 improvement over last year. The increase in net investment
income is the result of the 49% increase in investment income achieved
during fiscal 1998. MACC views this as a positive step toward achieving
its goal of increased net investment income and earnings stability.
Net realized gain on investments in fiscal year 1998 increased 64%
to $1,566,091 from $952,102 achieved in fiscal year 1997. MACC also
recorded net change in
[CONTINUED ON PAGE 12.]
MACC PRIVATE EQUITIES INC. 11
<PAGE> 12
[ ] MD&A
[CONTINUED FROM PAGE 11.]
unrealized appreciation during fiscal year 1998 of $2,554,471. This
resulted in a net gain on investments for fiscal year 1998 of $4,120,562
before income tax expense as compared to a net loss on investments of
$1,247,931 for fiscal year 1997. The change in unrealized appreciation
is mainly due to a valuation increase of one portfolio company. Net
change in unrealized appreciation/depreciation on investments represents
the change for the period in the unrealized appreciation on MACC's total
investment portfolio net of unrealized depreciation on MACC's total
portfolio investment. Generally, when MACC increases the fair value of a
portfolio investment above its cost, the unrealized appreciation item
for the portfolio as a whole increases, and when MACC decreases the fair
value of a portfolio investment below its cost, the unrealized
depreciation item for the portfolio as a whole increases. When MACC
sells an appreciated portfolio investment for a gain, unrealized
appreciation for the portfolio as whole decreases as the gain is
realized. Similarly, when MACC sells a depreciated portfolio investment
for a loss, unrealized depreciation for the portfolio as a whole
decreases as the loss is realized.
Most of MACC's portfolio investments are structured to mature in
five to seven years. Management does not attempt to maintain a
comparable level of realized gains from year to year, but instead
attempts to maximize total investment portfolio appreciation through
realizing gains in the disposition of securities and investing in new
portfolio investments. During fiscal years 1995 through 1998, MorAmerica
Capital recorded significantly higher levels of new and follow-on
portfolio investments as compared to fiscal years 1988-1994, and MACC
anticipates that MorAmerica Capital will continue these higher portfolio
investment levels over the foreseeable future. As an ordinary element of
its investment cycle, MACC typically experiences unrealized depreciation
and/or realized losses on portfolio investments before it experiences
unrealized appreciation and/or realized gains, if any.
MACC recorded increases in fair value of five portfolio companies in
the total amount of $4,239,990 and decreases in fair value of six
portfolio companies in the total amount of $1,365,099 for a net change
in unrealized appreciation on investments before income taxes of
$2,554,471. Of the total increases in fair value during the current
year, $3,418,028 represents unrealized appreciation in one portfolio
company. Although MACC's consolidated investment portfolio as a whole is
in the earlier stages of the five to seven year investment cycle, MACC
has benefited from some early developments in its portfolio.
Specifically one portfolio company was sold for stock in a publicly
traded company only a few months after the initial investment. Another
company held less than two years has been in negotiations for a
potential sale of the company which could result in a significant gain
to MACC. The board of directors determined to increase the fair value of
this portfolio investment due to its outstanding performance and
potential sale following MACC's portfolio investment valuation
guidelines. MACC anticipates that the growth, if any, in MACC's Net
Asset Value Per Share may continue to increase over the next three to
ten year period as a higher percentage of MACC's portfolio investments
reach maturity and investment gains, if any, are taken. However, it is
difficult to predict the timing or the amount of gains in the investment
portfolio.
FINANCIAL CONDITION:
LIQUIDITY AND CAPITAL
RESOURCES
To date, MACC has relied upon several sources to fund its investment
activities, including MACC's U.S. treasury bills, cash equivalents and
cash, and the Small Business Investment Company (SBIC) capital program
operated by the Small Business Administration (the SBA).
MACC, through its wholly-owned subsidiary, MorAmerica Capital, from
time to time may seek to procure additional capital through the SBIC
capital program to provide a portion of its future investment capital
requirements. At present, there is availability of capital for the next
three years in commitment periods of up to five years through the SBIC
capital program and MACC anticipates that there will be capital
available in future periods. MACC
12 MACC PRIVATE EQUITIES INC.
<PAGE> 13
[ ] MD&A
also believes that recently enacted federal legislation which permits
SBICs to obtain debt financing from federal home loan banks may provide
an additional source of debt financing for MACC.
As of September 30, 1998, MACC's U.S. treasury bills, certificates
of deposit and cash totaled $2,608,655. MACC borrowed $1,000,000 in new
SBA Guaranteed Debentures in December 1997, obtained a commitment for an
additional $1,000,000 in March 1998 and obtained a commitment for an
additional $17,290,000 in June 1998. The additional commitments of
$18,290,000 are 5 year commitments. MACC believes that its existing U.S.
treasury bills, certificates of deposit and cash, together with the
additional $18,290,000 in SBA commitments and other anticipated cash
flows, will provide adequate funds for MACC's anticipated cash
requirements during fiscal year 1999 and the next five years, including
portfolio investment activities, principal and interest payments on
outstanding debentures payable and administrative expenses. MACC plans
to invest a total of $8,500,000 in new and follow-on portfolio
investments during fiscal year 1999.
Liquidity for the next several years will be impacted by principal
payments on MACC's debentures payable. Debentures payable are composed
of $11,290,000 in principal amount of SBA-guaranteed debentures issued
by MACC's subsidiary, MorAmerica Capital, which mature as follows:
$2,450,000 in 2000, $5,690,000 in 2001, $2,150,000 in 2003 and
$1,000,000 in 2007. It is anticipated MorAmerica Capital would be able
to roll over this debt with new ten year debentures when it matures.
MorAmerica Capital has obtained a 5 year commitment of leverage from SBA
which includes commitments to refinance these debentures for another 10
year term. As indicated above, the total amount of MorAmerica Capital's
commitment from the SBA is $18,290,000.
MACC anticipates that it may seek additional capital, either in the
form of additional SBA-guaranteed debentures issued by MorAmerica
Capital or in the form of common stock of MACC, to fund growth of MACC,
to meet principal payments, if necessary, as the outstanding
SBA-guaranteed debentures become due and payable and for other corporate
purposes.
PORTFOLIO ACTIVITY
MACC's investment objectives for fiscal year 1998 called for total new
and follow-on investments of $7,000,000. During this period, MACC
invested $7,521,781 in 13 portfolio companies. Of this amount,
$4,759,387 was invested in seven new portfolio companies and $2,762,394
was invested in follow-on investments in six existing portfolio
companies. MACC's investments for fiscal year 1998 exceeded MACC's
investment objective as it also exceeded its investment objective in the
prior fiscal year. Management views investment objectives for any given
year as secondary in importance to MACC's overriding concern of
investing only in those portfolio companies which satisfy MACC's
investment criteria.
MACC attributes its ability to exceed its investment level
objectives for two consecutive fiscal years to a continued strengthening
of co-investment ties with investment partners who provide deal flow, a
very active venture financing market in 1998 and a continued commitment
to increase the average size of new investments.
PORTFOLIO CHANGES
The table on the next page summarizes the significant increases and
decreases in fair value of portfolio company securities held by MACC at
September 30, 1998, as compared with fair value at September 30, 1997.
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
liabilities by the total number of shares outstanding at the date as of
which the determination is made.
In calculating the value of the total assets, securities that are
traded in the over-the-counter market or on a stock
[CONTINUED ON PAGE 14.]
