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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-24412
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MACC Private Equities Inc.
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(Exact name of registrant as specified in its charter)
Delaware 42-1421406
- --------------------------------------------- ------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
101 Second Street SE, Suite 800, Cedar Rapids, Iowa 52401
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(Address of principal executive offices)
(Zip Code)
(319) 363-8249
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Please 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
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
At March 31, 1999, the registrant had issued and outstanding 1,619,097
shares of common stock.
Page 1 of 30
Exhibit Index appears at page 16
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INDEX
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
------- -------------------- ----
Condensed Consolidated Balance Sheets at March 31,
1999 (Unaudited), and September 30, 1998................ 3
Condensed Consolidated Statements of Operations
(Unaudited) for the three months ended March 31, 1999,
and March 31, 1998, and the six months ended March 31,
1999 and March 31, 1998................................. 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the six months ended March 31, 1999,
and the six months ended March 31, 1998................. 5
Notes to Condensed Consolidated Financial Statements.... 6
Item 2. Management's Discussion and Analysis
------- of Financial Condition and Results Of Operations........ 7
Item 3. Quantitative and Qualitative Disclosure About
------- Market Risk............................................. 11
PART II. OTHER INFORMATION....................................... 13
Item 2. Changes in Securities................................... 13
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Item 4. Submission of Matters to a Vote of Security Holders..... 13
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Item 6. Exhibits and Reports on Form 8-K........................ 14
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Signatures.............................................. 15
EXHIBIT INDEX......................................................... 16
2
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PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, September 30,
1999 1998
(Unaudited)
------------ ------------
Assets
Loans and investments in portfolio
securities at market or fair value,
cost of $28,549,387; $26,902,232 in 1998 $ 29,186,442 27,201,277
U.S. treasury bills, at cost, which
approximates market 0 1,023,715
Certificates of deposit 0 297,000
Cash 1,815,841 1,287,940
Other assets, net 1,034,316 983,592
Deferred income taxes 501,000 501,000
------------ ------------
Total assets $ 32,537,599 31,294,524
============ ============
Liabilities and stockholders' equity
Liabilities:
Debentures payable, net of discount $ 12,258,250 11,253,421
Accrued interest 285,659 284,898
Accounts payable and other liabilities 198,849 228,327
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Total liabilities 12,742,758 11,766,646
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Stockholders' equity:
Common stock, $.01 par value per share;
4,000,000 shares authorized;
1,619,097 shares issued and
outstanding, 1,246,392 in 1998 16,191 12,464
(See Note 2)
Additional paid-in-capital 15,312,381 15,312,381
Net investment income 397,166 372,538
Net realized gain on investments 3,432,048 3,531,450
Unrealized appreciation on investments 637,055 299,045
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Total stockholders' equity 19,794,841 19,527,878
------------ ------------
Total liabilities and
stockholders' equity $ 32,537,599 31,294,524
============ ============
Net assets per share (See Note 2) $ 12.23 $ 12.06
============ ============
See accompanying notes to unaudited condensed consolidated financial
statements.
