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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 June 30, 2001
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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____________
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
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(State or other jurisdiction (I.R.S. Employer
of incorporation 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 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 July 31, 2001, the registrant had issued and outstanding 2,329,255
shares of common stock.
Page 1 of 14
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INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
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Condensed Consolidated Balance
Sheets at June 30, 2001 (Unaudited),
and September 30, 2000............................................. 3
Condensed Consolidated Statements of Operations (Unaudited)
for the three months ended June 30, 2001, and June 30, 2000,
and the nine months
ended June 30, 2001 and June 30, 2000.............................. 4
Condensed Consolidated Statements of
Cash Flows (Unaudited) for the nine
months ended June 30, 2001, and
the nine months ended June 30, 2000................................ 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
Signatures......................................................... 14
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PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, September 30,
2001 2000
(Unaudited)
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Assets
Loans and investments in portfolio securities at market
or fair value, cost of $40,738,401;
$36,965,143 at September 2000 $ 39,265,793 41,032,116
Cash and money market accounts 2,573,300 3,767,188
Certificates of deposit 333,022 399,999
Other assets, net 2,102,296 1,408,163
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Total assets $ 44,274,411 46,607,466
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Liabilities and stockholders' equity
Liabilities:
Debentures payable, net of discount $ 20,470,828 20,320,922
Incentive fees payable 159,386 118,164
Accrued interest 400,356 242,424
Accounts payable and other liabilities 130,156 280,387
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Total liabilities 21,160,726 20,961,897
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Net assets:
Common stock, $.01 par value per share;
authorized 4,000,000 shares;
issued and outstanding 2,329,255 shares 23,293 23,293
Additional paid-in-capital 17,186,507 16,506,507
Net investment income 342,688 415,889
Net realized gain on investments 6,931,090 4,530,191
Unrealized (depreciation) appreciation on investments (1,369,893) 4,169,689
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Total net assets 23,113,685 25,645,569
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Total liabilities and net assets $ 44,274,411 46,607,466
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Net assets per share $ 9.92 11.01
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See accompanying notes to unaudited condensed consolidated financial statements.
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MACC PRIVATE EQUITIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three For the three For the nine For the nine
months ended months ended months ended months ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
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Investment income:
Interest $ 601,747 472,321 1,788,726 1,436,595
Dividends 200,248 256,761 576,092 437,436
Processing fees 37,639 39,976 76,554 124,573
Other 40,591 3,063 41,591 6,227
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Total income 880,225 772,121 2,482,963 2,004,831
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Operating expenses:
Interest expenses 433,965 341,746 1,328,635 960,952
Management fees 266,143 235,220 798,429 705,660
Professional fees 36,188 41,973 91,206 111,139
Other 97,784 86,653 267,894 258,881
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Total operating expenses 834,080 705,592 2,486,164 2,036,632
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Investment income (expense),
net before tax expense 46,145 66,529 (3,201) (31,801)
Income tax expense -- (10,000) (70,000) (10,000)
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Investment income (expense), net 46,145 56,529 (73,201) (41,801)
---------- ------- --------- ---------
Realized and unrealized (loss) gain
on investments:
Net realized gain (loss) on investments 6,430 (639,064) 3,090,397 (465,575)
Net change in unrealized depreciation/
appreciation on investments (47,991) 324,189 (5,539,582) 1,044,243
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Net (loss) gain on investments
before income tax expense (41,561) (314,875) (2,449,185) 578,668
Income tax expense -- -- (680,000) --
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Net (loss) gain on investments (41,561) (314,875) (3,129,185) 578,668
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Net change in net assets
from operations $ 4,584 (258,346) (3,202,386) 536,867
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See accompanying notes to unaudited condensed consolidated financial statements.
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MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the nine For the nine
months ended months ended
June 30, June 30,
2001 2000
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Cash flows from operating activities:
(Decrease) increase in net assets from operations $(3,202,386) 536,867
Adjustments to reconcile (decrease) increase in net
assets from operations to net cash
used in operating activities:
Net realized and unrealized loss (gain) on investments 3,129,185 (578,668)
Change in accrued interest, incentive fees payable,
accounts payable and other liabilities 117,706 (926,470)
Other (237,378) 167,397
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Total adjustments 3,009,513 (1,337,741)
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Net cash used in operating activities (192,873) (800,874)
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Cash flows from investing activities:
Proceeds from disposition of and payments on
loans and investments in portfolio securities 4,578,882 1,343,833
Purchases of loans and investments in
portfolio securities (5,536,501) (11,759,810)
Proceeds from disposition of short-term investments 740,875 5,782,133
Purchases of short-term investments (740,875) (99,000)
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Net cash used in investing activities (957,619) (4,732,844)
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Cash flows from financing activities:
Proceeds from debt issuance 5,835,000 5,000,000
Payments of principal on debt (5,690,000) (2,450,000)
Payments for fractional shares in connection with stock split (9,498) (11,152)
Payments for debt issuance and commitment fees (245,875) (125,000)
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Net cash (used in) provided by financing activities (110,373) 2,413,848
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Net decrease in cash and cash equivalents (1,260,865) (3,119,870)
Cash and cash equivalents at beginning of period 4,167,187 5,065,309
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Cash and cash equivalents at end of period $ 2,906,322 1,945,439
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Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ 1,087,905 981,849
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Supplemental disclosure of noncash investing and financing
information - Assets received in exchange of securities $ 2,175,832 848,944
=========== =========
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. (Equities) and its
wholly-owned subsidiary MorAmerica Capital Corporation (MACC) which have been
prepared in accordance with accounting principles generally accepted in the
United States of America 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 accounting principles generally accepted in the United States of
America 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, 2000. 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,
2000 has been derived from the audited balance sheet as of that date.