MACC PRIVATE EQUITIES INC. 13
<PAGE> 14
[ ] MD&A
<TABLE>
<CAPTION>
FAIR VALUE
-----------------------------------------------------------------------
PORTFOLIO COMPANY SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
<S> <C> <C>
Carleton Corporation $ 6,388 $ 71,703
Central Fiber Corporation. 712,812 550,000
Cirque Corporation 502,504 670,004
Miles Media Group, Inc. 1,143,720 1,100,003
Monitronics International, Inc. 436,848 73,214
Northword Holding Corporation 188,166 235,208
Portrait Displays, Inc. 300,000 200,000
Progressive Solutions, Inc. 565,706 875,200
Tru-Circle Corporation 4,636,900 1,218,872
-----------------------------------------------------------------------
</TABLE>
[CONTINUED FROM PAGE 13.]
exchange are valued in accordance with the current valuation policies of
the Small Business Administration ("SBA"). Under SBA regulations,
publicly traded equity securities are valued by taking the average of
the close (or bid price in the case of over-the-counter equity
securities) for the valuation date and the preceding two days. This
policy differs from the Securities and Exchange Commission's guidelines
which utilize only a one day price measurement. MACC's use of SBA
valuation procedures did not result in a material variance as of
September 30, 1998, from valuations using the Securities and Exchange
Commission's guidelines.
All other investments are valued at fair value as determined in good
faith by the Board of Directors. The Board of Directors has determined
that all other investments will be valued initially at cost, but such
valuation will be subject to semi-annual adjustments if the Board of
Directors determines in good faith that cost no longer represents fair
value.
YEAR 2000 COMPLIANCE
MACC anticipates that it will incur internal staff costs as well as
consulting and other expenses related to the enhancements necessary to
prepare its systems for the year 2000, and expects to be complete with
the year 2000 project by June 30, 1999. Based on MACC's current
knowledge, the expense of the year 2000 project as well as the related
potential effect on MACC's earnings is not expected to have a material
effect on MACC's financial position or results of operations. MACC's
current estimate for fiscal 1999 expenses of the year 2000 project are
not expected to exceed $50,000. MACC is aware of potential year 2000
risks and the possible adverse impact resulting from failures by third
parties (such as banks and vendors) and portfolio companies to
adequately address year 2000 problems. MACC could incur losses if
portfolio companies incur business losses related to the year 2000. To
date, MACC has not yet been advised by such parties that they do not
have plans in place to address and correct the issues associated with
the year 2000; however, no assurance can be given as to the adequacy of
such plans or to the timeliness of their implementation.
QUANTITATIVE AND
QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
The majority of the MACC consolidated investment portfolio consists of
debt and equity securities which are not publicly traded and are
recorded at fair value in accordance with SBA valuation policies. These
policies generally do not result in increases or decreases in the fair
value of debt portfolio investments based upon changes in market
interest rates. Moreover, equity securities that are not publicly traded
are not subject to market price risk. Nevertheless, MACC is exposed to
market risk from
14 MACC PRIVATE EQUITIES INC.
<PAGE> 15
[ ] MD&A
changes in market prices of publicly traded equity securities held in
the MACC consolidated investment portfolio.
At September 30, 1998, publicly traded equity securities in the MACC
consolidated investment portfolio were recorded at a fair value of
$580,693. In accordance with SBA regulations, the fair value of publicly
traded equity securities is determined based upon the average of the
closing prices (or bid price in the case of over-the-counter equity
securities) for the valuation date and the preceding two days. The
publicly traded equity securities in the MACC consolidated investment
portfolio thus have exposure to price risk, which is estimated as the
potential loss in fair value due to a hypothetical 10% adverse change in
quoted market prices, and would amount to a decrease in the recorded
value of such publicly traded equity securities of approximately
$58,069. Actual results may differ.
MACC is also exposed 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 September 30, 1998, was $11,540,000,
with a cost of $11,290,000. Fair value of MorAmerica Capital's
outstanding debentures payable is calculated by discounting cash flows
through estimated maturity using the borrowing rate currently available
to MorAmerica Capital 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.
<TABLE>
<CAPTION>
---------------------------------------------------------------------
1998
---------------------------------------------------------------------
<S> <C>
Fair Value of Debentures $ 11,540,000
Payable
Amount Over Cost $ 250,000
Additional Market Risk $ 165,000
---------------------------------------------------------------------
</TABLE>
RISKS
[ ] Portfolio Risks
Pursuant to Section 64(b)(1) of the Investment Company Act of 1940, a
business development company is required to describe the risk factors
involved in an investment in the securities of such company due to the
nature of MACC's investment portfolio. Accordingly, MACC states that:
The portfolio securities of MACC consist primarily of securities
issued by small, privately held companies. Generally, little or no
public information is available concerning the companies in which MACC
invests, and MACC must rely on the diligence of the Investment Advisor
to obtain the information necessary for MACC's investment decisions. In
order to maintain their status as business development companies, MACC
and MorAmerica Capital both must invest at least 50% of their total
assets in the types of portfolio investments described by Sections
55(a)(1) though 55(a)(3) of the Investment Company Act of 1940, as
amended. These investments generally are securities purchased in private
placement transactions from small privately held companies. Typically,
the success or failure of such companies depends on the management
talents and efforts of one person or a small group of persons, so that
the death, disability or resignation of such person or persons could
have a materially adverse impact on such companies. Moreover, smaller
companies frequently have smaller product lines and smaller market
shares than larger companies and may be more vulnerable to economic
downturns. Because these companies will generally have highly leveraged
capital structures, reduced cash flows resulting from an economic
downturn may adversely affect the return on, or the recovery of, MACC's
investments. Investment in these companies therefore involves a high
degree of business and financial risk, which can result in substantial
losses and should be considered speculative.
MACC's investments primarily consist of securities acquired directly
from the issuers in private transactions,
[CONTINUED ON PAGE 16.]
MACC PRIVATE EQUITIES INC. 15
<PAGE> 16
[ ] MD&A
[CONTINUED FROM PAGE 15.]
which are usually subject to restrictions on resale and are generally
illiquid. No established trading market generally exists with regard to
such securities, and most of such securities are not available for sale
to the public without registration under the Securities Act of 1933, as
amended, which involves significant delay and expense.
The investments of MACC are generally long-term in nature. Some
existing investments do not bear a current yield and a return on such
investments will be earned only after the investment matures or is sold.
Most investments are structured so as to return a current yield
throughout most of the term of the investments. However, these
investments will typically produce capital gains only when sold in five
to seven years. There can be no assurance, however, that any of MACC's
investments will produce current yields or capital gains.
[ ] Operations Risks
MACC generally relies on portfolio investment divestitures and liquidity
events, as well as increases in fair value of portfolio investments, to
provide for increases in net asset value in any period. MACC typically
relies on the sale of portfolio companies in negotiated transactions and
on the initial public offering of portfolio company securities to
provide for portfolio investment divestitures and liquidity events.
Accordingly, a contraction in the markets generally for corporate
acquisitions and/or initial public offerings could adversely affect
MACC's ability to realize capital gains, if any, from the sale of its
portfolio company securities. The SBIC guidelines under which MorAmerica
Capital operates permit the MorAmerica Capital Board of Directors to
determine increases in fair value of unliquidated portfolio investments
based upon a number of factors, including subsequent financings provided
to portfolio companies. Accordingly, decreases in the supply or demand
for additional capital to MACC's portfolio companies could adversely
affect MorAmerica Capital's ability to achieve increases, if any, in
fair value of its portfolio investments. MACC's failure to achieve its
investment level objectives for any particular year or years could also
adversely affect the rate of increase, if any, in net asset value.