3
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MACC PRIVATE EQUITIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
For the three For the three For the six For the six
months ended months ended months ended months ended
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Investment income:
Interest $ 462,774 461,491 921,172 890,537
Dividends 226,033 28,875 226,033 106,918
Other 61,350 62,935 83,360 115,096
--------- --------- --------- ---------
Total income 750,157 553,301 1,230,565 1,112,551
--------- --------- --------- ---------
Operating expenses:
Interest 246,344 240,537 486,627 464,428
Management fees 199,563 165,622 397,229 328,587
Professional fees 56,515 51,075 105,738 99,617
Other 126,721 120,720 216,342 176,588
--------- --------- --------- ---------
Total operating expenses 629,143 577,954 1,205,936 1,069,220
--------- --------- --------- ---------
Investment income (expense),
net before income taxes 121,014 (24,653) 24,629 43,331
Income taxes 0 9,900 0 (17,100)
--------- --------- --------- ---------
Investment income
(expense), net 121,014 (14,753) 24,629 26,231
--------- --------- --------- ---------
Realized and unrealized (loss) gain
on investments:
Net realized (loss) gain on
investments (39,782) (19,999) (85,999) 310,505
Net change in unrealized
appreciation/depreciation
on investments (58,524) 2,119,283 338,010 1,761,204
--------- --------- --------- ---------
Net (loss) gain on
investments before
income taxes (98,306) 2,099,284 252,011 2,071,709
Income taxes 0 (585,900) 0 (574,900)
--------- --------- --------- ---------
Net (loss) gain on investments (98,306) 1,513,384 252,011 1,496,809
--------- --------- --------- ---------
Net change in net assets
from operations $ 22,708 1,498,631 276,640 1,523,040
========= ========= ========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
4
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MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the six For the six
months ended months ended
March 31, March 31,
1999 1998
------------ ------------
Cash flows from operating activities:
Increase in net assets from operations $ 276,640 1,523,040
------------ ------------
Adjustments to reconcile increase in net
assets from operations to net cash
(used in) provided by operating activities:
Net realized and unrealized gain on
investments (252,011) (2,071,709)
Other 35,165 8,504
Change in assets and liabilities:
Receivables and other assets (102,327) 277,802
Deferred income taxes 0 592,000
Accrued interest, accounts payable,
and other liabilities (68,449) 4,636
------------ ------------
Total adjustments (387,622) (1,188,767)
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Net cash (used in) provided by
operating activities (110,982) 334,273
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Cash flows from investing activities:
Proceeds from disposition of and payments
on loans and investments in portfolio
securities 342,454 1,134,832
Purchases of loans and investments in
portfolio securities (1,989,609) (3,209,948)
Proceeds from disposition of other
investments 721,670 3,638,173
Purchases of other investments 0 (2,982,940)
------------ ------------
Net cash used in investing activities (925,485) (1,419,883)
------------ ------------
Cash flows from financing activities -
Proceeds from debt issuance 1,000,000 1,000,000
Payments for fractional shares in
connection with stock split (9,677) (9,454)
Payments for debt issuance and
commitment fees (25,000) 0
------------ ------------
Net cash provided by financing activities 965,323 990,546
------------ ------------
Net decrease in cash and cash equivalents (71,144) (95,064)
Cash and cash equivalents at beginning of period 1,886,985 2,902,406
------------ ------------
Cash and cash equivalents at end of period $ 1,815,841 2,807,342
============ ============
Supplemental disclosures of cash flow
information - Cash paid during the
period for interest $ 476,374 438,520
============ ============
Supplemental disclosure of noncash investing
and financing information - Assets received
in lieu of cash $ 72,872 0
============ ============
See accompanying notes to unaudited condensed consolidated financial
statements.
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MACC PRIVATE EQUITIES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of MACC Private Equities Inc. (MACC) and its wholly-owned
subsidiary MorAmerica Capital Corporation (MorAmerica Capital) have been
prepared in accordance with generally accepted accounting principles for
investment companies. All material intercompany accounts and transactions have
been eliminated in consolidation.
The financial statements included herein have been prepared in
accordance with generally accepted accounting principles for interim financial
information and instructions to Form 10-Q and Article 6 of Regulation S-X. The
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto of MACC Private Equities Inc. and its
Subsidiary as of and for the year ended September 30, 1998. The information
reflects all adjustments consisting of normal recurring adjustments which are,
in the opinion of management, necessary for a fair presentation of the results
of operations for the interim periods. The results of the interim period
reported are not necessarily indicative of results to be expected for the year.
The balance sheet information as of September 30, 1998 has been derived from the
audited balance sheet as of that date.
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.
Because net unrealized gains or losses on available-for-sale securities are
included in the Statement of Operations, SFAS 130 has no effect on MACC's
financial statements.
(2) Common Stock
During the quarter ended March 31, 1999, MACC declared a 30% stock
split effected in the form of a stock dividend resulting in the issuance of
372,705 shares of Common stock to its shareholders. Cash of $9,676.71 was paid
for fractional shares. The September 30, 1998 net assets per share is computed
as if the stock dividend occurred at that date.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This section contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "1995
Act"). Such statements are made in good faith by MACC pursuant to the
safe-harbor provisions of the 1995 Act, and are identified as including terms
such as "may," "will," "should," "expects," "anticipates," "estimates," "plans,"
or similar language. In connection with these safe-harbor provisions, MACC has
identified in its Annual Report to Shareholders for the fiscal year ended
September 30, 1998, 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
Second Quarter and Six Months Ended March 31, 1999, Compared to
Second Quarter and Six Months Ended March 31, 1998
MACC's investment income includes income from interest, dividends and
fees. Net investment income/expense 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.