(2) Common Stock
On March 31, 2001, MACC paid a 20% stock split effected in the form of
a stock dividend resulting in the issuance of 387,376 shares of Common Stock to
its shareholders. The September 30, 2000 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, 2000, 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
Third Quarter and Nine Months Ended June 30, 2001, Compared to Third
Quarter and Nine Months Ended June 30, 2000
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 on-going goals is to achieve net investment
income and increased earnings stability. 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, third quarter total investment income of
$880,225 was approximately 14% higher than total investment income of $772,121
for the prior year third quarter. In the current year third quarter as compared
to the prior year third quarter, interest income increased $129,426, dividend
income decreased $56,513, processing fees decreased $2,337 and other income
increased $37,528. The increase in interest income is primarily due to a
$6,830,456, or 44%, increase in MACC's interest-earning portfolio investments
during the prior fiscal year that are structured as subordinated debentures. The
receipt of dividend income is based primarily on the performance of the limited
liability companies in MACC's portfolio and the timing of when these companies
make distributions. In the current year third quarter dividends were received on
four portfolio companies as compared to dividends received on five portfolio
companies in the prior year third quarter. The increase in other income is due
to shares of stock received as part of a liquidation of a previously held
portfolio company investment.
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During the current year nine-month period, total income of $2,482,963
was an increase of $478,132, or 24%, over total income of $2,004,831 in the
prior year nine-month period. For the current year nine-month period as compared
to the prior year nine-month period, interest income increased to $1,788,726
from $1,436,595, dividend income increased to $576,092 from $437,436, processing
fee income decreased to $76,554 from $124,573 and other income increased to
$41,591 from $6,227. The increase in interest income is primarily due to the
growth in MACC's interest bearing portfolio investments and the interest
received from these investments. In the current year nine-month period dividends
were received on nine portfolio companies as compared to dividends received on
five portfolio companies in the prior year nine-month period. Processing fees
decreased due to only three new portfolio company investments made in the
current year nine-month period compared to seven new portfolio company
investments made in the prior year nine-month period in which MACC received a
processing fee at closing. The increase in other income was discussed in the
previous paragraph.
Total operating expenses for the third quarter and nine-month period of
the current year total $834,080 and $2,486,164, respectively, increases of 18%
and 22%, respectively, as compared to total operating expenses for the prior
year third quarter of $705,592 and nine-month period of $2,036,632. Interest
expense increased to $433,965 and $1,328,635 in the current year third quarter
and nine-month period, respectively, from $341,746 and $960,952 in the prior
year third quarter and nine-month period, respectively, due to additional
borrowings of SBA-guaranteed debentures. Management fees increased to $266,143
from $235,220 in the current year third quarter as compared to the prior year
third quarter and increased to $798,429 from $705,660 in the current nine-month
period as compared to the prior year nine-month period due to the increase in
assets under management. Professional fees decreased to $36,188 and $91,206 in
the current year third quarter and nine-month period, respectively, from $41,973
and $111,139 in the prior year third quarter and nine-month period,
respectively. Other expenses increased to $97,784 from $86,653 in the current
year third quarter as compared to the prior year third quarter and increased to
$267,894 from $258,881 in the current nine-month period as compared to the prior
year nine-month period mainly due to increased administrative expenses.
For the current year third quarter and nine-month period, MACC recorded
net investment income of $46,145 and net investment expense of ($73,201),
respectively, as compared to net investment income of $56,529 and net investment
expense of ($41,801) during the prior year third quarter and nine-month period,
respectively.
During the current year third quarter and nine-month period, MACC
recorded net realized gain on investments of $6,430 and $3,090,397,
respectively, as compared with net realized loss on investments of ($639,064)
and ($465,575) during the prior year third quarter and nine-month period,
respectively. MACC has several portfolio investment companies that are seeking
to sell or buyout MACC's position, however, it is uncertain at this time whether
any of these dispositions will occur or the prices at which such transactions
may occur. 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.