[ ] Interest Rate Risks
MACC faces several risks in relation to changes in prevailing market
interest rates. First, at September 30, 1998, MACC had outstanding
$11,290,000 in principal amount of SBA-guaranteed debentures issued by
MACC's subsidiary, MorAmerica Capital, which mature as follows:
$2,450,000 in 2000, $5,690,000 in 2001, $2,150,000 in 2003 and
$1,000,000 in 2007. These debentures provide for a fixed rate of
interest, and accordingly, changes in market interest rates will have no
effect on the amount of interest paid by MACC with respect to the
SBA-guaranteed debentures which are presently outstanding. However, if
MorAmerica Capital were to re-finance any of the maturing SBA-guaranteed
debentures by issuing additional SBA-guaranteed debentures at a time
when market interest rates have increased relative to the rates paid on
the maturing debentures, then MACC may incur higher interest expenses
during subsequent periods, and MACC's ability during such periods to
achieve a net operating profit, if any, could be adversely affected.
Second, MACC has stated that one of its goals is to structure more
portfolio investments to provide a current yield in order to provide
MACC with increased earnings stability. These investments typically
provide for a fixed preferred dividend or interest rate. Accordingly,
MACC's ability to earn a net operating profit under its current strategy
could be adversely affected by a decrease in market interest rates over
the next several years because the increased level of portfolio
investments anticipated to be made during this period would reflect
these lower interest rates, which would adversely affect MACC's
projected total income over the foreseeable future.
Third, many of MACC's portfolio companies have or will also issue
debt senior to MACC's investment. The payment of principal and interest
due on MACC's investment, therefore, will generally be subordinate to
payments due on any such senior debt. Moreover, senior debt typically
bears interest at a floating rate, whereas MACC's investments
16 MACC PRIVATE EQUITIES INC.
<PAGE> 17
[ ] MD&A
generally do not. Therefore, any increase in market interest rates may
put significant economic pressure on those portfolio companies that have
issued senior debt which bears interest at floating rate. Accordingly,
MACC's ability to achieve net operating income and generally to realize
on its portfolio investments may be adversely affected by an increase in
market interest rates.
[ ] Effect of New Accounting Standards
SFAS 130, Reporting Comprehensive Income, establishes the standards for
the reporting and display of comprehensive income in the financial
statements. Comprehensive income represents net earnings and certain
amounts reported directly in stockholders' equity, such as the net
unrealized gain or loss on available-for-sale securities. MACC adopted
SFAS 130 effective October 1, 1998.
SFAS 131, Disclosure about Segments of an Enterprise and Related
Information, establishes disclosure requirements for segment operations.
MACC adopted SFAS 131 on October 1, 1998.
SFAS 132, Employers' Disclosures about Pensions and other
Postretirement Benefits, revises the disclosure requirements for pension
and other postretirement benefit plans. MACC has no activities covered
by SFAS 132.
SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, will be effective for MACC for years beginning after October
1, 1999. MACC has no derivative or hedging activities, therefore, it is
not anticipated this statement will have a material effect on its
results of operations or financial position.
MACC PRIVATE EQUITIES 17
<PAGE> 18
[ ] INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS
MACC PRIVATE EQUITIES INC.:
We have audited the accompanying consolidated balance sheet of MACC
Private Equities Inc. and subsidiary, including the consolidated
schedule of investments, as of September 30, 1998 and the related
consolidated statements of operations and cash flows for the year ended
September 30, 1998 and the consolidated statements of changes in net
assets for the years ended September 30, 1998 and 1997. These
consolidated financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation or examination of securities owned as of September 30,
1998. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the aforementioned consolidated financial statements
present fairly, in all material respects, the financial position of MACC
Private Equities Inc. and subsidiary as of September 30, 1998 and the
results of their operations and their cash flows for the year then
ended, and changes in net assets for the years ended September 30, 1998
and 1997, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Des Moines, Iowa
November 11, 1998
18 MACC PRIVATE EQUITIES INC.
<PAGE> 19
[ ] CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
MACC Private Equities Inc. and Subsidiary
- -----------------------------------------------------------------------------
ASSETS
<S> <C>
Loans and investments in portfolio
securities at market or fair value, $ 27,201,277
cost of $26,902,232 (note 2)
U.S. treasury bills, at cost,
which approximates market 1,023,715
Certificates of deposit 297,000
Cash 1,287,940
Other assets, net 983,592
Deferred income taxes (note 5) 501,000
-------------
Total assets $ 31,294,524
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Debentures payable, net of discount (note 3) $ 11,253,421
Accrued interest 284,898
Accounts payable and other liabilities 228,327
-------------
Total liabilities 11,766,646
-------------
Stockholders' equity (notes 3 and 4):
Common stock, $.01 par value per share;
authorized 4,000,000 shares;
issued 1,246,392 shares 12,464
Additional paid-in-capital (notes 4 and 5) 15,312,381
Net investment gain 372,538
Net realized gain on investments 3,531,450
Unrealized appreciation on investments 299,045
-------------
Total stockholders' equity 19,527,878
-------------
Commitments (note 6)
Total liabilities and stockholders' equity $ 31,294,524
=============
Net assets per share $ 15.67
=============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- -----------------------------------------------------------------------------
MACC PRIVATE EQUITIES INC. 19
<PAGE> 20
[ ] CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
MACC Private Equities Inc. and Subsidiary
- -----------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest $1,876,000
Dividends 574,343
Other 232,042
----------
Total income 2,682,385
----------
OPERATING EXPENSES:
Interest 944,597
Management fees (note 6) 705,854
Professional fees 154,784
Other 248,222
----------
Total operating expenses 2,053,457
Investment income, net before income tax expense 628,928
Income tax expense (7,000)
----------
Investment income, net 621,928
----------
Realized and unrealized gain on investments (note 2):
Net realized gain on investments 1,566,091
Net change in unrealized appreciation on investments 2,554,471
----------
Net gain on investments before income tax expense 4,120,562
Income tax expense (585,000)
----------
Net gain on investments 3,535,562
Net change in net assets from operations $4,157,490
==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- -----------------------------------------------------------------------------
20 MACC PRIVATE EQUITIES INC.
<PAGE> 21
[ ] CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
MACC Private Equities Inc. and Subsidiary
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income (expense) $ 621,928 (253,367)
Net realized gain on investments,
net of tax 981,091 952,102
Net change in unrealized appreciation
(depreciation) on investments 2,554,471 (2,200,033)
------------ -----------
Net increase (decrease) in net assets
from operations 4,157,490 (1,501,298)
Repurchase/retirement of common stock (note 4) -- (180,388)
Payments for fractional shares in connection
with stock split (note 4) (9,454) (16,241)
------------ -----------
Net increase (decrease) in net assets 4,148,036 (1,697,927)
NET ASSETS:
Beginning of period 15,379,842 17,077,769
------------ -----------
End of period $ 19,527,878 15,379,842
============ ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
MACC PRIVATE EQUITIES INC. 21
<PAGE> 22
[ ] CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
MACC Private Equities Inc. and Subsidiary
- --------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Increase in net assets from operations $ 4,157,490
------------
Adjustments to reconcile increase in
net assets from operations to
net cash provided by operating activities:
Change in provision for doubtful accounts (10,016)
Net realized and unrealized loss on investments (4,120,562)
Other 37,332
Change in assets and liabilities:
Receivables and other assets 188,430
Deferred income taxes 592,000
Accrued interest, accounts payable, and
other liabilities 6,331
------------
Total adjustments (3,306,485)
------------
Net cash provided by operating activities 851,005
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition of and payments on loans and
investments in portfolio securities 3,064,306
Purchases of loans and investments in portfolio securities (7,521,781)
Proceeds from disposition of other investments 6,525,743
Purchases of other investments (4,707,340)
------------
Net cash used in investing activities (2,639,072)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt issuance 1,000,000
Payments for fractional shares in connection with stock split (9,454)
Payments for debt issuance and commitment fees (217,900)
------------
Net cash provided by financing activities 772,646
------------
Net decrease in cash and cash equivalents (1,015,421)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,902,406
------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,886,985
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION --
CASH PAID DURING THE YEAR FOR INTEREST $ 910,419
============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING INFORMATION -- ASSETS RECEIVED IN LIEU OF CASH $ 1,239,052
============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
22 MACC PRIVATE EQUITIES INC.
<PAGE> 23
[ ] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MACC Private Equities Inc. and Subsidiary
1 SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES AND
RELATED MATTERS
[ ] Basis of Presentation
The consolidated financial statements include the accounts of MACC
Private Equities Inc. (MACC) and its wholly-owned subsidiary, MorAmerica
Capital Corporation (MorAmerica Capital). Effective March 31, 1997,
MorAmerica Realty Services, Inc., a former subsidiary, was merged into
MACC. MACC and MorAmerica Capital (the Company) are qualified as
business development companies under the Investment Company Act of 1940.