During the current year, second quarter total investment income of
$750,157 was approximately 36% greater than total investment income of $553,301
for the prior year second quarter. In the current year second quarter as
compared to the prior year second quarter, interest income increased $1,283,
dividend income increased $197,158, and other income decreased $1,585. The
increase in interest income is attributable primarily to the growth in MACC's
portfolio and the interest received from its portfolio investments. The increase
in dividend income is due to dividends received on five portfolio companies in
the current year second quarter as compared to dividends received on one
portfolio company in the prior year second quarter. MACC records distributions
from its investments in limited liability companies as dividends.
7
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During the current year six-month period, total income of $1,230,565
increased 11% over total income of $1,112,551 in the prior year six-month
period. For the current year six-month period as compared to the prior year
six-month period, interest income increased from $890,537 to $921,172, dividend
income increased from $106,918 to $226,033 and other income decreased from
$115,096 to $83,360. The increases in interest income and dividend income are as
a result of the same factors as indicated above for the second quarter. The
decrease in other income is the net result of higher commitment fees received by
MACC in the prior year six-month period, other income from a payment received on
an other asset during the prior year six-month period, and other income from the
partial payment of MACC's claim against the liquidation estate of one of its
former insurers received in the prior year six-month period, which were
partially offset by an advisory fee received from one portfolio company during
the current year six-month period.
Total operating expenses for the second quarter and six-month period of
the current year total $629,143 and $1,205,936, respectively, increases of 9%
and 13%, respectively, as compared to total operating expenses for the prior
year second quarter of $577,954 and six-month period of $1,069,220. Interest
expense increased by $5,807 and $22,199 due to additional borrowings from the
Small Business Administration in the current year second quarter and six-month
period, respectively. Management fees increased from $165,622 to $199,563 in the
current year second quarter as compared to the prior year second quarter and
increased from $328,587 to $397,229 in the current six-month period as compared
to the prior year six-month period due to the increase of assets under
management. Professional fees increased by $5,440 and $6,121, respectively, and
other expenses, which includes administrative expenses associated with being a
public corporation, increased by $6,001 and $39,754 in the current year second
quarter and six-month period.
For the current year second quarter and six-month period, MACC recorded
net investment income of $121,014 and $24,629, respectively, as compared to net
investment expense and income of ($14,753) and $26,231 during the prior year
second quarter and six-month period, respectively.
During the current year second quarter and six-month period, MACC
recorded net realized loss on investments before income taxes of ($39,782) and
($85,999), respectively, as compared with net realized (loss) gain on
investments before income taxes during the prior year second quarter and
six-month period of ($19,999) and $310,505, respectively. MACC previously
announced that it anticipated a significant gain in connection with the
potential sale of one portfolio company investment, which was expected to occur
in or before the fourth quarter of fiscal 1998. Although that transaction was
not consummated as anticipated, MACC remains optimistic that the portfolio
company investment may be sold prior to fiscal year end 1999. With the above
portfolio sale and other potential sales, MACC expects to meet management's
projected September 30, 1999, net asset value per share of $13.65. Management
does not attempt to maintain a comparable level of realized gains from year to
year or quarter to quarter but instead attempts to maximize total investment
portfolio appreciation through realizing gains in the disposition of securities
and investing in new portfolio investments.
8
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MACC recorded net change in unrealized appreciation/depreciation on
investments of ($58,524) during the current year second quarter, as compared to
$2,119,283 during the prior year period which was due to the strong performance
of several portfolio companies. 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 it 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 a 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.
The net change in unrealized appreciation/depreciation on investments
of ($58,524) recorded during the current year second quarter is the net effect
of a decrease in the fair value of four portfolio investments which was
partially offset by the increase in the fair value of three portfolio
investments.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
To date, MACC has relied upon several sources to fund its investment
activities, including MACC's 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.