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MACC recorded net change in unrealized appreciation/depreciation on
investments of ($47,991) during the current year third quarter, as compared to
$324,189 during the prior year period. For the current year nine-month period as
compared to the prior year nine-month period, net change in unrealized
appreciation/depreciation on investments was $(5,539,582) and $1,044,243,
respectively. The net change in unrealized appreciation/depreciation on
investments of ($47,991) is attributable to the current market price increase of
the publicly traded common stock of one portfolio company of $135,603 and the
current market price decrease of the publicly traded common stock of another
portfolio company of ($183,594).
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
investment portfolio. 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 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.
In the current year nine-month period, the Company recorded a $70,000
provision for state income taxes attributable to pass-through income from
investments in limited liability companies in states which the Company does not
have net operating loss carryforwards. In addition, $680,000 was charged to
income tax expense with an offsetting credit to additional paid in capital under
the provisions of AICPA Statement of Position (SOP) 90-7, for the benefit of net
operating losses anticipated to be utilized in the current fiscal year which
were generated prior to reorganization. This allocation does not require any
cash payments of taxes.
At the end of the current year third quarter, MACC's net asset value
per share was $9.92 as compared to the net asset value per share on September
30, 2000 of $11.01 after giving effect to a 20% stock split effected in the form
of a stock dividend on March 31, 2001.
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 five years through the
SBIC capital program and MACC anticipates that there will be capital available
in future periods.
As of June 30, 2001, MACC's certificates of deposit and cash totaled
$2,906,322. MACC has commitments for an additional $955,000 and an additional
$10,000,000 in SBA
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guaranteed debentures, which expire September 30, 2002 and September 30, 2005,
respectively. MACC believes that its existing certificates of deposit and cash,
together with the $10,955,000 SBA commitment, additional commitments anticipated
through the SBIC capital program and other anticipated cash flows, will provide
adequate funds for MACC's anticipated cash requirements during the current
fiscal year, including portfolio investment activities, principal and interest
payments on outstanding debentures payable and administrative expenses. MACC's
investment objective is to invest $13,000,000 in new and follow-on investments
during the current fiscal year.
Liquidity will be impacted by principal payments on MACC's debentures
payable. Debentures payable are composed of $20,485,000 in principal amount of
SBA-guaranteed debentures issued by MACC's subsidiary, MorAmerica Capital, which
mature as follows: $2,150,000 in 2003, $1,000,000 in 2007, $2,500,000 in 2009,
$9,000,000 in 2010 and $5,835,000 in 2011. It is anticipated MorAmerica Capital
will be able to roll over the debenture maturing in 2003 with a new ten year
debenture when it matures. As indicated above, the total amount of MorAmerica
Capital's commitment from the SBA is $10,955,000.
Management believes that current economic conditions in the U.S. are
less favorable to MACC than those experienced in fiscal year 2000. Manufacturing
businesses, in particular, have been affected by high energy costs and decreases
in sales and production. While the cost of credit has decreased, portfolio
companies have been affected by the lack of availability of credit. In addition,
the declines in market capitalization of technology companies may have the
effect of reducing the availability of equity capital. The slowing economy and
the lack of visibility regarding future months contributes to the current
uncertainty regarding economic forecasts. These and other factors may have an
adverse effect on the fair value of MACC's portfolio investments and the markets
for corporate acquisitions and initial public offerings generally, and, as a
result, may adversely affect the rate of growth, if any, in MACC's net asset
value over the next twelve months. However, management does not anticipate that
these factors will have a significant adverse effect on MACC's liquidity through
the end of fiscal year 2001 because MACC's budget for the remainder of the
current year does not project significant cash to be generated from sales of
portfolio investments.
PORTFOLIO ACTIVITY
During the nine months ended June 30, 2001, MACC invested $5,341,496 in
twelve portfolio companies, consisting of $3,658,239 invested in three new
portfolio companies and $1,683,257 invested in follow-on investments in nine
existing portfolio companies. MACC's investment level objectives for fiscal year
2001 call for total new and follow-on investments of $13,000,000. The timing of
new and follow-on portfolio investments is somewhat uncertain and given current
economic conditions, MACC does not expect to meet 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.
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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 June 30, 2001, 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.
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 June 30, 2001, publicly traded equity securities in the MACC
consolidated investment portfolio were recorded at a fair value of $418,165. 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 $41,817. 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 June 30, 2001,
was $21,159,000, with a cost of $20,485,000. 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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2001
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Fair Value of Debentures Payable $21,159,000
Amount Above Cost $674,000
Additional Market Risk $428,000
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no items to report.
ITEM 2. CHANGES IN SECURITIES
There are no items to report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There are no items to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There are no items to report.
ITEM 5. OTHER INFORMATION
There are no items to report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
No exhibits are applicable.
(b) Reports on Form 8-K
MACC filed no reports on Form 8-K during the three months ended
June 30, 2001.
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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: 8/10/01 By: /s/ David Schroder
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David Schroder, President
Date: 8/10/01 By: /s/ Robert A. Comey
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Robert A. Comey, Treasurer
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