All material intercompany accounts and transactions have been
eliminated. The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for investment
companies.
On February 15, 1995, the Company consummated a plan of
reorganization as confirmed by the United States Bankruptcy Court for
the Northern District of Iowa on December 28, 1993. As of February 15,
1995, the Company adopted fresh-start reporting in accordance with
American Institute of Certified Public Accountants (AICPA) Statement of
Position (SOP) 90-7, Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code, resulting in the Company's assets and
liabilities being adjusted to fair values.
[ ] Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
[ ] Cash Equivalents
For purposes of reporting cash flows, the Company considers certificates
of deposit and U. S. treasury bills with maturities of three months or
less from the date of purchase and money market deposit accounts to be
cash equivalents. At September 30, 1998, such amounts totaled
$1,031,378.
[ ] Loans and Investments in Portfolio Securities
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.
Restricted and other securities for which quotations are not readily
available are valued at fair value as determined by the Board of
Directors. Realization of the carrying value of investments is subject
to future developments (see note 2). Investment transactions are
recorded on the trade date. 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.
[ ] Income Taxes
MACC and its subsidiary are members of a consolidated group for income
tax purposes.
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the consolidated
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect of a change in tax rates on deferred tax assets and liabilities
is recognized in the period that includes the enactment date.
[CONTINUED ON PAGE 24.]
MACC PRIVATE EQUITIES INC. 23
<PAGE> 24
[ ] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MACC Private Equities Inc. and Subsidiary
[CONTINUED FROM PAGE 23.]
[ ] Disclosures About Fair Value
of Financial Instruments
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures
About Fair Value of Financial Instruments, requires that disclosures be
made regarding the estimated fair value of financial instruments, which
are generally described as cash, contractual obligations, or rights to
pay or receive cash. The carrying amount approximates fair value for
certain financial instruments because of the short-term maturity of
these instruments, including cash, U. S. treasury bills, certificates of
deposit, accrued interest, and accounts payable.
Portfolio investments are recorded at fair value. The consolidated
schedule of investments discloses the applicable fair value and cost for
each security investment, which aggregated to $27,201,277 and
$26,902,232, respectively, at September 30, 1998.
The estimated fair value of long-term debt is $11,540,000, with cost
of $11,290,000. This amount was calculated by discounting future cash
flows through estimated maturity using the borrowing rate currently
available to the Company for debt of similar original maturity.
[ ] Effect of New Financial Accounting Standards
No proposed financial accounting standards are expected to have a
material effect on the Company.
2 LOANS AND INVESTMENTS
IN PORTFOLIO SECURITIS
Loans and investments in portfolio securities include debt and equity
securities in small business concerns located throughout the continental
United States, with current concentrations in the Midwest and New
England. The Company determined that the fair value of its portfolio
securities was $27,201,277 at September 30, 1998. Among the factors
considered by the Company in determining the fair value of investments
were 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; 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.
The Company acquired its portfolio securities by direct purchase
from the issuers under investment representation and values the
securities on the premise that, in most instances, they may not be sold
without registration under the Securities Act of 1933. The price of
securities purchased was determined by direct negotiation between the
Company and the seller. All portfolio securities other than Carleton
Corporation (acquired on October 15, 1997) and Building One Services
Corporation (Building One) (acquired on April 27, 1998) are considered
to be restricted in their disposition and illiquid at September 30,
1998. The Company's shares of Building One are restricted for periods
ranging from one to two years from the date of the investment.
Approximately 16% of the Company's shares are being held in escrow for
one year from the date of the investment.
3 DEBENTURES PAYABLE
Debentures of MorAmerica Capital guaranteed by the Small Business
Administration (SBA) of $11,290,000 at September 30, 1998 are unsecured.
In accordance with SOP 90-7, the debentures were revalued to fair value
on February 15, 1995. Debentures payable at September 30, 1998 are
recorded net of discount of $36,579. Maturities of the debentures are as
follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
YEAR ENDING
SEPTEMBER 30, DEBENTURES INTEREST RATE
------------------------------------------------------------------------
<S> <C> <C>
2000 $ 2,450,000 9.30%
2001 5,690,000 9.08
2003 2,150,000 6.12
2007 1,000,000 7.55
----------- ====
$11,290,000
===========
------------------------------------------------------------------------
</TABLE>
24 MACC PRIVATE EQUITIES INC.
<PAGE> 25
[ ] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MACC Private Equities Inc. and Subsidiary
The debentures contain restrictions on the acquisition or repurchase
of MorAmerica Capital's capital stock, distributions to MorAmerica
Capital's shareholder other than out of undistributed net realized
earnings, officers' salaries, and certain other matters. At September
30, 1998, $2,217,607 of MorAmerica Capital's undistributed net realized
earnings (computed under SBA guidelines) of $8,907,442 were available
for distribution to MACC.
During 1998, MorAmerica Capital signed two separate commitment
letters with the SBA. The first commitment allows MorAmerica Capital to
issue debentures totaling $1,000,000 and expires on September 30, 2002.
MorAmerica Capital paid a commitment fee of $10,000 for this agreement.
The second commitment allows MorAmerica Capital to issue debentures
totaling $17,290,000 and expires on September 30, 2002. MorAmerica
Capital paid a commitment fee of $172,900 for this agreement. The
commitment fees will be amortized over the commitment period using the
straight-line method.
4 STOCKHOLDER'S EQUITY
On February 24, 1998, the Company declared a stock split effected in the
form of a dividend equal to twelve common shares for every ten common
shares outstanding to shareholders of record on March 13, 1998. As part
of this transaction, the Company made payments to shareholders totaling
$9,454, representing the amount due for fractional shares and issued
206,777 shares of common stock. These payments were allocated to net
realized gain on investments.
On April 29, 1998, the Board of Directors approved and amended its
agreement with Zions Bancorporation (Zions) to increase the level of
outstanding common stock which Zions can purchase without approval of
the Board of Directors from 25% to 35%.
Transactions in common stock during the year ended September 30,
1997 were as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
SHARES AMOUNT
-----------------------------------------------------------------------
<S> <C> <C>
Purchase and retirement of shares (1)(19,346) $(180,388)
Issuance of shares (2) 94,863 --
------ ---------
Net change 75,517 $(180,388)
====== =========
-----------------------------------------------------------------------
</TABLE>
(1) The Company conducted a Commission-Free Shareholder Sales Plan,
purchasing outstanding shares from stockholders with less than 100
shares.
(2) On February 25, 1997, the Company declared a 10% stock split
effected in the form of a dividend to share holders of record on
March 14, 1997. As part of this transaction, the Company made
payments to shareholders totaling $16,241, representing the amount
due for fractional shares. These payments were allocated to net
realized gain on investments.
The purchase, retirement, and issuance of shares increased common
stock by $755. Amounts greater than par were allocated to additional
paid-in capital, increasing the balance by $180,194 to $15,312,381.
On February 25, 1997, the Company's shareholders approved a
resolution to increase the number of shares authorized from 2,000,000 to
4,000,000.