As of March 31, 1999, MACC's cash totaled $1,815,841. MACC borrowed
$1,000,000 in new SBA Guaranteed Debentures in March 1999 and has a commitment
for an additional $17,290,000 in SBA guaranteed debentures. The additional
commitments of $17,290,000 are 5 year commitments. MACC believes that its
existing cash, together with available proceeds from the additional $17,290,000
in SBA guaranteed debentures and other anticipated cash flows, will provide
adequate funds for MACC's anticipated cash requirements during the current
fiscal year and over the remaining SBA commitment period, including portfolio
investment activities, principal and interest payments on outstanding debentures
payable and administrative expenses. MACC has planned $8,500,000 in new and
follow-on investment activities during the current fiscal year.
Liquidity for the next several years will be impacted by principal
payments on MACC's debentures payable. Debentures payable are composed of
$12,290,000 in principal
9
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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, $1,000,000 in 2007 and $1,000,000 in 2009. 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 $17,290,000.
PORTFOLIO ACTIVITY
During the six months ended March 31, 1999, MACC invested $1,989,609 in
five portfolio companies, consisting of $1,739,000 invested in two new portfolio
companies and $250,609 invested in follow-on investments in three existing
portfolio companies. MACC's investment level objectives for fiscal year 1999
call for total new and follow-on investments of $8,500,000. MACC anticipates
that it will achieve its investment level objectives for the current fiscal
year. However, management views investment level objectives for any given year
as secondary in importance to MACC's overriding concern of investing in only
those portfolio companies which satisfy MACC's investment criteria.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of MACC's outstanding common stock is
determined quarterly, as soon as practicable after and as of the end of each
calendar quarter, by dividing the value of total assets minus total liabilities
by the total number of shares outstanding at the date as of which the
determination is made.
In calculating the value of total assets, securities that are traded in
the over-the-counter market or on a stock 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 March 31, 1999, 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 and on such other interim periods as are
justified by material portfolio company events if the Board of Directors
determines in good faith that cost no longer represents fair value.
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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 projects 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. MACC's
computer operations are not complex and functions can be performed manually for
some period of time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MACC is exposed to market risk from changes in market prices of
publicly traded equity securities held in the MACC consolidated investment
portfolio. At March 31, 1999, publicly traded equity securities in the MACC
consolidated investment portfolio were recorded at a fair value of $882,386. In
accordance with MACC's valuation policies and 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 $88,239. 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 March 31, 1999,
was $12,480,000, with a cost of $12,290,000. 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.
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------------------------------------------------------
1999
------------------------------------------------------
Fair Value of Debentures Payable $12,480,000
Amount Over Cost $ 190,000
Additional Market Risk $ 180,000
------------------------------------------------------
[Remainder of page intentionally left blank]
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no items to report.
ITEM 2. CHANGES IN SECURITIES
At its Annual Meeting on February 23, 1999, the Board of Directors
declared a 30% stock split effected in the form of a stock dividend payable to
shareholders of record as of March 15, 1999, which was distributed on March 31,
1999. On March 31, 1999 total outstanding shares increased from 1,246,392 to
1,619,097.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There are no items to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 23, 1999, the Company's 1999 Annual Meeting of Shareholders
(the "Meeting") was held in Cedar Rapids, Iowa. A quorum of 852,028 shares, or
approximately 68.35% of issued and outstanding shares as of December 31, 1998,
were represented in person or by proxy at the Meeting. The shareholders
considered three proposals at the Meeting.
With respect to the first proposal, by vote of 841,049 shares in favor
of and 10,979 shares withheld, the shareholders elected three directors to serve
until 2002 Annual Meeting of Shareholders or until their respective successors
shall be elected and qualified. These directors and the votes cast in favor of
and withheld with respect to each are as follows:
Director For Withheld
-------- --- --------
Paul M. Bass, Jr. 840,211 11,817
David R. Schroder 840,884 11,144
Robert A. Comey 841,006 11,022
With regard to the second proposal, the shareholders voted to ratify
the appointment of KPMG Peat Marwick LLP as independent auditors for the Company
for Fiscal year 1999 by a vote of 834,587 in favor of ratification and 3,219
against ratification, with 14,222 shares abstaining.