5 INCOME TAXES
Income tax expense differed from the amounts computed by applying the
United States federal income tax rate of 34% to pre-tax income due to
the following:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
<S> <C>
Computed "expected" tax expense $ 1,615,000
Increase (reduction) in income taxes resulting from:
State income tax benefit, net of federal tax effect 285,000
Nontaxable dividend income (172,000)
Change in the beginning of the period balance
valuation allowance for deferred tax assets (1,129,000)
Other (7,000)
-----------
Income tax expense $ 592,000
===========
-----------------------------------------------------------------------
</TABLE>
[CONTINUED ON PAGE 26.]
MACC PRIVATE EQUITIES INC. 25
<PAGE> 26
[ ] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MACC Private Equities Inc. and Subsidiary
[CONTINUED FROM PAGE 25.]
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets at September 30, 1998
are as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 4,949,000
Unrealized depreciation on investments 962,000
Other 38,000
-----------
Total gross deferred tax assets 5,949,000
Less valuation allowance (4,903,000)
-----------
Net deferred tax assets 1,046,000
Deferred tax liabilities - Equity investments (545,000)
-----------
Net deferred tax assets $ 501,000
===========
----------------------------------------------------------------------
</TABLE>
The net change in the total valuation allowance for the year ended
September 30, 1998 was a decrease of $1,129,000. In assessing the
realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible.
Management considers projected future taxable income and tax planning
strategies in making this assessment. In order to fully realize the
gross deferred tax assets, the Company will need to generate future
taxable income of approximately $14.7 million prior to the expiration of
the net operating loss carryforwards in 2008. The Company had taxable
income of $227,000 for the year ended September 30, 1998. Based upon the
level of historical taxable income of MorAmerica Capital and projections
for future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely than not
the Company will realize the benefits of these deductible differences,
net of the existing valuation allowance at September 30, 1998.
At September 30, 1998, the Company has net operating loss
carryforwards for federal income tax purposes of approximately
$12,372,000, which are available to offset future federal taxable
income, if any, through 2008. Approximately $3,334,000 of the
carryforwards are available for the year ending September 30, 1999, with
approximately $1,004,000 additionally available annually thereafter.
6 COMMITMENTS
[ ] Management Agreements
MACC has an investment advisory agreement (the Agreement) with
InvestAmerica Investment Advisors, Inc. (IAIA). Three of MACCs' officers
are officers and stockholders of IAIA. The management fee is equal to
2.5% of the assets under management, on an annual basis. The management
fee is calculated excluding MorAmerica Capital. In addition, MACC
contracted to pay an incentive fee of 13.4% of the net capital gains (as
defined in the Agreement) before taxes on the disposition of
investments. The Agreement may be terminated by either party upon sixty
days written notice. Total management fees under the Agreement amounted
to $51,866 for the year ended September 30, 1998. There were no
incentive fees accrued or paid under the Agreement in 1998.
MorAmerica Capital has a separate investment advisory agreement with
IAIA. This agreement may be terminated by either party upon sixty days
written notice. The fee is equal to 2.5% of the capital under management
(as defined in the Agreement) on an annual basis, but in no event more
than 2.5% per annum of the assets under management. In addition,
MorAmerica Capital contracted to pay IAIA 13.4% of the net realized
capital gains, before taxes, on investments in the form of an incentive
fee. Net realized capital gains, as defined in the agreement, are
calculated as gross realized gains, net of capital losses, less any
unrealized depreciation, including reversals of previously recorded
unrealized depreciation, recorded during the year. Capital losses and
realized capital gains are not cumu-
26 MACC PRIVATE EQUITIES INC.
<PAGE> 27
[ ] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MACC Private Equities Inc. and Subsidiary
lative under the incentive fee computation. Payments for incentive fees
resulting from noncash gains are deferred until the assets are sold.
Total management fees under this agreement amounted to $653,988 for the
year ended September 30, 1998. Incentive fees are an expense in
determining net realized gain (loss) on investments in the consolidated
statement of operations. Total incentive fees under this agreement
amounted to $131,304 in 1998. Approximately $86,700 of these fees
related to noncash gains and will be deferred as described above. At
September 30, 1998, $131,304 relating to these incentive fees are
included in other liabilities.
[ ] Guarantee
MorAmerica Capital has guaranteed a portion of a line of credit for an
investee company. MorAmerica Capital's portion is limited to $333,333
and is secured by a certificate of deposit of the same amount. The line
of credit for the investee company expires March 31, 2001.
MACC PRIVATE EQUITIES INC. 27
<PAGE> 28
[ ] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE 1
<TABLE>
<CAPTION>
MACC Private Equities Inc. and Subsidiary
- ----------------------------------------------------------------------------------------------------------------------------
MANUFACTURING:
- ----------------------------------------------------------------------------------------------------------------------------
PERCENT OF
COMPANY EQUITY SECURITY NET ASSETS VALUE COST
- ------- ------ -------- ---------- ----- ----
<S> <C> <C> <C> <C> <C>
CENTRAL FIBER CORPORATION *Warrant to purchase 18.4 common
- ------------------------- shares at $1.00, expires October 29, 2002 $312,812 --
Wellsville, Kansas *Warrant to purchase 10.4 common
Recycles and manufactures shares at $1.00, expires October 29, 2002 -- --
cellulose fiber products 12% Debt security, due January 1, 2003 400,000 400,000
--------- ---------
15.60% 712,812 400,000
--------- ---------
CENTRUM INDUSTRIES, INC. 11% Debt security, due March 31, 2001 1,254,890 1,254,890
- ------------------------ *Warrant to purchase 627,445 common
Holland, Ohio shares at $2.00, expires March 8, 2004 13 13
Manufacturing conglomerate *Warrant to purchase 3,732 common
with a focus in steel forging shares at $2.00, expires March 8, 2004 -- --
*Warrant to purchase 4,547 common
shares at $2.00, expires March 8, 2004 -- --
*Stock option to purchase 10,756 common
shares at $2.00, expires September 1, 2007 -- --
*Warrant to purchase 19,679 common
shares at $2.00, expires March 8, 2004 -- --
*Stock option to purchase 7,171 common
shares at $2.00, expires September 1, 2007 -- --
--------- ---------
7.46% 1,254,903 1,254,903
--------- ---------
CIRQUE CORPORATION
- ------------------
Salt Lake City, Utah *100,000 Shares Series A Pfd. at $3.35 251,250 335,000
Develops, manufactures, and *55,834 Shares Series A Pfd. at $6.00 251,254 335,004
markets PC pointing devices 3.45% --------- ---------
502,504 670,004
--------- ---------
HICKLIN ENGINEERING, L.C. 10% Debt security, due June 30, 2003 740,000 740,000
- ------------------------ *12,686 Units of membership interest 127 127
Des Moines, Iowa --------- ---------
Manufacturer of auto
and truck transmission 740,127 740,127
and brake dynamometers 12.69% --------- --------
THE HINCKLEY COMPANY 12% Debt security, due November 15, 2004 730,000 730,000
- -------------------- *2,190 Shares Series A Pfd. at $83.33 182,500 182,500
Southwest Harbor, Maine *Warrant to purchase 1,703 common
Custom and semi-custom shares at $.01, expires November 14, 2007 -- --
sail and power boat builder 3.90% --------- --------
912,500 912,500
--------- --------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
28 MACC PRIVATE EQUITIES INC.
<PAGE> 29
[ ] CONSOLIDATED SCHEDULE OF INVESTMENTS
SCHEDULE 1 CONTINUED...
<TABLE>
<CAPTION>
MACC Private Equities Inc. and Subsidiary
- -----------------------------------------------------------------------------------------------------------------------------------
MANUFACTURING CONTINUED...
- -----------------------------------------------------------------------------------------------------------------------------------
PERCENT OF
COMPANY EQUITY SECURITY NET ASSETS VALUE COST
- ------- ------ -------- ---------- ----- ----
<S> <C> <C> <C> <C> <C>
HUMANE MANUFACTURING, LLC 12% debt security, due April 3, 2002 $784,300 784,300
- ------------------------- *Membership interest 101,200 101,200
Baraboo, Wisconsin -------- -------
Manufacturer of rubber mats
for agricultural, exercise,
and roofing markets 44.28% 885,500 885,500
-------- -------
J-TEC ASSOCIATES, INC. *87,413 Shares Series C Pfd. at $2.86 9,245 9,248
- ---------------------- *51,129 Shares Series E Pfd. at $27.83 52,622 52,635
Cedar Rapids, Iowa *5,244 Shares Series C Pfd. at $2.86 555 555
Designer and manufacturer *31,250 Shares Series D Pfd. at $1.60 1,849 1,849
of gaseous and liquid flow *58 Common shares at $6.044 13 13
measurement and metering devices *3,200 Common shares at $0.1375 16 440
-------- -------
4.88% 64,300 64,740
-------- -------
KW PRODUCTS, INC.
- -----------------
Cedar Rapids, Iowa Variable rate debt security,
Manufacturer of automobile engine due January 1, 2001 346,759 346,759
and brake repair machinery *29,340 Common shares at $.01 92,910 92,910
-------- -------
28.50% 439,669 439,669
-------- -------
LINTON TRUSS CORPORATION 10% Debt security, due March 1, 2001 398,318 398,318
- ------------------------ *542.8 Common shares -- --
Delray Beach, Florida *400 Shares Series 1 Pfd. at $100.00 40,000 40,000
Markets and manufactures residential 10% Debt security, due October 31, 2001 80,000 80,000
roof and floor truss systems *Warrant to purchase 14.682% of
common shares, expires February 24, 2005 15 15
*Warrant to purchase 5.0% of
common shares, expires February 24, 2005 -- --
*Warrant to purchase 1.224% of
common shares, expires February 24, 2005 -- --
-------- -------
20.91% 518,333 518,333
-------- -------
MIDWESTERN ELECTRONICS, INC. 12% Debt security, July 31, 2003 838,666 838,666
- ---------------------------- *Warrant to purchase 262,857 common
Olathe, Kansas shares at $.20 per share, expires
Manufacturer of outsourced July 31, 2013 -- --
electronic assemblies -------- -------
838,666 838,666
5.00% -------- -------
MONITRONICS INTERNATIONAL, INC.
- --------------------------------
Dallas, Texas 0.95% *73,214 Common shares 436,848 54,703
Provides home security -------- -------
systems monitoring services
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MACC PRIVATE EQUITIES INC. 29
<PAGE> 30
[ ] CONSOLIDATED SCHEDULE OF INVESTMENTS
SCHEDULE 1 CONTINUED...
<TABLE>
<CAPTION>
MACC Private Equities Inc. and Subsidiary
- -----------------------------------------------------------------------------------------------------------------------------------
MANUFACTURING CONTINUED...
- -----------------------------------------------------------------------------------------------------------------------------------
PERCENT OF
COMPANY EQUITY SECURITY NET ASSETS VALUE COST
- ------- ------ -------- ----------- ----- ----
<S> <C> <C> <C> <C> <C>
MURPHEY ACQUISITION, LLC
- -----------------------
Mishawaka, Indiana
Manufacturer of custom plastic 12% Debt security, due November 15, 2001 $937,500 937,500
injection molded products for the *Membership interest -- --
RV and other industries 19.29% 937,500 937,500
---------- ----------
PPC ACQUISITION COMPANY 12% Debt security, due January 3, 2003 600,000 600,000
- ----------------------- *Warrant to purchase 16.67% common
Kansas City, Kansas shares at $.10, expire January 3, 2013 40 40
Manufacturer and printer ---------- ----------
of plastic packaging 16.60% 600,040 600,040
---------- ----------
PORTRAIT DISPLAYS, INC. *535,715 Shares Series B Pfd. at $1.40 49,999 750,001
- ----------------------- *Warrant to purchase 16,071 common
Pleasanton, California shares at $.14, expires August 23, 1998 -- --
Designs and markets pivot enabling *71,429 Shares Series C Pfd. at $1.40 100,001 100,001
software for LCD computer monitors *Warrant to purchase 13,570 Series C Pfd.
at $1.40, expires November 21, 2001 -- --
*Warrant to purchase 12,240 Series C Pfd.
at $1.40, expires November 21, 2001 -- --
*Warrant to purchase 27,160 Series C Pfd.
at $1.40, expires November 21, 2001 -- --
*911,300 Shares Series D Pfd. 150,000 150,000
---------- ----------
10.00% 300,000 1,000,002
---------- ----------
SIMONIZ USA, INC. 12% Debt security, due January 2, 2002 750,000 750,000
- ----------------- *Warrant to purchase 6.5625% of common
Bolton, Connecticut shares at $7,803.72 per share, expires
Producer of cleaning and wax December 23, 2006 -- --
products under both the Simoniz
brand and private label brand ---------- ----------
names 6.56% 750,000 750,000
---------- ----------
TAYLOR HOLDINGS, INC. 10% Debt security, due May 31, 2003 574,163 574,163
- --------------------- *48,038 Common shares at $1.00 48,038 48,038
Kansas City, Missouri *292,800 Shares Pfd. at $1.04 304,512 304,512
Manufacturer of industrial *Warrant to purchase 56,529 common shares
bagging equipment at $1.00, expires May 31, 2002 565 565
---------- ----------
16.80% 927,278 927,278
---------- ----------
TRU-CIRCLE CORPORATION 11% Debt security, due December 11, 2001 1,218,750 1,218,750
- ---------------------- *Warrant to purchase 271,234 common
Wichita, Kansas shares at $.45, expires December 11, 2007 3,418,150 122
Manufacturer of precision parts ---------- ----------
for the aircraft, aerospace and 10.27% 4,636,900 1,218,872
defense industries ---------- ----------
Weld Racing, Inc. 13% Debt security, due June 13, 2002 700,000 700,000
- ----------------- *Warrant to purchase 26.9824 common
Kansas City, Missouri shares at $1.00, expires June 13, 2008 32 32
Manufacturer of custom wheels
for the performance automotive ---------- ----------
aftermarket 4.50% 700,032 700,032
---------- ----------
Total Manufacturing 82.74% 16,157,912 12,912,869
===== ========== ==========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
30 MACC PRIVATE EQUITIES INC.
<PAGE> 31
[ ] CONSOLIDATED SCHEDULE OF INVESTMENTS
SCHEDULE 1 CONTINUED...