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The third proposal, to approve certain proposed amendments to the
Investment Advisory Agreement of MorAmerica Capital, was approved by the
stockholders. With respect to this third proposal, the shareholders voted
814,763 in favor of the proposal and 6,801 against the proposal, with 30,464
shares abstaining.
ITEM 5. OTHER INFORMATION
There are no items to report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(10.2) Investment Advisory Agreement between MorAmerica
Capital Corporation and InvestAmerica Investment
Advisors, Inc., dated March 1, 1999.
(27) Financial Data Schedule
No other exhibits are applicable.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the three months ended
March 31, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MACC PRIVATE EQUITIES INC.
Date: 5/11/99 By: /s/ David Schroder
-------- ---------------------------------
David Schroder, President
Date: 5/11/99 By: /s/ Robert A. Comey
-------- ---------------------------------
Robert A. Comey, Treasurer
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EXHIBIT INDEX
Exhibit Description Page
- ------- ----------- ----
(10.2) Investment Advisory Agreement between MorAmerica 17
Capital Corporation and InvestAmerica Investment
Advisors, Inc., dated March 1, 1999
(27) Financial Data Schedule 28
16
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EXHIBIT (10.2)
Investment Advisory Agreement between
MorAmerica Capital Corporation and
InvestAmerica Investment Advisors, Inc.,
Dated March 1, 1999
17
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MORAMERICA CAPITAL CORPORATION
INVESTMENT ADVISORY AGREEMENT
This INVESTMENT ADVISORY AGREEMENT dated as of March 1, 1999 (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.
18
<PAGE> 3
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
Regulatory Capital as defined in the SBA regulations as of the date hereof
(which regulations define Regulatory Capital to exclude unrealized capital gains
and losses) ("Regulatory 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 minus
the sum of: (i) Capital Losses determined in accordance with generally accepted
accounting principles; and (ii) net investment losses, if any, as reported on
Line 32 of SBA Form 468.
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 "Regulatory 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;
19
<PAGE> 4
(b) With regard to all assets owned by MACC prior to the
mergers of MorAmerica Financial Corporation and Morris Plan Liquidation
Company into the 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;
20
<PAGE> 5
(c) Maintain office space and facilities to the extent required
by InvestAmerica to provide adequate management services to MACC;
(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
21
<PAGE> 6
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 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
22
<PAGE> 7
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 Regulatory Capital bears
to the total Regulatory 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.
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.
23
<PAGE> 8
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 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 either: (i) 2.5% per annum. of the Assets
Under Management, or (ii) 7.5% of Regulatory Capital.
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).
24
<PAGE> 9
(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; provided, however,
that incentive fees earned with respect to non-cash Realized Capital
Gains shall not be due and owing to InvestAmerica until the cash is
received by MACC.
(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 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 Regulatory 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 Regulatory
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
25
<PAGE> 10
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 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.
26
<PAGE> 11
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 March
1, 1998, 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/ Paul M. Bass, Jr.
--------------------------------
Chairman of the Board
--------------------------------
INVESTAMERICA INVESTMENT
ADVISORS, INC.
By: /s/ David R. Schroder
--------------------------------
President
--------------------------------
27
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<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> MAR-31-1999
<INVESTMENTS-AT-COST> 28,549,387
<INVESTMENTS-AT-VALUE> 29,186,442
<RECEIVABLES> 0
<ASSETS-OTHER> 1,034,316
<OTHER-ITEMS-ASSETS> 2,316,841
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<OTHER-ITEMS-LIABILITIES> 484,508
<TOTAL-LIABILITIES> 12,742,758
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<SHARES-COMMON-STOCK> 1,619,097
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<NET-ASSETS> 19,794,841
<DIVIDEND-INCOME> 226,033
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<EXPENSES-NET> 1,205,936
<NET-INVESTMENT-INCOME> 24,629
<REALIZED-GAINS-CURRENT> (85,999)
<APPREC-INCREASE-CURRENT> 338,010
<NET-CHANGE-FROM-OPS> 276,640
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
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<NET-CHANGE-IN-ASSETS> 266,963
<ACCUMULATED-NII-PRIOR> 372,538
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<OVERDISTRIB-NII-PRIOR> 0
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