<TABLE>
<CAPTION>
MACC Private Equities Inc. and Subsidiary
- ------------------------------------------------------------------------------------------------------------------------------------
SERVICE:
- ------------------------------------------------------------------------------------------------------------------------------------
PERCENT OF
COMPANY EQUITY SECURITY NET ASSETS VALUE COST
- ------- ------ -------- ---------- ----- ----
<S> <C> <C> <C> <C> <C>
BUILDING ONE SERVICES
- ---------------------
CORPORATION
- ---------------------
Washington, D.C. *48,499 Common shares at $19.45 $510,558 943,218
Commercial facilities Less than *9,564 Escrowed common shares at $12.31 63,747 117,769
management services provider 1.00% ---------- ----------
574,305 1,060,987
---------- ---------
CARLETON CORPORATION Less than
- -------------------- 1.00% *5,785 Common shares at $43.31 6,388 250,536
Eden Prairie, Minnesota ---------- ---------
Acquires, develops, markets,
and licenses IBM and IBM
compatible mainframe software
CONCENTRIX CORPORATION 13,283 Shares 8% amortizing Pfd. at $100.00 1,328,250 1,328,250
- ---------------------- *Warrant to purchase 412,500 common shares
Rochester, New York at $.01, expires April 1, 2007 -- --
Provides media outsourcing solutions *Warrant to purchase 82,500 common shares
including telemarketing, fulfillment, at $.01, expires April 1, 2007 -- --
and creative communications *Warrant to purchase 82,500 common shares
at $.01, expires April 1, 2007 -- --
*Warrant to purchase 100,650 common shares
at $.01, expires April 1, 2007 -- --
*Warrant to purchase 86,625 common shares
at $.01, expires April 1, 2007 -- --
10% Debt security, due on demand 627,000 627,000
*Warrant to purchase 198,000 common shares
at $.01, expires April 1, 2007 -- --
*Warrant to purchase 853,875 common shares
at $.01, expires April 1, 2007 -- --
10% Debt security, due on demand 173,250 173,250
10% Debt security, due on demand 126,750 126,750
*Warrant to purchase 346,500 common shares
at $.01, expires April 1, 2007 -- --
*Warrant to purchase 507,000 common shares
at $.01, expires April 1, 2007 -- --
---------- ---------
15.80% 2,255,250 2,255,250
---------- ---------
EAGLE WEST, L.L.C. 12% Debt security, due July 31, 2003 434,134 434,134
- ------------------ *262.5 Units Class C membership interest 128,827 128,827
Hays, Kansas *937.5 Units Class D membership interest 93 93
Consolidator of cable TV systems ---------- ---------
12.00% 563,054 563,054
---------- ---------
HERITAGE CONSUMER PRODUCTS, LLC
- -------------------------------
Brookfield, Connecticut 12% debt security, due September 1, 2004 983,913 983,913
Distributor of consumer *Membership interest 147,587 147,587
over-the-counter pharmaceuticals 9.30% ---------- ---------
1,131,500 1,131,500
---------- ---------
NEWPATH COMMUNICATIONS, LC 10% Debt security, due April 16, 2002 847,000 847,000
- -------------------------- *Membership interest 385 385
Des Moines, Iowa ---------- ---------
Rural cable TV network provider 6.93% 847,385 847,385
---------- ---------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MACC PRIVATE EQUITIES, INC. 31
<PAGE> 32
[ ] CONSOLIDATED SCHEDULE OF INVESTMENTS
SCHEDULE 1 CONTINUED...
<TABLE>
<CAPTION>
MACC Private Equities Inc. and Subsidiary
- ------------------------------------------------------------------------------------------------------------------------------------
SERVICE CONTINUED:
- ------------------------------------------------------------------------------------------------------------------------------------
PERCENT OF
COMPANY EQUITY SECURITY NET ASSET VALUE COST
- ------- ------ -------- ---------- ----- ----
<S> <C> <C> <C> <C> <C>
ORGANIZED LIVING, INC. 400,000 Shares Series A Pfd. convertible at $1.00 $ 400,000 400,000
- ---------------------- 130,435 Shares Series B Pfd. convertible at $1.15 150,000 150,000
Lenexa, Kansas 43,478 Shares Series B Pfd. convertible at $1.15 50,001 50,001
Retail specialty store for 94,241 Shares Series C Pfd. convertible at $1.27 120,029 120,029
storage and organizational --------- --------
products 5.0% 720,030 720,030
--------- --------
PROGRESSIVE SOLUTIONS, INC. *4,609,406 Shares Class A Pfd. 326,440 1,175,000
- --------------------------- *6,141,515 Shares Class B Pfd. 87,218 87,218
Salt Lake City, Utah *500,575 Common shares 152,048 152,048
Develops court automation and *Warrant to purchase 10,000 common shares
public records management software at $14.00, expires May 28, 2002 -- --
*Warrant to purchase 300 common shares
at $.1667, expires May 28, 2002 -- --
--------- ----------
12.80% 565,706 1,414,266
--------- ----------
RSI HOLDINGS, INC.
- ------------------ 11% Debt security, August 22, 2002 654,970 654,970
Fargo, North Dakota *Warrant to purchase 1,188 common shares
Satellite simulcast communications at $251.86, expires May 22, 2007 -- --
and services to the gaming industry 11% Debt security, August 22, 2002 319,557 319,557
*Warrant to purchase 562 common shares
at $251.86, expires March 27, 2008 -- --
--------- ----------
11.88% 974,527 974,527
--------- ----------
SIGHT & SOUND DISTRIBUTORS, INC. 13,333 Shares Pfd. at $25.00 1,333,333 1,333,333
- --------------------------------- *Warrant to purchase 2 common shares
St. Louis, Missouri at $2.00, expires July 31, 2008 -- --
National video products distributor --------- ----------
13.33% 1,333,333 1,333,333
--------- ----------
TUTTLE'S DESIGN-BUILD, INC.
- --------------------------
Lakeworth, Florida *106,362 Shares Pfd. at $13.59 -- 1,444,990
Distributor of ornamental and bedding plants *26.14% Interest in $550,000 promissory note 1 143,770
to retailers and provider of irrigation *8% Loan due December 31, 1999 -- 39,317
and landscaping services 0.00% --------- ----------
1 1,628,077
--------- ----------
VIASTAR SERVICES CORPORATION 13% Debt security, due July 17, 2003 740,000 740,000
- ---------------------------- *Warrant to purchase 4,359 common
Dallas, Texas shares at $.0068, expires July 17, 2009 -- --
Legal, audit, and logistical services
for the trucking industry --------- ----------
5.00% 740,000 740,000
--------- ----------
Total Service 49.73% 9,711,479 12,918,945
===== ========= ==========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
32 MACC PRIVATE EQUITIES INC.
<PAGE> 33
[ ] CONSOLIDATED SCHEDULE OF INVESTMENTS
SCHEDULE 1 CONTINUED...
<TABLE>
<CAPTION>
MACC Private Equities Inc. and Subsidiary
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER:
- ------------------------------------------------------------------------------------------------------------------------------------
PERCENT OF
COMPANY EQUITY SECURITY NET ASSETS VALUE COST
- ------- ------ -------- ----------- ----- ----
<S> <C> <C> <C> <C> <C>
MILES MEDIA GROUP, INC. *Warrant to purchase 232 common
- ---------------------- shares at $52.64, expires February 2, 2001 $ -- --
Sarasota, Florida *Warrant to purchase 1,789 common
Tourist magazine publisher shares at $52.64, expires June 1, 2002 -- --
*4,500 Shares Red. Pfd. at $100.00 894,860 450,000
*1,550 Shares Class A Conv. Pfd. at $32.26 50,003 50,003
*1,000 Shares Red. Pfd. at $100.00 198,857 100,000
*155 Shares Class A Conv. Pfd. -- --
---------- -----------
26.50% 1,143,720 600,003
---------- -----------
NORTHWORD HOLDING CORPORATION *325.8 Shares Red. Pfd. at $1,000.00 188,166 325,800
- ----------------------------- *235 Common shares at $615.38 -- 144,615
Minocqua, Wisconsin *Earnout warrant -- --
Publisher of nature-related *Earnout warrant -- --
audio products ----------- -----------
188,166 470,415
----------- -----------
2.10%
Total Others 6.82% 1,331,886 1,070,418
==== ----------- -----------
$27,201,277 26,902,232
=========== ===========
* Presently nonincome producing
SEE ACCOMPANYING NOTES TO CONSOLIDATED SCHEDULE OF INVESTMENTS.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MACC PRIVATE EQUITIES INC. 33
<PAGE> 34
[ ] NOTES TO CONSOLIDATED SCHEDULE OF INVESTMENTS
MACC Private Equities Inc. and Subsidiary
A For investments held at the February 15, 1995 fresh-start date, the
stated cost represents the fair value at the fresh-start date.
B At September 30, 1998, all securities except for Building One Services
Corporation and Carleton Corporation are considered to be restricted in
their disposition and are stated at what the Board of Directors
considers to be fair market value.
C The percentages in the "equity" column express the actual or potential
equity interest held by MACC Private Equities Inc. and subsidiary (the
Company) in each issuer. The percentage represents the amount of the
issuer's common stock held by the Company as a percentage of the
issuer's total outstanding common stock or, where the issuer has
outstanding warrants, convertible securities, or shares reserved for
employee stock options, the percentage reflects the approximate equity
interest held by the Company upon the exercise of all warrants,
conversion rights, and reserved employee options.
D At September 30, 1998, the cost of securities for federal income tax
purposes was $29,607,225, and the aggregate unrealized appreciation and
depreciation based on that cost was:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
<S> <C>
Unrealized appreciation $ 4,274,556
Unrealized depreciation (6,680,506)
-----------
Net unrealized depreciation $(2,405,950)
===========
-----------------------------------------------------------------------
</TABLE>
E The Company owns a portfolio which includes investments in restricted
securities of small businesses. Within this portfolio, twenty-five of
these restricted securities include registration rights and seven of
these restricted securities do not include registration rights. Within
the twenty-five securities that include registration rights, the actual
rights include the following general characteristics:
(1) The securities generally provide for demand rights as follows:
a The demand rights may only be required from a low of 25% of
- the security holders to a high of a majority of the security
holders.
b The security holders may require from one to two demand
- registrations.
c The small businesses are generally only required to use "best
- efforts" to comply with the demands.
(2) The securities generally allow the security holders to register
securities if the small business registers its securities, i.e.
"piggyback rights."
a Piggyback rights generally may be accessed by individual
- security holders.
b Under piggyback rights, the small business and its investment
- bankers are only required to use best efforts to comply with
the right.
(3) The Company expects that, in general, the securities that they will
acquire in the future will include demand and piggyback rights.
34 MACC PRIVATE EQUITIES INC.
<PAGE> 35
[ ] SHAREHOLDER INFORMATION
[ ] Stock Transfer Agent
ChaseMellon Shareholder Services, L.L.C., 85 Challenger Road, Overpeck
Centre, Ridgefield Park, New Jersey 07660 (telephone (800) 288-9541,
(800) 231-5469 (TDD), and www.chasemellon.com) serves as transfer agent
and registrar for MACC's common stock. Certificates to be transferred
should be mailed directly to the transfer agent, preferably by
registered mail.
[ ] Shareholders
MACC had approximately 2,816 record holders of its common stock at
November 30, 1998.
[ ] Annual Meeting
The Annual Meeting of Shareholders of MACC will be held on Tuesday,
February 23, 1999, at 10:00 a.m. at the Crowne Plaza Five Seasons Hotel,
350 First Avenue N.E., Cedar Rapids, Iowa.
[ ] Dividends
MACC has no history of paying cash dividends and does not anticipate
declaring any cash dividends in the foreseeable future, but instead to
retain all earnings, if any, for use in MACC's business. During fiscal
year 1998, however, MACC declared and paid a 20% stock split effected in
the form of a stock dividend. The payment of dividends, if any, in the
future is within the discretion of the Board of Directors and will
depend upon MACC's earnings, capital requirements, financial condition
and other relevant factors. MACC does not presently have any type of
dividend reinvestment plan.
[ ] Market Prices
The common stock of MACC is traded in the over-the-counter market
through the National Association of Securities Dealers Automated
Quotation ("NASDAQ") National Market under the symbol "MACC". At the
close of business on November 30, 1998, the bid price for shares of
MACC's common stock was $9.25. The following high and low bid quotations
for the shares during each quarterly period ended on the date shown
below of MACC's fiscal years 1998 and 1997 were taken from quotations
provided to MACC by the National Association of Securities Dealers, Inc:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
HIGH LOW
----------------------------------------------------------------------
<S> <C> <C>
December 31, 1996 $ 7.77 $7.20
March 31, 1997 8.33 7.77
June 30, 1997 8.96 8.33
September 30, 1997 8.33 7.50
December 31, 1997 8.59 7.40
March 31, 1998 7.92 6.67
June 30, 1998 9.50 8.88
September 30, 1998 11.00 9.00
----------------------------------------------------------------------
</TABLE>
High and low bid quotations have been adjusted to reflect the
payment of a 20% stock split effected in the form of a stock
dividend on March 31, 1998 and a 10% stock split effected in the form of
a stock dividend on March 31, 1997.
Such over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent
actual transactions.
MACC PRIVATE EQUITIES INC. 35
<PAGE> 36
[ ] OFFICERS AND DIRECTORS
FUND MANAGER
- -----------------------------------------------------------------------------
InvestAmerica Investment Advisors, Inc.
OFFICERS
- -----------------------------------------------------------------------------
DAVID R. SCHRODER
President and Secretary
ROBERT A. COMEY
Executive Vice President and Treasurer
KEVIN F. MULLANE
Vice President
BOARD OF DIRECTORS
- -----------------------------------------------------------------------------
PAUL M. BASS, JR. - DALLAS, TEXAS
Chairman of the Company
Vice Chairman of First Southwest Company,
a regional investment banking firm
ROBERT A. COMEY - CEDAR RAPIDS, IOWA
Executive Vice President of the Company
Executive Vice President of
InvestAmerica Investment Advisors, Inc.
MICHAEL W. DUNN - MANCHESTER, IOWA
President, Farmers and Merchants Savings Bank
HENRY T. MADDEN - IOWA CITY, IOWA
Adjunct Professor, School of Management,
University of Iowa, and Management Consultant
JAMES L. MILLER - CEDAR RAPIDS, IOWA
Self-employed, with background in retail management
DAVID R. SCHRODER - CEDAR RAPIDS, IOWA
President of the Company, President of
InvestAmerica Investment Advisors, Inc.
TODD J. STEVENS - SALT LAKE CITY, UTAH
Manager of the Utah Office of Wasatch Venture Fund,
Manager of the Venture Capital Department of Zions
First National Bank
JOHN D. WOLFE - MOUNT VERNON, IOWA
Retired from career in retail banking and mortgage lending
36 MACC PRIVATE EQUITIES INC.
<PAGE> 1
SUBSIDIARY OF MACC PRIVATE EQUITIES INC.
1. MorAmerica Capital Corporation, an Iowa corporation, is a
wholly-owned subsidiary of MACC Private Equities Inc.
92
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 27,925,947
<INVESTMENTS-AT-VALUE> 28,224,992
<RECEIVABLES> 0
<ASSETS-OTHER> 983,592
<OTHER-ITEMS-ASSETS> 2,085,940
<TOTAL-ASSETS> 31,294,524
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 11,253,421
<OTHER-ITEMS-LIABILITIES> 513,225
<TOTAL-LIABILITIES> 11,766,646
<SENIOR-EQUITY> 12,464
<PAID-IN-CAPITAL-COMMON> 15,312,381
<SHARES-COMMON-STOCK> 1,246,392
<SHARES-COMMON-PRIOR> 1,039,615
<ACCUMULATED-NII-CURRENT> 372,538
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,531,450
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 299,045
<NET-ASSETS> 19,527,878
<DIVIDEND-INCOME> 574,343
<INTEREST-INCOME> 1,876,000
<OTHER-INCOME> 232,042
<EXPENSES-NET> 2,060,457
<NET-INVESTMENT-INCOME> 621,928
<REALIZED-GAINS-CURRENT> 981,091
<APPREC-INCREASE-CURRENT> 2,554,471
<NET-CHANGE-FROM-OPS> 4,157,490
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 205,777
<NET-CHANGE-IN-ASSETS> 4,148,036
<ACCUMULATED-NII-PRIOR> (239,290)
<ACCUMULATED-GAINS-PRIOR> 2,551,781
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
